Why lease structure matters more than the rent number
Every commercial property has the same operating costs: real property taxes, insurance, maintenance of common areas and systems, utilities, management, and eventually capital items like roofs and parking lots. A lease structure is simply an agreement about which of those the tenant pays directly, which the landlord pays and recovers through rent, and which the landlord absorbs. The structure shifts both cost and risk.
A gross lease prices the risk into the rent: the landlord estimates expenses, builds them into the rate, and bears the consequence if taxes or insurance rise. A net lease passes the actual expenses through, so the tenant pays what the building actually costs, and the landlord's income is insulated from increases. Neither is better in the abstract. The structure should match the asset, the tenant's ability to budget, and the length of the term.
Full-service gross lease
Under a full-service gross lease, the tenant pays one rent and the landlord pays the operating expenses, including taxes, insurance, maintenance, janitorial, and utilities for the common areas and often for the premises. This is the standard structure for multi-tenant office buildings, where many tenants share systems that are impractical to meter separately.
Most full-service leases include a base year or an expense stop. With a base year, the landlord pays expenses up to the level incurred in the first year of the lease, and the tenant pays its proportionate share of any increase above that level in later years. With an expense stop, the lease states a dollar figure per square foot and the tenant pays increases above it. Either way, a gross lease is only fully gross in year one.
What to negotiate: the base year (a full, normally occupied year, not a partial or low-occupancy year that sets an artificially low baseline), a gross-up clause so expenses in a partly vacant building are stated as if it were mostly occupied, a cap on controllable expense increases, and clear exclusions for capital improvements, leasing costs, and the landlord's own overhead.
Modified gross lease
A modified gross lease splits operating expenses by category rather than by base year. A common version has the landlord pay taxes, insurance, and common area maintenance while the tenant pays its own utilities and janitorial. Another has the tenant pay a share of everything except structural repairs and management. The term covers a wide range, which is exactly why the label tells you little.
Modified gross is common in smaller office buildings, flex and service-industrial space, and medical office, where some expenses are easy to meter to the premises and others are shared. It is also what many gross leases become after a base year has been negotiated.
What to negotiate: a schedule that lists every expense category and assigns it to one party, how shared categories are allocated (rentable square footage is standard), and the same caps, exclusions, and audit rights you would want under NNN.
Triple net (NNN) lease
Under a triple net lease the tenant pays base rent plus its proportionate share of the three nets: real property taxes, property insurance, and common area maintenance. CAM typically covers landscaping, parking lot maintenance and lighting, snow removal, common utilities, security, repairs to shared systems, and a management fee. The tenant also pays its own utilities and interior maintenance. The landlord generally retains responsibility for the roof and structure in a multi-tenant NNN lease, which is why practitioners sometimes call that version a double net or NN lease.
NNN is the standard structure for retail centers, industrial buildings, and single-tenant properties, and it is the structure that makes net-leased investment property attractive: the owner's income is the base rent, and expense increases are the tenant's problem. Our NNN properties guide covers the investment side.
What to negotiate as a tenant: a detailed definition of CAM with exclusions for capital items, roof and structure, the landlord's financing costs, leasing commissions, and tenant-specific costs of other tenants; a cap on controllable CAM increases; a management fee cap stated as a percentage; the right to audit reconciliations; and a clause that handles reassessment of property taxes after a sale of the building. As a landlord: a management fee, an administrative fee on CAM, the ability to pass through capital items that reduce operating costs, and clean reconciliation timing.
Absolute net (bondable) lease
An absolute net lease puts every cost and risk on the tenant: taxes, insurance, all maintenance including roof and structure, and in the strictest versions the obligation to keep paying rent even if the building is damaged or condemned. It is used for single-tenant properties leased to investment-grade or large regional operators, such as a drugstore, a quick-service restaurant on a ground lease, or a distribution facility built to suit.
For the investor, an absolute net lease is as close to a bond as real estate gets, which is why these properties trade at lower cap rates than multi-tenant assets with the same tenant credit. For the tenant, it is the price of controlling a purpose-built location for a long term, and large operators accept it because they prefer to manage their own buildings.
Percentage rent and ground leases
Two structures appear alongside the four above. Percentage rent, common in retail, adds rent equal to a percentage of the tenant's sales above a breakpoint to a base rent; it aligns landlord and tenant in a center where traffic drives sales, and it requires sales reporting and audit rights in the lease. A ground lease rents the land only; the tenant builds and owns the improvements for the term, typically 20 to 99 years, after which they revert to the landowner. Ground leases are almost always absolute net and are the usual structure for pad sites and build-to-suit retail along Albuquerque's commercial corridors.
How to compare a gross quote to a NNN quote
Convert every quote to total occupancy cost per square foot per year, then to a monthly dollar figure for the premises. Ask the landlord for the current year's operating expense estimate per square foot under a NNN or modified gross lease, and for the base year expenses under a full-service lease. Add the costs the tenant pays directly, such as utilities and janitorial, to whichever quote excludes them.
A hypothetical comparison for a 5,000-square-foot office in Albuquerque: Building A quotes $22.00 full-service with janitorial and utilities included. Building B quotes $17.00 NNN with estimated expenses of $6.50, and the tenant pays its own janitorial and electricity, which it estimates at $2.25. Building B's total occupancy cost is $25.75, about $18,750 more per year than Building A, before any difference in parking, improvement allowance, or escalations. The lower headline rent was the more expensive space.
Then compare the risk. The full-service tenant's exposure is limited to increases above the base year; the NNN tenant pays every increase in taxes and insurance from day one. On a long term in a building likely to be sold and reassessed, that difference can be larger than the rent gap.
New Mexico specifics that change the math
Gross receipts tax: base rent under a true lease of real property is deductible from New Mexico gross receipts tax, so neither party pays GRT on it. Services the landlord provides and bills separately, and equipment or furniture included in the rent, are taxable, and tenant improvement construction carries GRT at the local rate. Our guide to gross receipts tax and commercial real estate covers the details.
Property taxes: New Mexico assesses property tax on one-third of the assessed value multiplied by the local mill rate, and a sale can trigger a reassessment to current market value. Under a NNN lease that increase passes straight through to tenants, so ask how long the current owner has held the building and what a sale would do to the tax line.
Insurance and CAM in a high-desert climate are generally lower than in coastal markets, but roof and HVAC replacement cycles are shorter under Albuquerque sun and hail, which is why the capital-expense exclusion in CAM matters here.
Which structure fits which property
Conventions by asset type, so you know what a quote probably includes before asking.
- Multi-tenant office: full-service gross with a base year, or modified gross in smaller buildings.
- Medical office: modified gross or NNN, with tenant-paid utilities because of equipment loads.
- Multi-tenant retail: NNN, often with percentage rent for restaurants and anchors.
- Industrial and flex: NNN, with the tenant handling interior maintenance and the landlord retaining roof and structure.
- Single-tenant retail, restaurant, and pharmacy: NNN or absolute net, frequently on a ground lease.
- Build-to-suit distribution or manufacturing: absolute net for a long initial term.
This is general information, not tax or legal advice. Confirm details with your CPA, attorney, and qualified intermediary before acting.
Have a question this page does not answer? Contact Team Southwest or call us; a broker, not a form, will respond.
