Gross Lease & Modified Gross Lease vs. Absolute NNN Lease

Jan 16, 2020

If you are a commercial real estate investor who owns a triple-net (NNN) property, you benefit from a corporate lease with a high-credit tenant and many landlord benefits, including a long-term, safe, responsibility-free income and the peace of mind that comes with it. But what if you’re considering investing in a property that’s not a NNN lease? Then, most likely, you will have either a gross lease or a modified gross lease.

A Gross Lease

A gross lease, also known as a full-service lease, is a commercial lease commonly used with multi-tenant properties, industrial, and some retail properties. In a gross lease, the property owner/landlord pays all expenses, including property taxes, insurance, operating, and maintenance expenses then calculates one rent amount that covers all the monthly costs. The tenant then pays a base or “gross” rent, which includes a pro-rated or “pro-rata” share of those expenses.

One of the risks with this type of lease, aside from the high level of daily responsibility and potential capital outlay, is that it’s difficult to estimate accurate expenses, especially if the tenant is new and you have no idea what kind of consumption or needs will be presented. When locked into a long-term lease, expenses can increase significantly over time and you may be left paying the difference until the lease comes around for renewal. Once you factor in all the expenses, time investment, and unknown factors, an advertised 10-12% return could end up a realistic 5-6% ROI.

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Modified Gross Lease

A modified gross lease (MGL), also known as a double-net lease, is often used for office complexes and retail centers where there are many tenants, as well as some single-tenant units leased by national corporations, such as AutoZone or Starbucks. Each tenant pays a portion of the net operating costs directly related to the real estate – usually utilities, maintenance or CAM, minor repairs, security, and janitorial services. A MGL usually requires the tenant to pay the designated costs directly to the supplier charging the fees but could also state that the tenant pays a portion of the expenses directly to the landlord in addition to rent. With a double-net or MGL, the property owner/landlord pays building maintenance and structural costs, as well as the real estate taxes and insurance.

There are a few more landlord benefits with a modified gross lease than a gross lease, namely, the reassurance that the building is being taken care of in an agreed-upon manner with fewer expenses and less likelihood of tenant conflict when it comes to maintenance. However, with a MGL, an advertised 10-12% return could amount to a 6-9% ROI, depending on the lease agreement and expenses.

Absolute NNN Lease

NNN lease property is an investment in which the tenant agrees to a long-term lease that requires paying the “net” amount for three types of costs – net real estate taxes on the leased asset, net building insurance, and net common area maintenance. Most often, these tenants are investment-grade corporations such as Dollar General, Walgreens, or McDonald’s, who want control of all aspects of the property for uniformity across their brand. These tenants perform their own maintenance, use their own vendors, and pay for all capital expenditures. The landlord is responsible for nothing.

As the investor, you are protected from unpredictable and rising operating costs, leaving you completely free to carry on with life and collect monthly income with zero responsibility. By the time you factor in tax advantages, positive leverage, and incremental rent increases over a 10- to 20-year lease term, an advertised 6% cap rate on an absolute NNN could ultimately amount to an easy 8-10% total return.

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Understand Different Lease Types Before Buying

In a gross lease or MGL, tenants pay their pro-rata share of expenses but they will not pay for anything above that, so if you own a non-NNN property, you are doing a lot of work and spending your capital, which leads to an overall lower ROI. However, if you don’t mind a modified “hands-on approach,” there are some national corporations like DaVita, 7-11, and O’Reilly Auto Parts, that only offer NN leases but offer the benefit of being credit-worthy, reliable, long-term tenants who pay handsomely for the privilege to lease a sound building in a prime location.

If you want to receive a 100% responsibility-free monthly check for the next two decades from a multibillion-dollar, reliable, credit-worthy tenant anywhere in the nation with periodic rent increases, no maintenance responsibilities, and a solid 8-10% overall ROI – then a NNN investment is for you.

Thank you, Westwood Net Lease Advisors, for allowing me to sleep at night. I sold my four-family flat and obtained a great national company, Dollar General, which sends me one check a month. I no longer get calls from tenants. I spend my time playing golf instead of listening to their complaints. You guys are terrific.” – M. Overly, Florida

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To Wrap It Up – Gross Lease, Modified Gross Lease, or NNN?

As you contemplate your financial goals and how active you want to be in your next commercial real estate investment, or if you are new to the CRE market, the selection of a buyer’s broker is a very important decision in the process. Engaging a trusted Westwood Net Lease Advisor makes for a smooth process whether you choose a gross lease, a modified gross lease, or a NNN lease property. We have decades of expertise working with buyers and sellers all over America and offer objective advice, education, knowledge, and advocacy from the property search to closing – all without any cost to you! Contact us today for a free, no-obligation consultation, 314-997-5227.

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