CRE Reference
Commercial Real Estate Lease Types
Understanding lease structures is fundamental to commercial real estate investing. Different lease types allocate operating costs and risk between landlord and tenant in radically different ways — directly impacting your yield, management burden, and risk exposure. Here's a complete guide to every major CRE lease type.
Quick Comparison
| Lease Type | Landlord Burden | Typical Cap Rate | Best For |
|---|---|---|---|
| Ground Lease | Minimal | 3.75% - 5.25% | Multi-generational wealth |
| Absolute NNN | None (100% tenant) | 5.5% - 7.0% | Passive income investors |
| Double Net (NN) | Roof + structure | 5.75% - 7.0% | Higher-yield seekers |
| Build-to-Suit | Develops then sells | 5.25% - 6.5% exit | Active developers |
| Modified Gross | Variable | 6.5% - 8.5% | Multi-tenant office/retail |
| Full-Service Gross | Everything | 6.0% - 8.0% | Class A office |
| Percentage Rent | Retail-focused | Varies | Anchor/mall tenants |
Absolute NNN Lease
The gold standard for truly passive real estate income
An absolute NNN lease (also called a 'bondable lease') is the purest form of triple net lease. The tenant is responsible for 100% of property-related expenses — property taxes, insurance, all maintenance, roof replacement, and structural repairs. The landlord's only responsibility is to collect rent. This is the most landlord-friendly lease structure in commercial real estate and the gold standard for passive investors.
Double Net Lease (NN)
Triple net minus the roof and structure
A Double Net (NN) lease is similar to triple net but with landlord retaining responsibility for specific structural items — typically roof, structure, and sometimes HVAC replacement. The tenant still pays property taxes, insurance, and day-to-day maintenance. NN leases trade at slightly wider cap rates than absolute NNN because the landlord has some operational exposure.
Ground Lease
Own the land, let the tenant build the building
A ground lease separates land ownership from building ownership. The land owner (lessor) leases the land long-term (typically 40-99 years) to a tenant (lessee) who builds and owns the improvements. The lessee pays ground rent, property taxes, insurance, and all maintenance. At lease end, improvements typically revert to the land owner — providing long-term reversion value in addition to rent.
Build-to-Suit (BTS) Lease
Pre-committed leases on properties built to tenant specs
A Build-to-Suit (BTS) lease is a long-term lease agreement where a tenant pre-commits to lease a property before it's built. The developer acquires land, builds the property to the tenant's specifications (layout, size, fixtures), and delivers the finished property to the tenant for lease commencement. BTS is the primary development model for single-tenant NNN retail — dollar stores, auto parts, QSR, pharmacies, and convenience stores all expand primarily through BTS.
Modified Gross Lease
The hybrid lease — landlord and tenant split expenses
A Modified Gross Lease falls between full-service (landlord pays everything) and NNN (tenant pays everything). The tenant pays a base rent plus specific operating expenses, with landlord covering others. The exact split varies — some common structures: tenant pays utilities and janitorial; landlord pays taxes, insurance, structure, common areas. Modified gross is common in multi-tenant office buildings and some multi-tenant retail.
Full-Service Gross Lease
Tenant pays one rent — landlord covers all expenses
A Full-Service Gross (FSG) lease is structured so the tenant pays one all-inclusive rent, with the landlord covering all property expenses (taxes, insurance, utilities, janitorial, common area maintenance). The landlord prices the rent to cover projected expenses plus profit. Most common in Class A office buildings where tenants prefer predictable costs and landlord manages professionally.
Percentage Rent Lease
Base rent plus a percentage of tenant sales above a threshold
A Percentage Rent Lease combines a fixed base rent with an additional percentage of the tenant's gross sales above a defined breakpoint. Common in regional malls, anchor retail, and some shopping centers. The structure aligns landlord and tenant incentives — both benefit when sales grow. Typically layered on top of an NNN or modified gross structure.
Need Help Choosing a Lease Structure?
The right lease structure depends on your specific goals — passive income, value-add upside, or long-term reversion. Let's talk through your situation.
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