The term ‘net lease’ is used within the real estate business in the United States. It refers to arrangements where the lessee (tenant) is held responsible to pay the agreed amount for all relative expenses to the real estate ownership, in addition to base rent. The expenses are commonly known as ‘three nets’, hence the term ‘NNN Lease’. The three nets include maintenance, insurance, and property taxes. However, due to rent being classified under net lease expenses, rent being collected is often going to be less compared to that of rent being charged under the classification ‘gross lease’. Types of net leases include single, double, and triple net leases, while the term is simply shortened to ‘net lease’ to express the arrangements.
Furthermore, when expressing the agreement of a triple net lease, that is when the lease includes all three main expense classifications, it is frequently abbreviated as “NNN lease”. However, when pronounced, it is still referred to as “Triple Net Lease”.
NNN Lease Variation
Typically, a NNN lease is invested to a single tenant, which is known as a Single Tenant Net Lease (STNL). However, it is possible for a NNN lease to have multiple tenants, but is not classified under an STNL investment. For instance, both MetroPCS and Starbucks share a building structure under two individual NNN leases, otherwise a retail strip location with all of the tenants combined into a single NNN lease. Therefore, in both of these examples they would be classified under a NNN lease investment, but should not be categorized as STNL investments.
With multiple tenants, risks of defaulting get spread across all tenants within the NNN lease agreements. Therefore, if either business were to shut down and/or go bankrupt, rent due would continue to be paid by the other tenants under the NNN lease. For investors looking to spread the risks, multi-tenant agreements can be appealing, but it forfeits the simplicity of receiving a single check for rent by a single tenant.
Double Net Lease
The NN lease is another type of agreement related to an NNN lease. This refers to a ‘Net-Net’ lease, pronounced as simply ‘double net lease’. Typically, the ‘net’ part refers to property insurance and property taxes. Like NNN leases, a double net lease is commonly a single tenant arrangement, but not always. Although, certain additional financial maintenance obligations are carried by landlord.
For instance, some Auto Parts dealers and Discount Dollar stores are operating under a NN lease, whereas landlords are responsible for the building structure and roof maintenance. Within the net lease industry, the term of ‘net lease’ is loosely mentioned, usually utilized while referring to either a double or triple net lease. Although, double net leases and trip net leases have a distinction between them, even though certain brokers may use the term ‘Net Lease’ to describe both types of arrangements.
A NN lease investment will often trade with higher CAP rates compared to that of NNN lease investments, due to the additional maintenance expenses the landlord continues to be responsible for.