Commercial leases for a property can come in many different forms and types. The two most common types of commercial leases are gross lease and net lease.
The difference between the two comes from how much the tenant, or the business, has to pay the landlord.
A net lease is a type of commercial lease in which the lessee, or the tenant, pays a portion of the expenses associated with the property, such as insurance, maintenance and taxes.
The tenant pays these expenses in addition to the basic rent on the property. Ideally, for the landlord, the tenant would pay all expenses associated with the property in a net lease.
However, tenants can’t bear all of these expenses. Therefore, they agree to pay a portion of it rather than the full amount.
A net lease, like any form of commercial leases, allows a business to lease a property and use it without the need to acquire it.
A net lease allows landlords to mitigate all the expenses associated with their properties to the tenants. Some types of net leases may also specify the types of expenses that tenants need to bear and have the landlord take care of the rest.
Net leases, while advantageous to landlords, may also benefit the tenants in the form of lower basic rent.
Net leases are the opposite of gross leases. Gross leases usually do not require the tenants to pay a portion of the expenses associated with the property.
Instead, the landlord adjusts these expenses in the base rent of the tenant. Gross leases may come with higher rents as compared to net leases but require the landlord to make estimates of the costs associated with the property.
3 Types of Net Leases
There are many different types of net leases. The three main types of net leases are single, double and triple net leases.
1) Single Net Lease
A single net lease is the simplest form of net lease. In this type of net lease, the tenant pays only one of the three expense categories, which are insurance, taxes or maintenance.
2) Double Net Lease
In a double net lease, the tenant has to pay two of the three expense categories. Double net leases are also known as net-net leases.
3) Triple Net Lease
Triple net lease, also known as net-net-net lease or NNN lease, is the type of net lease in which the tenant pays for all the expenses related to a property.
As mentioned above, this means the tenant pays a portion of the insurance, maintenance and taxes of the property. In a triple net lease, the tenant has to pay the lowest rent among all types of net leases.
While some may consider this a disadvantage for landlords, it makes it easier for them to attract renters as compared to the other two types of net leases.
Similarly, the lower rent is also beneficial for the tenant. That is as long as the leased property is in good condition.
If it is not, it means the tenant has to suffer a high amount of maintenance fee, which may not be attractive.
It also puts the landlord at a significant advantage as the maintenance cost is the responsibility of the tenant, and the landlord will still receive the rent for the property.
Furthermore, for a landlord, it is vital to understand that while three of the most common expenses related to the property are the tenant’s responsibility, the landlord still has to pay some other expenses.
These include legal fees or accounting fees, related to services for the property. However, the landlord may still put these expenses as the tenant’s responsibility in the lease contract.
Advantages of Triple Net Lease
As mentioned above, the triple net lease can be beneficial for both the parties involved in this type of net lease.
The advantage of the tenant is the lower rent demand by the landlord. In a triple net lease, the tenant absorbs higher other expenses related to property and as a result, must pay lower rent.
For the landlord, the triple net lease allows them to have a lower vacancy rate. Similarly, the landlord gets the advantage of not having to pay for the expenses but have the tenant pay it instead.
Disadvantages of Triple Net Lease
The main disadvantage of a triple net lease for the tenant is that the expenses apart from rent paid on property are not predictable. In case of heavy damages to the property, for any unexpected reasons, the tenant has to bear huge losses.
Similarly, the tenant pays the expenses on behalf of the landlord and cannot use them as a tax deduction.
For the landlord, while the triple net lease is heavily favorable, it still puts the tenant in a better position to negotiate favorable lease terms. It is means the landlord can still be at a disadvantage.
Net leases are the type of commercial lease in which the tenant has to pay a portion of the insurance, maintenance, and taxes associated with the leased property. Net leases are the opposite of gross leases.
There are three types of net leases, single, double and triple. A triple net lease requires the tenant to pay all three of the expenses associated with the property.
A triple net lease is favorable to the landlord but can still have other advantages and disadvantages for both the involved parties.