A lot of us have come across leases in our personal and professional life. A net lease is a lease where you pay one or more of the additional expenses. The expenses include property insurance premium, property tax, or maintenance cost and it is used in commercial properties. There are three different types of net leases- single lease, double lease and triple lease. In a single lease, you pay the rent and property taxes. In a double lease, you will pay the rent, property taxes and the insurance premium. A triple lease is also known as net-net-net lease and you pay rent and all the three expenses.
Rent is usually lower in net leases as compared to the traditional lease. When a tenant bears more expenses, the landlord will charge a lower base rate. However, triple net lease is also bondable lease. This means that a tenant cannot back out due to high costs. Let us discuss each in detail to get in-depth information.
A single net lease is also known as an N lease or a Net lease. In a single net lease, the landlord will transfer minimum risk to the tenant. The tenant will pay the property tax.
It means that any other expenses like insurance, repairs, maintenance, and utility will be paid by the landlord. Additionally, it will be the landlord’s responsibility for repairs and maintenance that need to be done during the period of the lease in the property.
If you are under a single net lease, you will be paying slightly lower rent than that with a standard lease. This is due to the additional cost of property tax.
It is important to understand that a high rental payment will not alleviate the responsibility of the landlord for keeping the expenses updated.
If a tenant does not pay the municipality, the landlord will be on the hook and it may lead to additional fees or fines.
This is the main reason why landlords include property tax in rent payments. It helps pass the payment through them so they are aware that the taxes are paid on time.
A double net lease is also known as NN lease or net-net lease and it is highly popular in the commercial real estate. For NN lease, you will pay the property taxes as well as insurance premium with rent.
The rent for the area will be low due to the additional cost that the tenant has to bear. The cost of maintenance will be the responsibility of the landlord who will directly pay for them. Similar to a single lease, in double net lease, the landlord will ensure that the additional payments are passed on to them and they will pay accordingly.
Since the name on the property documents is of the landlord, they will ultimately be at fault in case of a default or delay in payment. This is why the landlord prefers to have the additional payments passed to them.
Also known an NNN lease or net-net-net, in a triple net lease, the landlord has minimal risk. You will pay for the cost of repair and maintenance, property taxes, insurance premium and rent.
Since these expenses are borne by the tenant, the base rent will be low. When the cost of maintenance is high, the tenant might try to get rid of the lease or might ask for rent concessions.
In order to avoid this from occurring, landlords prefer a bondable net lease. It is a lease that cannot be terminated before the date of expiry. The amount of rent also cannot be changed and it includes the unexpected increase in ancillary expenses.
Landlords choose to use a bondable net lease because sometimes tenants do attempt to get out of the lease. It could increase the operational expenses of the tenant and they could be held for deductibles in case of insurance policies.
Further, the tenant could also be responsible for any damages that are not covered by the insurance company. In most cases, triple net leases last longer than a decade and it includes concessions for an increase in rent.
Before you consider any type of lease, it is important to keep in mind that the rent payment may increase in the future. A landlord can increase the rent due to legal increase permitted by the local government.
It is equally important to consider the cost of other expenses that you are bearing in addition to rent. Remember that the amount of additional expense should be lower than the rent amount. If it is more than the rent, it might not be a good option for you.