Understanding the Main Types of Commercial Leases

When it comes to commercial leases, there are various types and terms that can be confusing for both lessors and lessees. Among these terms are “triple net leases,” “pass-through leases,” and “bondable leases,” which may vary in naming conventions depending on the region. Understanding the different types of commercial leases is essential for both parties involved. Let’s take a look into the meaning of triple net leases and explore various types of commercial leases to shed light on their characteristics and implications.

Gross Lease

A gross lease is similar to renting an apartment for personal use. In this type of lease, the lessor includes all expenses, such as snow removal, lawn maintenance, and hallway lighting, in the rent payment. This is the simplest form of a commercial lease, but it is relatively uncommon in the commercial real estate market.

Example of a Gross Lease

A small business renting a shared coworking space. A company may favor a gross lease to simplify expenses, as the landlord assumes responsibility for all operating costs, such as utilities, maintenance, and property taxes.

Modified Gross Lease

A modified gross lease is often seen in office buildings, combining elements of both gross and net leases. Under this type of lease, operating expenses, property taxes, and insurance are typically included in the initial base year rent. However, any increases in these expenses over the base year are charged to the tenant based on their pro-rata share. The exact terms may vary, specifying either the actual expenses or an increase over a base amount.

Example of a Modified Gross Lease

A small business renting a shared coworking space. A company may favor a gross lease to simplify expenses, as the landlord assumes responsibility for all operating costs, such as utilities, maintenance, and property taxes.

Triple Net Lease (NNN lease)

Triple net leases (NNN leases) are frequently seen in retail leases. In this type of lease, the lessee assumes responsibility for additional expenses beyond the base rent. These expenses typically include common area maintenance (CAM), property taxes, and property insurance. The lessee pays the base rent “net” of these three expense categories. Hence, it is called a triple net lease.

Example of a Triple Net Lease

A national retail chain might opt for a triple net lease to gain control over property taxes, insurance, and maintenance expenses to ensure transparency and flexibility across their portfolio.

Absolute Net Lease

An Absolute Net Lease, also known as a bondable lease, is the most tenant-intensive lease structure. The tenant assumes full financial responsibility for all property-related expenses—including taxes, insurance, maintenance, and even structural repairs or replacement. These leases are typically non-cancelable and remain in force even if the building is destroyed. This structure is commonly used in long-term, single-tenant agreements with investment-grade tenants.

Example of an Absolute Net Lease

A national retailer like Walgreens may lease a freestanding pharmacy building on a 20–25 year absolute net lease. Walgreens would pay the rent, cover all property-related expenses, and be responsible for any roof or foundation repairs without landlord involvement.

Percentage Lease

A Percentage Lease combines a base rent with a percentage of the tenant’s gross sales, aligning landlord income with tenant performance. This lease type is common in retail settings where revenue can fluctuate based on seasonality or location traffic. The lease agreement typically sets a breakpoint—a sales threshold above which the tenant begins paying the percentage. Expense responsibilities (like taxes or maintenance) vary and are often negotiated separately.

Example of a Percentage Lease

A clothing retailer leasing space in a regional shopping mall might pay $3,000 per month in base rent plus 5% of monthly gross sales over $60,000. If the store earns $80,000 in a given month, they would owe an additional $1,000 in percentage rent (5% of $20,000).

What are Pass-Through Expenses in Commercial Leases?

Pass-through expenses refer to operating costs that a tenant pays in addition to base rent. These can include property taxes, insurance, maintenance, snow removal, and landscaping. Rather than being bundled into rent, these expenses are “passed through” from the landlord to the tenant—either directly or through reimbursement.

Pass-through clauses are common in lease types like triple net (NNN), modified gross, and even percentage leases. For example, in a triple net lease, tenants typically cover all pass-through costs. In contrast, a modified gross lease might allocate only certain expenses to the tenant.

Key Features of Common Lease Structures

Comparing Common Commercial Lease Types

Understanding the differences between commercial lease types is essential for making informed financial and operational decisions. Below, we compare the most common lease structures, including gross, modified gross, triple net, percentage, and absolute net leases, to help you assess which lease may align best with your organization’s needs

Triple Net Lease (NNN Lease) vs. Gross Lease

The key difference between a triple net lease and a gross lease is who covers additional expenses. In a triple net lease, the tenant pays the base rent plus expenses for common area maintenance (CAM), property taxes, and property insurance. In a gross lease, the tenant pays a fixed rent, and the landlord covers all other property expenses. This makes it simpler for the tenant but often results in a higher rent.

Triple Net Lease (NNN Lease) vs. Modified Gross Lease

The difference between a triple net lease and a modified gross lease is the structure of expenses. Triple net leases have lower base rent with separate additional expenses, while modified gross leases combine elements of gross and net leases. In a modified gross lease, the base year rent includes certain expenses, but any increases in these expenses over the base year are charged to the tenant. This offers a balance between predictability and flexibility in managing expenses.

