In a commercial real estate, a net lease requires the tenant to pay, in addition to rent, some or all of the property expenses that normally would be paid by the property owner (known as the "landlord" or "lessor"). These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities, and other items.
The precise items that are to be paid by the tenant are usually specified in a written lease. For properties that are leased by more than one tenant, such as a shopping center, the expenses that are "passed through" to the tenants are usually pro-rated among the tenants based on the size (square footage) of the area occupied by each tenant. The term "net lease" is distinguished from the term "gross lease". In a net lease, the property owner receives the rent "net" after the expenses that are to be passed through to tenants are paid. In a gross lease, the tenant pays a gross amount of rent, which the landlord can use to pay expenses or in any other way as the landlord sees fit.
Types of net leases
There are standard names in the commercial real estate industry for different sets of costs passed on to the tenant in a net lease.
Single net lease
In a single net lease (sometimes shortened to Net or N), the lessee or tenant is responsible for paying property taxes. Double- and triple-net leases are more common forms of net leases because all or the majority of the expenses are passed on to the tenant.
Double net lease
In a double net lease (Net-Net or NN), the lessee or tenant is responsible for property tax and building insurance. The lessor or landlord is responsible for any expenses incurred for structural repairs and common area maintenance. "Roof and structure" is sometimes calculated as a reserve, the most common amount is equal to $0.15 per square foot.
Triple net lease
A triple net lease (Net-Net-Net or NNN) is a lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three "Nets") on the property in addition to any normal fees that are expected under the agreement (rent, utilities, etc.). In such a lease, the tenant or lessee is responsible for all costs associated with the repair and maintenance of any common area.
This form of lease is most frequently used for commercial freestanding buildings. However, it has also been used in single-family residential rental real estate properties.
A bondable lease (also called an "absolute triple net lease", "true triple net lease", or a "hell-or-high-water lease") is the most extreme variation of a triple net lease, where the tenant carries every imaginable real estate risk related to the property. Notably, these additional risks include the obligations to rebuild after a casualty, regardless of the adequacy of insurance proceeds, and to pay rent after partial or full condemnation. These leases are not terminable by the tenant, nor are rent abatements permissible. The concept is to make the rent absolutely net under all circumstances, equivalent to the obligations of a bond: hence the "hell-or-high water" moniker. An example of this type of lease would be a leaseback arrangement in which a retailer leases back the building it formerly owned and continues to run the store.
Bondable leases are typically used in so-called credit tenant lease deals, where the main driver of value is not so much the real estate, but the uninterrupted cash flow from the usually investment-grade rated "credit" tenant.
Typically, the buildings in which landlords use triple net leases (NNN) are 'equity investments', rather than 'cash flow investments'. For example, the owner will finance a significant portion of the purchase price on a property and pay the resulting mortgage with the lessee's monthly owed rent. There is usually a small amount left over as monthly profit for the owner (positive cash flow), but the greater investment payoff comes from the tax shields afforded to the owner through the use of leverage or gearing. The resulting property is then sold after a period of equity-building, usually five years – the typical commercial mortgage term.
- Principles and Practices of New Jersey Real Estate 6th Ed by Frank W. Kovats, DREI.