Industry jargon. Commercial real estate is chock-full of it. Whether you have negotiated a commercial lease before or it’s your first time, chances are you will run into some potentially... Read More
When you are looking to lease a property, you may initially think that your principle financial concern is the monthly rent payment. However, there are several other types of payments that you will have to address, most particularly for taxes, insurance, and maintenance costs. These issues are all determined by whether you have a single net lease, double net lease, or triple net lease.
A double net lease (sometimes referred to as just “NN” or “net-net”) is a common type of net lease in commercial real estate. But there are also single and triple net leases available, so to better understand them, let’s break each type of net lease down one by one.
Single Net Lease
The type of net lease that has the fewest expenses associated with it is the single net lease. With this agreement, you will be responsible for only the monthly rent payments and the annual property taxes. The insurance premiums, deductibles, and maintenance costs for the building will fall to the landlord, not the tenant. If that sounds too good to be true, that’s probably why single net leases simply aren’t a very common option offered to prospective tenants.
Double Net Lease
With a double net lease, along with the monthly rental payments, the tenant is expected to take on two more additional expenses: annual property taxes, and insurance premiums & deductibles for the property. If you sign a double net lease agreement on a commercial property, you will be responsible for all those payments, but the landlord will still be expected to take care of the maintenance and upkeep for the building.
Triple Net Lease
The triple net lease (NNN) puts the most expectations on the shoulders of the tenant. In fact, with this agreement, the tenant might feel like they practically are the landlord, since this lease requires them to take on so much financial responsibility. With the triple net lease, the tenant agrees to pay:
- Monthly rental payments
- Annual property taxes
- Insurance premiums on the property
- Maintenance and upkeep costs for the building
It is a lot for a tenant to take on, but this is in fact a pretty common lease agreement, so be prepared for the possibility that you might need to assume all of these additional expenses.
What are the pros and cons of the double net lease?
The double net lease is a fairly common type of lease in commercial real estate – so, the question is, is it worth it? Before signing this lease, it’s smart to evaluate the all the pros and cons, so let’s go over them.
The main advantage is that with this lease, you don’t have to worry about the headaches that can come with ensuring that the building is in good operating condition and well-maintained. The hassles and costs that come with servicing a property—ranging from janitorial services to paint jobs—can be considerable, and a double net lease will allow you to avoid all of that.
Having to pay property taxes may seem like a con, but in reality that is nearly unavoidable. (Even the rare single net release requires you to shoulder the annual property tax burden.) The more significant disadvantage of the double net lease is that the tenant has to assume the responsibility of paying both premiums and deductibles to insure the property.
But what if the tenant isn’t leasing the entire building? For instance, a tenant could be leasing one store inside of a large mall or an office park. If that tenant signs a double net lease agreement with the landlord, the tenant will only be responsible for a share of the property taxes and insurance, which will be split amongst the various tenants according to their percentage of the total square footage of the property.
The difference between net leases and gross leases
You should be aware that not all leases are single net leases, double net leases, or triple net leases. There is also something known as a gross lease, which is the type of lease where the property owner pays for the annual property taxes, insurance, and maintenance costs. With the gross lease, the tenant is only responsible for their monthly rent payments.
While this may sound like the ideal situation, the reality is that landlords usually pass down those other costs to the lessee in the form of a higher rental rate and perhaps even less advantageous lease terms.
Understanding bondable leases
Sometimes the building’s ownership may seek out a bondable lease to help ensure that the tenant keeps to the terms of the net lease. For instance, if a tenant signs a triple net lease, they are supposed to cover rent, property taxes, insurance, and maintenance, as we explained above. However, with a standard triple net lease, if the building was condemned, the tenant would not have to continue paying rent – a bondable lease ensures that they do have to continue making payments. A bondable lease also ensures that the tenant can’t cancel the lease before the agreed-upon term (for instance, a 10-year lease) is completed.
What kind of building insurance do NN and NNN lease holders get?
If you get a double net lease or triple net lease, you will need to pay to insure the property. Commercial property insurance and general liability insurance are likely the types that you will need to get in order to make certain the building is adequately covered according to the terms of the agreement.
The property insurance will offer protection in the event that the property is damaged in a fire, storm, or by some kind of accident (flooding is usually not included and requires a separate policy). This kind of insurance will also provide coverage if your business is robbed or vandalized. The liability insurance will provide coverage if someone is injured on your property.
The maintenance expenses are sometimes referred to as a CAM (Common Area Maintenance) fee. If there are multiple tenants, such as in a complex where there are several retail businesses, the fee will be shared among them and determined based on each tenant’s amount of square footage. The CAM fee typically goes to things like fixing pavement and landscaping, but could also include everything from security personnel to snow removal. Since what the fee covers can vary wildly, a tenant should be certain to ask the property owner to clearly spell out exactly what the CAM will cover.
Even if a tenant is under a triple net lease agreement where they are expected to handle maintenance costs, it often still falls to the landlord to pay for large expenses like structural repairs, roof repairs, and things like plumbing and electricity. Again, it is important to have the property owner clarify this in the agreement.
Does the tenant pay directly to the landlord?
When signing a net lease, the lessee and landlord also need to determine how payments will be received. Naturally, the tenant will pay their monthly rent directly to the property owner, but the owner may also want the tenant to pay any additional costs – for maintenance, property taxes, insurance – through them so that they are able to stay in the loop.
Weighing your options
Now you know about the different types of net leases, and who is responsible for paying property taxes, insurance, and maintenance in each instance. The double net leases and triple net leases are among the most common in commercial real estate dealings, so tenants seeking a property for their business should be prepared for the likelihood of signing an NN or NNN agreement. Whichever net lease you end up with, it is important to have plenty of clarity on how each of the additional costs will break down, so that you don’t end up with any surprises later on.