Types of Commercial Leases for Office Tenants: Manhattan Uses Modified Gross

The five lease types, a few lines each

• Full-service gross. One rent with taxes, insurance and operating expenses inside it, and often electricity too. Repairs are the landlord's job. In the pure version, only the steps agreed in the lease change the rent.
• Modified gross. The same three costs are inside the rent, but only at their base-year level. The tenant pays a share of later increases, and pays for electricity separately. The landlord looks after the building and its systems, and the tenant looks after its own installation.
• Net, single or double. The tenant pays its share of real estate taxes on top of rent, and of building insurance as well on a double net. Operating costs and repairs stay with the landlord.
• Triple net, or NNN. Taxes, insurance and operating and maintenance costs are all billed to the tenant, above a lower base rent. Structural items often stay with the landlord.
• Absolute net. Everything is the tenant's, structural repairs and capital replacement included. It is used for single-tenant retail, industrial property and ground leases.

The structure a Manhattan office lease uses

Modified gross with a base year. Nearly every office floor in Manhattan is quoted this way, even where a listing says full service. In the first year you pay the quoted rent plus electricity, which usually comes to $2 to $4 per square foot over the year. From the second year, a share of any increase in the building's taxes and running costs over the base year is added. True net structures are found mostly in retail and industrial property.

Reading a quote such as $35 NNN

As an example, say a listing in another market reads $35 NNN: the base rent is $35 a square foot for the year, and the tenant is then billed its portion of the property's taxes, insurance and maintenance as well. The figure is incomplete by design.

That is why a low net number is not cheaper than a higher gross one. To compare, ask the landlord for this year's budget per square foot for each of the three nets, add them to the base rent, and set that total beside the gross quote. The triple net entry works through it. The block below shows the lowest gross asking rents we list, the fair comparison for a net quote once its costs are added back. The under $50 page lists the whole band.

Direct lease or sublease is a separate question

Gross against net describes how costs are split. Direct against sublease describes who you sign with. On a direct lease your counterparty is the building's owner, and the deal brings the full package: improvement money, free rent, and renewal and expansion options. On a sublease your counterparty is an existing tenant, the term is whatever is left of theirs, the rent is usually lower and the space comes largely as it stands.

A sublease inherits the cost structure of the lease above it, including an older base year, so the type of lease still has to be read. Direct lease covers how long each kind runs.