Modified Gross Lease vs. Triple Net Lease: Which Industrial Lease is Best for Your Business?

As an experienced industrial real estate broker in Orange County, California, we've seen firsthand the importance of understanding the nuances between different lease structures. When it comes to industrial properties, the two most common lease types are the modified gross lease and the triple net lease. Let's dive in and explore the key differences between these two options.

What is a Modified Gross Lease?

In a modified gross lease, the landlord is responsible for covering certain operating expenses such as property taxes, insurance, and common area maintenance (CAM) costs. The tenant, on the other hand, is typically responsible for utilities, janitorial services, and any maintenance or repairs within their leased space.

To illustrate, let's consider a hypothetical $4,000,000 industrial building in Anaheim. Under a modified gross lease, the landlord may cover the $80,000 annual property tax bill and the $50,000 annual insurance premium, while the tenant would be responsible for utilities averaging $30,000 per year and any maintenance or repairs within their leased space, which could run an additional $20,000 annually.

The tenant's base rent in a modified gross lease is generally higher than a triple net lease to account for the landlord's additional expenses. However, the tenant benefits from the predictability of fixed operating costs and the landlord handling the hassle of property management.

What is a Triple Net Lease?

In contrast, a triple net (or "NNN") lease shifts the responsibility for property taxes, insurance, and CAM costs directly onto the tenant. The tenant essentially pays a lower base rent, but is then responsible for reimbursing the landlord for their pro-rata share of these expenses.

Taking the same $4,000,000 Anaheim property example, under a triple net lease, the tenant may pay a base rent of $15 per square foot, or $300,000 annually. They would then also be responsible for paying their 50% pro-rata share of the $80,000 property taxes, $50,000 insurance premium, and $100,000 in CAM costs - totaling an additional $115,000 per year.

So while the base rent is lower, the tenant's total occupancy cost is actually higher under a triple net lease compared to a modified gross lease for the same property. The benefit is that the tenant has more control over and transparency into their operating expenses.

Which Lease is Best for Your Business?

So which lease structure is the better fit for your industrial real estate needs? It really depends on your priorities and risk tolerance as a tenant.

Modified gross leases tend to be preferred by smaller businesses or startups who value the predictability and simplicity of fixed occupancy costs. The higher base rent is offset by the landlord handling the hassle of property management.

On the other hand, larger, more sophisticated tenants often opt for triple net leases. They may be willing to take on the additional responsibility in exchange for lower base rents and more control over operating expenses. This can be especially beneficial for businesses with specialized space needs or unique property requirements.

Ultimately, there is no one-size-fits-all answer. The best approach is to carefully evaluate your business's financial situation, growth projections, and operational requirements. Consulting an experienced industrial real estate broker can also be invaluable in navigating these complex lease structures and finding the optimal solution.

The Bottom Line

Both modified gross leases and triple net leases have their pros and cons for industrial tenants. In our experience, the choice often comes down to whether you prioritize cost predictability or operational control. Whichever path you choose, be sure to consult with a trusted advisor who can guide you through the nuances and help you make the best decision for your business.

If you have any questions about industrial lease structures or need assistance evaluating your options, our team at IndustrialRealEstate.io is here to help. Give us a call to schedule a consultation - we're excited to put our decades of experience to work for you.