You may have heard of the benefits of NNN investments. There are many ways to structure a lease agreement such as: Gross Lease, Net Lease, NN Lease, NNN Lease, Absolute Lease, or Bond Lease. Today we’d like to explain the differences between these common lease structures.
At a basic level, the names of these lease structures describe the terms of the leases. A gross lease requires a rent payment from the tenant that will cover gross, or all, operating expenses the landlord will realize on the property: maintenance costs, property insurance fees, and real estate taxes. A net lease, in contrast, requires a rent payment that will cover the operating expenses net, or excluding certain costs. The more “nets” in the lease, the fewer property expenses the lease payment is going to cover. Let's dive into a deeper explanation of each of these lease structures and show you why NNN investments are popular among real estate investors.
A common residential lease structure. The tenant pays a straightforward rent rate. The landlord is responsible for paying estate taxes, property insurance fees, and property maintenance expenses.
Net Lease (Single Net Lease, Modified Gross Lease):
The tenant pays rent in addition to utility costs, real estate taxes, or property insurance. The landlord is responsible for all property maintenance and expenses not covered by the tenant.
Net Net Lease (Double Net Lease, NN Lease):
The tenant is responsible for paying rent and most of the property’s operating expenses that may exclude aspects of property maintenance, particularly of common areas, roof, and the base structure. The landlord maintains liability of the property and is responsible for areas of maintenance not covered by the tenant.
Net Net Net Lease (Triple Net Lease, NNN Lease):
The tenant is responsible for paying rent and all operating expenses, including structural maintenance. The landlord maintains responsibility in the case of casualty or condemnation if the property is destroyed.
Absolute NNN Lease (Bond Lease):
The tenant is responsible for paying rent and all operating expenses even in the unlikely event of casualty or condemnation.
When there are fewer “nets” in the lease agreement, the investor takes on less liability and responsibility for the property. The landlord seeks higher rent from the tenant and addresses more of the maintenance issues. The landlord maintains control over the property’s use and upkeep. As the “nets” increase, tenants take on more responsibility for the property and gain control of the upkeep and the property costs. As they pay utility costs, taxes or insurance fees directly, tenants are less likely to be overcharged for these costs when they are estimated into a standard rent rate.
For certain tenants and landlords, triple net leases and bond leases are valuable opportunities. For tenants, particularly those that are national companies who have building and design specifications, triple net leases allow them to have complete control over the upkeep and appearance of the property. The same could be achieved if these companies directly owned the properties themselves, but, by leasing the property in this way, they can use the majority of their capital to run their business as they wish without having to tie up capital in real estate ownership.
For NNN investors, triple net leases allow them to focus time and capital on acquisitions, dispositions, and leasing rather than property management. They can better estimate profits when they know what the monthly rent payments will be and are not responsible for unexpected maintenance repairs or raises in insurance costs or taxes. Furthermore, triple net leases are generally made with credit-rated tenants who are more likely to uphold long-term leases, which can generate higher long-term income and higher growth potential for landlords.