Net Lease vs. Triple Net Lease: a Guide for Landlords and Tenants

The U.S. commercial real estate market is on a roll — experts are forecasting it to grow by over 3.45% annually through 2028. That's not just a number — it's a signal that the commercial property market continues to expand. As more players enter the game, both property owners and tenants will need to understand commercial lease options.

This article explores commercial real estate agreements and the differences between net and triple-net lease types. We'll examine types of leases, lease structures, and the unique characteristics that distinguish these leases. You'll learn about the financial implications of different agreements, their benefits to landlords and tenants, and the key considerations for choosing the right lease type for your needs.

Types of commercial real estate leases

Commercial real estate leases are different from residential leases. They're not one-size-fits-all; instead, they have negotiable terms, complex details, and they vary in length. Deciding on the best kind of lease for your needs is essential: you're not just signing up for a year — you're often committing to 3, 5, or 10 years — or even more.

These long-term agreements affect all parties. Different commercial lease types shift risks and responsibilities between landlord and tenants in various ways. Bear in mind that a lot can change over a decade in business and real estate markets.

That's why it's so important to understand the ins and outs of these leases. No two commercial leases are exactly alike, and what works for one business might be a disaster for another. You're choosing a financial and operational strategy that will affect your business for years to come.

Here are the different types of commercial real estate leases:

Net leases

A net lease refers to any commercial real estate lease where the tenant pays a base rent plus some or all of the property expenses that the landlord would normally cover. These agreements can have different terms — the tenant may pay for one, two, or all of the operating expenses. Each type of lease comes involves different levels of risk and responsibility for both parties.

Here's the different levels of this type of lease:

• Single-net lease: The tenant pays base rent plus one additional expense, typically paying property taxes.
• Double-net lease: With double-net leases, tenants pay base rent, property taxes, and insurance premiums.
• Triple-net lease: Tenants in a triple-net lease will pay base rent plus property taxes, insurance, and maintenance costs.

Gross leases

This lease agreement type is the closest to a residential lease. There are two types of gross leases:

• Modified gross lease: This is a hybrid between a net lease and a gross lease. The tenant pays some of the operating expenses, which both parties negotiate as part of the rental contract.
• Full-service gross lease: The landlord pays all operating expenses, including property taxes, insurance premiums, maintenance costs, and utilities (if applicable).

Detailed comparison of net lease types

Triple net leases fall under the net lease category, but they have distinct characteristics because most operating expenses shift to the tenant. Key differences between these lease types include the following:

Typical net lease by property type

These lease types differ when it comes to the kind of property and tenant they serve best. Let's break it down:

Net lease agreements

You'll find this structure in multi-tenant office buildings and shopping centers. A double-net lease is the more popular choice for this type of commercial real estate property. This is because landlords like to maintain the building at large and its common areas. Plus, tenants in these spaces usually don't have their own maintenance crews, so they prefer the landlord to pay this cost.

Triple-net lease agreements

A triple-net lease is common in single-tenant situations. These tenant companies prefer this lease type for specific reasons:

• Restaurants and retail: These free-standing buildings house drug stores and fast-food restaurants. National chains usually prefer this type of lease agreement because it gives them more control over the property. These companies have specific building requirements and prefer to handle maintenance themselves.
• Industrial properties: These include warehouses, distribution centers, and manufacturing facilities. Large companies often prefer a triple-net lease because they can customize the space to their specific needs.
• Office buildings: Single-tenant office buildings or corporate campuses favor triple net leases to gain more control over the property's management and maintenance.
• Banks: Standalone bank branches frequently use a triple-net lease. Banks have specific security and technology requirements, so they prefer to manage the property themselves.
• Gas stations and convenience stores: These businesses often have specialized equipment and environmental considerations, making triple net leases a preferred commercial real estate lease type.
• Medical facilities: Standalone clinics or medical office buildings sometimes use a triple-net lease, especially when large healthcare providers occupy the space and want control over the specialized infrastructure.

Financial implications

A net lease structure gives landlords higher base rents, but they're still responsible for costs like insurance and maintenance. This can make profits unpredictable, especially when surprise repairs are necessary.

A triple-net agreement does the opposite and puts most of the financial burden on the tenants. Landlords get lower base rents, but their income is more predictable since they're not dealing with changing operating costs.

In both cases, who pays for what affects the base rent. The more responsibilities the tenant takes on, the less they usually pay.

Here's how this affects cash flow and taxes:

• Risk and reward: Landlords with net lease agreements might make more money, but they're also taking on more risk. Triple-net landlords see steadier income, but because they’re taking on less risk, these properties have lower capitalization rates and return on investment.
• Cash flow and budgeting: Net lease landlords need to keep cash on hand for unexpected costs. Triple-net tenants need to budget for all the extra expenses in addition to rent.
• Tax implications: A net lease allows landlords to deduct operating expenses and lower their overall tax bill. In a triple net lease, the IRS may consider the rent income passive income, which means it's not subject to employment tax and could be a win for the landlord.

