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Commercial Lease Types: Triple Net (NNN), Gross and Modified Gross

By Matthew Martinez, Founder, CEO & Managing Broker, Diamond Real Estate Group. California DRE #01869679.

In a triple net (NNN) lease, the tenant pays base rent plus its share of the property’s three main operating costs: property taxes, building insurance and maintenance, often billed as common area maintenance or CAM. In a full-service gross lease, the tenant pays one rent and the landlord pays those costs out of it; a modified gross lease sits in between, with the tenant paying some costs, such as its own utilities or increases over a base year. These labels are market shorthand, not legal definitions, so the lease’s operating-expense clause decides who pays what.

This guide compares the main structures, works through the same space priced three ways, and covers the California rules that change the math: Proposition 13 reassessment when a building sells, the Civil Code section 1950.9 limits on operating-cost charges to small tenants that took effect for leases signed from 2025, and the CASp disclosure required in leases of space open to the public. It is written for small-business tenants and for owners leasing space for the first time. For leasing and sales help, see our commercial real estate services.

Lease types at a glance

Structure	Tenant pays	Landlord pays	Who carries cost increases
Absolute net (sometimes “bondable”)	Base rent plus all property costs, often including roof and structure	Little or nothing	Tenant
Triple net (NNN)	Base rent plus its share of taxes, insurance and maintenance or CAM	Often roof, structure and capital items, depending on the lease	Mostly tenant
Double net (NN)	Base rent plus taxes and insurance	Maintenance and repairs	Shared
Single net (N)	Base rent plus property taxes	Insurance and maintenance	Mostly landlord
Modified gross	Rent that includes some costs, plus negotiated items such as utilities, janitorial or increases over a base year	The costs built into the rent	Shared, set by the lease
Full-service gross	One rent, sometimes with an annual escalator	Taxes, insurance, maintenance and often utilities	Landlord, unless the lease passes through increases

In our North Bay markets, single-tenant industrial and retail buildings are often leased on net terms, while multi-tenant office space is more often gross or modified gross. Retail leases can also add percentage rent tied to sales. None of that is fixed; read the clause, not the label.

One space, three structures: a worked example

The figures below are a hypothetical illustration, not market rents. Assume a 2,000-square-foot space where the landlord’s operating costs (taxes, insurance and CAM) run $0.75 per square foot per month, or $1,500 a month for this space.

Item	NNN	Modified gross (base year)	Full-service gross
Base rent	$2.00/sq ft = $4,000	$2.75/sq ft = $5,500 (includes year-one operating costs)	$2.90/sq ft = $5,800 (includes operating costs and utilities)
Operating costs billed to tenant	$1,500	$0 in year one	$0
Tenant’s own utilities and janitorial	$300	$300	Included
Year-one monthly total	$5,800	$5,800	$5,800
If operating costs rise 10% in year two	Tenant pays $150 more a month	Tenant pays the $150 increase over the base year	Landlord absorbs it, unless the lease passes it through
If the building sells and taxes rise $400 a month for this space	Tenant pays $400 more a month, unless the lease excludes it	Tenant pays the increase over the base year, unless excluded	Landlord absorbs it

Year one looks identical, which is the point. The structures differ in who carries the risk of change, and that is where tenants should spend their negotiating effort. Always compare proposals as total monthly occupancy cost, not base rent.

California rule 1: Proposition 13 reassessment on a sale

Under Proposition 13, property tax is capped at 1% of taxable value plus voter-approved debt, and assessed value can rise by no more than 2% a year for inflation, according to the State Board of Equalization. When a property changes ownership, the assessor resets it to market value as of the transfer date, and the difference is billed through a supplemental assessment.

A building that has not sold in decades may have a low tax base. If the landlord sells during your NNN lease, the new owner’s reassessed tax bill flows through to you unless the lease says otherwise. That can be one of the biggest cost increases a net tenant faces.

Tenants can negotiate an exclusion or cap on tax increases caused by a change in ownership, for the whole term or the first several years. Leases also create their own reassessment issue: under Revenue and Taxation Code section 61(c), creating a leasehold of 35 years or more, counting renewal options, is a change in ownership. Long ground leases and leases with many option periods need a tax review before signing.

California rule 2: Civil Code 1950.9 operating-cost rules for small tenants

For leases signed, and tenancies started or renewed, on or after January 1, 2025, Civil Code section 1950.9 limits how landlords bill building operating costs to “qualified commercial tenants.” That means a microenterprise, a restaurant with fewer than 10 employees, or a 501(c)(3) nonprofit with fewer than 20 employees that has given the landlord written notice and a self-attestation of its employee count within the past 12 months.

For those tenants, the landlord must:

Allocate costs proportionately, usually by square footage, or by another documented method.
Charge only costs incurred in the previous 18 months or reasonably expected in the next 12.
Tell the tenant before signing that it may inspect supporting documentation, and provide it within 30 days of a written request.
Not charge the fee until it provides that documentation, and not charge costs paid or reimbursed by someone else, including insurance.
Give written notice with documentation before changing the allocation method in a way that raises the tenant’s share.

