This is the third in a series of three articles that explores the different types of commercial real estate investments.
In the first article, we listed 8 types of CRE:
Hotel and hospitality structures
Those 8 types of buildings are classified as Class A, Class B and Class C, which you can read about more: 8 Types and 3 Classes of Commercial Real Estate.
In the second article, we explore the four basic types of CRE:
Core, which tends to be low-risk, high-quality CRE such as high-rise apartment buildings, luxury retail centers and multifamily apartment complexes.
Core plus, which tends to be the same type of CRE as core, but older and in need of updates, repairs, or tenants.
Value-add, which are CRE properties that are at higher risk and in need of significant updates, repairs, and tenants.
Opportunistic, which, as you might expect are the riskiest and tend to need a lot of capital investments, such as abandoned properties.
There are four types of commercial property leases: single net lease, double net lease, triple net lease, and gross lease. The rest of this article explores the differences between each.
Common Terms in CRE Leasing
Before we dive into the four types of commercial real estate leases, let's define some of the common terms that you'll read throughout the rest of the article.
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.
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.
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.
Some property owners use net leases, which we'll explain next. Three are three types of net leases: single net (N lease), double net (NN lease), and triple net (NNN lease).
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.
Property Taxes & Assessments
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. Assessments 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.
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.
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.
Should You Rent or Buy 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.