Types of Commercial Real Estate Leases

Commercial real estate leases are categorized by how rent and operating expenses are divided between landlord and tenant. Understanding the structure you are signing -- or negotiating -- is essential to protecting your financial position. At ROGCRE, Geoff Adams, CCIM represents tenants, landlords, buyers, and investors across every lease type throughout Arizona -- including Phoenix, Scottsdale, Mesa, Tempe, Chandler, and Gilbert.

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Gross Lease (Full Service Lease)

In a gross lease, the tenant pays one all-inclusive rent amount that covers most property-related expenses. The landlord pays taxes, insurance, maintenance, janitorial services, and utilities out of the rent received. As a result, this structure offers maximum predictability for tenants -- no surprise maintenance fees or fluctuating CAM charges.

However, tenants should clarify which janitorial services are included and whether excessive utility usage will trigger additional charges. Note that even in a gross lease, tenants remain responsible for their own business property insurance. This lease type is common in multi-tenant office buildings throughout the Phoenix metro.

Net Leases -- Single, Double, and Triple Net

In a net lease, the landlord charges a lower base rent and passes some or all operating expenses to the tenant. These expenses typically include real estate taxes, property insurance, and Common Area Maintenance (CAM) charges such as landscaping, parking lot maintenance, trash collection, and shared utilities. There are three tiers:

NNN leases are the dominant structure for investment-grade commercial properties in Arizona. For example, a tenant leasing 1,000 SF in a 10,000 SF building pays 10% of the building's taxes, insurance, and CAM costs. Furthermore, NNN leases provide transparency -- tenants see actual operating costs rather than an inflated gross rate. However, NNN costs fluctuate year to year, which makes expense forecasting more challenging. Therefore, tenants should negotiate annual CAM increase caps and audit rights.

Absolute Triple Net Lease (Hell-or-High-Water)

The absolute NNN lease is the most landlord-favorable structure available. Unlike a standard NNN lease where the landlord retains some responsibilities, an absolute NNN lease makes the tenant liable for all costs under any circumstance -- including rebuilding after a disaster and continuing rent payments even if the building is condemned. This structure is infrequently used and typically reserved for corporate credit tenants on long-term deals. Moreover, it requires exceptionally careful review before signing.

Modified Gross Lease

The modified gross lease is a hybrid structure -- rent is paid as a single amount like a gross lease, but landlord and tenant negotiate which specific operating expenses are included. Typically, base rent covers property taxes, insurance, and CAM, while utilities and janitorial services are excluded and paid separately by the tenant. As a result, tenants gain more control over variable costs while landlords receive partial expense coverage through the base rent.

This flexibility makes modified gross leases popular in office and flex properties throughout the Phoenix metro, where both parties can reach agreement more easily than with a strict gross or net structure.

How to Compare Lease Structures

When evaluating commercial space, never compare base rental rates alone. A NNN rate of $18/SF may cost the same or more than a gross rate of $24/SF once taxes, insurance, and CAM are added. Market forces tend to equalize total occupancy costs for comparable spaces in the same submarket. Therefore, always calculate your total monthly obligation -- base rent plus all pass-through expenses -- before making a decision.

Key negotiation points regardless of lease type include:

• Tenant improvement allowance (TIA) -- landlord contribution toward your buildout
• Free rent periods -- rent abatement during construction or early occupancy
• CAM caps -- annual limits on how much CAM charges can increase
• Audit rights -- your right to verify landlord's expense calculations
• Renewal options -- predetermined rent and notice requirements for extensions
• Exclusivity and co-tenancy clauses -- protection against competing tenants and anchor departures
• Sublease and assignment rights -- flexibility if your business changes

For a complete glossary of lease terms including WALT, CAM, TIA, and more, see our Commercial Real Estate Terms glossary. For a side-by-side comparison of NNN vs Gross leases, visit our Common Lease Types page. The CCIM Institute also provides extensive educational resources on commercial lease analysis. You can search available leased properties on our Arizona Commercial MLS, or contact us directly to discuss your lease situation.