What Is a Net Lease in Commercial Real Estate?

Commercial real estate involves various lease structures, each defining the financial responsibilities between a landlord and a tenant. Among these, the net lease stands out as a common and distinct type where the tenant assumes more financial responsibility for the property’s operating expenses beyond merely paying base rent. Understanding the specifics of this structure is crucial for anyone engaging in commercial property leasing.

Defining the Net Lease Concept

A net lease is a commercial real estate agreement where the tenant pays not only a base rent but also a portion or all of the property’s operating expenses. The term “net” signifies that the rent received by the landlord is “net” of these operating expenses, which are directly passed through to the tenant. The primary categories of operating expenses typically associated with net leases include property taxes, property insurance, and maintenance costs, often referred to as Common Area Maintenance (CAM). While a gross lease typically involves the landlord covering most operating expenses, a net lease places a greater financial burden on the tenant by requiring them to contribute to these additional costs.

Exploring Net Lease Types

Net leases are further categorized into specific types based on the combination of operating expenses the tenant is responsible for. These classifications include Single Net (N), Double Net (NN), and Triple Net (NNN) leases, each with distinct tenant responsibilities.

Single Net Lease (N Lease)

In a Single Net Lease (N Lease), the tenant pays the base rent and is also responsible for property taxes. The landlord retains responsibility for property insurance and maintenance costs. This lease type is less common due to the potential risk it presents to landlords if the tenant fails to pay property taxes.

Double Net Lease (NN Lease)

A Double Net Lease (NN Lease). Under this structure, the tenant pays the base rent, property taxes, and property insurance premiums. The landlord remains responsible for structural repairs and maintenance of the building. Double net leases are frequently utilized in commercial properties with multiple tenants, such as shopping centers or industrial spaces, where costs are proportionally distributed among occupants.

Triple Net Lease (NNN Lease)

The Triple Net Lease (NNN Lease) represents the most comprehensive form of tenant responsibility. Here, the tenant pays the base rent along with property taxes, property insurance, and all or most maintenance costs, including common area maintenance. This type of lease is common in single-tenant retail properties, industrial facilities, and office buildings, often for long-term lease terms. In a triple net lease, the tenant assumes nearly all of the financial obligations associated with property ownership, allowing the landlord to receive a more predictable net rental income.

Understanding Specific Tenant Responsibilities

Tenants in net leases assume detailed responsibilities for various operating expenses. These responsibilities encompass property taxes, property insurance, and common area maintenance (CAM).

Property taxes

Property taxes are levied by local governmental authorities based on the assessed value of the commercial property. In a net lease, the tenant is responsible for paying their pro-rata share of these taxes, or the full amount if they are the sole occupant. This means that any increases in property tax assessments directly impact the tenant’s financial obligations.

Property insurance

Property insurance in a net lease covers the building structure and liability. A tenant’s responsibility might include contributing to the landlord’s master insurance policy for the building or obtaining their own insurance policy for their business operations and contents within the leased space. This coverage protects against risks such as fire, natural disasters, and other insured perils.

Maintenance and Common Area Maintenance (CAM)

Maintenance and Common Area Maintenance (CAM) charges cover the upkeep of shared spaces and the property’s general operation. CAM expenses can include routine repairs, utilities for common areas, landscaping, janitorial services for lobbies and restrooms, parking lot maintenance, and security. These charges are calculated based on each tenant’s pro-rata share of the property’s total leasable area. Landlords often estimate these charges at the beginning of a year, and then perform a CAM reconciliation annually, to adjust for the actual expenses incurred, which may result in a refund to the tenant or an additional payment owed.