Net Leases for Commercial Property

A net lease is a type of commercial property lease. In such a lease, the base rent paid by the tenant is lower than that of a full-service gross lease, but the tenant also pays other expenses. These expenses can include common area maintenance items (CAMS), insurance, and property taxes.

In a net lease, to calculate tenant’s pro-rata share of operating expenses, the landlord takes the total operating cost per square foot for all rented space then divides it among tenants based on the percentage of the building used by each tenant.

There are three main types of net leases and the fourth option of an absolute net lease. The landlord passes a different level of financial obligation onto the tenant in each type of net lease.

Triple-Net Lease (or NNN lease)

A triple net lease is basically the opposite of a gross lease. The tenant pays rent, utilities, in addition to a proportionate share of CAMS, real estate taxes, and property insurance. CAMS generally include janitorial services, property management fees, sewer, water, trash collection, landscaping, parking lot maintenance, and any other commonly shared area or service. The landlord pays for a base amount of building maintenance and repairs, mainly for structural items. NNN leases are often longer-term. This type of agreement can cause issues for tenants when maintenance fees are far higher than expected.

• Tenants pay rent and utilities and their pro-rata share of all the building’s operating expenses, including maintenance fees, building insurance, and property taxes.

• Landlord pays base building maintenance and repairs.

• This commercial lease type is quite common.

Double-Net Lease (or NN lease)

The tenant pays rent, utilities, property taxes, and the cost of building insurance. The landlord is only responsible for maintenance costs. Like other net leases, base rent is generally lower since the tenant is responsible for additional expenses.

• Tenant pays rent and utilities plus property taxes and building insurance.

• Landlord only pays maintenance costs.

Single-Net Lease (or N lease)

The tenant pays base rent, utilities, and the property tax. The landlord pays the building insurance and maintenance fees.

• Tenant pays rent, utilities, and property taxes.

• Landlord pays building insurance and maintenance.

Absolute Net Lease

An absolute triple-net lease (also known as a bondable lease) is the exact opposite of a gross lease, and it is more binding than a standard triple-net lease.

• Tenants pays all building expenses.

• Landlord does not have any responsibility for building costs.

• These leases are the least common type.

The terms absolute NNN lease and triple net lease are sometimes used interchangeably, but they are not the same. In a triple net lease, the tenant usually pays for certain maintenance and repair expenses, but the landlord pays for structural maintenance expenses, such as for the roof, exterior walls, and the foundation of the building.

However, in an absolute triple-net lease, the tenant is responsible for all expenses associated with the property including any structural or roof repairs. The tenant takes all responsibility for all the costs no matter what happens, even in the event the building is destroyed due to a natural disaster. In this case, the tenant would, on the one hand, pay the costs for reconstructing the building, and on the other hand, would continue to pay the rent.

Although the base rent for this lease is much lower than other types of leases, this is the rarest commercial lease type. Most tenants do not want to take on this level of risk.