What Is a Zero Net Lease?

A Zero net lease is a type of commercial property lease. It falls within the category of N leases, where the N stands for net. These include single net lease (N), double net lease (NN), and triple (NNN) net leases. The zero net lease is a type of NNN lease. 

Large credit clients usually opt for NNN leases. They are long-term leases with low rental rates. But what is a zero net lease, and who are they for?

NNN Net Lease

To understand what a zero net lease is, let’s first discuss the NNN lease.

In a NNN lease, the tenant must pay a pro rata amount of taxes, insurance, and maintenance plus capital expenses such as the HVAC. The landlord pays for the roof and structure. Responsibility for common areas such as the parking lot can vary.

NNN leases are long-term and usually around 10 years. Because the tenant is taking on so much responsibility for the property, the lease amount is lower than that of N, NN, or gross lease arrangements.

Zero Net Lease

A zero net lease is also referred to as a bondable or absolute lease. It is called absolute because the rent is absolutely net under all circumstances.

The zero net lease is similar to the NNN lease, except the tenant must also cover the roof and structure. This basically puts the full financial responsibility of the property under the tenant. It also means the tenant can do things to the property without waiting for the landlord.

The advantage for the landlord is obvious. The only thing he has to worry about is collecting a rent check. In that regard, the property is passive income. The landlord has transferred all financial obligations of the property to the tenant. Additionally, risk has been transferred from the landlord to the tenant.

Zero net leases are often used as a leaseback. In this scenario, the owner of the building sells the property. The new owner then leases it back to the previous owner. That might sound strange but it allows the previous owner to raise capital (from the sale) and reduce debt (i.e.,  financing the property).

Tenants should be aware of what happens if the building suffers casualty or condemnation. Is the tenant expected to restore/rebuild the building to its original specifications at their expense? An attorney should be able to help point out various edge cases that may or may not be covered in the contract.

Under a zero net lease, it is common that there is only one tenant. Whereas a NNN lease might have pro rata expenses due to multiple tenants within the same building, if there is only one tenant, pro rata doesn’t apply.

The NNN and zero net leases can be confused as the same type of lease. However, that shouldn’t prevent a tenant from reading the contract and having their attorney go through it as well. It’s the contract rather than the ad for the listing that will provide important details about the lease arrangement.