Commercial Lease Types Explained: NNN vs. Gross vs. Modified Gross vs. Percentage

The quoted rent on a commercial lease is not the rent you actually pay. A space advertised at $12 per square foot on a triple net basis will run you $18-$22 per square foot once you add property taxes, insurance, and common area maintenance. That same space quoted at $22 per square foot on a full-service gross lease might be the better deal, or it might not. It comes down to the lease structure.

Before you sign any commercial lease, or before you evaluate any building as an investment, you need to know the lease type. It decides who pays for what, who eats the risk when costs go up, and who really controls the economics of the property. Nothing else on the deal matters as much.

I'll cover the four structures I run into across Massachusetts and the rest of the country: triple net (NNN), full-service gross, modified gross, and percentage leases.

The four lease structures, side by side

Every commercial lease is one of four types, and the difference is how the operating expenses get split between landlord and tenant. Here's the framework:

The part people miss is that it isn't just about who writes the check. It's about who carries the risk when those costs move over time.

Triple net (NNN) leases

On a triple net lease the tenant pays base rent plus all three operating expense categories: property taxes, property insurance, and common area maintenance (CAM). The landlord collects a "net" rent and has almost no exposure to operating costs.

What the three nets actually cost

Each of the three "nets" is its own cost line:

A real NNN cost example

Take a 5,000-square-foot retail space in a Worcester shopping center:

The $14/SF you saw in the ad is really $26/SF, an 86% jump over the number on the sign. That's normal. The NNN add-on routinely runs 40-60% of the base rent.

Now put that same tenant into 5,000 SF in Spencer, where commercial tax rates are roughly a third of Worcester's:

That's a $50,250 gap every year, and it comes from structure and location working together. In Massachusetts commercial tax rates run from $11.77 per $1,000 in Leicester to $28.61 per $1,000 in Worcester, so where you sit matters as much as what you sign.

Where NNN is the norm

Certain property types are almost always NNN:

• Freestanding retail: Dollar stores, pharmacies, quick-service restaurants, auto parts stores, and gas stations are NNN almost without exception. Terms run 10-25 years with fixed escalations of 2% annually or 10% every 5 years
• Industrial and warehouse: NNN is the standard here. Industrial captured 64% of all net lease investment volume in 2024 (CBRE). Sale-leasebacks are especially common
• Single-tenant buildings: One tenant in the building, and it's almost always NNN, whatever the property type
• Medical office (freestanding): Standalone medical buildings are more and more written as NNN

Who NNN helps and who it hurts

For landlords: NNN is predictable, passive income. You collect rent and the tenant handles the rest. Long terms with credit tenants, 10 to 25 years, cut your vacancy risk. That's exactly why NNN properties are the go-to for 1031 exchanges and passive investors.

For tenants: Your base rent is lower because you're taking on the expenses. You pick the vendors, you set the maintenance standard, you control the timing. For a creditworthy national tenant, NNN gives you a known total cost you can budget around at scale.

The risk for tenants: You don't actually know your costs. A tax reassessment, an insurance spike after a bad storm season, a surprise capital repair, any of these blows up your budget. The moment that stings is the annual CAM reconciliation, when your estimated monthly payments get squared against what the landlord actually spent. Reconciliation bills of $5,000-$15,000 are common for retail tenants.

Full-service gross leases

A full-service gross lease rolls every operating expense into one rent number. The tenant pays that number each month, and out of it the landlord covers property taxes, insurance, maintenance, utilities, janitorial, and everything else.

How a gross lease splits out

Where gross leases are the norm

Full-service gross is the traditional structure for:

• Multi-tenant Class A office buildings: The main lease type in downtown Boston and other big metros
• Professional office space: Law firms, accounting firms, financial services
• Co-working and serviced office: WeWork-style spaces and executive suites

You see gross leases less often in Central Massachusetts than in downtown Boston. Worcester and the surrounding towns lean modified gross and NNN across most property types.

