Single net, double net, modified gross, oh my!

The world of commercial lease types and accounting is a wild one, full of varying types of contracts and expense responsibilities for both lessees and lessors. In this blog, we’ll go over the various types of leases, such as net and gross leases, and do some comparative analyses, such as triple net vs gross lease, triple net vs double lease, etc.

Let’s start by looking at the two most general categories: gross leases and net leases.

What is a Gross Lease?

A gross lease in commercial real estate is a lease in which the lessee is responsible only for their rent payment. The lessor pays all other operating expenses, such as:

• Insurance
• Property taxes
• Utilities
• Common area maintenance (CAM)

The lessee pays a single “gross” amount that accounts for all of these expenses. Gross leases like this are also called absolute gross leases.

Lessees benefit from this structure because it means that they have more predictable monthly costs, they do not have to deal with managing property operations, and they’re protected from any abrupt cost increases. However, because of the fact that lessors assume the cost of things such as insurance and taxes, the gross amount paid by the lessee is often higher. 

Variations of gross leases exist, such as a modified gross lease, where the lessee pays some expenses.  A full-service gross lease is one in which the lessor covers everything. An expense stop lease has the lessor covering everything up to a certain point.

Gross leases are a popular choice for office buildings or multi-tenant properties because in these cases it can be difficult to separate operating expenses between tenants.

What is a Net Lease?

Net leases are commercial leases in which the lessee pays at least one of the lessor’s operating expenses. How many and which operating expenses the lessee is responsible for changes depending on the type of net lease, such as single, double, triple, or absolute triple.

In general, a good rule of thumb is that if the word “net” is in the name of a lease, it means that the lessee will be responsible for at least one type of operating expense. In an absolute net lease, the lessee is responsible for all the operating expenses associated with a property. 

Some advantages of a net lease for lessors include:

• Reduced risk
• Increased predictability of income
• Fewer management responsibilities
• Higher property value

Advantages for lessees include:

• A lower base rent
• Increased control over property operations
• Direct management of expenses
• Transparency in operating costs

What is a Single Net Lease?

A single net lease is a lease in which a lessee agrees to pay one of the three main operating expenses in addition to their rent. The operating expense for which a lessee is responsible varies depending on the contract, but property taxes are the most common in this type of lease agreement.

Lessee responsibilities for this type of lease most often include:

• Base rent payments
• Property taxes
• Their personal utilities and maintenance

Lessor responsibilities for this type of lease usually include:

• Insurance 
• Common area maintenance (CAM)
• Structural repairs and exterior maintenance
• Operating expenses

Single net leases are advantageous to lessees because they usually get a lower base rent than gross leases, have more predictable expenses compared to a triple net lease, have less responsibility for overall building operations, and have protection from most maintenance costs. 

The benefit for lessors is that single net leases transfer the risk of property tax increases to the tenant while allowing them to maintain control over building operations and maintenance.

In a Single Net (N) Lease, What Expenses are Typically Covered by the Lessee, and What is Covered by the Lessor?

The expenses that are paid by a lessee in a single net lease are any rent expenses along with the property taxes. In a single net lease, the lessee only takes on one of the lessor’s operating expenses, which is usually the property taxes. Otherwise, all of the other operating expenses are still the lessor’s responsibility.

What is a Double Net Lease?

In a double net lease (NN lease), a lessee is responsible for paying their rent alongside two of the main operating expenses that would otherwise fall on the lessor. Usually these two expenses are property taxes and building insurance payments. Most other operating expenses fall on the lessor.

Double net leases are beneficial for lessors because they transfer some of the operating cost risk to the lessee, they have a higher net operating income than if they were in a gross lease arrangement, the lessor maintains control over the maintenance of their building, and they are offered protection from increases in tax and insurance costs.

For a lessee, NN leases have very similar advantages to single net leases. The big benefit of a double net lease over a single net lease is that the former has a better balance of responsibilities between lessors and lessees.

These types of leases are commonly used for multi-tenant office buildings, medical office buildings, and shopping centers.

What is a Triple Net Lease?

Triple net leases (NNN lease) are leases in which the lessee is responsible for their base rent, but also the property taxes, building insurance, and common area maintenance charges. Common area maintenance, or CAM, can consist of any expense associated with the upkeep of shared areas of a property which a lessee is leasing.

Benefits for lessors include minimal managerial responsibilities; a very predictable source of income and, due to this, a higher property value; lowered financial risk; and generally longer lease terms spanning a decade or more.

For lessees, NNN leases offer complete control over the operations of a leased property, the ability to direct control over operating expenses, and the ability to maintain consistent standards across locations.

How Do Absolute NNN Leases Differ from Triple Net (NNN) Leases?

An absolute NNN lease, or a bondable lease, is different from a NNN lease in one way. In an absolute NNN lease, the lessee is responsible for any building repair expenses, such as a roof replacement or a different type of structural repair. In a triple net lease, lessees usually are not responsible for this type of expense.

Triple Net vs Gross Lease

The general difference between a triple net and a gross lease is that in a gross lease, the lessor is responsible for paying the operating expenses, whereas in a triple net lease, most of the operating expenses instead fall on the shoulders of the lessee.

Need Help with Your Commercial Lease Accounting?

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Reach out to us today to schedule a demo and see how LeaseCrunch could save your organization time and money!

FAQs

How does a triple net (NNN) lease differ from a double net (NN) lease?

In a triple net lease, the lessee pays three of the main operating expenses that would otherwise be the responsibility of the lessor: The building insurance, property taxes, and common area maintenance charges. In a double net lease, the lessee is only responsible for two of these operating expenses.

What is a modified gross lease, and how does it balance responsibilities between lessees and lessors?

A modified gross lease is a lease in which a lessee pays some, but not all, of a lessor’s operating expenses. So leases such as a single or double net lease would fall under the category of modified gross leases.

What is a Full-Service Lease, and how does it differ from other commercial lease types?

A full-service lease is just another term for a gross lease. In a full-service lease, or gross lease, the lessor is responsible for all operating expenses and the lessee is just responsible for their rent payment. This is different from other commercial lease types because they can require the lessee to pay for at least one of the operating expenses.

 Are tenants responsible for any additional expenses in a full-service lease after the first year?

The lessee is responsible for any rising operating expenses after the first year of the lease. This is called an expense stop.