NNN versus gross is one of the most misunderstood topics in commercial leasing. The common assumption — that a gross lease is the simpler, safer option and a NNN lease is where tenants get nickel-and-dimed — is often backwards. For both tenants negotiating space and landlords structuring deals, it pays to understand how these leases behave.
How a NNN Lease Works
In a NNN lease, the tenant pays base rent to the landlord, then its prorated share of the building’s operating expenses — property taxes, insurance, and common area maintenance (CAM) — on top of it.
The math is straightforward. A tenant leasing 10% of a building pays 10% of the property tax bill, 10% of the insurance bill, and 10% of the CAM costs.
The costs are visible, and each party pays its share. Transparent.
How a Gross Lease Works — and the Catch
In a gross lease, the tenant pays one flat rent number, and the landlord covers the operating expenses out of it.
It sounds simpler. But nearly every gross lease includes a base year, and that’s where people often get confused.
Suppose a tenant signs a gross lease in 2025 at $20 per square foot. Of that $20, $10 covers operating expenses for the year. That $10 becomes the base year number.
In 2026, operating expenses rise to $11 per square foot. The $1 increase over the base year gets passed back to the tenant, who now pays $20 plus $1 in expense pass-throughs — $21 per square foot.
In other words, the flat rent only covers expenses up to the base year. Every increase above it is billed to the tenant anyway — which is why a gross lease often isn’t truly “gross” like the name implies.
Why NNN Can Favor Tenants
The part that often gets overlooked is what happens when operating expenses fall.
In a NNN lease, when expenses drop, the tenant’s total cost drops with them. In a gross lease with a base year, when expenses drop, the rent stays the same — and the landlord keeps the difference.
Take the same example. Start at the equivalent of $20 in 2025, with $10 going to operating expenses. If those expenses fall to $8 in 2026:
- Gross lease: The tenant still pays $20. The savings stay with the landlord.
- NNN lease: The tenant pays $10 base + $8 expenses = $18 — a savings of $2 per square foot.
When operating expenses are trending down, a NNN lease can often work in the tenant’s favor.
Why This Matters Right Now
Property taxes and insurance costs spiked across the board after COVID, but they’re now normalizing, and even coming down in many markets.
Tenants with NNN leases capture those savings as they happen. Tenants with gross leases with a base year set during the high-cost years may never see them — they’re effectively locked in near the peak. For landlords, the reverse holds: a base year set high offers some protection when costs decrease.
Over the life of a lease, the difference can be meaningful.
The Bottom Line
Most gross leases have a base year, which means they’re not truly gross. Increases in operating expenses are passed along to the tenant. If expenses decrease, the tenant’s rent doesn’t decrease along with it.
For landlords and tenants alike, the key is to understand what’s being signed. The lease structure can have significant implications, particularly over a long-term lease.
