Understanding Double Net Leases vs Triple Net Lease in Commercial Real Estate

Imagine owning a commercial property where tenants handle property taxes and insurance, leaving you with predictable income and fewer headaches. This is the essence of a double net lease in commercial real estate. These commercial lease agreements, often abbreviated as NN leases, offer landlords predictable income and reduced operating responsibilities. For tenants, they provide clarity in cost-sharing while allowing for operational flexibility.

Understanding double net leases aligns closely with the Prepare stage of the PRIME framework, particularly in learning about property types and investment styles. Whether you’re a landlord seeking steady cash flow, a tenant aiming for transparent costs, or an investor exploring reliable opportunities, double net leases cater to diverse needs.

This article delves into the fundamentals of double net leases, explains how they operate within the net lease structure and compares them to other lease structures to help you make informed decisions.

What Is a Double Net Lease?

A double net lease is a commercial lease agreement where the tenant assumes responsibility for two major operating expenses: property taxes and insurance. This significantly reduces the landlord’s financial burden compared to a standard gross lease.

Key Responsibilities:

Landlord Responsibilities:

• Maintaining the property’s structure (e.g., roof, foundation)
• Handling major repairs (e.g., HVAC systems, plumbing)

Tenant Responsibilities:

• Paying property taxes
• Covering property insurance costs

This structure strikes a balance, ensuring landlords have predictable income while tenants gain operational control.

Key Features of NN Lease

Beyond the core responsibilities, here are some key features:

• Simplified Management: Landlords have reduced day-to-day management responsibilities.
• Predictable Cash Flow: Offers consistent income streams, simplifying financial planning for landlords.
• Applicable to Various Property Types: Common in retail, office, and industrial properties, including strip malls, office buildings, and commercial real estate leases.

How Double Net Leases Work

In a double net lease, landlords and tenants negotiate terms that balance responsibilities.

Steps in Negotiation:

• Lease Negotiation: It’s crucial to clarify what expenses the tenant is responsible for. Landlords and tenants carefully negotiate the lease terms, including each party’s base rent, escalation clauses, and specific responsibilities.  
• Expense Allocation: Tenants directly pay property taxes and insurance premiums to the relevant authorities.  
• Maintenance: Landlords are responsible for structural integrity, while tenants typically handle minor repairs and maintenance within the leased space.
• Sign the Lease: Outline responsibilities clearly in the contract.

Understanding lease terms and their impact on cash flow is crucial during the research stage.

Let’s compare double net leases to triple net leases to better understand their benefits.

Double Net Lease vs. Triple Net Lease

Feature	Double Net Lease (NN)	Triple Net Lease (NNN)
Tenant Responsibilities	Property taxes, insurance, utilities, maintenance	Property taxes, insurance, maintenance, structural repairs
Landlord Responsibilities	Structural repairs	Minimal to none
Risk Profile	Moderate risk for both parties	Higher tenant responsibility

• Double Net Lease (NN): A balanced risk profile where both landlord and tenant share responsibilities, making it attractive for tenants seeking reduced risk and landlords aiming for predictable income.
• Triple Net Lease (NNN): Double net leases shift almost all risks and costs to tenants, which can deter some tenants but attract landlords looking for near-complete cost transfer in a real estate lease.

Comparing lease types helps investors select the most suitable investment options.

Next, we’ll differentiate between gross and net commercial leases.

The Difference Between Gross and Net Commercial Leases

Commercial leases are categorized into different types, with gross and net leases being the most common. The main difference between the two lies in the responsibility for operating expenses.

In a gross lease, also known as a full-service lease, the tenant pays a fixed rent, and the landlord is responsible for all operating expenses associated with the property. Gross leases offer simplicity and predictability for tenants since their rental costs remain constant throughout the lease term. This type of lease is commonly used in multi-tenant office buildings and retail spaces.

On the other hand, a net lease requires the tenant to pay a base rent plus a portion of the property’s operating expenses. The extent of the tenant’s responsibility for operating expenses varies depending on the specific type of net lease. There are three main types of net leases:

• Single Net: You chip in for property taxes, while the landlord may handle the rest.
• Double Net: You cover property taxes and insurance.
• Triple Net (NNN): You’re responsible for property taxes, insurance, maintenance, and repairs. This gives you more control but also comes with the biggest responsibility. You’ll often find these in single-tenant buildings like warehouses or standalone stores, where the tenant is responsible for many costs.

Modified Gross Lease: These are a bit of a mix. You and your landlord split the operating costs, with the lease agreement clearly outlining who pays for what.

Choosing the Right Lease:

The best lease for you depends on your business needs and risk tolerance.

