Office Leases Aren't Standardized, and That Changes How You Underwrite Them

Ask a residential landlord what a lease covers and the answer is simple: rent, term, and not much else. Ask that same question about an office lease and the answer depends entirely on which lease structure you're looking at. Office leasing runs on a handful of different frameworks, and each one shifts financial responsibility between landlord and tenant in a different place. Underwriting an office asset without knowing which structure you're dealing with is underwriting blind.

Full-Service Gross Puts the Landlord on the Hook

In a full-service gross lease, the tenant pays one number and the landlord absorbs property taxes, insurance, utilities, and maintenance inside that rent. It's the simplest lease from a tenant's perspective and the riskiest from an owner's, because operating cost increases eat directly into the landlord's margin unless the lease includes an expense stop or base year escalation clause. A building full of full-service gross tenants needs an owner who's actively managing operating expenses, not one who's collecting rent and assuming the number stays flat.

Modified Gross Splits the Difference

Modified gross leases carve out specific expenses, usually utilities or janitorial, and pass them to the tenant while keeping taxes and insurance with the landlord. It's a negotiated middle ground, and the specifics vary enough from lease to lease that two buildings both described as "modified gross" can carry meaningfully different expense exposure. There's no substitute for reading the actual lease language here.

Triple Net Shifts the Risk to the Tenant

In a triple net lease, the tenant pays base rent plus their share of taxes, insurance, and maintenance directly. This is common in single-tenant office buildings leased to a company that wants full control over its space and is willing to take on the operating cost exposure in exchange for a lower base rent. Triple net office assets read as lower-risk to an owner because expense volatility passes through to the tenant, but that also means the owner has less say in how the building is maintained day to day.

The Rent Roll Tells You More Than the Building Does

None of this shows up by looking at the property. It shows up in the rent roll and the lease abstracts. Two office buildings can look identical from the street and carry completely different risk profiles depending on what's actually written into each tenant's lease, how much term is left, and which of these three structures governs each unit. Office due diligence starts with the paper, not the walkthrough.

Tenant Credit Is the Other Half of the Equation

Lease structure tells you who's responsible for what. Tenant credit tells you how likely they are to actually pay. An investment-grade tenant on a full-service gross lease with eight years remaining is a fundamentally different asset than a small local business on a triple net lease with fourteen months left. Office underwriting has to weigh both, the structure and the tenant, together, because either one alone gives an incomplete picture.

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