What Is a Double Net (NN) Lease?

A net lease is described by which costs the tenant pays on top of base rent. In a double net lease, also written NN, those costs are the first two of the usual three.

• Tenant: base rent, plus property taxes and building insurance, or a proportionate share of them in a multi-tenant property.
• Landlord: some or all of the maintenance and repair. What is included depends on the lease.
• Usually the tenant as well: suite costs such as electricity, cleaning and repairs inside the premises, unless the lease says otherwise.

That middle line is where the definitions differ. Realized1031 describes a double net landlord as responsible for all other operating and structural expenses, which would leave most maintenance with the owner. Other descriptions are narrower, leaving the landlord responsible only for items such as the roof, structure, parking lot or common areas. You may also see the term NN R&S, where R&S stands for roof and structure.

Those are different deals. Under the first, routine upkeep might be the landlord’s. Under the second, it can be read to leave a tenant with many other property costs, and a tenant in a single-tenant building may find quite a lot still sits with it.

The three cost categories are taxes, insurance and maintenance. A triple net tenant pays all three, and a double net tenant pays the first two. Maintenance is the dividing line.

In practice the boundary is less tidy, because triple net leases are not uniform either. Some describe the tenant as paying for roof and structure, and others leave major structural costs with the landlord. One rough test: if the landlord pays any expense the tenant does not reimburse, the lease may not be a true triple net lease in the strict sense. A lease marketed as NNN that carves out the roof can look a lot like NN R&S in substance.

Ignore the letters and write out who pays for each item: taxes, insurance, routine maintenance, parking lot, roof repair, roof replacement, structure, HVAC. That table is the real description of your lease.

A tenant tends to think about the costs it will see every month. Taxes and insurance show up on a schedule and can be estimated. Roof and structural failures are different. They are irregular, they can be large and they often have little to do with how the tenant uses the space.

Keeping them with the landlord is the main thing a double net lease can do for a tenant, particularly in an older building or on a short term. A tenant paying for a new roof near the end of a lease receives very little of the benefit, while the owner keeps it for years afterward.

Even so, look closely at the wording. These are the points that often decide who actually pays.

• Repair or replacement. A landlord may be responsible for the roof structure, while the tenant pays for membrane repairs or minor leaks. Check whether both repair and replacement are addressed.
• Parking lot and exterior. These are sometimes grouped with roof and structure and sometimes not.
• Damage caused by the tenant. Check whether the landlord’s duty carves out damage from your acts, alterations or rooftop equipment.
• Pass-through by another route. A landlord’s obligation to perform a repair is not the same as an obligation to pay for it. A broad operating expense definition can bring the cost back to you.

That last point is worth checking first. Read the landlord’s maintenance covenant and the operating expense definition together, to be sure one does not undo the other.

The figures below are hypothetical, for illustration, and are not market rents. Assume a 10,000-square-foot single-tenant building.

• Base rent of $15.00 per square foot: $150,000 a year.
• Property taxes at $3.00 per square foot: $30,000.
• Building insurance at $0.50 per square foot: $5,000.
• Year-one total before suite costs: $185,000, or $18.50 per square foot.

In this example, the lease makes the landlord responsible for roof and structure, so a $100,000 roof replacement in year four is the owner’s bill. Under a triple net lease in which the tenant has taken on the roof, that same bill might be yours. If it were passed through unamortized, it would equal two-thirds of a year of base rent. The base rent difference between two proposals has to be weighed against that kind of exposure, not considered on its own.

• ✓Exactly which maintenance items remain with the landlord, by name?
• ✓Does the landlord pay for both repair and replacement of the roof?
• ✓Is the structure defined, including the foundation, exterior walls and floor slab?
• ✓Who maintains the parking lot, and who repaves it?
• ✓Who repairs and replaces the heating and cooling equipment serving our space?
• ✓Can the landlord recover any of its maintenance costs through operating expenses or CAM?
• ✓What are the age and condition of the roof and major systems today?
• ✓How are insurance costs calculated, and is the deductible passed through?
• ✓Do we have the right to review how taxes and insurance are billed?

Realized1031 advises checking the age of the roof and the condition of the parking lot before choosing a lease type. We would add that it helps to have someone inspect them when you are looking at an older single-tenant building, because the lease allocation matters most when the property is near a major expense.

The label comes up most clearly in buildings where a tenant could plausibly take on the property’s costs, such as single-tenant retail, industrial and small commercial buildings, though landlords and markets vary. Much of the published explanation, including the Realized1031 page cited here, is written for investors, so do not expect a listing to spell out the tenant’s side of it.

Tenant Advisory Group represents tenants and buyers, and when a client is offered NN or NNN terms we convert the label into a line-by-line allocation of costs so the client can see what risk comes with each rent. Have your attorney confirm how the lease and your state’s law treat repair obligations.