Triple Net Lease vs. Percentage Lease

A triple net lease requires the tenant to pay base rent plus all property expenses, offering predictable income for landlords. A percentage lease, commonly used in retail, includes a base rent plus a percentage of the tenant’s gross sales. While triple net leases prioritize cost control and clarity, percentage leases give landlords a share in tenant success—especially useful in high-traffic or seasonal locations.

Gross Lease vs. Percentage Lease

In a gross lease, tenants pay one flat rent and the landlord handles all operating expenses. A percentage lease includes a base rent plus a percentage of the tenant’s gross sales—often used when rent is tied to performance. Gross leases are straightforward and predictable, while percentage leases offer flexibility and profit-sharing potential, particularly in retail environments where foot traffic and seasonal variation impact revenue.

Gross Lease vs. Modified Gross Lease

The primary difference between a gross lease and a modified gross lease lies in how expenses are handled. In a gross lease, the tenant pays a fixed rent while the landlord covers all property expenses. A modified gross lease, however, splits certain costs—such as utilities, maintenance, or property taxes—between the landlord and tenant. This creates more flexibility for tenants who want some cost predictability but are open to sharing specific responsibilities.

Absolute Lease vs. Triple Net Lease

While both lease types shift operating costs to the tenant, an absolute net lease goes a step further. In a triple net lease, the tenant pays for taxes, insurance, and maintenance, but the landlord may still retain responsibility for structural repairs. With an absolute net lease, the tenant assumes all expenses with no exceptions, including roof or foundation repairs. These long-term leases are typically non-negotiable and used in single-tenant, investment-grade retail properties.

How the Real Estate Market Impacts Commercial Lease Type Choice

The current state of the real estate market plays a significant role in influencing not only lease negotiations but also the type of lease businesses might prefer.

• Post-Pandemic Adjustments: The rise of hybrid work has driven demand for flexibility, leading many businesses to favor modified gross leases. These allow companies to scale costs in line with their usage, a key benefit when space needs are uncertain or fluctuating.
• Retail Industry Trends: As e-commerce continues to expand, retailers are leaning toward triple net leases. These provide more control over operational costs, allowing businesses to invest in enhancing in-store experiences without unexpected financial burdens. This lease structure also gives landlords more predictable income, making it common in freestanding and single-tenant retail.
• Economic Uncertainty: In uncertain or inflationary climates, businesses often prefer gross leases to avoid fluctuating expenses. A fixed rent amount ensures predictable budgeting, which is critical for financial planning.
• Energy Efficiency: With sustainability becoming a top priority, some companies are opting for pass-through leases that include provisions for energy-efficient upgrades. Tenants can directly manage energy-saving projects and negotiate shared savings with landlords.
• Sustainability Priorities: As environmental, social, and governance (ESG) goals become more central to corporate strategy, some tenants prioritize lease structures, like triple net or modified gross, that allow direct control over operational upgrades. This enables companies to invest in energy efficiency and negotiate shared savings with landlords.

Commercial Lease Type Implications for Lease Accounting

Understanding the nature of the commercial lease type is essential for proper lease accounting, as it affects how expenses are treated under accounting standards such as FASB, ASC 842, and IFRS 16.

While the lease payment represents the amount paid for asset usage, common area maintenance expenses are typically considered variable expenses, separate from the lease component. Taxes are treated similarly, and considered excluded from the lease expense. Lessors should carefully allocate these expenses based on the lease type to accurately report their assets and liabilities.

The classification of these expenses varies depending on lease structure. For example:

• In a gross lease, nearly all costs are bundled into the fixed lease payment and classified as lease expense.
• In a triple net lease, only the base rent is capitalized; expenses like CAM, taxes, and insurance are accounted for separately.
• Modified gross leases require careful allocation depending on which costs are fixed vs. variable.

Accurate classification is critical for financial reporting, compliance, and audits. Both lessees and lessors should document cost components and allocate them based on lease type to ensure accurate reporting of assets and liabilities.

How Lease Accounting Software Supports All Commercial Lease Types

Lease accounting software simplifies the managing of various commercial lease types, ensuring businesses can track lease terms, expenses, and compliance requirements efficiently.

It offers a centralized platform for storing and monitoring key lease data. This allows accurate tracking of critical dates, lease-specific expenses like CAM fees, and financial commitments across multiple leases.

A lease accounting software also ensures compliance with accounting standards like ASC 842 and IFRS 16. By adopting a lease management system, businesses can enhance their efficiency, improve decision-making, and maintain compliance.

Understanding the different types of commercial leases is important for businesses and landlords. Whether you’re negotiating a triple net lease, gross leases, pass-through lease, the right knowledge and tools can significantly impact your financial outcomes.

To take your lease management to the next level, consider a real estate lease accounting softwarelike Visual Lease. Our lease accounting software is designed to simplify complex lease terms, automate calculations, and ensure compliance with accounting standards like ASC 842 and IFRS 16.

With tools for tracking lease types, generating reports, and managing critical dates, Visual Lease empowers businesses to make smarter decisions and maximize the value of their lease agreements. Want to see how it works? Request a demo today.