Matt Mellott, Advisor
Tenants of commercial real estate often ask us questions about terms they see in their leases. One we hear often is: what’s the difference between a triple net and absolute net lease? Let’s start with a triple net lease.
This is when a tenant agrees to pay all three of the property’s expense categories in addition to the base rent. Things like property taxes, insurance, and operating expenses, sometimes referred to CAM, or common area maintenance charges are, passed through to the tenant typically pro-rata based on how much of the building they occupy.
Often, the landlord’s property management company will make a “triple net” or “CAM” budget, at the beginning of the year, then collect 1/12 of that amount each month along with the base rent. Then, at year end, the management company will reconcile the budget vs. actual expenditures and either refund over-charges for CAM or bill the tenant for any under-charges. This is sometimes referred to as “passing through” expenses to the tenants. Landlords love this, but tenants often do not as it can make predicting total rent expenses year-to-year more challenging. NNN leases are most common on multi-tenant leases with 5 years or less terms.
Now when it comes to an absolute net lease, the tenant still pays a base rental rate (perhaps $25 per square foot per year).
But unlike a NNN lease, the taxes, insurance, and operating expenses are often paid directly by the tenant for the property rather than being collected 1/12 at a time by a management company. Tenants will often arrange their own lawn care and snow plowing (in accordance with the lease) and pay it directly. On top of what is included in a NNN lease, an absolute net lease will also often make the tenant responsible for repairs to roofs, parking lots, lighting, etc. Absolute net leases are often long-term — many times 15 years or more – with users that want to be in the space for a long time.
Absolute net leases are most familiar with what are called single-tenant, net-leased properties. Think of a standalone Starbucks, Walgreens, Chik-fil-a, or Panera Bread — these are often absolute net leases.