Real estate investments can be an excellent investment tool both because of their risk manageability and tax deferment potential, but knowing what kind of lease is best suited for the owner and tenant can have a significant impact on the value of your investment. Higher risk agreements like single and double net leases can result in higher monthly rent costs but fewer obligations for the tenant, while lower risk agreements like triple and absolute triple net leases shift responsibility away from the owner and toward the tenant in exchange for a lower base rent.
Such differences can drastically change the overall value of your commercial property assets - and that’s to say nothing of factors like lease length, rent bumps to account for inflation, number of tenants, and much more. That’s why, whether you’re a business seeking to lease some commercial property for your company or an owner trying to decide how best to protect yourself and your property from unnecessary risk, understanding the different kinds of lease options is an important step in making the right investment decision. We’ve put together an introductory guide to help you understand the basics of what to consider when leasing your commercial property.
Introductory Terms
To start off, note that although some net leases could theoretically be used for residential property, our emphasis is on commercial property, which differs from residential agreements in several ways. For starters, most residential property agreements exist as gross leases, whereby the tenant pays a flat fee and the landlord pays for all ownership costs associated with the building, like taxes, insurance, and maintenance. Commercial property agreements exist as nets leases, where the tenant assumes responsibility for some or all of these ownership costs in exchange for a lower base monthly rent. The difference between single net, double net (NN) and triple net (NNN) consists in the number of ownership costs that the tenant assumes, and the greater total of costs they assume, the lower the risk carried by the landlord. It should be clarified that when we say the tenant assumes an ownership cost such as insurance, taxes, or maintenance, the expenses for these costs are still in the property owner’s name; they are just passed along to the tenant. Therefore, the responsibility for any failed payments for taxes, insurance, or maintenance does still fall to the owner.
Such ownership costs can be shared amongst multiple tenants in a multi-tenant net lease agreement, which is often the case for commercial properties occupied by more than one tenant (such as a strip mall), or they may be placed solely on one tenant as is the case in single tenant net leases, or STNLs - which is one of the focus areas for NNNLegacy. Multi-tenant net leases give the owner the ability to lower their risk by distributing it across multiple tenants, but they do eliminate the convenience collecting a single check for the expenses of the entire property. STNLs, on the other hand, allow the landlord to obtain payment from a single business, but this does heighten the risk carried by the owner should a tenant be unable to pay. For this reason, only investment grade tenants may qualify for STNLs, so a high tenant credit rating, often from Standard & Poors, is essential.
Single Net Leases
Single net leases are commercial property agreements whereby the tenant is responsible for property taxes in addition to their base monthly rent, and the landlord is responsible for other ownership costs like insurance and maintenance. These are the least common form of leasing agreement, as they expose property owners to the greatest amount of risk. The heightened risk also results in greater base monthly rent amounts assigned to the tenant as well. Here’s a brief summary of who incurs the cost in single net leases:
| Property Taxes | Tenant |
| Insurance | Owner |
| Maintenance and Utilities | Owner |
| Base Rent Amount | Highest |
Double Net Leases
Also referred to as NN leases, double net leases or net-net leases are commercial property agreements whereby the tenant incurs the cost of property taxes and insurance, but maintenance costs are still held by the owner. NN leases are very common in the commercial property industry, and frequently result in a lowered base monthly rent offered to the tenant to compensate for the extra incurred costs. Owners are vulnerable to less risk in double net leases than single net agreements, but there is more risk placed upon them with these than with triple net leases. Here’s a summary:
| Property Taxes | Tenant |
| Insurance | Tenant |
| Maintenance and Utilities | Owner |
| Base Rent Amount | Lower |
Triple Net Leases
Triple net leases, or NNN leases or net-net-net leases, transfer still more risk away from the landlord and onto the tenant. In these agreements, the tenant is required to cover the costs of property taxes, insurance, and maintenance in addition to their base monthly rent. The fact that nearly all ownership costs associated with the commercial property are incurred by the tenant gives the property owner maximum risk protection, and in exchange the tenant is often given an even lower base rate than that afforded by NN leases. Here’s the breakdown:
| Property Taxes | Tenant |
| Insurance | Tenant |
| Maintenance and Utilities | Tenant |
| Base Rent Amount | Lowest |
Even with this protection though, some risk is still present, such as in the event of a natural disaster or circumstance where the tenant may seek to obtain rent concessions. Triple net leases are often long-term agreements, lasting for at least 10 years.
Absolute Triple Net Leases
To avoid situations where a tenant may attempt to escape the terms of their leasing agreement, absolute triple net leases or bonded triple net leases may be used. These afford the property owner maximum risk management, as it is made clear in the lease that the tenant must pay rent for the entire duration of the agreement, and that the rent may not be adjusted to account for unexpected maintenance, utility or insurance costs.
Taxes and Other Terms
Because many triple net leases exist as long-term agreements, other factors like inflation and periodic rent increases must be taken into account to maximize the value of the commercial property. To do that, some lease agreements assume given rates of inflation and incorporate rent hikes into the lease. An alternative is to break up the lease into shorter periods of duration so that the owner may re-evaluate rent amounts more regularly, but this carries more risk with it, as it affords the tenant more occasions to vacate the property, resulting in loss of payment to the owner.
An additional parameter for owners to consider is their ability to defer paying capital gains taxes on their property via a 1031 exchange, whereby one commercial property may be swapped for another. There are several requirements for performing a 1031 exchange - a like-kind property transfer of equal or greater value being one of them - so be sure to consult your own team (accounting, tax, legal, brokerage) during this process.
Risk Summary
There’s a lot of information to absorb here, so take a look at our risk summary table to summarize who is responsible for each cost associated with each type of commercial property lease.
| Property | Taxes | Insurance | Maintenance & Utilities | Base Rent Amount |
|---|---|---|---|---|
| Single Net Lease | Tenant | Owner | Owner | High |
| Double Net Lease | Tenant | Tenant | Owner | Medium |
| Triple Net Lease | Tenant | Tenant | Tenant | Low |
As you can see, what sets each leasing option apart is the degree of risk transferred from the commercial property owner to the tenant. The greater the risk assumed by the owner, the greater the base monthly rent will be. As it is the goal of all investors to optimize their profit-to-risk ratio, leases that minimize risk held by the owner are typically considered more desirable, which is why triple net leases are often so highly prized.