Within commercial real estate there are varying forms of leases that define, among other terms, the division of costs between the landlord and tenant. In most leases, the base rent includes the tenant's proportionate share of real estate tax increases above a certain base year as well as common building maintenance, known as CAM charges. These provisions increase the rent paid by tenants, but leave the owner responsible for actually maintaining and operating the property. One form of lease, known as a net lease, completely relieves the building owner of certain or all operating expenses.
Net leases, in contrast to normal leases, obligate the tenant to directly pay for operating costs in addition to rent. This form of lease comes in four types which obligate the tenant, in varying degrees, to pay more of the operating costs. As a concession for bearing these costs, a net lease usually has a lower base rent than traditional leases.
A single-net lease obligates the tenant to pay all real estate taxes, not just the tax increase over a specified base year. This type of lease relieves the owner from having to experience varying costs due to tax increases.
A double-net, or NN, lease obligates the tenant to pay for real estate taxes and building insurance. This leaves the owner responsible for all building maintenance, most notably the roof and structure. Although maintenance can vary in cost, usually due to the age and type of building, owners usually experience lower variance in cash flows because of the tenant's obligation to pay both real estate taxes and insurance, including any increases in either.
A triple-net, or NNN, lease relieves the owner of all operating expenses; the tenant is responsible for all real estate taxes, insurance, and building maintenance. This type of property is usually purchased by investors who are looking to receive a structured cash flow that is unobstructed by the operating costs associated with other types of leases and property. NNN is the most common form of net lease.
An absolute NNN lease is the strongest of all net leases. In addition to it being a NNN lease, the tenant also takes on nearly all real estate risk including rebuilding of the structure in the event of a catastrophe. These leases are usually only created with strong national credit tenants who are able to bear the added risk. This lease acts similar to a bond in that the owner receives continual rental income net of any expenses, regardless of the usability of the property. These types of leases are rare, can have terms of 30 or more years, and offer the lowest risk of any net-lease.
-Written by Sean Shanahan, Chief Financial Officer | Iridium Capital| sshanahan@IridiumCapLLC.com | visit our website
