What does double net, net net, or NN mean?
Nets in a commercial lease refer to expenses that a tenant has to pay in addition to their base rent. A double net lease, also known as a net net or NN lease, refers to a lease in which the tenant pays their pro rata share of property taxes and property insurance.
In a multi-tenant commercial space, each tenant will pay their share of the property insurance and the property taxes based on the square footage of the space they occupy.
For instance, if a tenant occupies 1,000 square feet (sf) in a 10,000 sf building, they will pay 10% of the property taxes and insurance.
These expenses are usually estimated for the year and are charged monthly. If the tenant overpaid throughout the year, the landlord will provide a refund once the costs are reconciled. If the costs totaled more than the tenant paid, the tenant will have to pay the difference at the end of the year.
Let's look at an example:
Building size: 10,000 sf
Space leased: 1,000 sf
Lease rate: $12 psf
Property taxes: $20,000
Property Insurance: $12,000
The taxes and insurance combined total $32,000 for the year.
The tenant is responsible for 10% of that cost, so $3,200.
Based on 1,000 sf, the tenant's share of taxes and insurance comes out to $3.20 psf. This is their double net charge.
The $3.20 is paid in addition to their $12 psf base rent.
The rate per square foot in a lease rate is their total annual rent. So $12 psf equals $12,000 for the year, which is $1,000 per month.
Monthly base rent: $1,000
Monthly net net charges: $266.67 ($3,200 / 12 months)
This means the tenant will be paying a total of $1,266.67 to the landlord each month.
While net net leases are still more common than net leases, they aren't quite as popular as triple net leases.
What's the difference between a net lease, a double net lease, and a triple net lease?
A net lease is exactly the same as a double net lease in every way except that it doesn't include the cost of property insurance. In a net lease, the tenant only pays their pro rata share of the property taxes.
A triple net lease charges the tenants their share of both property taxes and insurance but also includes the common area maintenance. Common area maintenance is most commonly referred to as CAM charges.
CAM charges include things such as lawn care, snow removal, utilities for common areas, and other operating expenses that go into managing the property. Just like with the taxes and insurance, the common area maintenance is divided up among the tenants based on the amount of space they occupy.
The easiest way to remember the difference between net, double net, and triple net leases is with the acronym TIM.
The first net is T - Taxes
The second net is I - Insurance
The third net is M - Maintenance
How are these types of leases different from a gross lease?
In a gross lease, the tenant simply pays their base rent every month while the landlord covers all of the costs of taxes, insurance, and common area maintenance. Some gross leases even include electricity, gas, and water.
The lease rate on a gross lease is normally higher than any of the net leases to make up for the additional costs the landlord is paying. Tenants often prefer this type of lease because they know exactly what they will be paying each month.
Why are there different types of commercial leases?
In most cases, landlords prefer a triple net lease because their net income stays the same no matter what the expenses are. If taxes increase or maintenance costs are higher one year, those additional expenses get passed on to the tenant.
On the other hand, tenants normally prefer a gross lease. Gross leases are often preferred because the tenant can have an exact budget for their lease payments and doesn't have to worry about any surprises if the expenses increase.
Landlords often insist on a triple net lease for long-term leases. If expenses were to increase more than expected over the years, a property owner could end up losing money if the rent payments on a gross lease aren't high enough.
A net lease, and a double net lease are basically a compromise between a gross lease and a triple net lease. Double net leases are still attractive to tenants because property taxes and insurance usually stay pretty consistent. Even as insurance premiums and taxes go up, it doesn't normally impact each tenant's rent very much.
Of course, there are plenty of exceptions to these scenarios. Different lease types are more common in some markets than others. Some markets may have almost all triple net leases, while others mainly have double net leases.
What is the benefit of a double net lease over other types of leases?
A double net lease provides a certain level of protection for both the landlord and tenant. In most cases, it's a reasonable compromise between the other lease types.
Many people see double net leases as being fair to both parties. The property owner is responsible for the maintenance of their building, and the tenant's double net charges are based on the costs associated with doing business in that particular area.
The bottom line
There really is no standard when it comes to a commercial real estate lease. Some properties simply go with a certain type of lease because that's how it was when they bought it. Others have evolved over the years from negotiations with different tenants that have come through.
Just because a commercial building uses triple net leases doesn't mean a deal can't be negotiated for a double net lease with a new tenant or one that's up for renewal. While anyone can argue that one type of lease is better than another, it all comes down to what works best for your situation.
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