Leasing options are complex, especially in commercial real estate. However, net leases offer tenants and landlords alike options that aren’t overly complex and can serve the best interests of both parties.
Net Lease or Gross Lease – What’s the difference?
A double net lease isn’t the only type of lease available to landlords and tenants of commercial properties. There are also single net leases and triple net leases. Additionally, there is one called a gross lease. In a gross lease arrangement, tenants only have to pay the monthly rent for their office or other type space and the owner of the property is responsible for property tax, insurance, and other costs of maintaining the property. From a tenant’s perspective, a gross lease may appear to be the better option. In reality, property owners tend to pass these costs down to the tenant anyway as higher rents and sometimes less beneficial leasing terms.
For now, let’s just look at the other two types of net leases aside from the double net lease — more on that in a moment.
Single net lease
- Least expenses and responsibility
- Responsible for monthly rent and annual property tax
- Landlord responsible for insurance and maintenance
- Least common lease type
Triple net lease
Most responsibility falls on the tenant in a triple net lease, which is a pretty common lease type.
Tenants are responsible for:
- Monthly rent
- Annual property tax
- Insurance premium and deductible
- Maintenance costs
Double Net Lease Definition
Now, let’s dive into double net leases.
These are common leasing arrangements for commercial properties. In a double ent lease, tenants must pay property tax, insurance, and a base rent. Landlords must provide repairs for structural issues and, because the property and associated bills are in the landlord/property owner’s name, he or she is still responsible for ensuring that property taxes and insurance premiums are paid—the tenant merely reimburses the landlord for his or her share of these obligations.
Because tenants pay these obligations to the landlord and not to the specific entity owed, the landlord has to ensure proper management of each obligation. This means:
- Making sure each tenant pays their share, and only their share
- Ensuring all notices for upcoming payments due are given to tenants in a timely fashion
- Collecting rent payments from tenants on time
Tenants who are late on payments put a stress on the property owner, as he or she must come up with funds to cover the tenants’ portions—meaning property owners should have enough capital to cover these expenses in the event they arise.
For commercial properties with multiple tenants, the obligations are typically divided according to square footage of the tenant’s rental space and assessed proportionally.
Benefits and Disadvantages of a Double Net Lease
Because double net leases are one of the most common commercial real estate lease types, you’re probably wondering—is all the hype for a reason? Before you sign any lease agreement, it’s important to understand the benefits and disadvantages of a double net lease.
The primary benefit of a double net lease for tenants is that all the worry that comes with maintaining a building rests on the shoulders of the property owner or landlord. This means all property maintenance—from simple janitorial services to HVAC maintenance—aren’t the tenant’s responsibility. And these tasks and services can come with hefty price tags.
One of the drawbacks of a double net lease—having to pay property tax—is not typically something you can avoid anyway. Even a single net lease agreement requires tenants to assume a portion of property taxes. The greatest disadvantage of double net leases is the tenant’s responsibility for the insurance premium and deductible.
Just to recap, let’s review the pros and cons of double net leases from the tenant and landlord perspectives, respectively.
Tenant
Pros include:
- Lower rent payments
- Less management responsibility
Cons include:
- Negotiating effective lease terms to avoid overpayment of rent
- Must analyze cost-effectiveness of paying insurance vs. paying higher rent
But tenants aren’t the only parties that experience disadvantages, regardless of lease type. Lease agreements have nuances that must be inspected carefully—make sure the lease you sign lines up with your long-term goals. If you’re the tenant and you’d like to have a bit more say in property improvements over the years, you may consider an absolute net or a triple net lease instead of a double net lease.
Landlord
Pros include:
- Can have better control over monthly expenses than with a single net lease or any gross lease type
- Retain control of structures on the property
But with control comes responsibility, however, so some of the disadvantages of a double net lease for a landlord are:
- Responsibility financially for maintaining structures on the property
- Potential for major costs associated with upkeep which could require liquid capital
It’s important that landlords have properties assessed or appraised and to review reports from third parties. This helps landlords avoid potentially investing in properties that require major upkeep, that may need extensive renovations, or that have other issues that could impact the landlord’s cash flow.
Is a Double Net Lease Right for You?
Now that you all about a double net lease—which party must pay which expenses—it’s time to weigh your options. A double net lease is one of the most common commercial real estate leases, so if you’re a tenant, you’ll likely be presented with either a double net (NN) lease or a triple net (NNN) lease. Read the entire lease to ensure you understand what’s expected of you and the landlord for the duration.
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