A double net lease — like other net leases — is typical in commercial real estate. While some may have trouble understanding the terminology, net leases are simply contractual agreements in which the tenant or lessee of a property is required to pay rent and some or all of the property’s expenses.
Under normal circumstances, the landlord or lessor would be responsible for property taxes, insurance, maintenance, and other expenses associated with owning the property.
However, net lease agreements shift this financial burden onto the lessee. The various net lease types determine which of the major property expenses the lessee will be responsible for.
Whether you’re looking into your investment options, already own a property, or want to rent one out, read on to understand the difference between single, double, and triple net leases and how they can impact your business interests.
What Is a Double Net Lease?
Net leases obligate the tenant to take on extra costs in addition to rental payments. When considering property expenses, there are three major categories to consider: property taxes, insurance, and maintenance.
Much like the name implies, a double net lease, NN lease, or net-net lease passes two additional costs onto the tenant.
In a double net lease agreement, the tenant agrees to take on responsibility for both property tax and insurance. Where there are multiple tenants, for example, the costs may be divided proportionally amongst them. These are expenses that the property owner would otherwise be expected to cover.
Instead of taking on the responsibility for all the costs associated with property ownership, the landlord will retain responsibility for maintenance and repairs. In exchange, however, the tenant may enjoy a lower rental amount.
Double Net Vs. Single Net
A single net lease or N lease is the least demanding net lease on the tenant. In this case, the tenant is only expected to pay property taxes in addition to rent. This means that the lessor remains responsible for insurance, deductibles, and maintenance costs.
In comparison, a double net lease takes the stress of the lessor by passing it on to the tenant. As a result, a lessor would typically offer a double net over a single net lease to a prospective tenant.
Double Net Vs. Triple Net
In a triple net lease agreement, the tenant is expected to pay annual property taxes, insurance premiums on the property, maintenance, and upkeep costs for the building. All these costs are paid by the tenant in addition to regular rental payments.
Consequently, triple net leases charge the lowest rental amount to compensate for the tenant’s additional costs. With a double net lease, the tenant has fewer costs than in a triple net lease but conversely, a higher rental payment.
For more information on triple net leases, take a look at this complete guide.
Gross Vs. Net Leases
In a gross lease, the lessee agrees to pay a single flat fee to cover all of the expenses that they are responsible for. This means that the lessor agrees to cover all of the expenses associated with owning the property and its usage.
The lessor is therefore responsible for paying property taxes, insurance, and maintenance costs. However, in setting the amount for the single payment, the lessee factors these costs into the rental amount.
A gross lease agreement is common commercial real estate, especially in apartment buildings where the occupant in each unit is responsible for a single rental amount to the lessor. Other multi-tenant properties such as office buildings may also offer gross lease agreements for the sake of convenience.
However, because costs are likely to increase over time due to inflation and increased living costs, the rental amount will likely be made subject to an escalation clause to ensure that the lessor remains able to cover all the costs regardless of the increase in costs.
On the other hand, commercial free-standing buildings such as shopping complexes are usually subject to net leases. More often than not, of the different lease types, property owners prefer triple nets, as they provide an opportunity for the lessor to take a back seat when it comes to managing the property.
Deciding between a gross and net lease is largely a matter of both convenience and consistency. While accepting a single flat fee may be less of a hassle for the lessor, the problem arises where the expenses fluctuate so much that the estimated flat fee no longer covers them or the tenant is grossly overpaying.
Choosing the Right Lease for Your Investment
When it comes to real estate investing, choosing the right lease to complement your investment, lifestyle, and financial goals is crucial. However, with so many lease types to choose from, the decision can quickly become overwhelming.
As a landlord, you naturally enjoy more bargaining power when it comes to lease negotiations. However, while the lessor typically dictates the terms of the lease in residential agreements, when it comes to commercial agreements, it’s often in your best interest to meet the tenant halfway — especially if they own a lucrative business.
A double net lease reduces the burden on the lessor, passing it on to the tenant — as does the single net lease. But because the lessee takes on relatively less responsibility, the lessor is empowered to charge higher rentals and significantly raise the rental amount in proportion with the rising cost of living, if need be.
If you’re sitting on prime real estate, then the possibility of charging a premium in the future may persuade you to pursue a double net lease agreement or even a single net lease; however, doing so may compromise the possibility of securing long-term occupancy — not to mention taking on more duties and responsibilities like maintenance and property taxes.
That said, if a landlord pursues a single or double net lease with the view of charging a high rental, there are certain concessions that the parties can make in order to sweeten the deal.
For example, the lessor and lessee can negotiate on the escalation clause, utilities, and other minor issues that may just mean the difference between sealing the deal and seeking out a new prospect.
However, if you’re after long-term, consistent income with minimal responsibility, then, by all accounts, a triple net lease agreement is the most attractive option. Embodying the true meaning of passive income, triple nets generate earnings for the lessor with minimal effort required on their part.
In a sense, the lessor gets to enjoy all the benefits of property ownership with none of the costly drawbacks. The lessee, although taking on more responsibility, embraces a level of control over the property akin to owning it themselves. Allowing the lessee to make cosmetic changes to the property can also go some way in persuading them to take on the additional expenses.
Of course, if the lessee agrees to a triple net, then you can’t reasonably expect to charge a rental premium in addition to all the costs they have already taken on. This means lowering the rental amount to offset the added financial burden on the tenant. While this may eat into your passive income, it’s a small price to pay for a relatively low-risk investment.
Conclusion
The viability of your commercial real estate investment can be influenced by your lease agreement. In the same vein, tenants entering into a net lease agreement should carefully assess their financial situation and projected profitability to ensure the success of their venture.
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