Commercial Lease Types Explained: A Complete Guide
Commercial real estate leases come in many flavors, each shifting expenses and responsibilities between landlord and tenant. Understanding lease types is critical—they directly impact NOI, cap rates, and investor returns. This guide walks you through every major lease structure used in CRE.
Read time: 12 minutes | Updated April 2026
Triple Net Lease (NNN)
Triple Net Lease (NNN): Tenant pays base rent PLUS all three "nets": property taxes, insurance, and common area maintenance (CAM). The landlord's responsibility is minimal—just the mortgage, capital improvements, and structural repairs.
Landlord Pays
- • Mortgage (if financing)
- • Roof & structural repairs
- • Parking lot resurfacing (major)
Tenant Pays
- • Base rent
- • Property taxes
- • Insurance
- • CAM (parking lot, common areas)
- • Maintenance inside their space
Typical Properties
Single-tenant (credit tenant such as CVS, Walgreens), multi-tenant strip centers, industrial warehouse parks, office buildings with stable tenants
Pros for Landlord
- ✓ Predictable net rental income (tenant pays most expenses)
- ✓ Lower operational burden and management costs
- ✓ High NOI margins (50–65%)
Cons for Landlord
- ✗ Capital expenses (roof, structure, parking lot) are landlord's obligation
- ✗ Limited upside (can't control operating expenses)
- ✗ Tenant default on expense payments affects cash flow
Double Net Lease (NN)
Double Net Lease (NN): Tenant pays base rent PLUS two "nets": property taxes and insurance. The landlord still handles CAM, maintenance, and structural repairs.
Tenant Pays
- • Base rent
- • Property taxes
- • Insurance
Landlord Pays
- • Base building structure & roof
- • CAM & common area maintenance
- • Utilities (if building-level)
- • Mortgage
Double Net leases are less common than NNN or Gross leases. They're often used in multi-tenant office or retail where the landlord wants to maintain operational control but shift certain risk to tenants.
Single Net Lease (N)
Single Net Lease (N): Tenant pays base rent plus one "net": property taxes only. The landlord covers insurance, maintenance, utilities, and all other operating expenses.
Single Net leases are less common in modern CRE. They offer minimal expense passthrough, giving landlords significant operational responsibility but less risk of tenant non-payment on expense items.
Full Service / Gross Lease
Full Service Gross Lease: Tenant pays only base rent. The landlord covers all operating expenses: property taxes, insurance, maintenance, utilities, CAM, management—everything. This is the landlord's most expensive lease structure.
Typical Properties
Office buildings with high-credit tenants, Class A multifamily buildings, hotel leases, some retail in prime locations
Pros for Tenant
- ✓ Simplicity—only pay rent, no surprise bills
- ✓ Predictable occupancy costs for budgeting
Cons for Landlord
- ✗ Lower NOI margins (40–50%)
- ✗ Landlord absorbs all expense inflation
- ✗ Higher operational management burden
Modified Gross Lease
Modified Gross Lease: A hybrid structure where the tenant pays base rent plus some (but not all) operating expenses. Common variation: tenant pays base rent, landlord covers some expenses, then they split overage amounts above a base year.
Example: Base Year + Overage Structure
Year 1 (Base Year) Property Taxes: $100,000
Year 2 Property Taxes: $105,000
Overage (Year 2): $105,000 - $100,000 = $5,000
Tenant pays 50% of overage ($2,500) to landlord
Modified Gross leases are common in mid-market office and retail where landlord wants to share inflation risk with tenants but maintain some simplicity for the tenant.
Percentage Lease
Percentage Lease: Tenant pays base rent PLUS a percentage of their gross sales revenue. Common in retail shopping centers where the landlord has upside if the tenant's business thrives.
