Gross vs. NNN lease: how to compare true occupancy cost across retail suites by adding base rent, nets and the costs that never show up in an asking rent.
Photo: Colton Sturgeon / Unsplash
The question I hear most from retail tenants sounds like this: this space is one rate a foot and that one is another, so which is cheaper? My honest answer is usually that I cannot tell yet, because the two numbers are not measuring the same thing.
Asking rent is a starting point. Total occupancy cost is what you actually pay. Here is how I compare them.
What is the difference between a gross lease and a NNN lease?
In a gross lease, the tenant pays one rent and the landlord pays the property's operating costs out of it. In a NNN, or triple net, lease the tenant pays base rent plus a share of the three nets: real estate taxes, property insurance and common area maintenance.
Between the two sit modified gross leases, where some costs are included and others are passed through. The label on the lease matters less than the list of who pays what.
Why is base rent alone misleading?
A gross rent looks higher because it already includes operating costs. A NNN rent looks lower because it does not. Compare them directly and the NNN space almost always looks cheaper on paper, whether or not it is.
Base rent also hides the items neither number includes: utilities, janitorial, HVAC maintenance, interior repairs, and in some leases the roof or parking lot. Those belong in the comparison too.
How do you calculate total occupancy cost?
- Start with base rent per square foot per year.
- Add the estimated nets per square foot: taxes, insurance and CAM.
- Add the costs you will pay directly: utilities, an HVAC service contract, janitorial and interior repairs.
- Multiply by the suite's square footage for an annual figure, and divide by 12 for monthly.
- Adjust for anything unusual: free rent, a TI allowance or rent escalations over the term.
- Total cost per SF per year
- $26.00/SF
- Total per year
- $52,000
- Total per month
- $4,333/mo
Occupancy cost = (base rent + NNN) × SF. Compare suites on this number, not on base rent alone. The example figures are illustrative, not the terms of any property.
Open the full calculator →Worked by hand: $20 plus $6 is a hypothetical $26 per square foot all-in. On 2,100 SF that is $54,600 a year, or $4,550 a month, before utilities and the other direct costs.
Then add the direct costs. Utilities, a service contract on your HVAC unit, janitorial and routine interior repairs are rarely in any quote, and for some uses they are a meaningful share of the total. Put an honest estimate on each before you compare one space with another.
How do you compare occupancy cost across suites of different sizes?
Per-square-foot rates make spaces look comparable. Annual dollars tell you what your business has to carry. To show the scale only, take one invented all-in rate of $26 per square foot:
- Every square foot you lease costs a hypothetical $26 a year, all-in
- Double the floor area and the annual cost doubles with it
- Triple it, and the business has to carry three times the occupancy cost
The point is not the dollar figures, which are invented. The point is that a suite three times the size costs three times as much to occupy at any rate, and your sales plan has to support the size you choose, not the rate you were quoted.
How do rent escalations change occupancy cost over the term?
A first-year number is not the whole story. Most leases step up base rent over the term, and nets follow the real costs of taxes, insurance and CAM. To compare two spaces fairly, I lay out the full term year by year and total it.
A lease with a fixed annual increase costs noticeably more in year five than in year one, while a flat lease does not. Two spaces that look the same in year one can be far apart over the full term. The total-term number, along with what you will pay in the final year, is what I want a tenant to see before deciding.
Who pays for the roof, HVAC and parking lot?
This is where gross and NNN labels mislead most. Some NNN leases make the tenant responsible for HVAC repair and replacement on their own unit. Some pass roof and parking lot replacement through CAM as amortized capital costs. Others leave those with the landlord. Read the repair and maintenance section line by line, and put a dollar estimate on anything that becomes yours.
How do TI allowances and free rent change the comparison?
A landlord may offer a tenant improvement allowance, free rent or both. Those have real value, but they are paid back somewhere, often through a higher base rent or a longer term. To compare fairly, spread the concession over the lease term and subtract it from your annual cost. Matthew Danner, Windfield's development associate, explains how TI allowances and lease terms interact in his article on build-outs.
See how TI allowances and lease terms work together on a build-out.
How does this apply to The Shops at Smithville?
The Shops at Smithville is a 30,150 SF center at 14903–14901 U.S. 169 in Smithville, with 18,680 SF available in four spaces: Suite 400 at 1,400 SF, Suite 500 at 2,100 SF, Suite 600 at 5,180 SF and the standalone 14901 South Building at 10,000 SF. Committed tenants include a pizza shop, AT&T, a nail salon, an HVAC company and an accountant.
Each space starts a different occupancy-cost conversation. Suite 600, the largest in-line suite, can suit a user such as a fitness studio that needs open floor area. The 10,000 SF South Building is a standalone building, which raises its own questions about who maintains the roof, parking and building systems. When a tenant calls me about any of these spaces, the first thing we build together is the all-in annual number.
Fitness operator? See how Suite 600 and the other spaces fit a studio or gym.
Franchise or QSR developer? See the standalone 10,000 SF South Building.
Compare annual dollars, not asking rates. If you want help building that comparison for your business, call me at Windfield Real Estate, 816-612-5191.
Review the site plan, the brochure and all four available spaces at The Shops at Smithville.
Questions people ask
Is a NNN lease cheaper than a gross lease?
Not necessarily. A NNN rent looks lower because taxes, insurance and CAM are billed separately, while a gross rent already includes them. The only fair comparison is total occupancy cost: base rent plus nets plus the costs you pay directly, multiplied by the square footage. Sometimes the gross space costs less overall, and sometimes it does not.
What does 'nets' mean in a retail lease?
Nets are the operating costs passed through to the tenant on top of base rent, typically real estate taxes, property insurance and common area maintenance. They are usually quoted as an estimated amount per square foot per year, billed monthly, and reconciled against actual costs after the year ends. Ask how the estimate was built and what it includes.
What is a modified gross lease?
A modified gross lease sits between gross and NNN. The tenant pays a base rent that includes some operating costs, while others, often utilities, janitorial or increases in taxes over a base year, are passed through. Because the split varies from lease to lease, read the expense section closely rather than relying on the label.
Should I compare rent per square foot or annual cost?
Use both, but decide on annual cost. Rent per square foot helps compare spaces of similar size. Annual dollars tell you what your business has to carry, and that is what your sales forecast must support. A cheaper rate on a much larger suite can still be the more expensive choice for your business.
What costs are left out of most rent quotes?
Utilities, HVAC maintenance contracts, janitorial, interior repairs, signage, and in some leases the roof, structure or parking lot. A quote may also leave out the cost of your build-out above the TI allowance. List every cost you expect to pay over the term, then add it to the base rent and nets before you compare spaces.
Ben is a Certified Commercial Investment Member (CCIM) who advises clients on leasing, acquisitions and investment analysis. Before joining Windfield in 2020 he advised investors in St. Louis and worked in leasing and property management in Columbia, Missouri.
Windfield Real Estate, LLC · Licensed Missouri real estate broker · 816-612-5191 · info@windfieldrealestate.com
