There is a wide spectrum of lease types in commercial real estate. To make it easier to communicate with others, it is not uncommon for complicated leases to be described using simple language. The ‘double net lease’ in commercial real estate is a term that describes a certain type of lease agreement, but it’s not always as simple as it might sound. In this article we’ll take a closer look at the double net commercial real estate lease.
What is a Double Net Lease?
First of all, what is a double net lease? A double net lease is a lease structure where the tenant is responsible for paying for two expenses associated with the property. The two expenses paid by a tenant under a double net lease are real estate taxes and insurance. The landlord is responsible for paying all other property expenses.
Although this double net lease structure might sound simple, commercial real estate leases are complicated legal documents that must be read thoroughly in order to be understood. Even with a double net lease there are many lease provisions that can create a more complicated lease structure. We’ll cover some of these nuances below, but first let’s talk about the spectrum of all commercial real estate leases.
The Spectrum of Commercial Real Estate Leases
Although the double net lease structure can be defined in simple terms as we did above, it is important to take a step back and understand the spectrum of all commercial real estate leases. You can think of commercial real estate leases as a spectrum.
On one end of the spectrum are absolute net leases. In absolute net leases, the tenant pays for all expenses associated with a property. On the other end of the spectrum are absolute gross leases. In absolute gross leases, the landlord pays for all expenses associated with the property. Most leases, including the double net lease, fall somewhere in the middle of these extremes and are considered hybrid leases.
Why You Should Always Read the Lease
Commercial real estate leases rarely fit neatly into boxes with common descriptive names on them. This is true for double net leases, as well as other common lease types such as the full service lease, triple net lease, single net lease, or the modified gross lease. The reality is that commercial real estate leases are complicated legal documents that usually contain nuance and detail specific to each lease.
The reason why leases vary so much is because they are created at different times, under different economic conditions, and are negotiated to reflect the specific needs of each party. This is why the most important thing to understand about commercial real estate leases is that the only way to understand a lease agreement is to read it. In fact, it is not uncommon for a lease to be described one way, such as “double net”, but actually say something different when the lease is read in its entirety.
Lease terms differ depending on who you are talking to and what part of the world they are in, so it’s always important to read a lease agreement thoroughly in order to fully understand it.
Double Net Lease Example
Double net leases fit somewhere in the middle of the spectrum of commercial real estate leases mentioned above. Although the lease structure itself may sound simple enough because it only requires the tenant to pay for property taxes and insurance, there is often complexity hidden in a lease agreement.
One example of this is how reimbursements are calculated. For example, the reimbursements could be calculated using expense stops. An expense stop only requires the landlord to pay for expenses up to a certain threshold. For instance, a landlord might have an expense stop in the lease for $5 per square foot. What this means is that if expenses exceed $5 per square foot in any given year, then the tenant would be responsible for paying for all expenses over $5 per square foot.
There could be other nuances as well. For instance, the expense stop itself could change from year to year to keep up with inflation. Or, an expense stop might be structured using a base year stop, which requires the tenant to pay only for the portion of expenses that exceed the amount of the expense in the base year of the lease. There could also be variations on how the base year itself is calculated.
These are just some of the nuances you might see in a double net lease. Again, the most important takeaway is that the only way to understand what a particular lease requires from the tenant and the landlord is to fully read the lease itself.
Double Net Lease vs Single Net Lease
A double net lease requires the tenant to pay for property taxes and insurance. This is in contrast to a single net lease which only requires the tenant to pay for property taxes. The difference between a double net lease and a single net lease is that the tenant does not have to reimburse the landlord for any insurance expense associated with the property. It should be noted that the same nuances that could cause the double net lease to be more complicated than it sounds will apply to all other lease types discussed, including the single net lease.
Double Net Lease vs Triple Net Lease
While the double net lease requires the tenant to pay for two expenses, the triple net lease requires the tenant to pay for all expenses. Specifically, the tenant is responsible for paying property taxes and insurance under a double net lease. In a triple net lease, the tenant is responsible for paying property taxes, insurance, and maintenance. However, as with any lease, it is important to clarify exactly who is responsible for paying each expense and triple net leases are not always as simple as they might sound.
Double Net Lease vs Gross Lease
A gross lease, sometimes called a full service lease, requires the landlord to pay for all of the operating expenses associated with a property. A double net lease shifts the responsibility for property taxes and insurance to the tenant. Although a gross lease might sound like a better deal for a tenant, in practice the base rents for a property will often be higher in a gross lease in order to reflect the additional expenses a landlord must pay.
Double Net Lease vs Modified Gross Lease
The double net lease can be thought of as a type of modified gross lease. It is a hybrid lease where some of the expenses for a property are paid by the tenant and some are paid by the landlord. Often both of these leases will contain nuance that make them more complicated to understand than at first glance. Some of this additional nuance could include expense stops, caps, floors, administrative fees, etc. As mentioned several times, the only way to understand a lease structure is to dig into the actual lease agreement and read it thoroughly.
Conclusion
In this article we defined the double net lease, looked at some examples of nuances you might see in a double net lease, and discussed how it compares to other common lease types. Along the way we emphasized that commercial real estate leases are complicated legal documents that must be read thoroughly in order to fully understand them. Simple shorthand descriptive terms, such as the double net lease, are not always an accurate depiction of the actual terms of a lease agreement.