What are the functions of the real estate gross lease, double net lease, and triple net lease?
What is a Gross Lease?
A Gross lease is a type of lease wherein the landlord pays the property taxes, insurance, and maintenance (CAM). The tenant is only responsible for paying a flat fee as rent, the landlord will be responsible for all costs related to property ownership. When determining the rent, the landowner accounts for all the anticipated costs for the property and charges a flat fee that will cover the costs and cater to the required profit margin.
Gross leases are usually costlier than net leases. This is because the landlord is trying to ensure that costs never drain their cash flow or diminish their margins. The gross lease is determined at the landowner's discretion and is drawn to their advantage. The benefit to tenants is that the rent is flat throughout and that makes financial planning easier.
Although by definition gross leases have a flat rent, they may have escalating clauses to counter rising taxes, insurance premiums or maintenance costs (CAM). It is important to fully understand escalating clauses and how that may affect rent in the future.
What is a Double Net Lease (NN)?
A double net lease stipulates that the tenant is responsible for paying insurance and property taxes on top of the rent charged. The amount paid for insurance and property tax can be split pro rata in a shared property, like a mall. As the tenants are taking on more financial responsibility, they can negotiate for lower rent, as in below:
It is in the interest of the landlord to have the tenant sign a double net lease so as to limit the financial risks of increasing taxes or insurance costs. The insurance and tax money will still be paid through the landlord so as to ensure that it is paid on time and that the right amount is paid.
What is a Triple Net Lease (NNN)?
A triple net lease stipulates that the tenant is responsible for paying for insurance, property tax and common area maintenance (CAM) expenses along with the rent. Triple net leases are sometimes abbreviated to NNN, for example next to a property listing.
A triple net lease not only reduces the financial burden but also transfers the financial risks from the landlord to the tenant. Should any of the three expenses (insurance, property tax or CAM) increase then the landlord will not have to absorb the cost, which would affect the properties profitability.
Triple net leases are not very common. They are used by landlord’s looking to reduce their risk. They are usually used on high-grade commercial properties leased to a single client. Lease terms may be between 10 and 15 years with a predetermined escalating rent.