Commercial real estate investors need to consider many factors when choosing a property, tenants, and the type of lease to offer tenants. Depending on the situation and property characteristics, using a gross lease or one of the net lease options, like a double or triple net, may make more sense.
Net Versus Gross Leases
The tenant pays a flat amount for rent with a gross lease, and the owner/landlord pays the associated property expenses, including taxes, utilities, insurance, maintenance, and repairs. This type of agreement is also often called a full-service lease, and it typically has a higher lease amount and usually a shorter lease term. Net leases (single, double, or triple) move some expenses from the landlord's responsibility to the tenants. For example, in a single-net (which is not a typical arrangement), the tenant would pay rent plus the property taxes, and the owner would still be responsible for all other associated costs.
More frequently used is a double net lease, in which the tenants pay rent, property taxes, and insurance costs. An owner may use this arrangement in a multi-tenant commercial property where the individual lessees occupy different amounts of space. Each tenant pays a proportional percentage of the costs based on how much of the entire building they use.
Risks of NNN Leases
NNN or triple net leases can offer property owners long-term tenant stability, which is why they are popular for retail outlets and commercial centers. Some investors prefer long-term leases with credit-worthy tenants. In turn, the tenants can gain some advantages of property ownership without owning property by leasing for extended times and controlling their costs. Tenants may be individual or anchor retailers. With the NNN lease, the owner is usually liable for repairs to building structures, including the roof. Another significant risk is termination—if a tenant defaults on a lease, the landlord may incur associated costs.
Addressing Risks With a Bondable Lease
A bondable lease is frequently called an “absolute triple net” lease because the tenant is responsible for all expenses related to the property and isn't allowed a termination clause. In fact, a bondable lease is sometimes called a “come hell or high water lease” because the tenant remains obligated to the property regardless of circumstances. This provision protects the owner from efforts by the tenant to move in cases where the property needs substantial repairs that the tenant would prefer not to pay for. Unlike a standard NNN lease, the tenant would be liable for repairs to the building structure, roof, plumbing, and HVAC. Even if the building is condemned, the tenant may be required to rebuild or continue paying rent.
The potential benefits include consistent cash flow and less involvement in operations. A bondable lease is a good way for the tenants to secure a long-term location without concern about the lease terms. Since the tenant is responsible for maintenance and repairs, they can handle issues as they prefer without getting the owner's approval.
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. Programs that depend on tenants for their revenue may suffer adverse consequences as a result of any financial difficulties, bankruptcy or insolvency of their tenants. All real estate investments have the potential to lose value during the life of the investment.
