NNN Lease
vs
Modified Gross Lease
A NNN (triple net) lease passes property taxes, insurance, and common area maintenance to the tenant on top of base rent; a modified gross lease covers operating expenses up to a base year's amount, with only increases above that base year passed through to the tenant.
TL;DR
NNN is the modern single-tenant default with full expense pass-through. Modified gross is the common multi-tenant office structure, where the landlord absorbs base-year expenses and passes through inflation. NNN shifts expense risk to the tenant; modified gross keeps some with the landlord.
What is NNN Lease?
A triple net (NNN) lease charges the tenant base rent plus the three nets: property taxes, building insurance, and CAM (common area maintenance). The landlord's income approximates base rent with limited exposure to expense inflation. NNN is the standard structure for single-tenant retail, most industrial, and many medical properties.
What is Modified Gross Lease?
A modified gross lease (sometimes called 'full service with pass-throughs' or 'base-year lease') charges the tenant a single rent that covers operating expenses at a base-year level. Any increases in operating expenses above that base year are passed through to the tenant on a pro-rata basis. Modified gross is dominant in multi-tenant office and common in some multi-tenant retail.
Side by side
NNN Lease vs Modified Gross Lease — the differences.
| Dimension | NNN Lease | Modified Gross Lease |
|---|---|---|
| Tenant pays | Base rent + taxes + insurance + CAM | Single rent; only expense increases above base year pass through |
| Landlord absorbs | Structural (classic NNN); nothing (absolute NNN) | All operating expenses up to base year amount |
| Expense-inflation risk | Tenant bears | Landlord bears up to base year; tenant bears marginal increases |
| Typical context | Single-tenant retail, industrial, medical | Multi-tenant office, some multi-tenant retail |
| Administrative burden | Annual CAM reconciliations | Annual base-year adjustment calculations |
| Landlord expense control | Limited — tenant controls operations | Full — landlord operates building |
| Cap rate effect | Lower — reflects expense-pass-through predictability | Higher — landlord retains expense risk |
| Tenant rent transparency | Base rent + ongoing pass-through itemization | Single number initially; base-year increases add cost over time |
When to use NNN Lease
- You're the landlord on single-tenant credit retail, industrial, or medical
- You want predictable base rent income with limited expense volatility
- The tenant wants operational control over its own space and expenses
- You're investing in CRE for long-term passive income (NNN NNN is more passive)
When to use Modified Gross Lease
- You're the landlord of a multi-tenant office building
- You operate the building and control common areas and services
- You want to amortize expenses across multiple tenants efficiently
- You want to offer tenants rent clarity at lease signing (vs. pass-through pro-ration)
Verdict
NNN for single-tenant simplicity and passive income. Modified gross for multi-tenant office where the landlord must operate shared services. Each structure is the dominant choice for its context, not directly substitutable.
Frequently asked questions
What is a 'base year' in a modified gross lease?
The base year is the first year of the lease, and its operating expenses set the 'included' baseline in the gross rent. Subsequent years' expenses above the base year amount are passed through to the tenant on a pro-rata basis (by square footage in a multi-tenant building).
Which is better for the tenant — NNN or modified gross?
Depends on the tenant's preferences. NNN gives the tenant more control over its own expenses but exposes it to expense volatility. Modified gross gives the tenant expense certainty at base year but exposes it to pass-through increases afterward. Different tenants prefer different structures.
What is a 'full service' lease?
A full service lease is a near-gross lease where the landlord provides cleaning, utilities, security, and other services included in rent. Full service leases typically have a base-year operating expense structure — effectively modified gross with services included.