• Gross leases are easily understood and offer predictable costs, but you might pay a premium for that simplicity. Ideal for properties requiring minimal tenant involvement.
• Net leases give you more control over your expenses but come with the responsibility of managing those costs effectively.

Ultimately, carefully consider your budget, your business’s needs, and your preferred level of involvement before signing any commercial lease agreement. For a deeper dive into leases, refer to our comprehensive article: Gross, Net, Modified Gross Lease: Commercial Leases Breakdown

Now, let’s examine why NN leases are advantageous for landlords.

Advantages of Double Net Lease (For Landlords)

• Predictable Income: Consistent rental income, regardless of fluctuations in operating expenses.
• Reduced Operating Expenses: Lower financial burden for landlords, leading to improved profitability.
• Attractive to Investors: Low-risk, stable returns make NN leases appealing to those building real estate portfolios.

NN leases align with financial goals, offering stability and predictable returns.

Despite the benefits, it’s important to acknowledge the potential drawbacks.

Disadvantages

In practice, let’s look at real-world examples to understand how it function.

Example of a Double Net Lease in Real Estate

Let’s say “Coffee Corner,” a popular local cafe, leases a space in a bustling strip mall. Under a double net lease agreement, Coffee Corner would be responsible for:

• Paying Property Taxes: Let’s say the annual property tax for their space is $12,000. This translates to a monthly property tax expense of $1,000.
• Covering Insurance Costs: Coffee Corner must maintain commercial insurance, costing around $3,000 per year, or roughly $250 per month.

Here’s a simplified table illustrating the monthly expenses:

Expense	Tenant Responsibility	Landlord Responsibility
Base Rent	$5,000 (Example)
Property Taxes	$1,000
Insurance	$250
Total Monthly Expense for Coffee Corner	$6,250
Structure & Major Repairs		Landlord

In this scenario:

• Coffee Corner enjoys the flexibility of managing its own insurance and property tax responsibilities.
• The landlord is relieved of these expenses and focuses on maintaining the overall structure of the strip mall, such as the roof, parking lot, and common areas.

This example demonstrates how a NN lease can work in a real-world setting, highlighting the shared responsibilities and financial considerations for both the tenant and the landlord.

With this understanding, let’s discuss how to invest in double net leases and their benefits in the commercial real estate market.

Investing in Double Net Leases

Investing in NN lease can be lucrative, but success depends on careful evaluation and strategic planning. Here are actionable steps and risk mitigation strategies

• Analyze Property Location:
  • Research high-demand areas where tenant turnover is low, and property appreciation potential is high. Strong local economies and stable tenant demand are key indicators of profitable markets.
• Evaluate Tenant Creditworthiness:
  • Assess the financial stability of tenants by reviewing their credit ratings, financial statements, and business history before entering into a commercial real estate lease. Long-term leases with reputable tenants can reduce the risk of defaults.
• Understand Lease Terms:
  • Scrutinize the lease agreement to understand the allocation of responsibilities, base rent, and escalation clauses. Ensure responsibilities for maintenance, taxes, and insurance are explicitly defined.
• Calculate Potential Returns:
  • Use key metrics such as capitalization rates (cap rates) and return on investment (ROI) to evaluate the property’s profitability. Compare these metrics with similar investments in the area.
• Inspect the Property:
  • Conduct thorough property inspections to assess the condition of structural elements like the roof, foundation, and HVAC systems. This ensures you’re prepared for potential repair costs and common area maintenance.
• Diversify Your Portfolio:
  • Consider including multiple property types (e.g., retail, office, and industrial) and geographic locations to minimize risks associated with market fluctuations.

Before investing, it’s crucial to conduct thorough market research during the Research phase. This includes analyzing market trends, property values, and financial benchmarks to make informed investment decisions.

Lastly, let’s address common misconceptions about double net leases.

Common Misconceptions About NN Leases

• Myth: Tenants always bear all costs.
  • Reality: NN leases specifically exclude the landlord’s responsibility for major structural repairs and maintenance.
• Myth: NN leases are always low-risk, especially when the tenant may be responsible for property taxes and insurance.
  • Reality: Landlords still face risks such as tenant default and potential disputes over responsibilities.

FAQs:

Conclusion

Double net leases offer a balanced approach to real estate investment, combining predictable income for landlords and manageable tenant responsibilities. These leases appeal to investors seeking stability, lower management burdens, and steady cash flow. By carefully analyzing property locations, tenant creditworthiness, and lease terms, investors can capitalize on the advantages of double net leases while mitigating potential risks.

If you’re ready to explore double net leases, research properties in stable markets and partner with real estate professionals to ensure informed decisions. With the right strategy, double net leases can be valuable to your real estate portfolio, delivering consistent returns and long-term financial growth.