Example: Retail Percentage Lease
Base Rent: $50,000/year
Percentage Rent: 5% of gross sales above $1M
Tenant Annual Sales: $2M
Percentage Rent Owed: ($2M - $1M) × 5% = $50,000
Total rent: $50,000 base + $50,000 percentage = $100,000
Typical Properties
Shopping centers, retail, restaurants, entertainment venues (movie theaters, bowling alleys)
Pros for Landlord
- ✓ Upside if tenant's sales grow
- ✓ Natural inflation hedge (sales typically rise with inflation)
Cons for Landlord
- ✗ Need access to tenant's sales records (audit rights)
- ✗ Downside if tenant's business declines
- ✗ Complex to underwrite (depends on tenant performance)
Ground Lease
Ground Lease: The landlord owns the land, the tenant owns or develops the building. The tenant pays rent to the landlord (ground rent) for use of the land. Common term: 30–99 years.
Typical Properties
Retail buildings in premium locations, office towers in CBD, hotels, some industrial and multifamily properties
Pros for Landlord
- ✓ Land appreciates, building depreciates (rent increases with resets)
- ✓ Long-term income stream (30–99 years)
- ✓ Reversion of improvements to landlord at lease end
Cons for Tenant
- ✗ No land equity—improvements revert at lease end
- ✗ Long lease term creates refinancing/exit complications
- ✗ Rent resets can dramatically increase over time
Lease Type Comparison
| Lease Type | Tenant Pays Rent | Tenant Pays Taxes | Tenant Pays CAM | Landlord NOI Margin |
|---|---|---|---|---|
| Triple Net (NNN) | ✓ | ✓ | ✓ | 50–65% |
| Double Net (NN) | ✓ | ✓ | – | 45–55% |
| Single Net (N) | ✓ | ✓ | – | 40–50% |
| Gross / Full Service | ✓ | – | – | 40–50% |
| Modified Gross | ✓ | Partial | Partial | 45–55% |
How Lease Type Affects NOI and Valuation
Lease structure directly impacts NOI and property value. A NNN-leased property generates higher NOI margins (landlord expense burden is lower), while a Gross-leased property has lower NOI margins (landlord absorbs all expenses).
Example: Same Property, Different Lease Types
Assume a 20,000 sq ft retail property with $400k annual gross rental income:
NNN Lease (tenant pays taxes, insurance, CAM)
Gross Rent: $400,000
Landlord Opex (roof, structure only): -$40,000
NOI: $360,000 (90% margin)
Gross Lease (landlord pays all)
Gross Rent: $400,000
Landlord Opex (taxes, insurance, CAM, maintenance): -$180,000
NOI: $220,000 (55% margin)
Same $400k rent, but NOI differs by $140,000! At a 5% cap rate, the NNN property is worth ~$7.2M while the Gross-leased property is worth ~$4.4M. Lease type is critical to valuation.
Frequently Asked Questions
Why do NNN leases command lower cap rates? ▼
NNN leases are lower risk for landlords because tenants pay most operating expenses and the landlord's only obligation is structural. This lower risk = lower required yield = lower cap rate. A NNN single-tenant property with a strong tenant might trade at 4.0% cap rate, while a Gross-leased property trades at 5.5% because the landlord carries more operational risk.
What happens if a tenant's sales decline in a percentage lease? ▼
Percentage rent falls with the tenant's sales. If a retailer's annual sales drop 30%, percentage rent decreases by 30%. This is why percentage leases have a base rent floor—it ensures minimum income even if sales collapse. The base rent covers the landlord's structural expenses.
Can you convert a lease type after signing? ▼
Technically yes, but it requires mutual agreement between landlord and tenant. In practice, lease types are set at signing. Some leases include modification rights (e.g., expense stops that shift costs to tenants after year 5), but wholesale changes are rare and typically include rent adjustments to compensate.
Which lease type is best for investors? ▼
It depends on your strategy. NNN leases with strong tenants offer stable, predictable income with low management burden. Gross leases offer more control but require operational expertise. Percentage leases offer upside if the tenant thrives. Conservative investors prefer NNN; value-add investors target Gross-leased properties where they can improve operations.
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