Leases can vary greatly depending on what expenses a tenant agrees to take on in additional to the based rental rate. These expenses can range anywhere from taking on utilities costs, to being responsible for absolutely all expenses.

In the world of single tenant investments, the two most prominent lease structures include Double Net & Triple Net (AKA NN & NNN). Before getting into the NN & NNN lease structures however, it is important to understand what operating expenses are and how they apply to the lease.

What are operating expenses?

Operating expenses are the costs associated with operating and maintaining a commercial property such as an industrial building or retail center. Operating expenses are made up of three main components:

Property Taxes: The taxes charged to the property owner by taxing entities. To learn more about how property taxes are calculated in Austin, read our article: What are Commercial Property Tax Rates in Austin, Texas.

Insurance: Insurance is the cost for the owner to ensure the building, which is typically required by the lender that is financing the property.

Common Area Maintenance fees: These expenses typically include management fees, building maintenance and repairs, utilities, administrative fees, management salaries and fees, property lighting, parking lot maintenance and more.

Each investment will have its own series of expenses, and these expenses can vary greatly depending on various different factors including age, location, quality, site usage, etc. With such variations in operating expenses.

In any event, managing expenses on a commercial real estate property is an integral aspect of the investment, and one of the most challenging to oversee. Separate from regular increases in utilities, insurance, property taxes, maintenance costs repairs, and other unforeseen expenses all impose additional uncertainty when owning commercial real estate. This is where the Net Lease Structure comes into play.

A “net lease” is a lease structure wherein the tenant is responsible for paying, in addition to base rent, some or all of the operating expenses related to real-estate ownership. Net lease types include single net, double net, and triple net leases, with the term “net lease” often being used as a shorthand expression for any of these arrangements.

NNN leased investments are generally leased to one single tenant and are therefore often times to as STNLs or Single Tenant Net Leases. A NNN lease investment can however have two or more tenants, though it would not be considered an STNL investment. An example of this would be a Starbucks & MetroPCS which share a building under two separate NNN leases, or a retail strip center where all tenants are wrapped into one NNN lease. Both examples would be considered NNN leased investments; however they would not be STNLs.

Another variation of the NNN lease is the NN lease or “Net-Net” lease which is pronounced “double net” where the “net” amounts generally are property tax and insurance. Double net leases, like triple net leases, are usually, though not always, single-tenant arrangements, however the landlord carries some extra financial maintenance obligation.

The term “Net Lease” is tossed around loosely in the net lease industry, often used when referring to a triple or double net lease; however there is a definite distinction between a triple net and a double net lease even though some brokers erroneously use the term “Net Lease” to describe both. Double net leased investments generally trade at a slightly higher CAP rate than triple net leased investments, because of the maintenance expenses which the landlord is responsible for (often times the landlord will be responsible for Roof and Structure in a NN Lease).

How is does a Net Lease Benefit Me?

Although there are many advantages to owning a net-leased investment, probably the most attractive consideration is its relative stability and passive income nature. With new leases commonly spanning at least 10 years, and upwards of 25 years, a STNL property offers predictable long-term cash flow. Since rental rates are defined in the lease agreement and the tenant is responsible for all, or the majority of, operating expenses, future cash flows to the investor are more predictable than compared to other real estate investments. Additionally, because of the contractual lease term, this cash flow is not as vulnerable to tenant turnover or fluctuations in market lease rates when compared to properties with shorter-term lease agreements.

We are totally free

But, to keep our information exclusive, we require everyone to sign up.