What Are the 4 Types of Commercial Real Estate Leases?

Commercial real estate investments are complicated and diverse, which is why we’ve dedicated a series of articles on the topic.

In the first article, we listed 8 types of CRE, which you can read about here: 8 Types and 3 Classes of Commercial Real Estate.

In the second article, we explore types of commercial real estate, which you can read about here: Four basic types of CRE.

This post explains four types of commercial property leases: single net lease, double net lease, triple net lease, and gross lease.

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Glossary of Common Commercial Lease Terms

Before we dive into the four types of commercial real estate leases, let's define some of the common terms that you'll hear as you learn about commercial property leases.

Property lease: A property lease defines an agreement between a property owner and the tenant. A well-written CRE lease explains who is responsible for paying for repairs and improvements, property taxes, maintenance, utilities, etc.

Property taxes: Local governments levy property taxes based on the value of real estate and, sometimes, personal property. Property taxes typically help pay for schools, police and fire, road maintenance and parks.

Common area maintenance: Some leases include fees for maintaining common areas such as lobbies, mail rooms, hallways, parking lots and even landscaping.

Tenant improvement allowance: An amount is negotiated into the lease to cover the cost of customizing the space to fit the tenant’s business needs.

Rent escalation clause: This clause defines how and when the landlord may increase rent during the lease term.

Operating expenses: These are costs to operate the building, such as taxes, maintenance and utilities, and some leases require tenants to pay all or a portion of the expenses.

So, a net lease is a type of lease where the tenant pays some of the expenses that would "normally" be paid by a property owner.

Gross Vs Single Vs Double Vs Triple Net Leases

What differentiates each type of CRE lease is how expenses for property taxes, assessments, insurance, and maintenance are paid.

What is a gross lease?

A gross lease is the simplest, most straightforward type of CRE lease. The tenant pays a flat rate in exchange for the rights to occupy and use space in the building for business purposes over a defined time. All other expenses, including taxes, insurance, maintenance, security, etc., are covered by the property owner.

Typically, the property owner folds those operating expenses into the flat rate the tenant pays. In other words, the property owner has calculated the asset's total annual operating costs and figured them into the gross lease payments, so they can earn a profit.

With a modified gross lease, tenants pay base rent plus a portion of the operating expenses, which positions it between a gross lease and the net leases. Meanwhile, a full service gross lease is another variation where all major expenses are included in the rent (common among high-end office buildings).   

Some property owners use net leases, which we'll explain next. There are three types of net leases: single net (N lease), double net (NN lease), and triple net (NNN lease).

Should you sign a gross lease?

Pro tip for owners: Operating costs are baked into the rent, so accurate forecasting is key to protecting your margins.

Pro tip for tenants: You’re paying for those expenses whether you see the line items or not. Be sure to ask how the landlord calculated the rent. Transparency here can help you negotiate a better deal or avoid surprises down the road.

What is a single net lease?

A single-net lease is also referred to as an N lease or a net lease, and it's where the tenant pays rent plus one of three expenses, usually property taxes. Property taxes can include special assessments, which are special taxes that municipalities charge property owners, usually for a specific use, such as infrastructure improvements. You might see assessments for fiber optic cable, sidewalks, and roads, for example.

The single N lease is the least common net lease. This type of lease can also be risky for landlords because if the tenant doesn't pay the property taxes, the government doesn't care. In the government's eyes, the property owner is responsible for paying property taxes.

Are single net leases better than gross leases? They have advantages and disadvantages for tenants and landlords.

Pros and cons for owners: The N lease shifts some cost burden to tenants, but you're still liable if they don’t pay those taxes. Make sure payment schedules and responsibilities are clearly spelled out and monitored.

Pros and cons for tenants: Confirm whether you’re paying just property taxes or also local assessments. These fees can fluctuate and impact your cash flow, so it’s a good idea to review past billing history before signing the lease.

What does a double-net lease mean?

The definition of a double-net lease, also known as an NN lease or net net lease, is where the tenant pays two categories of expenses plus rent. Typically, the two operating expenses are property taxes (which include assessments) and insurance.

In a double-net lease, the landlord or property owner covers maintenance and repairs. They are commonly used in multi-tenant office buildings, for example.

Are NN leases better for owners or tenants?

Pros and cons for owners: This lease balances less overhead for you while still maintaining control of the property’s condition, which protects long-term value. Make sure your insurance policies align with tenant requirements.

Pros and cons for tenants: Paying for insurance gives you some say in coverage, but it also means you’re on the hook if rates rise. Clarify what insurance you’re responsible for (property, liability, etc.), and whether you're paying only your share or contributing to a master policy.

What About a Triple Net Lease?

The meaning of a triple net lease, as you might guess, is that the tenant pays rent plus property taxes, insurance and maintenance. It is also referred to as an NNN lease or net net net lease. According to Q4RealEstate, this is the most common type of commercial real estate lease.

There is another type of NNN lease, called an absolute triple net lease, and that is where the tenant is also responsible for the building structure and the roof.

Is an nnn lease worth it? 

Pros and cons of NNN leasing for owners: The NNN type of lease reduces your operational costs and responsibilities, plus it offers predictable income. But don’t check out entirely: Regularly inspect your property and review lease compliance to help ensure your asset is being properly maintained.

Pros and cons of an NNN property for tenants: Triple net leases often come with lower base rent, but you carry the risk of fluctuating expenses. Ask for a breakdown of historical operating costs, and clarify responsibilities like roof repairs or parking lot resurfacing, as they’re not always obvious in the fine print (and they can be super expensive!).

Renting versus Buying CRE Property

Why would a business choose to sign a NNN lease instead of purchasing its own CRE asset? Well, they may not have that option. In a highly desirable CRE market, where demand outpaces supply, property owners have the upper hand. Likewise, if a business depends on a specific geographic location or proximity to infrastructure, it may not have much choice but to lease.

For CRE property owners, the advantage of NNN leases is that they can take a hands-off approach to operating and maintaining their investment properties. They negotiate NNN leases because they can.

For tenants, the advantage of triple N leases is that they tend to have lower rents. The tenant has more control over variable expenses such as utilities, janitorial services, maintenance and repairs. So, rather than paying a flat gross rent to a property owner, the tenant negotiates a base rent amount and assumes responsibility for variable expenses that include taxes, assessments, insurance and maintenance.

Commercial real estate leases can be very complex, so what we explained in this article shouldn't be taken as legal advice. Consult with a legal expert who specializes in CRE before signing a lease.

Pro tip for owners: If you're leasing a property, especially on a triple net basis, you get predictable income with minimal day-to-day involvement. Remember: A “hands-off” lease still needs a hands-on approach to tenant selection and property oversight.

Pro tip for tenants: Leasing gives you flexibility and potentially lower upfront costs, but it comes with recurring responsibilities. Make sure you understand not just the rent, but every line item you're agreeing to pay, especially in a net lease scenario.

Sources consulted:

• Commercial Real Estate Investment Types. Investopedia. 2022 July 20.

• Single vs Double vs Triple Net Leases: What's The Difference. Investopedia. 2021 December 21.

• Commercial Lease Types. Reonomy. 2019 March 25.

• NNN Lease Vs Gross Lease. Q4 Real Estate. Accessed 2023 March 14.