The Ultimate Guide to Net Leases
Absolute NNN? Better double-check.
Net lease is a term to classify the terms of a lease between a landlord and a tenant. The degree of “Net” generally defines which items a tenant is responsible for paying rather than the landlord.
Net Lease can be structured as Single Net (N), Double Net (NN), Triple Net (NNN), or Absolute Net Lease (Absolute NNN) the four types of net leases are as follows:
- A Single Net lease (N): is a lease agreement where the tenant is responsible for paying property taxes in addition to their monthly rent payment.
- A Double Net Lease (NN): is a lease agreement where the tenant is responsible for paying property taxes and insurance in addition to their monthly rent payment.
- A Triple Net Lease (NNN): is a lease agreement where the tenant is responsible for paying property taxes, insurance, and maintenance & repairs in addition to their monthly rent payment.
- An Absolute Net Lease (Absolute NNN) is a lease agreement where the tenant is responsible for paying property taxes, insurance, maintenance & repairs, and capital expenditures
Although the four categories of Net Leases are relatively easily defined, leases can be miscategorized by investment professionals. The misclassification of leases is due to a variety of reasons ranging from a misinterpretation of language in the lease, overselling a deal, or simply a difference in vernacular across markets. Some common examples are:
- Misclassifying a lease as absolute when landlord is still responsible for one major cap ex (roof, parking, structure, etc.)
- Misinterpretation of what’s included as a landlord responsibility in maintenance & repairs due to different regional customs and definitions
- Misunderstanding of direct payment vs. a reimbursement in landlord responsibility for tax, insurance, maintenance, and capital expenses payments.
Leases vary in length and depth and it’s important to read the document and amendments closely to fully understand what a landlord is responsible for. In most cases, a review of the lease can clarify any confusion surrounding the nature of a lease, and some leases even go as far to explicitly include language stating the intention of the lease to absolve landlord of all maintenance responsibilities. Engaging an investment professional to help interpret and fully understand a lease is an important step in the acquisition process.