A gross rent and a triple net rent can be identical in year 1 and far apart by expiry, and the difference is a forecast of operating costs.
Convert both offers to the landlord's net income, year by year, and discount them: a gross rent is only comparable with a triple net rent after the operating costs the landlord pays under the gross lease are taken off. On a fictional 20,000 sq ft, ten-year lease, 38.00 gross and 27.00 triple net look identical in year 1 because operating costs are 11.00, but with costs growing 4.50 per cent against 3.00 per cent rent bumps, the gross lease leaves the landlord 181,353 worse off over the term, undiscounted (110,316 in present value), and the gross rent would have to start at 38.70 to match.
Worked in full in How to Read a Commercial Lease by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The two structures allocate one risk differently. Under a triple net lease the tenant pays its share of taxes, insurance and maintenance on top of the base rent, so the landlord's income is the rent. Under a full gross lease the landlord pays those costs out of the rent, so its income is the rent minus whatever the costs turn out to be. Comparing the headline numbers, or even the year-1 net, misses that the second structure leaves the landlord holding the growth in costs for the whole term.
| Input | Gross lease | Triple net lease |
|---|---|---|
| Starting rent | 38.00 | 27.00 |
| Annual rent bump | 3.00% | 3.00% |
| Operating costs, year 1 | 11.00, paid by landlord | 11.00, paid by tenant |
| Operating cost growth | 4.50% | 4.50% |
| Term | 10 years | 10 years |
| Area | 20,000 sq ft | 20,000 sq ft |
| Discount rate | 7.00% | 7.00% |
Landlord net, gross lease (year t) = gross rentt − operating costst
Landlord net, triple net lease (year t) = base rentt
Equivalent gross rent = (PV of NNN rent + PV of operating costs) ÷ PV of a growing annuity at the bump rate
In Excel, with years in a row: =Gross*(1+Bump)^(t-1)-Opex*(1+OpexG)^(t-1) for the gross-lease net, then =NPV(Disc,range) on each line.
| Year | Gross rent | Operating costs | Net under gross | Net under NNN | Gap |
|---|---|---|---|---|---|
| 1 | 38.00 | 11.00 | 27.00 | 27.00 | 0.00 |
| 3 | 40.31 | 12.01 | 28.30 | 28.64 | −0.34 |
| 5 | 42.77 | 13.12 | 29.65 | 30.39 | −0.74 |
| 8 | 46.74 | 14.97 | 31.77 | 33.21 | −1.44 |
| 10 | 49.58 | 16.35 | 33.23 | 35.23 | −1.99 |
| Term total | 300.46 | 309.52 | −9.07 |
The gross offer at 38.00 is 0.70 per sq ft short of the triple net offer at 27.00, even though they are identical in year 1. The shortfall is entirely the difference between cost growth and rent growth: the landlord under the gross lease has fixed its income growth at 3.00 per cent and left its cost growth open. By year 10 that is costing it 1.99 per sq ft, 39,891 a year on the suite.
The tenant's view is the mirror image. Under the triple net lease the tenant pays 27.00 plus costs, 38.00 in year 1 and 444.70 per sq ft over the term, against 435.63 under the gross lease. A tenant who expects costs to grow faster than the bumps should prefer the gross lease at the same starting figure, which is precisely why landlords rarely offer one without an expense stop.
| Cost growth | Year-10 net under gross | PV gap against NNN | Equivalent gross rent |
|---|---|---|---|
| 2.50% | 35.84 | 1.75 | 37.78 |
| 3.00% | 35.23 | 0.00 | 38.00 |
| 4.50% | 33.23 | −5.52 | 38.70 |
| 6.50% | 30.19 | −13.54 | 39.71 |
When costs grow at exactly the bump rate, 3.00 per cent, the two leases are worth the same and 38.00 is the right gross rent. Every point of cost growth above the bumps widens the gap, and at 6.50 per cent the gross rent needs to start at 39.71. The comparison is therefore a forecast of operating costs, and insurance and property taxes are the lines most likely to outrun a fixed bump.
The common mistake is to compare year-1 net income, or to add year-1 costs to the triple net rent and call the result the gross equivalent: 27.00 + 11.00 = 38.00. That is exact for one year and wrong for every year after. A second mistake applies to multi-let buildings: triple net recoveries are charged on occupied space, so at 10 per cent vacancy the landlord still pays 1.10 per sq ft of the building's year-1 costs that no tenant reimburses. Between the two extremes sit modified gross leases, where the landlord pays costs up to a base year and the tenant pays the excess; how a base year expense stop works covers that structure, and a tenant's pro rata share covers the recovery arithmetic.
Compare the landlord's net income over the whole term, not the headline rents or year 1. Here a gross rent of 38.00 equals 27.00 triple net only if costs grow no faster than the 3.00 per cent bumps; at 4.50 per cent the gross rent must start at 38.70, and the lease as offered costs the landlord 110,316 in present value. The free working documents for this book include the cost categories marked landlord or tenant and the recovery checklist, which is where the forecast should begin.
Adding year-1 operating costs to the triple net rent is right for year 1 only. For the whole term, solve for the starting gross rent whose net stream has the same present value. With 27.00 triple net, 11.00 of costs growing 4.50 per cent, 3.00 per cent bumps and a 7.00 per cent discount rate over ten years, the equivalent gross rent is 38.70, not 38.00.
Triple net, whenever operating costs grow faster than the rent bumps, because the tenant carries that growth. At equal year-1 net income, costs growing 4.50 per cent against 3.00 per cent bumps leave the landlord 5.52 per sq ft worse off in present value under the gross lease. If costs grow 2.50 per cent, the gross lease is worth 1.75 more.
The landlord. Recoveries are charged to tenants on their occupied share, so the costs attributable to vacant space are not reimbursed. At 10 per cent vacancy and 11.00 per sq ft of operating costs, the landlord bears 1.10 per sq ft of the building's costs in year 1 even though every lease is triple net.
This article is one calculation from How to Read a Commercial Lease. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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