Net lease is a term used within commercial real estate in various countries, but especially within the U.S. A net lease agreement requires tenants to pay for part or full property expenses in addition to rent, which is generally paid by a property owner (lessor or landlord). These expenses may include, but are not limited to insurance, property taxes, repairs, maintenance, utilities, and operations.
These types of expenses are commonly classified under the ‘three nets’, which include maintenance, insurance, and property taxes. Within the United States, when expenses of all three categories are the responsibility of a tenant, it is referred to as an NNN lease, or triple net lease.
There are distinguishing factors that separate ‘net lease’ from ‘gross lease’. For instance, the net lease enables the owner of the property to collect the ‘net’ rent once expenses are paid by the tenant. Whereas, gross lease refers to property owners collecting the gross rent amount, while the landlord is responsible to covering the expenses of and may use the rent money to cover these expenses. It is common for gross lease agreements to have increased rent to help cover the additional expenses, compared to a net lease arrangement.
A written lease is commonly created that precisely lists all of the expenses a tenant will be responsible for. When a property has multiple tenants and net lease agreements, such as a strip mall, the expenses covered by tenants are often pro-rated depending on the size of the tenant’s area (based on sq. footage). There are different types of leases, with variations controlled yearly.
There are multiple forms of net leases, including:
Single Net Lease
This is often referred to simply as ‘Net lease’ or ‘N lease’. Under this classification, tenants are required to pay the property taxes, but single net leases are uncommon.
Double Net Lease
This is often referred to as ‘Net-Net’ or ‘NN lease’. Under this classification, tenants are required to cover expenses of both the property taxes, along with insurance coverage on the building structure. Meanwhile, the landlord or lessor will remain responsible for any incurred expenses for maintenance of common areas and repairs to the structure.
Triple Net Lease
This is often referred to as ‘Triple Net Lease’ or ‘NNN Lease’. Under this classification, tenants agree to take on the responsibility of all three ‘nets’, including maintenance, insurance, and property taxes in addition to the regular rental fees and coverage expected under rental agreements, including the rent, utilities, etc. Therefore, under a NNN Lease the lessee or tenant becomes responsible for any expenses connected to the maintenance or repairs of common areas (Common Area Maintenance). The Common Area Maintenance is often a set dollar amount per sq. footage and negotiated up front.
The Triple Net Lease is the most commonly used approach in commercial freestanding building structures, but it can be found within single family residential properties as well.