Definition of Net Lease

The Definition of Triple Net Lease 

The most sought after net lease agreement for an investor would be a NNN Lease, or Triple Net Lease. These leases allow for passive long-term cash flow with little to no involvement with the property. In other words, it is what we call “Mailbox Money”. Below, we dive into what is a commercial triple net lease and other net lease terms like absolute net leases, fee simple net lease and ground leases.

Definition of Net Lease

With a net lease, a landlord or investor charges rent for the commercial building, plus standard costs for operation, upkeep, janitorial tasks, sewer, trash collection, water, parking lots and fire sprinklers. Net leases are known to be passive and long term investments for the landlord and generate monthly cash flow. Net lease investments have a variety of lease structures and can also be a single tenant or multiple tenants in one property.

Meaning of NNN

The NNN in triple net lease stands for net, net net. The NNN fees include taxes on the property, property insurance and maintenance. In addition to these fees, the tenant is responsible for paying the landlord or lessor a lease fee, or rent payment. Similar to Triple Net, you also have Double Net (NN) Net Net where the landlord is responsible for one of the net costs, usually we see Roof and Structure. These are more prominent in multi-tenant properties. 

Absolute Net Lease

An absolute NNN lease, also known as a bondable lease, is an agreement between the landlord and a tenant. It is similar to a triple net lease in the fact that the tenant pays for all costs related to the operation of the business. The absolute net lease structure stresses that the tenant is also responsible for paying to expenses for the property as well. The one thing to keep in mind as an investor is that an Absolute NNN Lease means you ABSOLUTELY do not have to pay for any operational costs that the tenant incurs whether it be insurance, repairs, or landscaping, etc.

Fee Simple Net Lease

Fee simple is sometimes called fee simple absolute because it is the most complete form of ownership.  A fee simple buyer is given title (ownership) of the property, which includes the land and any improvements to the land in perpetuity.   The fee simple owner has the right to possess, use the land and dispose of the land as he wishes: sell it, give it away, trade it for other things, lease it to others, or pass it to others upon death.

Gross Lease

In a full-service gross lease the tenant pays a fixed rent that takes into consideration the fact that the landlord covers estimated operating expenses such as taxes, insurance, utilities, maintenance and repairs. The tenant pays the same rental rate regardless of whether operating expenses end up being higher or lower than estimated.

Modified Gross Lease is when a gross lease is modified to meet the needs of the property owner and/or tenant, or the unique characteristics of a property. One common modification a gross lease may have is a provision that allows the landlord to recoup increases in expenses beyond a benchmark or “base year” expenses.

Benefits of Net Lease

There are so many advantages to investing in net leased assets. As the owner/investor you are guaranteed a rent pay check every month for the term of the lease. Leases are normally structed with options that the tenant can execute which also prolongs the life of the tenancy. Net leases usually have little changover which helps give the investor peace of mind instead of focusing on re-tenanting. Tenants are responsible for all (in most occasions) operational expensives giving the landlord the best form of a worry-free investment.

Do you still want to know more about what is a commercial triple net lease? Or dive further into the Triple Net Lease meaning? We are here to make sure you understand these investments/ We are happy to discuss NNN leases with you at Avison Young. A triple net lease can offer a variety of benefits, but there are some factors to consider before jumping in head first. Let us help offer guidance before you commit to a new investment.

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