Single vs. Double vs. Triple Net Leases: An Overview
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 single net lease requires the tenant to pay only the property taxes in addition to rent. With a double net lease, the tenant pays rent plus the property taxes as well as insurance premiums. A triple net lease, also known as an NNN or net-net-net lease, requires the tenant to pay rent plus all three additional expenses.
Rents are generally lower with net leases than traditional leases—the more expenses a tenant has to bear, the lower base rent a landlord charges. But triple net leases are usually bondable leases, which means a tenant cannot back out because the costs—especially maintenance costs—may be higher.
Single Net Leases
Single net leases, which are often referred to as a Net or N lease, are not as common in the rental 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. The landlord is also responsible for any maintenance and/or repairs that must be done during the course of the lease within the property.
Tenants under a single net lease end up paying slightly lower rent than with a standard lease because of the added cost of property taxes. But a higher rental payment doesn't alleviate the landlord's responsibility for keeping these expenses up to date.
For example, a tenant may miss or make late payments to the municipality, which means the landlord is on the hook for them. These may result in fines and/or additional fees. That's why most landlords include the property taxes in the rent payments. They prefer that the payment pass through them so they know the taxes are paid on time and in the correct amount.
Double Net Leases
Double net leases, which are also called net-net or NN leases, are especially popular in commercial real estate. In a lease like this, the tenant pays property taxes and insurance premiums in addition to the rent. The base rent payable for the space itself is generally lower because of the additional expenses the tenant must bear. All maintenance costs, on the other hand, remain the responsibility of the landlord, who pays for them directly.
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.
Just like the single net lease, landlords should have the additional payments passed on to them, so they can pay them to the municipality and insurance company. Even though the tenant's lease includes these payments, the landlord's name is on the tax and insurance bill, meaning he is ultimately responsible. 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
The triple net lease absolves the landlord of the most risk of any net lease. This means even the costs of structural maintenance and repairs must be paid by the tenant in addition to rent, property taxes, and insurance premiums. Because these additional expenses are passed on to the tenant, the landlord generally charges a lower base rent.
When maintenance costs are higher than expected, tenants under triple net leases frequently attempt to get out of their leases or obtain rent concessions. To preempt this from happening, many landlords prefer to use a bondable net lease. This is one kind of triple net lease that cannot be terminated before its expiration date. Furthermore, the rent amount cannot be altered for any reason, including unexpected and significant increases in ancillary costs.
Landlords may prefer to use a bondable net lease as tenants may try to get out of an expensive triple net lease.
Triple net leases may increase the tenant's operational expenses, and they may be on the hook for deductibles on insurance policies, and they may also be responsible for any damages to the property that are not covered by the insurance company.
Most triple net leases are long-term leases, lasting for more than 10 years, and generally include concessions for rent increases. They are also called net-net-net or NNN leases within the real estate industry. (For related reading, see: What kinds of real estate use triple net (NNN) leases?)
- 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.
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.
But there are alternatives. If given the option, tenants may want to consider signing a gross lease, which charges a flat rental rate. This amount covers the fee for the space as well as any additional expenses that come with it. The landlord, therefore, retains the responsibility for paying property taxes, insurance premiums and maintenance costs. He covers these costs by building them into the rent he charges his tenant.
For example, if the yearly rent is $10,000 and he estimates the additional costs to be $3,000, the effective rent he charges the tenant is $13,000 annually. While traditional leases are more common than net leases, they present more risk to the landlord, who must absorb any unexpected increases in the extra expenses. This is why some landlords prefer using a type of net lease, shifting some or all of this risk to the tenant.