Commercial leases for a property can come in many different forms and types. The two most common commercial leases are gross and net leases.
The difference between the two comes from how much the tenant, or the business, has to pay the landlord.
Net Lease
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 commercial lease, 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 tenant’s base rent. Gross leases may come with higher rents than 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: insurance, taxes, or maintenance.
2) Double Net Lease
The tenant must pay two of the three expense categories in a double net lease. Double net leases are also known as net-net leases.
3) Triple Net Lease
A 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 property’s insurance, maintenance, and taxes.
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 to attract renters than 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 maintenance fee, which may not be attractive.
It also puts the landlord at a significant advantage as the maintenance cost is the tenant’s responsibility, 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 benefit both 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 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 having the tenant pay them 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 property damage, the tenant has to bear huge losses for any unexpected reasons.
Similarly, the tenant pays the expenses on behalf of the landlord and cannot use them as a tax deduction.
While the triple net lease is heavily favorable for the landlord, it still puts the tenant in a better position to negotiate favorable lease terms. It means the landlord can still be at a disadvantage.
Conclusion
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 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 parties involved.
