The term ‘net lease’ encompasses a group of different lease types. Each net lease type has a specific lease arrangement, which determines whether the landlord or tenant pays for certain expenses. Many people mistakenly group these different net leases together as just “net leased.” The two most common types of net leases are double net (NN) and triple net leases (NNN). They are often mistaken as the same kind of lease. In this article, we’ll look at what makes these two lease types different.
What Is A Net Lease?
Net lease is a term used to describe different leases such as single net, double net, triple net, absolute net, bondable, gross, and modified. These unique leases are used with different property types, such as retail, office, industrial, and healthcare. A net lease arrangement divides the property’s expenses between the tenant and landlord. With some net leases, the tenant may have a variable monthly payment while in other net leases, it is fixed.
The words single, double, and triple refer to the different expenses a tenant can expect to pay each month on top of their base rent. These different expenses include taxes, insurance, and operating expenses. Typically, a tenant’s base rent is lower if they are responsible for more of these expenses.
Responsibilities Of Tenant and Landlord
Specifically focusing on the double and triple net leases, responsibilities are divided up like this:
Double net lease — the tenant pays monthly rent, property taxes, and property insurance. The landlord is responsible for all other operating and structural expenses. Because rent, taxes, and insurance are fairly static monthly expenses, the tenant can accurately forecast their lease budget.
Triple net lease — the tenant pays for property taxes, property insurance, and operating expenses in addition to the monthly rent. Operating expenses may include the tenant’s share of common area maintenance, normal repairs/maintenance, and utilities. For example, if you have a retail location, you’ll be responsible for replacing and re-striping the parking lot.
The landlord remains responsible for capital items pertaining to structural components of the building, such as roof replacements.
With a triple net lease arrangement, the tenant’s expenses become more variable month to month. When the tenant is paying a higher share of the expenses, they can usually expect a lower base rent.
For the landlord, depending on which lease they go with, there can be large differences when it comes to expenses.
Which Is Best?
As you might expect, there isn’t a clear answer. Whether you are the tenant or landlord, here are a few things to consider when trying to decide.
- Roof — how old is the roof and when was it last replaced? If you are coming into a new lease with an old roof that hasn’t yet been replaced, you may try to shift that expense to the other party.
- Parking lots — parking lots can be expensive to replace and maintain, to the tune of several thousand dollars a year. In areas that get a lot of snow or sun, the parking lot’s life expectancy can be much shorter than in other climates — factor in your climate and condition of the parking lot when deciding on a net lease type.
- Historical cost — is the building in fairly good shape with no major upcoming expenses? Also, check how much it cost to operate the building in the last few years. Then factor in any irregular expenses that may be coming due. With historical cost, expected upcoming cost, and base rent offered by the landlord, you can get an idea if the lease arrangement is a good value.
Double or triple net leases can be favorable lease arrangements for both parties but understanding the differences between the two structures can help you to negotiate the proper lease for your situation. Knowing exactly what goes into the lease and how to evaluate expense components will help you when deciding if a double or triple net lease is right for you.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
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