What is a net lease?

On Behalf of | Oct 11, 2023 | Commercial Real Estate

Real estate terminology can often seem like a foreign language to those unfamiliar with the industry. When diving into commercial real estate, understanding the intricacies of leasing structures is essential. Among the various lease types, net leases stand out due to their unique structure and allocation of costs.

Net leases, while standard in the commercial realm, can vary in their specifications. At their core, they involve shifting certain expenses from the landlord to the tenant, in addition to the rent.

Net leases and their variations

A net lease typically requires the tenant to pay some or all of the property’s operating costs apart from the base rent. These costs can encompass property taxes, insurance, and maintenance. The allocation of these expenses depends on the type of net lease:

  • Single net lease (N lease): The tenant pays the base rent and property tax. The landlord covers maintenance, insurance and other operational costs.
  • Double net lease (NN lease): The tenant is responsible for the base rent, property taxes and building insurance. Maintenance and other expenses remain the landlord’s responsibility.
  • Triple net lease (NNN lease): This is the most common net lease, where the tenant handles almost all property expenses. This includes base rent, property taxes, building insurance and maintenance.

For landlords, net leases can minimize uncertainties related to variable property expenses. The predictability of income is a significant advantage. On the other hand, tenants might benefit from net leases through potentially lower base rents and more control over the property’s operations and maintenance.

Net leases offer a unique structure in commercial real estate, providing both landlords and tenants with specific advantages. Understanding the nuances of each type helps ensure that both parties can negotiate a lease that aligns with their interests and expectations. Having legal guidance can help.