Net leases are quickly becoming the standard for rental agreements for commercial properties. Under a gross lease, lessees are only responsible for a flat-rate rental amount; however, under a net lease, lessees are also responsible for at least one additional operating expense. While it’s readily apparent how a net lease benefits a lessor, reducing responsibility and expenses for the upkeep of the property, they can also be advantageous for lessees.
Net leases provide lessees more control. Lessees may be more motivated to conserve their utility use since they’re responsible for a portion or all of the cost, which results in them paying less than they would in an all-encompassing gross lease. Read on to learn more about the differences between single, double, and triple net leases and how to account for them.
What is a net lease?
A net lease requires the lessee to pay base rent and assume responsibility for at least one additional operating expense associated with the property. The lessee can either pay the cost(s) directly or through remittance to the lessor. The following four lease subtypes determine the portion of additional expenses paid for by the lessee:
- Single net (N) lease
- Double net (NN) lease
- Triple net (NNN) lease
- Absolute net lease
Net leases are one of the most common types of leases for commercial real estate. For multi-tenant properties, the net lease expenses are typically pro-rated and based on the rentable square feet occupied by each tenant.
What is the difference between single, double, and triple net leases?
Single net (N) lease
For a single net lease, the lessee pays the monthly base rent and property taxes; meanwhile, the lessor takes care of all other operating expenses. Single net leases tend to be the least common type of commercial lease, but when they are implemented, it’s often for retail properties.
Double net (NN) lease
For a double net lease, the lessee pays the insurance in addition to the monthly base rent and property taxes. The lessor is responsible for all other operating expenses.
Triple net (NNN) lease
For a triple net lease, the lessee pays common area maintenance costs in addition to the monthly base rent, property taxes, and insurance. The lessor is responsible for any remaining incidental expenses, such as structural repairs to the property.
What is the difference between triple and absolute net leases?
Absolute net leases, sometimes called bondable net leases, require the tenant to be responsible for rent and all other property-related expenses, including roof and structural repair costs. In these lease agreements, the lessor is relieved of all financial obligations. Absolute net leases are commonly used when the property investor borrows money to finance the commercial property and chooses to leave additional risks up to the lessee(s).
Although a less common lease subtype, confusion often arises because triple net and absolute net leases are both advertised as NNN leases. Structural repairs are generally costly, so it’s vital to complete ample research on different lease subtypes and clarify who will be responsible upfront.
Read more: Avoid these 7 common lease administration mistakes
Who are typical net lease tenants?
The most common net lease tenants are often businesses that offer fundamental goods and services, colloquially referred to as “recession-proof” tenants. These low-risk lessees are sought after for providing a steady flow of residual income. However, the unique benefits afforded to the lessor and lessee(s) are dependent on whether the lease is for a single tenant or multi-tenant property.
Single tenant net lease
Commercial single tenant properties are often rented out via a triple net lease. These types of lease agreements often occur in real estate investments where the landlord does not actively manage the property. Typically, single tenant net leases have terms lasting ten or more years.
Common examples of businesses that utilize single tenant net leases include:
- Grocery stores
- Convenience stores
- Gas stations
- Fast food restaurants
- Big-box stores
Multi-tenant net lease
Commercial multi-tenant properties are more often rented out via a double net lease. Usually, each tenant possesses their own net lease agreement with the landlord, covering rent, property taxes, and insurance. Multi-tenant net leases tend to last for shorter durations—it’s rare for the terms to be longer than seven years.
Common examples of businesses that utilize multi-tenant net leases include:
- Retail strip malls
- Shopping malls
- Office buildings
- Apartment complexes
- Healthcare centres
While multi-tenant properties are higher risk investments that involve more maintenance work, lessors regularly receive higher yields and lessees pay lower monthly rent than for single tenant properties.
How to calculate a net lease
Understanding how to calculate a net lease is beneficial for both lessors and lessees. Lessees can make more informed decisions and compare lease advertisements while lessors can increase their odds of raising occupancy rates by better communicating the value of their offer.
How to calculate a triple net lease
For a triple net lease, the lessee must pay the base rent, property taxes, insurance, and common area maintenance (CAM) expenses. These charges are often lumped into one estimated annual rate that the lessee is required to pay. An example of an advertisement for a triple net lease would look something like this:
Lease rate: $20.00/ sq. Ft. NNN (Estimated NNN = $5 / sq. ft.)
In other words, the base annual rental rate is $20/ square foot, and the annual property expenses (NNN), which include property taxes, insurance, and CAM, are estimated at $5/square foot.
How to calculate single and double net leases
For single net (N) and double net (NN) leases, the estimated property expenses would not include CAM and would follow a similar format to triple net leases. For example, if the above advertisement was for a double net lease, it would be stated like this:
Lease rate: $20.00/ sq. Ft. NN (Estimated NN = $5 / sq. ft.)
Property expenses often change from year to year, so lessees must be prepared for costs to increase and decrease over a multiple year lease agreement.
Example of triple net lease calculation for single tenant property
Let’s assume that a lessor advertises the following for a 3,000 square foot, single tenant property:
Lease rate: $25.00/ sq. ft. NNN (Estimated NNN = $4 / sq. ft.)
The first calculation you’ll need to perform is finding the monthly base rent. This can be achieved using the following formula:
Monthly base rent = (rent per square foot x square footage) / 12
Monthly base rent = ($25 x 3,000 sq. ft.) / 12
Monthly base rent = $6,250
Then you must calculate the NNN or monthly property expenses:
Monthly NNN = ($4 x 3,000 sq. ft.) /12
Monthly NNN = $1,000
Finally, you must add together the values of the monthly base rent and the monthly NNN, which will return the monthly rent:
Monthly rent = $6,250 + $1,000 = $7,250
Therefore, the lessee must pay $7,250/month for the property. When the accounts are reconciled during period end, the lessee is billed or credited based on the actual expenses.
Introducing Property Lease Management
Net lease calculations can quickly become complicated, especially when managing multiple and multi-tenant properties. Errors from manual processes and delayed invoices can jeopardize your compliance requirements with accounting standards ASC 842, IFRS 16, and GASB 87, as well as negatively impact the relationship between the lessor and lessee. A robust solution, like Property Lease Management, automates your accounting processes and takes care of the nitty gritty, so you are free to focus on the tasks that matter.