Single, Double and Triple Net Leases: What is the Difference?

In commercial leasing, every expense is negotiable between landlords and tenants. The term ‘net lease’ encompasses a group of different lease types. Each net lease type has a specific lease arrangement, which determines whether the landlord or tenant pays for certain expenses.

What is a Net Lease?

A net lease is a real estate lease in which a tenant pays one or more additional expenses. They generally include property taxes, property insurance premiums, or maintenance costs, and are often used in commercial real estate. There are three basic types of net leases: Single, double, and triple net leases.  A net lease is the opposite of a gross lease, where the tenant pays a flat rental fee while the landlord is responsible for the other costs.

Single Net Leases

Single net leases, which are often referred to as a Net or N lease, are not as common in the commercial world. In a lease like this, the landlord transfers a minimal amount of risk to the tenant, who pays the property taxes. This means any other expense—such as insurance, maintenance and repairs, and utilities—are the landlord’s responsibility.

To compensate for the extra expense, landlords will typically offer a lower monthly rent. However, the amount of rent will escalate annually to account for inflation as well as to pay the expected increase of real estate taxes and assessments. On balance it tends to even out, with tenants paying roughly the same amount in a given year.

Failure to pay the property tax bill causes trouble for the landlord. Therefore, landlords must be able to trust their tenants to correctly pay the property tax bill on time. Alternatively, the landlord can collect the property tax directly from tenants and then remit it.The latter is certainly the safest and wisest method.

Double Net Leases

This is perhaps the most popular of the three NL types. In double net leases, which are also called net-net or NN leases, the tenants pay property taxes and insurance premiums. The landlord is still responsible for all exterior maintenance costs. Again, landlords can divvy up a building’s insurance costs to tenants on the basis of space or something else.Typically, a commercial rental building carries insurance against physical damage. This includes coverage against fires, floods, storms, natural disasters, vandalism and so forth. Additionally, landlords also carry liability insurance and perhaps title insurance that benefits tenants.

In larger commercial developments with more than one space available to rent such as shopping malls and expansive office complexes, tenants may have a different square footage than their neighbors. So landlords typically assign taxes and insurance costs to tenants proportionally based on the amount of space leased. By having the tenant pay these expenses directly to him, the landlord can avoid the problems associated with late or missed payments by tenants, which could result in extra fees.

Triple Net Leases

Triple net leases, or net-net-net or NNN leases, assign even more risk to the tenant. In addition to property taxes and property insurance, tenants agree to pay for all maintenance and repair costs. Maintenance is the most problematic cost, since it can exceed expectations when bad things happen to good buildings. When this happens, some tenants might try to worm out of their leases or ask for aren't concession.

Tenants typically enter triple net leases for long-term contracts, often ten years or longer. The NNN lease contract usually includes scheduled annual rent increases, although that remains negotiable between the two parties. In many of these leasing scenarios, the tenants customize the rented space, such as with restaurants and bars, for example. The tenants modify the space to meet their unique criteria, and then they maintain it as needed, with the landlord’s oversight, of course. Landlords require specific standards to be maintained, such as roof and plumbing integrity, no leaking plumbing or roof leaks, and so forth.

Naturally, the monthly rental is lower on an NNN lease than on a gross lease agreement. However, the landlord’s reduction in expenses and risk usually outweighs any loss of rental income.

Key Takeaways

• Net leases involve tenants paying one or more additional expenses in the commercial real estate industry.
• In a single net lease, the tenant pays a lower base rent in addition to property taxes.
• Double net leases include property taxes and insurance premiums with the base rent.
• Triple net leases include property taxes, insurance, and maintenance costs plus base rent.
• Tenants may try get out of triple net leases because of the high costs associated with them, so landlords generally use a bondable net lease.

Final Thoughts

When entering any type of lease, the tenant must consider that their rent payments, whether they include additional expenses or note, may increase. A landlord may up the rent because of legal increases permitted by local governments. But the rent may also increase because of property tax reassessments or increases in insurance premiums.

No matter the type of property you own, you can count on the experts at Evanco Realty Advisors for the very best in full-service commercial administration. We provide everything you need to minimize your ownership workload and maximize the return on investment for each of your commercial properties. We provide peace of mind to owners; implement excellent property management services that enhance value for landlords.

Call us today at (619)814-1688 to see how our commercial property management strategies can help you!

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