What Is the Difference Between a Net Lease and a Triple Net Lease?

Posted Jul 10, 2022

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Lease types vary along a spectrum from gross to absolute, with quite a few stops in between. Among the common ones are Single Net, Double Net, and Triple Net. These are often referred to using the “N” corresponding to their characterization.

In a gross lease, the tenant pays the agreed-on rent amount, and the owner pays all other costs. Of course, the investor presumably factors those costs into the rent but can't pass them along directly to the tenant. Apartments are frequently offered with gross leases, although some require the tenants to pay some utilities. There are also modified gross leases, in which the agreement starts as a gross lease and evolves to add a share of operating costs in subsequent years. A modified gross lease may also refer to a lease in which the tenant does pay their share of utilities if the usage can be accurately traced to individual tenants within the property.

Single Net Leases are less common than a double or triple net. In most cases, with a single net lease, the tenant pays for property taxes directly or into an escrow account and nothing else besides rent. The owner pays for the property's insurance, repairs, maintenance, and other costs. Whether the tenant pays utilities with an N agreement varies. It often depends on the ease with which utility costs can be equitably divided in a multi-tenant building or the variability of expected expenses. Single net leases are similar to modified gross agreements in that some properties use this approach when the utilities can be easily apportioned by usage.

Following the single N is a double net lease option. Not surprisingly, a NN designation indicates that the tenant is responsible for two of the significant expenses associated with the property. In this case, the costs absorbed by the tenant are usually property taxes and insurance. These NN leases are often used with multi-tenant commercial spaces like office buildings. Since the occupants each lease a different amount of space, they also pay a variable amount of the tax and insurance costs, assigned according to their respective footprints.


How Is the Triple Net Different?

Going further along the net pathway is the sought-after Triple Net Lease (NNN). In this structure, the tenant pays rent plus utilities, property taxes, property insurance costs, and maintenance expenses. If the property houses more than one tenant, a NNN lease will divide the costs on a pro-rata basis among the occupants. However, the owner is generally responsible for the costs of major repairs, including structural.

Triple net leases are often preferred by retail establishments like banks, retail chains, repair shops, and other public-facing companies that want to establish and maintain a presence. They may not want to own property, but they prefer to have a solid footing and a long lease term. Owners of NNN properties appreciate the stability of these long-term tenants (although the lease length can inhibit their ability to respond to rising rental rates).

Finally, on the far end of the lease type spectrum is the absolute net lease, in which the tenant pays virtually all property expenses, including major repairs and structural work. But as with any lease, neither owners nor tenants should rely on the name. It's better to review the lease terms carefully to ensure that you know what you are paying for.

 

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.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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