Commercial Lease Structuring: Full Service Gross vs. Modified Gross vs. NNN Net Present Value
A commercial real estate financial analysis comparing Full-Service Gross, Modified Gross, and Triple Net (NNN) leases, expense stops, and tenant improvements.
Commercial Lease Comparison Model
Normalize gross vs NNN lease cash flows and model base year expense stop overages
Empirical Analysis & Findings
## Lease Structure Normalization: Gross vs. Modified vs. NNN
Comparing office and retail lease proposals requires normalizing operating expense pass-throughs to determine the True Effective Net Rent per square foot.
### 1. Primary Commercial Lease Formats
1. **Full-Service Gross (FSG)**: Tenant pays single flat rate per square foot. Landlord covers property taxes, building insurance, structural maintenance, and utilities up to the Base Year Expense Stop.
2. **Modified Gross (MG)**: Tenant pays base rent plus proportional shares of selected operating cost increases (typically taxes and utilities, while landlord maintains roof and structure).
3. **Triple Net (NNN)**: Tenant pays base rent plus 100% of property taxes, insurance, and common area maintenance (CAM).
$$\text{Effective Rent NPV} = \sum_{t=1}^{N} \frac{\text{Base Rent}_t + \text{Expense Overages}_t - \text{TI Amortization}_t}{(1 + r)^t}$$
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Frequently Asked Questions
What is a 'Base Year Expense Stop' in a Full-Service Gross commercial lease?
The landlord covers operating expenses up to the first-year actual expense level (the base year); any subsequent annual expense increases are billed pro-rata to the tenant.
How do Tenant Improvement (TI) allowances affect effective net rent?
Landlord-funded TI allowances reduce net effective rent; analysts amortize the TI expenditure over the initial lease term at the landlord's cost of capital to calculate true rent.
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