This article is an excerpt from chapter two of David Sobelman‘s The Little Book of Triple Net Lease Investing: Second Edition.
By this point in the book, you may have wondered where the term “net” lease comes from. Put simply, it’s a means of distinguishing such leases from “gross” leases in real estate. Here’s the difference between the two:
- With a gross lease, the tenant pays a gross amount of rent. From that rent, the landlord can pay expenses or spend it in any other way that he or she wants to.
- With a net lease, the property owner receives the rent “net” after all the expenses are passed through to tenants.
In commercial real estate, net leases are a matter of negotiation between the tenant and the property owner. These negotiations typically revolve around expenses like maintenance, repairs, utilities, insurance, real estate taxes, and so forth.
As a result of these negotiations, there are a variety of lease forms to fit the needs of both property owners and tenants. In this chapter I’ll explain the most common types, and provide you with a good base of knowledge upon which to make investment decisions.
NNN (“Triple Net”) Lease
As described earlier in this chapter, the triple net lease is a lease where the tenant agrees to pay a monthly lump sum base rent as well as the property taxes, the property insurance, and the maintenance. It’s also known as a “bond lease” or “absolute triple net lease.”
This is a net lease where the tenant agrees to pay a monthly lump sum base rent, plus the property taxes and insurance. The landlord may be responsible for the maintenance of the roof, the structure of the building, and, perhaps, the parking lot, while the tenant is responsible for all other operating expenses of the premises. Of course, there are many variations of this type of lease but the essence is that the landlord will ultimately have some responsibilities, albeit not day-to-day, for the building.
Modified Net Lease
This is a compromise between the gross lease and the triple net. Usually, the landlord and tenant agree to split the maintenance expenses, while the tenant agrees to pay taxes and insurance. Utilities are often also negotiated in the modified net lease.
Modified Gross Lease
With this form of lease, the landlord generally pays for the base yearly property taxes and building insurance. In general, tenants are responsible for their share of common area operating expenses and common area utilities.