Understanding Lease Types
By Belinda D. Schuster, CCIM, Northwest Indiana Commercial Real Estate
Definitions for commercial leases can vary from market to market, location to location and broker to broker. When it comes to NNN net leases in the investment arena it may be worth understanding the differences.
Each type of lease has it’s own inherent risks. The characteristics of NNN leases, NN leases and Bond Leases have a specific risk profile, debt and equity structure and impact on property valuation. The following definitions are based on industry publications, and my experience, to help you understand the differences.
NNN Bond Lease (Absolute)
- In this type of lease the tenant is completely responsible for all of operating expenses, maintenance, and repairs.
- In the event of a material casualty/condemnation the tenant is responsible for rebuilding and cannot seek any rent abatements.
- The tenant is responsible for all real estate risk as it relates to the property and site.
- NNN Bond Leases are considered investment grade leases because they tend to have investment grade tenants such as Walgreen/CVS
NNN Lease
- The tenant is responsible for all of the property’s expenses both fixed and operating.
- NNN lease and the bond lease are similar in definition however capital expenditures could be limited through negotiations between landlord and tenant. In the event of a material casualty/condemnation tenant usually is not responsible for rebuilding and can seek rent abatements.
- Tenant/Broker can negotiate an expense stop/cap to limit and control operating expense responsibility.
NN Lease or Double Net
- The NN lease is the same as the NNN lease however; the landlord may be responsible for some of the capital expenditures such as roof, structure, and parking lot.
By understanding basic risks, operating expense responsibilities, the financial impact, and liabilities in a commercial lease will aid in negotiating terms. When analyzing commercial leases always advise your clients to seek legal and financial counsel.