Unpopular Opinion in Commercial RE:

I'm not opposed to gross leases and don't think NNN leases are always the best route.

Most of our tenants operate on NNN, however there is a faction that are gross and would rather pay more per month to stay on a gross structure.

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The majority of our tenants who preferred gross leases are mom and pop operators who don't want to deal with the added layer of complexity a NNN lease contains.

They prefer a flat monthly rate with absolutely no variance.

As an operator, this means fewer management and bookkeeping hassles having to explain every year to them how the NNN lease works.

One could argue an asset operating on gross leases is not as valuable to the marketplace as one operating on NNN.

I would disagree. It all comes down to the tenant base. If you bought an asset with only credit tenants and they were operating on gross leases, absolutely....

Although that would be a rarity to find. If you are buying an asset with a majority of mom and pop or regional tenants, I don't think the market will punish you for operating on gross leases.

The other aspect to consider is the ability to strengthen your NOI with Gross vs NNN.

Let's say you own a building where rent is $14 per ft NNN (Assuming $6 per ft CAM charges) in essence your tenant is paying $20. Let's say the tenant gives push back and expresses they don't want to deal with NNN charges.

You as the landlord relent, and offer them a gross lease of $22 per ft with the selling point being you pay all their expenses, minus utilities. They are happy, and you are happy because you just created a $2 spread compared to what your NNN lease would have been.

If you have a building with stabilized operating expenses, you aren't taking much downside risk in expenses jumping. Also, if you are able to lower expenses, it goes straight to your NOI and does not benefit the tenant.

We have used this strategy with success and created win-win situations.

I will still always offer a NNN lease first because there are benefits, however as I pointed out in this thread, there can be benefits to a gross lease as well.

As in many areas of Real Estate, there's not always one way. The best practice is crafting a solution that works for all parties involved.

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