What is a Net Lease?

A net lease is a specific type of lease in commercial real estate, which means property that is leased for use in business rather than for residential use. A net lease is one that states the tenant is responsible for some or all of the costs that are usually borne by the property owner. Different categories of net leases involve various added costs.

In a standard, non-net lease, the tenant will simply pay for the right to use a property. Most costs related to the maintenance of the property remain the responsibility of the owner. This standard lease is technically known as a gross lease, as theoretically the rent should be enough to cover all the property owner's costs and leave some profit.

There are several specific categories of net leases, the most common of which are single, double or triple. They can also be referred to as Net, Net-Net and Net-Net-Net, or N, NN and NNN respectively. There is also a more severe form known as an absolute triple.

The usual definitions of these classes has the added cost responsibilities added cumulatively. This means that a single net lease has the tenant responsible for property taxes. A double net lease makes the tenant responsible for property taxes and buildings insurance. A triple net lease makes the tenant responsible for property taxes, buildings insurance and maintenance costs. As a general rule, the amount charged for rent will lower slightly as the lease takes on the extra cost responsibilities.

Triple net leases are often viewed as a form of equity investment. This is because the rent will usually be much lower than on a standard lease, meaning the property owner will be unlikely to make much month-to-month profit if paying off a mortgage. Instead, they are more likely to make a profit as and when they sell the property, particularly considering the building will have been maintained without the property owner having to bear the relevant costs.

There is a variation of the triple net lease known as the absolute triple net lease, or the bondable lease. This makes the tenant responsible for any costs related to the property whatsoever. This could include the costs of rebuilding if the building is destroyed by a natural disaster. Usually such leases have no provision for an early exit. Such a lease is very advantageous to the property owner as they have an absolute guarantee of income and no ongoing costs, though this is usually reflected in a considerably lower rent.