In commercial real estate, several types of leases accommodate a range of different economic responsibilities between the tenant and investor. These leases include single, double or triple net (NNN) leases; percentage leases; gross leases; modified gross leases; pass through leases and absolute net leases. When investing in commercial property, it’s important to have proper expectations before signing any type of lease. NNN leases are often confused with absolute net leases and making a discernible distinction is integral to understanding your commercial real estate investment and responsibilities.
What is a NNN lease?
In a NNN lease, the tenant is responsible for taxes, insurance, and general building maintenance, and the landlord or investor is removed from almost all of the financial obligations. However, the roof and structure of the property are not traditionally included in the tenant’s list of maintenance responsibilities. NNN leases are typically longer-term for commercial real estate properties and have initial terms that begin at 10 years or more. Accordingly, NNN leases are very popular as they provide multiple benefits for both tenants and investors.
What is an absolute net lease?
In an absolute net lease, sometimes called a bondable lease, the tenant is responsible for rent and all other property related expenses, which includes roof and structure. This agreement completely relieves the property owner or investor of all financial obligations. An absolute net lease is a variation of the NNN lease that is commonly used when the investor has borrowed money to finance the commercial property and opts to put additional risks in the hands of the tenant.
Why are NNN leases and absolute net leases often confused?
The confusion between NNN leases and absolute net leases often initiates from an inaccurately advertised NNN lease, or a misunderstanding of the different leases on either the investor’s or the tenant’s behalf. When a property is advertised as a NNN lease, the investor may make the purchase under the assumption that all expenses are the tenant’s responsibility and unintentionally incur a massive financial expenditure in the future. In another scenario, and because ”NNN lease” is a more popular phrase than “absolute net lease,” the property may be listed as a NNN lease when the terms describe an absolute net lease. This risks blindsiding the tenant later on with a hefty roof or structural repair bill.
What are the best ways to avoid confusion between NNN leases and absolute net leases?
Investors and tenants can avoid confusion between NNN leases and absolute net leases by performing ample research on the different types of leases. The parties involved must also be well-versed in both the particulars and the fine print of a lease before signing. Additionally, commercial real estate brokerages offer expertise and information on all different types of agreements and investments. To maximize the returns of a commercial property investment, it’s always best to consult professionals.
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