Tenants in a triple-net lease can deduct all their lease payments as business expenses, including the portion covering property taxes and insurance. This reduces their taxable income, potentially pushing them into a lower tax bracket or qualifying them for additional tax credits based on their adjusted gross income.

Lease agreement structure and terms

Each lease agreement type differs in structure and terms. These include the following:

• Rent adjustments: Net leases involve more frequent rent adjustments to allow for adaptation to market changes. A triple-net agreement usually has fixed rent increases or adjustments tied to specific indices over longer periods.
• Property management: With net leases, landlords control property management decisions, whereas the tenant is responsible for these in a triple net lease.
• Lease transferability: A triple-net lease is easier to assign, making it attractive for businesses planning expansion or exit strategies. However, net leases usually require landlord approval for transfers, subletting, or lease assignment.
• Default provisions: Triple net leases have more complex default and remedy clauses due to the tenant's extensive responsibilities. Net leases have simpler default terms focused mainly on rent payments.
• Capital improvements: Net leases typically leave capital improvements to the landlord. Triple net leases may require tenant participation in or full responsibility for major improvements.
• Termination clauses: Net leases can have more flexible early termination options. Triple net leases typically have stricter termination provisions due to their long-term nature.

Benefits of a triple net lease for all parties

There are reasons why both parties choose to sign a triple-net lease. Here are the benefits for :

For landlords

Net lease investments offer a unique risk profile. As David Grazioli of US Realty Advisors puts it, they provide a 'sleep well at night' risk profile. Here's why:

• Predictable income: Triple net leases provide you with steady, predictable income since tenants cover most operating expenses.
• Lower risk: With tenants responsible for most costs, you'll face less financial risk from unexpected expenses or market changes.
• Passive investment: These leases require minimal landlord involvement in property management, which means passive rental income for the property owner.
• Easier property valuation: The predictable income stream can make it easier to value and potentially sell the property.

For tenants

A triple net lease comes with more financial responsibility, but it offers several advantages for tenants:

• Control: You get to manage the property your way, making changes or improvements without landlord approval.
• Lower base rent: Since you're taking on more costs, the base rent is usually lower than in other lease types.
• Transparency: You know exactly what you're paying for, with no hidden costs bundled into the rent.
• Tax benefits: All lease payments, including those for taxes and insurance, may be tax-deductible as business expenses.

Evaluating different lease agreements

If you’re choosing between a net lease or a triple net lease, options both parties should evaluate include the following:

Tenant considerations

• Cash flow: How much predictability do you need in monthly expenses?
• Control: Do you want to manage the property or focus on your core business?
• Growth plans: Will you need flexibility to expand or move in the near future?

Landlord considerations

• Income stability: Do you prefer steady, predictable income or the potential for higher returns?
• Property control: How much control do you want over property operations and improvements?
• Long-term plans: Are you looking to sell soon or hold the property for years?
• Market conditions: Which types of leases are competitors offering?

Managing commercial real estate leases

Commercial real estate property owners can improve their operations with property management software like Azibo. These tools save you time and effort, freeing you up to focus on growing your real estate portfolio. This integrated platform supports your business by doing the following:

• Streamlining rent collection: Automate payments, and keep track of tenant payment status.
• Simplifying accounting: Keeping all your financial data in one place makes it much easier to pull information together for tax season.
• Managing maintenance requests: Stay on top of repairs and keep your tenants happy by giving them the ability to submit maintenance requests online.
• Generating reports: Get insights into your property's performance with just a few clicks.
• Storing documents: Keep leases, contracts, and other important documents organized and accessible.

NN vs. NNN lease

Choosing the right lease can make or break your commercial real estate business. Net leases and triple net leases each offer distinct advantages and challenges for both landlords and tenants. Your choice will shape your financial obligations and operational responsibilities.

The growing real estate market isn't just about new buildings — it's reshaping how we do business. Net leases and triple net leases are financial instruments that directly affect your bottom line. Understanding these lease types helps you make smarter decisions on either side of the negotiation table.

Net lease vs. triple net lease: FAQs

What is the downside of a triple-net lease?

The downside of a triple net lease is that the tenant bears all property-related expenses, which can lead to unpredictable costs.

What does net net net mean in a lease?

This means a triple net lease (NNN) where the tenant pays base rent plus property taxes, insurance, and maintenance costs.

What is the difference between CAM and NNN?

CAM stands for common area maintenance and covers shared property expenses like landscaping and janitorial services. NNN stands for triple net lease, wherein the tenant pays CAM plus property taxes, insurance, and maintenance costs.