What is an Absolute Net Lease?
An absolute net lease, sometimes known as an absolute NNN lease, is one of the strictest forms of commercial leases. In an absolute net lease, a tenant is generally responsible for insurance, taxes, maintenance and minor repairs, as well as larger structural repairs, such as roof replacement.
Triple Net Leases vs. Absolute Net Leases: What’s the Difference?
A conventional triple net lease (NNN lease) has a tenant being responsible for property taxes, insurance premiums and property maintenance costs. In contrast, the absolute net lease includes major building repairs. For investors looking to purchase a commercial property with a tenant in-place, this is a key difference, especially if the building is older and the roof, windows, HVAC system, or other major structural components will need to be replaced during the remaining lease term. Differences in lease types may also impact a property’s eligibility for commercial financing; in particular, NNN leases and absolute net leases may be underwritten somewhat more leniently and may require less in replacement reserves
Absolute Net Leases vs. Bond Leases
A bond lease, sometimes known as a “hell or high water lease” is an even more extreme form of ab absolute net lease. In a bond lease, the tenant is not only responsible for making major structural repairs, but is also responsible for rebuilding the property should an act of God occur. A bond lease tenant is also generally responsible for continuing to pay rent, even if the property is condemned. In some cases, a tenant may be able to leave their lease after a condemnation, but not always. Both absolute triple net leases and bond leases are popular in the case of a sale-leaseback, in which a business sells a property to an investor with the stipulation that they can “lease back” the property from the investor, typically for a 20-year term.
The Pitfalls of Lease Variations for Commercial Real Estate Investors
Regardless of how a lease is advertised, it’s essential to look into the details to determine which expenses will be the responsibility of the landlord, and which the tenant will need to take care of. Not all leases advertised as “absolute net” or absolute NNN” have the same elements, and the misreading of a lease could require an investor to make some very expensive repairs a few years down the road.