NNN vs. Gross vs. Modified Gross Leases, With the Math

The difference between NNN, gross, and modified gross leases is who pays the property’s operating costs and who carries the risk that they rise. The total cost can be identical in year one and very different by year five.

The three structures

Gross (full service). The tenant pays one rent. The landlord pays taxes, insurance, and operating costs from it. Common in multi-tenant office, especially downtown.

Modified gross. The tenant pays one rent that includes operating costs at a reference level, then pays its share of increases above a base year or expense stop. Some modified gross leases also make the tenant pay its own utilities or janitorial directly. See the modified gross definition for the variations.

Triple net. The tenant pays base rent plus its full share of taxes, insurance, and CAM. Covered in depth in the triple net lease guide.

One suite, priced three ways

A 5,000 square foot suite in a building where operating costs run $9.00 per square foot this year:

NNN              base rent $22.00 + NNN $9.00          = $31.00 per SF
Modified gross   rent $31.00, base year 2026 costs included
Gross            rent $31.50, landlord carries all costs

Year one is nearly a wash: $155,000 for NNN and modified gross, $157,500 for gross. The landlord asks for a small premium on the gross deal because it carries the cost risk.

Now assume operating costs grow 6% a year and base rent escalates 3% a year in all three leases:

Year	NNN	Modified gross	Gross
1	$155,000	$155,000	$157,500
3	$167,261	$170,002	$167,092
5	$180,617	$186,265	$177,268

By year five the gross tenant pays about $3,300 a year less than the NNN tenant, because the landlord absorbed the cost growth.

The modified gross tenant pays the most, and the reason is worth knowing. Its 3% escalation applies to the whole $31.00 rent, including the $9.00 of operating costs built into it, and it also pays every dollar of cost growth above the base year. The embedded costs are effectively escalated twice. Tenants with good counsel negotiate escalation on the base rent portion only; landlords rarely offer it.

Who carries which risk

Risk	NNN	Modified gross	Gross
Tax reassessment	Tenant	Tenant, above base	Landlord
Insurance market spike	Tenant	Tenant, above base	Landlord
Vacancy raising per-SF costs	Shared via gross-up	Shared via gross-up	Landlord
Annual reconciliation work	Landlord	Landlord	None

The last row matters to a property manager. A gross lease needs no reconciliation at all. NNN and modified gross both need one every year, and a portfolio that mixes them needs a reconciliation engine that handles both a full pass-through and a base-year deduction.

Comparing offers fairly

When a tenant or owner compares lease types, convert everything to total occupancy cost per square foot over the term:

1. Start from base rent and its escalation schedule.
2. Add the current NNN rate, grown at a realistic rate per net. Taxes and insurance rarely grow at the same rate as CAM.
3. For modified gross, add only the expected increase above the base year or stop.
4. Compare the term totals, not the year one rents.

The NNN occupancy cost calculator does the year one comparison, and the rent escalation schedule builder projects the base rent side across the term.