Double Net Leases Explained: How They Work, Types, and Examples
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Summary:
A double net lease, commonly known as a ‘net-net’ or ‘NN’ lease, is a nuanced rental agreement frequently seen in commercial real estate. In this lease structure, tenants bear the financial responsibility for property taxes and insurance premiums on the building, while landlords typically retain maintenance responsibilities. This article delves into the intricacies of double net leases, how they work, and their key differences from other types of net leases. We’ll also explore the pros and cons of double net leases to help you understand their impact on both tenants and landlords.
What is a double net lease?
A double net lease, sometimes referred to as a ‘net-net’ or ‘NN’ lease, is a specific type of commercial lease agreement. In this arrangement, tenants not only pay the base rent but also assume financial responsibility for two out of the three primary property expenses. These two expenses are property taxes and insurance premiums, including building insurance.
One distinguishing feature of double net leases is that landlords remain responsible for structural maintenance expenses. This includes repairs, upkeep, and general maintenance of the building. Therefore, in a double net lease, the tenant is not burdened with maintenance costs beyond their obligation to cover property taxes and insurance premiums. Each month, the tenant pays the base rent, along with the additional payments for property taxes and insurance.
How double net leases work
Double net leases are most commonly encountered in the realm of commercial real estate. They are particularly prevalent in properties with multiple tenants, such as shopping malls, office buildings, or industrial complexes. In these situations, expenses like property taxes and building insurance premiums are typically allocated among individual tenants in proportion to their occupied space or usage.
While tenants are responsible for property taxes and insurance premiums, property owners often ensure that property taxes are passed through to them. This practice helps landlords stay informed about payment issues, ensuring that these vital expenses are not neglected, as non-payment can lead to legal complications.
Double net lease vs. other types of net leases
Understanding the distinctions between double net leases and other net lease types is essential for both tenants and landlords:
Single net lease
In a single net lease, the tenant is responsible for paying property taxes only. This form of lease is less common due to its singular focus on property taxes, making it less attractive for tenants.
Triple net lease (NNN lease)
A triple net lease obligates the tenant to cover all primary property expenses, including real estate taxes, building insurance, and maintenance costs. Additionally, tenants are responsible for standard costs such as rent and utilities. While common in commercial properties, this type of lease can also be applied to single-family residential rental agreements.
Bondable net lease
Due to the challenges tenants may face with unexpected cost increases in triple net leases, some landlords prefer bondable net leases. These leases offer stability by stipulating that the lease cannot be terminated before its specified expiration date, and the rent amount remains fixed, even in the face of unforeseen and significant increases in ancillary costs.
The difference between gross and net commercial leases
In contrast to net leases, where tenants assume the responsibility for specific expenses, a typical commercial gross lease shifts these financial obligations to the landlord. Under a gross lease, the landlord pays for all costs associated with the building, including maintenance, insurance, and property taxes. These expenses are typically factored into a higher monthly rent, simplifying the tenant’s financial responsibilities. Parties involved in a gross lease agreement often establish a “base year” for estimated expenses, with the landlord billing the tenant for any costs that exceed this baseline.
Frequently asked questions
Are double net leases only applicable to commercial properties?
Double net leases are most commonly found in commercial real estate due to the shared expenses associated with these properties. However, they can also be used in other property types.
What happens if property taxes or insurance premiums increase significantly?
If there is a significant increase in property taxes or insurance premiums during a double net lease, the tenant remains responsible for these additional costs. Property owners, in such cases, can work with tenants to address any substantial cost increases.
Are there options for landlords to mitigate tenant turnover or defaults in double net leases?
Landlords can implement lease terms and conditions that address tenant turnover or defaults. It is essential to have legal agreements in place that outline the responsibilities and consequences for both parties in such situations.
Can double net leases be customized to allocate expenses differently?
Yes, double net leases are often subject to negotiation. Both landlords and tenants can customize the lease terms to allocate expenses differently based on their specific needs and preferences.
How are double net leases affected by property value fluctuations?
Property value fluctuations can impact double net leases. If property values increase, tenants may face higher property tax obligations. Conversely, if property values decrease, tenants may benefit from reduced property tax expenses.
Key takeaways
- A double net lease involves tenants covering property taxes and insurance premiums in addition to base rent.
- Double net leases are common in commercial real estate and often result in reduced rent for tenants.
- Triple net leases require tenants to bear all property expenses, including taxes, insurance, and maintenance.
- Tenants under triple net leases may seek lease concessions if unexpected expenses arise.
- Gross leases shift financial responsibility for maintenance, insurance, and taxes to the landlord, simplifying tenant obligations.
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