NNN vs Gross Lease and How Lease Type Changes Value
Stockton Farnsworth, Utah Associate Broker · Team Utah Commercial, brokered by RE/MAX Associates
October 19, 2026 · 6 min read
Two buildings can collect the same rent and be worth very different amounts. A big reason is the lease. Who pays the property taxes, the insurance and the repairs decides how much of the rent the owner actually keeps, and how well that income holds up when costs rise.
If you own an industrial, retail, office or flex building in Utah, your leases are probably one of three basic types. Here is how each works, what it does to your net operating income (NOI), and why buyers care.
The three basic lease types
NNN (triple net)
In a triple net lease, the tenant pays base rent plus its share of the three "nets": property taxes, insurance and maintenance of common areas. Investopedia's NNN guide covers the basics. NNN is common in industrial and retail buildings.
Even in NNN deals, the landlord usually still carries some costs. Roof and structure, for example, are often the landlord's job, as are management time and anything the lease does not let the owner pass through. Read your leases. "NNN" on a summary sheet does not always mean every cost is covered.
Full service gross
In a full service gross lease, the tenant pays one rent, and the landlord pays the operating costs out of it: taxes, insurance, maintenance and often utilities and janitorial. Investopedia's gross lease page explains the idea. This structure is most common in multi-tenant office buildings.
The rent is higher because it has to cover those costs. The risk sits with the owner. If taxes or insurance go up, the landlord absorbs the increase unless the lease says otherwise.
Modified gross
A modified gross lease sits in the middle, and the details vary from lease to lease. Investopedia's modified gross lease page describes how costs get split. Often the tenant pays its own utilities and janitorial while the landlord pays taxes and insurance. Many of these leases add a base year or expense stop: the landlord covers costs up to the first year's level, and the tenant pays its share of any increase after that.
Because "modified gross" can mean almost anything, a buyer will want to read the actual lease language, not just the label.
Why lease structure changes NOI
NOI is income minus operating expenses. Lease type changes both sides of that equation.
- Under NNN, the tenant reimburses most expenses, so income and expenses both rise together. The owner's NOI stays close to the base rent.
- Under full service gross, the owner's NOI is whatever is left of the rent after paying the costs. When costs rise, NOI shrinks.
- Under modified gross with a base year, the owner is protected from increases above the base year, but not from costs the lease leaves on the landlord's side.
For the full step-by-step on NOI, see how to calculate cap rate.
Worked example: same building, two leases
Example: All numbers below are made up to show the math. They are not market rents, expenses or cap rates, and they do not describe any real building.
Picture a 10,000-square-foot single-tenant building. Operating expenses (taxes, insurance and common-area maintenance) are $50,000 a year. The owner also carries $6,000 a year of costs no lease passes through, such as structural reserves and unreimbursed management.
Year 1
| Line | NNN lease | Full service gross lease |
|---|---|---|
| Base rent | $120,000 ($12/sq ft) | $170,000 ($17/sq ft) |
| Expense reimbursements from tenant | $50,000 | $0 |
| Total income | $170,000 | $170,000 |
| Operating expenses | -$50,000 | -$50,000 |
| Landlord-only costs | -$6,000 | -$6,000 |
| NOI | $114,000 | $114,000 |
In year 1, the two leases produce the same NOI. The gross rent is higher precisely because it has to cover the expenses.
Year 2: taxes and insurance rise by $8,000
| Line | NNN lease | Full service gross lease |
|---|---|---|
| Base rent | $120,000 | $170,000 |
| Expense reimbursements | $58,000 | $0 |
| Operating expenses | -$58,000 | -$58,000 |
| Landlord-only costs | -$6,000 | -$6,000 |
| NOI | $114,000 | $106,000 |
Under the NNN lease, the tenant absorbs the increase and the owner's NOI does not move. Under the gross lease, the owner loses $8,000 of NOI.
If the lease were modified gross with a year-1 base year, the tenant would pay the $8,000 increase above the base, and the owner's NOI would stay at $114,000, much like the NNN case.
What that does to value
Divide NOI by a cap rate to estimate value. Using 7% purely as an example rate:
- NNN: $114,000 / 0.07 = about $1,629,000
- Full service gross: $106,000 / 0.07 = about $1,514,000
An $8,000 cost increase the owner could not pass through cost the gross-lease owner about $114,000 of value in this example. You can try your own numbers in our cap rate calculator.
There is a second effect the table does not show. Buyers weigh risk. Income that can shrink every time taxes or insurance rise is often viewed as less certain than income protected by pass-through clauses, and buyers may price that uncertainty into the cap rate they are willing to accept. How much depends on the property, the tenant and the market at the time.
What buyers look for in your leases
When a buyer or broker reviews your building, the lease type is only the start. They will look at:
- What actually passes through. Taxes, insurance, CAM, management fees, capital repairs and utilities each need a clear answer.
- Caps on increases. Some leases cap how much CAM or controllable expenses can rise each year. A cap shifts risk back to the owner.
- Base years and expense stops. Which year is the base, and is it a normal year?
- Reconciliations. Do you actually bill tenants for their share each year and collect it? Unbilled reimbursements are lost NOI.
- Rent escalations. Fixed bumps each year protect a gross lease better than flat rent does.
- Who handles the roof, structure and parking lot. These are often the largest costs a landlord carries, even in NNN leases.
- Lease term and renewal options. A strong lease with two years left is worth less than the same lease with ten years left.
Comparing rents across lease types
One practical trap: rent per square foot is not comparable across lease types. A $17 gross rent and a $12 NNN rent in the example above produced the same year-1 NOI. If you are comparing your rents with a neighbor's, or deciding what to charge on a renewal, first convert both to the same basis by adding or subtracting the expenses.
Getting more value from the leases you have
If your leases are gross or loosely written, you are not stuck. At renewal, owners often move toward clearer expense pass-throughs, base years or fixed escalations. Even with current leases, billing every reimbursement the lease allows, on time, can raise NOI. Talk with a real estate attorney before rewriting lease language.
Get a real number on your building
This article is general education, not legal, tax or investment advice. Lease structure is one of the biggest drivers of what a buyer will pay, and it is specific to your building. For a free broker opinion of value, call or text 801-664-3370. It is not an appraisal. It is a licensed broker's view of likely price, based on your actual leases, income and the current market.
Stockton Farnsworth, Utah Associate Broker, Team Utah Commercial, brokered by RE/MAX Associates.
General education only, not legal, tax, investment or appraisal advice. Information is believed reliable but not guaranteed. Written by Stockton Farnsworth, Utah Associate Broker, Team Utah Commercial, brokered by RE/MAX Associates.