The base year, and why it matters

Most gross leases carry a base year provision to shield the landlord from expense inflation. Here's the mechanism:

1. Year one of the lease sets the "base year" for operating expenses
2. In later years, any expense increase above that base year amount gets passed through to the tenant
3. So the tenant pays a true gross rent in year one, then something closer to a modified gross rent after that

Example: A tenant signs a gross lease at $28/SF in 2026. Operating expenses that year are $12/SF. In 2027 they rise to $13/SF. The tenant now owes an extra $1/SF ($1 x 5,000 SF = $5,000) on top of the $28/SF base rent.

So a lease that looks like a clean gross deal often behaves like a modified gross lease after year one. Read the base year definition carefully and know exactly which expenses are in it.

Who gross leases help and who they hurt

For tenants: Simple to budget. One payment, one number, no surprises in year one. No vendors to manage, no CAM reconciliation to sweat, no insurance to shop.

For landlords: You can charge a premium for taking all that off the tenant's plate. The risk is expenses climbing faster than your rent bumps. In an inflationary stretch, a gross-lease landlord gets caught between fixed rent and rising taxes, insurance, and utilities.

The risk for tenants: You pay a higher all-in rate because the landlord priced in that risk. And the base year means your costs climb in year two and beyond anyway. Plenty of tenants sign a gross lease expecting cost certainty and get blindsided by escalation charges the following year.

Modified gross leases

A modified gross lease splits the operating expenses between landlord and tenant however the two sides negotiate it. There's no standard definition. Every modified gross lease is its own animal. Taxes, insurance, maintenance, utilities, janitorial, any of them can land on either party in any combination.

Common modified gross setups

Where modified gross shows up

Modified gross is the fastest-growing structure in commercial real estate right now. It's become the standard for:

• Flex and light industrial space: Tenant usually pays base rent plus utilities; landlord keeps taxes and insurance
• Suburban office: Especially multi-tenant buildings outside the big downtowns
• Medical office (multi-tenant): Where the landlord wants to keep control of the building but move some costs off
• Post-COVID office renewals: Landlords are converting old gross leases to modified gross at renewal to cut their exposure to expense inflation

Who modified gross helps and who it hurts

For landlords: You share the expense-inflation risk with the tenant while keeping some control of the building and some management simplicity.

For tenants: More predictable than full NNN, since some costs stay with the landlord. More flexible than gross, since you can negotiate which specific expenses you're willing to run yourself.

The risk for both sides: Ambiguity. Because "modified gross" means nothing on its own, fights break out over which expenses are "included" versus "passed through." You have to read one of these clause by clause. Two leases both called "modified gross" in the very same building can allocate expenses in completely different ways.

Percentage leases

A percentage lease has the tenant pay base rent plus a cut of gross sales above a set threshold, the "breakpoint." It ties the two sides together: when the tenant's business does well, the landlord shares in it.

How the math works

The pieces:

• Base rent: A fixed monthly amount, usually below market for the space
• Percentage rate: Typically 5-10% of gross sales, depending on the business
• Natural breakpoint: The sales level where percentage rent starts, figured as annual base rent divided by the percentage rate

Example: A retailer pays $30,000/year base rent with a 6% percentage rate.

• Natural breakpoint: $30,000 ÷ 0.06 = $500,000
• If annual gross sales hit $700,000: percentage rent = 6% × ($700,000 - $500,000) = $12,000
• Total annual rent: $30,000 + $12,000 = $42,000

Typical percentage rates by business

Where percentage leases get used

Percentage leases are almost entirely a retail thing, in spots where the landlord's property directly drives the tenant's sales:

• Enclosed shopping malls
• Lifestyle centers and power centers
• High-traffic shopping centers
• Airport and transit terminal retail
• Kiosk and temporary retail spaces

Who percentage leases help and who they hurt

For landlords: You share in the upside when tenants win. And your interests line up. You have a reason to keep investing in the property, parking, lighting, landscaping, events, because more foot traffic means more tenant sales and more percentage rent to you.

For tenants: The lower base rent is a cushion during slow stretches. You only pay more when business is good. That risk-sharing is worth a lot to a new business or a seasonal retailer.

The risk: Fights over how "gross sales" is defined are the single most common lawsuit in percentage leases. Questions the lease has to nail down: Are online sales in? What about returns and exchanges? Gift cards issued versus redeemed? Sales tax? Employee purchases? Delivery revenue from third-party apps? Every one of those has ended up in court.

