Double-Net Lease: What It Is, How It Works, Triple Net Difference

Commercial real estate lease contracts come in a few variations, and one of these is the double-net lease. Through this arrangement, the tenant and landlord have similar proportions of financial responsibility, making this option attractive to investors who want a balance of income and costs. How does a double-net lease work? How does this compare to triple net leases? Below, Realized 1031 has shared a guide explaining this arrangement, its pros and cons, and more.

What Is a Double-Net Lease?

In rental properties, there are three main net operating costs: property taxes, insurance premiums, and maintenance costs. A gross lease arrangement puts all the responsibility for these expenses on the landlord or property owner.

This is different in a double-net lease. In this case, the tenant shoulders two net operating costs. These are usually the property taxes and insurance premiums. Since these expenses are generally more predictable than maintenance costs, tenants who want more control over their expenses prefer this arrangement.

Responsibilities of Tenants in a Double-Net Lease

In most double-net lease contracts, the tenant handles the following.

• Base Rent: The occupant pays rent to the landlord based on the frequency outlined in the contract.

• Property Taxes: Instead of the owner, the taxpayer designation transfers to the tenant. They must pay the correct taxes to the local revenue department.

• Insurance Premiums: Being responsible for insurance premiums is appealing to certain industries because of the control it offers. For example, tenants in the manufacturing industry may want specialized protection for their equipment, which the landlord may not pay for in a gross lease.

Responsibilities of Landlords in a Double-Net Lease

Here are the responsibilities of landlords or property owners.

• Maintenance Costs: The only net operating cost the landlord shoulders is the maintenance expenses. These include property repairs and regular tune-ups for HVAC, electrical, and plumbing systems.

• Structural Repairs: Outside of net operating expenses, the property owner is also responsible for structural repairs such as cracked walls or foundations.

• Major Capital Improvements: Finally, the landlord pays for major capital improvements. These include roofs and parking lots.

Double-Net Lease vs. Triple-Net Lease

Double-net leases are often compared to triple-net leases because there’s only one difference between the two. In the former, the landlord pays for the maintenance costs. In a triple net lease, the tenant is responsible for all three net operating costs.

In general, double-net leases are the preferred agreement for multi-tenant buildings. The owner has more control over the upkeep and maintenance of the property without having to pay the insurance premiums each unit may require. On the other hand, triple-net leases are ideal for single-tenant buildings. These attract tenants who prefer the most control over the property, allowing them to make a lot of changes to fit their operational needs.

Pros and Cons of Double-Net Leases

Understanding the advantages and disadvantages of double-net leases helps investors make more informed decisions before entering such agreements. Here are a few key items to consider: 

Pros

• Shared Financial Responsibility: You don’t have to handle all net operating expenses unlike in a gross lease.

• Control Over Maintenance: Investors remain in control of the property’s upkeep, allowing you to ensure that your property stays in good condition.

• Attractive to Many Types of Tenants: Double-net leases are appealing to a wider range of tenants compared to triple net leases, which usually only attract those that have resources for the three net operating costs.

Cons

• Exposure to Market Risks: To be more specific, having to pay maintenance costs exposes you to fluctuating costs for related products and services. This unpredictability can impact your cash flow.
• Management Requirements: The need to oversee and manage structural upkeep requires ongoing involvement.

• Moderate Involvement: For investors who want more hands-off involvement over their property, a double-net lease may not be the ideal option. Triple net or absolute net leases may be more suitable.

Wrapping: Double-Net Lease 101

A double-net lease arrangement transfers two net operating costs from the landlord to the tenant. Thanks to this arrangement, the landlord or owner is left with only the maintenance costs as their financial responsibility plus the rare capital improvements. This arrangement allows for more flexibility between the two parties compared to absolute net leases or gross leases. Even so, there are drawbacks for investors. There’s still moderate exposure to market risks as well as hands-on involvement in property upkeep.

If you want to enter a double-net lease arrangement with a tenant, it’s best to consult knowledgeable professionals. Our team at Realized 1031 can help you understand double-net leases in-depth so you can be more confident with your decision. Contact us to schedule an initial appointment!

Sources:

https://www.investopedia.com/terms/d/double-net-lease.asp

https://www.law.cornell.edu/wex/net_lease

https://www.wilaw.com/beware-of-maintenance-and-repair-responsibilities-in-commercial-leases/