Types of Commercial Property Leases: Investment Risk and Return

When you invest in commercial real estate, understanding types of commercial property leases is just as important as selecting the right location or tenant. The lease structure you choose directly affects your cash flow, management responsibilities, and overall investment risk.

In this blog, we’ll break down the three most common lease types (Gross, Modified Gross, and Triple Net) and explore how each impacts landlord obligations, risk exposure, and returns. We’ll also discuss how to align the right lease structure with your investment strategy.

What Are the Main Types of Commercial Property Leases?

While there are many variations, most commercial real estate agreements fall into three primary categories: Gross, Modified Gross, and Triple Net (NNN) leases. The main difference lies in how operating expenses (like property taxes, insurance, and maintenance) are divided between landlord and tenant.

• Gross Leases: In a gross lease, the tenant pays a flat rental amount, and the landlord covers most property expenses, including utilities, maintenance, and taxes.
• Modified Gross Leases: A modified gross lease is a hybrid model. The tenant pays a base rent plus certain operating expenses, such as utilities or janitorial services, while the landlord covers the rest.
• Triple Net (NNN) Leases: In an NNN lease, the tenant pays base rent along with nearly all property expenses, including taxes, insurance, and maintenance.

Each structure creates a different balance of predictability, responsibility, and risk for the investor.

Commercial Lease Structures and Investment Risk

Choose a lease type based on the level of control and risk you want to maintain as an investor. Here’s how each lease structure can affect your investment.

Gross Leases: Predictable but Landlord-Heavy

Gross leases offer predictable income because the tenant’s rent remains consistent regardless of fluctuating property expenses. This predictability is appealing to new investors who want a simple cash flow model.

Pros:

• Simplified income tracking
• Easier budgeting for tenants, which may improve retention

Cons:

• The landlord absorbs variable costs like rising utility rates or unexpected maintenance
• Limited ability to pass through increasing expenses to tenants

For investors, this means higher potential for expense volatility, even with steady rental income.

Modified Gross Leases: A Balanced Approach

Modified gross leases split expenses between landlord and tenant, offering a middle ground. The tenant might pay utilities and cleaning services, while the landlord handles structural repairs and property taxes.

Pros:

• Offsets some landlord costs, reducing risk
• Easier to negotiate with tenants compared to a full NNN lease

Cons:

• Still requires landlord oversight and expense management
• Expense allocation can vary, making agreements more complex

This lease type works well for investors who want to share operational costs but remain involved in property oversight.

Triple Net (NNN) Leases: Lower Responsibility, More Risk Control

NNN leases transfer most property expenses to the tenant, giving landlords more predictable net income. They’re common with single-tenant retail or medical properties.

Pros:

• Lower management burden
• More stable returns since tenants cover most expenses

Cons:

• Higher vacancy risk, especially in single-tenant properties
• Longer lease-up times if a tenant leaves

While NNN leases reduce ongoing involvement, they require careful tenant selection to ensure long-term stability.

Aligning Commercial Lease Type With Asset Strategy

The type of commercial property lease you choose should fit your property type, financial goals, and risk tolerance.

• Single-tenant retail or medical buildings often use NNN leases to minimize landlord expenses.
• Multi-tenant office buildings may work best with modified gross leases to balance shared expenses.
• Creative or flexible spaces sometimes use gross leases to attract tenants who prefer simplicity.

Market cycles also influence which lease type works best. In a strong market, landlords may secure NNN leases with high-credit tenants. In softer markets, offering gross or modified gross leases can attract and retain tenants faster.

When deciding, consider:

• Your desired involvement in daily property management
• The stability of your tenant base
• How much expense risk you’re comfortable absorbing

Choosing a lease type that aligns with both your asset and your investment goals ensures a healthier long-term return.

Partner With a Commercial Property Management Company to Choose the Right Lease Structure

Each lease structure offers its own balance of predictability, responsibility, and risk. There’s no one-size-fits-all answer. The best lease type for you depends on your investment strategy, property type, and management style.

At Kenwood Management, we help investors evaluate these factors so they can select the right lease structure for their goals. Our team’s market expertise in Baltimore and D.C. ensures you have the insight you need to make confident, profitable decisions.

Ready to determine which lease type best fits your property? Explore our lease structure resources or take our Property Investment Strategy Quiz to get personalized recommendations.