Picking the right structure

A quick read for tenants

A quick read for landlords and investors

What to negotiate, by lease type

On NNN leases

1. Cap the CAM: Push for annual caps of 3-5% on controllable CAM. Non-cumulative caps that reset each year favor the tenant; cumulative caps that carry unused room forward favor the landlord
2. Keep capital expenditures out of CAM: Roof replacements, HVAC systems, and structural repairs belong to the landlord. Those are building improvements, not maintenance
3. Get audit rights: The right to examine the landlord's expense records. It's standard tenant protection and it stops overcharging
4. Ask for 2-3 years of actual expense history before you sign. Line the actuals up against the estimates in your proposal. The gap tells you how honest the landlord's projections are
5. Watch for management fees buried in CAM: Property management fees run 5-15% of total CAM and should be excluded or capped

On gross leases

1. Read the base year definition hard: What's included, and when does the base year start? A partial first year makes the base artificially low and sets you up for bigger pass-throughs later
2. Get a gross-up clause: If the building isn't full during the base year, the landlord should "gross up" expenses as if it were. Without it, your base year is understated
3. Cap the escalations: Negotiate annual limits on the expense pass-through increases
4. Pin down utilities: Some "gross" leases carve out electricity. Read the fine print

On modified gross leases

1. Put every allocation in writing: "Modified gross" is meaningless without specifics. The lease has to spell out which expenses the tenant pays and which the landlord pays
2. Set a base year for each expense category separately if you're using a base year structure
3. Know what happens when an expense gets reclassified: Whether something is a "repair" (tenant) or a "capital improvement" (landlord) can be a judgment call

On percentage leases

1. Define "gross sales" precisely: Carve out sales taxes, returns, employee purchases, and gift card issuances (count redemptions only)
2. Negotiate the breakpoint: An artificial breakpoint set by negotiation rather than the natural formula can cut either way
3. Address online and delivery sales: In 2026 a real chunk of retail revenue can come through channels the landlord's property doesn't drive
4. Set the reporting cadence: Monthly or quarterly reporting with an annual reconciliation is standard

What's different in Massachusetts

Property taxes swing hard from town to town

Massachusetts commercial tax rates jump around a lot by municipality, and that feeds straight into NNN costs. If you're weighing space across Central Massachusetts, the tax line alone can flip the economics of a deal:

A tenant leasing 10,000 SF in a building assessed at $1 million pays $16,870 more per year in property taxes in Worcester than in Spencer on an NNN lease, a $1.69/SF difference from taxes alone.

Local lease norms

Worcester and Central Massachusetts don't lease the way Greater Boston does:

• Boston downtown: Full-service gross runs the office market. NNN for retail and industrial
• Worcester metro: Modified gross and NNN are more common than full-service gross across nearly every property type
• Suburban Worcester County: NNN is standard for retail and industrial. Modified gross for office and flex
• Industrial across the region: NNN, universally. Base rents in Central MA run $6-$12/SF NNN, with total costs of $10-$20/SF after pass-throughs

How the lease type moves the value

If you're buying, the lease structure drives the valuation and the risk profile:

NNN properties with credit tenants and 10-plus-year terms trade at the lowest cap rates, meaning the highest prices, because the income reads almost like a bond. A Dollar Tree on a 15-year NNN lease is a completely different asset than the same building on a month-to-month gross lease.

The lease structure is the foundation under every good commercial real estate decision, whether you're signing for your own business, negotiating with a tenant, or sizing up an investment. Lornell Real Estate provides leasing advisory services for tenants and landlords across Central Massachusetts. Call us at (860) 305-7432 to talk through your lease or have the terms reviewed before you sign.

Related guides: Tenant's Guide to Negotiating Your Commercial Lease | Complete Guide to NNN Lease Investing | Property Tax Appeals Guide | Finding Commercial Space in Worcester

Sources & References

• CBRE

This article cites data from the sources listed above. For the most current figures, consult the original publications directly.

Data current as of publication date. Market conditions, rates, and regulations may have changed. Consult a qualified commercial real estate professional before making investment decisions.