To many, the terms “net lease” and “triple net lease” sound like they could be interchangeable. Although similar, they are in fact very different.
In this article, we will describe the key differences between the terms “net lease” and “triple net lease,” why they matter in commercial real estate, and how they can impact commercial real estate investment financial modeling. By the end, readers will have the information needed to identify lease types and incorporate this information into their pre-investment due diligence process.
At First National Realty Partners, we specialize in the purchase and management of grocery store anchored retail centers, which often include tenants on net lease agreements. To learn more about our current commercial real estate investment opportunities, click here.
Types of Commercial Leases
The term “net lease” refers to one of the two broad categories of commercial real estate leases. The other is known as a “gross lease” and the key difference between the two lies in who is responsible for paying for the property’s operating expenses. For simplicity’s sake, it can be helpful to think of a gross lease as a “full service lease” or “all in” option while a net lease is more of an “a la carte option.”
Specifically, gross lease holders are responsible for making one monthly lease payment to the property owner, which is inclusive of base rent and the tenant’s share of operating expenses. For this reason, gross lease amounts tend to be more expensive than net leases.
In a net lease, which is the a la carte option, the tenant pays a lower base rent amount plus some portion of the property’s operating expenses, depending on what type of net lease it is.
What Are The Types of Net Leases?
Commercial real estate operating expenses can be grouped into three categories: property taxes, property insurance, and maintenance. Net lease types are closely correlated to these categories as follows:
- Single Net Lease: In a single net lease structure, the tenant pays base rent plus one category of operating expenses, usually property taxes.
- Double Net Lease: In a double net lease agreement, the tenant pays base rent plus two categories of operating expenses, usually property taxes and building insurance.
- Triple Net Lease: In a triple net lease – sometimes called a “NNN Lease”, the tenant pays base rent plus all three categories of operating expenses: property taxes, insurance, and maintenance.
- Absolute Net Lease: In an absolute net lease, the tenant pays base rent plus all operating expenses associated with the property, which could include additional expenses like repairs or improvements.
The exact calculation of operating expenses that the tenant is responsible for is based on the number of tenants in a property. In a multi-tenant property, the tenant is usually responsible for their pro rata share based on the square footage leased. For example, if a tenant leases 1,000 square feet in a 10,000 square foot building, their pro rata share is 10%. Conversely, in a single tenant property, the tenant is responsible for 100% of the operating expense bucket(s) that correspond to their net lease type.
So, What Is The Difference Between a Net Lease and Triple Net Lease?
Going back to the question posed by the headline of this article, the difference between a net lease and a triple net lease is slight, but important. A net lease is a broad category of commercial real estate lease while a triple net lease is a subtype of the net lease category.
Why Does It Matter?
The difference between a net lease and a triple net lease matters in commercial real estate for three reasons:
- Financial Modeling: In order to accurately model a property’s cash flows and calculate investment profitability metrics, it is critically important to understand key clauses in the leases agreement like the rental rate, square footage leased, lease term, and just how much of the operating and common area maintenance expenses the tenant is responsible for paying. These are inputs into a financial model and necessary for the creation of a pro forma.
- Marketing: Just as real estate investors have different preferences for property type or real estate market, they also have preferences for lease type. In particular, there is a subset of investors who prefer a relatively low risk way to achieve passive income through purchasing properties with triple net leases. So, when a property has them, they are marketed to this group of real estate investors who typically snap them up quickly.
- Tenant Budgeting: It should come as no surprise that tenants want to know exactly how much money they will have to pay each month to the landlord. Understanding the difference between a net lease and triple net lease helps in their budgeting exercises and spending decisions.
For those real estate investors who like the net lease structure, there are two ways to invest.
How To Invest in Net Leases
The two most common ways to gain exposure to net lease properties are through real estate investment trusts (REITs) and/or private equity investments.
Real Estate Investment Trusts (REITs) are companies who own, manage, or finance commercial real estate assets. Investors who like the REIT structure can purchase the publicly traded shares of REITs who specialize in net leased properties. For example, National Retail Properties (ticker: NNN) owns a large number of single-tenant, net leased properties.
Or, for real estate investors who meet certain minimum income and net worth requirements, another option is to partner with a private equity firm (like First National Realty Partners) to invest directly in deals that involve net leased properties. The net lease, combined with the private equity firm, means that this can be a truly passive investment.
In either case, real estate investors should always perform their own due diligence and read all offering documents carefully before committing capital to a deal.
Summary of Net Lease vs. Triple Net Lease
There are two major types of commercial real estate leases, gross and net. The key difference between the two has to do with whether operating expenses and maintenance costs are the landlord’s responsibility or the tenant’s responsibility.
In a gross lease, the tenant pays one monthly rental amount and operating costs are paid by the landlord. This can also be thought of as a full service lease.
In a net lease, tenants pay lower rent plus some portion of the property’s operating expenses. The exact portion depends on the specific type of net lease.
One type, the triple net lease, also known as an “NNN lease” or a “net-net-net lease”, means that the tenant pays rent plus their proportionate share of the property’s taxes, insurance premiums, and maintenance costs.
So, net lease is a broad category of commercial real estate leases while triple net leases are a specific subtype of net leases.
The distinction matters for financial modeling, marketing, and tenant budgeting purposes.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you’d like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