Tenants can raise a violation as a defense in an eviction for unpaid fees, and the rights can’t be waived. A landlord who violates the section is liable for the tenant’s actual damages, and for a willful violation the tenant may recover three times actual damages plus punitive damages. The statute defines building operating costs to include common area maintenance, utilities that aren’t separately metered, and taxes or assessments charged to the landlord as owner. Leases signed before 2025 are covered only if they say nothing about operating costs.

California rule 3: the CASp disclosure

For leases signed since January 1, 2017, Civil Code section 1938 requires the owner or landlord of commercial property to state in the lease whether the premises have been inspected by a Certified Access Specialist (CASp). The section defines commercial property as space offered to someone who operates, or plans to operate, a place of public accommodation or a facility the public is invited into. If no inspection certificate exists, the lease must include a statement the code prescribes, which tells the tenant it may request an inspection and that the parties must agree on its timing, its fee and who pays for repairs.

If there is a CASp report, the tenant gets a copy before signing, and correcting violations is presumed to be the owner’s job unless the parties agree otherwise. A tenant who receives the report less than 48 hours before signing may rescind within 72 hours. Our guide to CASp and ADA compliance for commercial property covers inspections in detail.

How to read the operating-expense clause

Whatever the lease is called, this checklist covers the terms that move the numbers:

Definition of operating costs. Get the full list, and the exclusions. Common exclusions to ask for: capital improvements, correcting original construction defects, accessibility work the landlord should have done, leasing commissions, the landlord’s financing costs, disputes with other tenants, and costs covered by insurance or warranties.
Capital items. If roof, HVAC or parking lot replacement can be passed through, ask that they be spread over their useful life rather than billed in one year.
Property tax. Ask for a cap or exclusion on increases from a change in ownership, and decide who pays special assessments.
Insurance. Find out which policies are passed through, and whether earthquake coverage or large deductibles are included.
Management fee. If the landlord charges one, set it as a percentage cap.
Controllable expense cap. A yearly cap on increases in costs the landlord controls protects you from budget surprises.
Base year and gross-up. In a modified gross lease, confirm the base year and whether costs are “grossed up” to a stated occupancy level.
Reconciliation and audit. Set a deadline for the annual true-up statement, a time limit for back-billing and a right to audit the landlord’s books.
Measurement. Confirm whether rent and your share are based on rentable or usable square feet, and the load factor.

Tenant improvements and free rent are negotiated alongside these terms; see our guides to the tenant improvement allowance and negotiating a commercial lease.

If you own or are buying leased property

For an owner, the lease structure decides how much of the income survives cost increases. A well-drafted NNN lease keeps net operating income steadier; a gross lease leaves the owner carrying inflation and reassessment. Our guides to net operating income and cap rates show how that flows into value.

A buyer should read every lease and get tenant estoppel certificates confirming rent, reconciliations and any disputes. Remember that your purchase will trigger reassessment; check whether each lease lets you pass the new tax bill through. Our guide to buying NNN-leased property covers single-tenant deals, and the commercial due diligence checklist covers the rest of the review.

Many California brokers and attorneys start from standardized lease forms, such as those published by AIR CRE, and negotiate from there. A standard form is a starting point, not a substitute for reading what was changed.

Questions people ask

What is a triple net lease?

A lease in which the tenant pays base rent plus its share of property taxes, building insurance and maintenance or CAM. The landlord may still be responsible for roof, structure or capital items, depending on the lease.

What does the landlord pay in a triple net lease?

It depends on the lease. Often the landlord keeps responsibility for the roof, structure and major capital replacements, plus its own financing and leasing costs. In an absolute net lease, the tenant may pay nearly everything.

What is the difference between a triple net lease and a gross lease?

In a NNN lease, operating costs are billed to the tenant on top of rent, so the tenant carries increases. In a gross lease, they are built into the rent and the landlord carries increases unless the lease passes them through.

What is a modified gross lease?

A middle ground: the rent includes some operating costs, and the tenant pays others, commonly its own utilities and janitorial, or its share of increases above a base year.

Can my landlord pass a Prop 13 reassessment on to me?

Under most NNN leases, yes, unless the lease excludes or caps tax increases caused by a sale. Negotiate that before you sign; once the lease is signed, the clause controls.

Do California’s 2025 CAM rules apply to my business?

Civil Code 1950.9 protects microenterprises, restaurants with fewer than 10 employees and small 501(c)(3) nonprofits that give the landlord written notice and a self-attestation, for leases signed or renewed on or after January 1, 2025.

Is a NNN lease better for a tenant?

Not inherently. A NNN lease can offer lower base rent and transparency, but the tenant takes the risk of cost increases. A gross lease costs more up front and gives more predictability.

Leasing space or reviewing a lease for a building you own? We can compare proposals on total occupancy cost, flag the clauses above and help with negotiation in Sonoma, Napa, Marin and the wider Bay Area; see our pages on Sonoma County commercial property and Napa County commercial property, or contact us to talk through a space.

This is general information, not legal or tax advice; talk to a California real estate attorney before you sign a lease, and a tax adviser about property tax and reassessment questions.

Sources & notes

Last reviewed October 2026 by Matthew Martinez.