What Is an Absolute Net Lease?

In a triple net lease, the tenant pays base rent plus taxes, insurance and maintenance, and many such leases leave roof and structural costs with the landlord. An absolute net lease removes that remaining layer. It is often described as leaving the landlord with essentially no responsibility for expenses, with the tenant paying them directly. Sands Investment Group says the main difference from a standard triple net is that structural and roof costs move to the tenant.

In other words, the landlord’s role becomes close to that of an investor receiving a payment. The tenant runs the property much as an owner would, but without owning it.

There is a further point about language. Terms such as absolute net, absolute triple net, true triple net, bondable and hell or high water are often used as if they mean the same thing. Sources treat them as overlapping, but an actual lease may stop short of the strictest version. Sands Investment Group warns that confusion between triple net and absolute net is common, and a property can be marketed one way and read another way. You need to look at the document.

The word "bondable" points to how the investor sees this lease. Rent is meant to behave like a payment on a bond, a stream of income that does not stop or shrink whatever happens to the building. USLegal defines a bondable lease as a variant of triple net in which the tenant carries every imaginable real estate risk related to the property. As described there and in a Bisnow explainer, the strictest form includes these features.

• The tenant must rebuild after a casualty, even if insurance proceeds fall short.
• The tenant keeps paying rent after a partial or full condemnation.
• The tenant cannot terminate the lease.
• Rent cannot be abated.

Those four points are what separates this structure from an ordinary lease, including an ordinary triple net lease. A fire that closes your building might, under a conventional office lease, reduce your rent or let you leave. Under the strictest version of a bondable lease, you would continue paying and be responsible for rebuilding.

Whether such terms are enforced in a given situation is a question of the lease and state law, and it is one for your attorney. This guide describes what these clauses are written to do, not how a particular court would treat them.

Because an absolute net tenant steps into much of the owner’s position, the list of exposures is long. The specifics depend on the lease, but these are the areas to check.

• Roof, structure and foundation, including replacement, not just repair.
• Parking lot, heating and cooling, and the mechanical, electrical and plumbing systems.
• Capital replacements over the whole term, however long that is.
• Taxes, including any increase following a reassessment, and whether you can contest them.
• Insurance, including the coverage required and who bears the deductible.
• Casualty and condemnation, including restoration duties, who holds insurance proceeds and any right to terminate.
• Compliance with laws, including accessibility, zoning and building code work.
• Environmental conditions, potentially including ones you did not cause.

A tenant signing an absolute net lease should budget like an owner, with a reserve for capital items, even though the building will not belong to it at the end of the term.

You are unlikely to meet an absolute net lease while looking for a floor in a multi-tenant office building. It tends to appear in these situations.

• Single-tenant buildings, where one occupant can reasonably run the whole property.
• Investment-grade or strong-credit tenants. Bisnow reports these leases are used primarily by tenants with very high credit, which is what makes the rent stream bond-like to an investor.
• Sale-leasebacks, where a company that has owned and run the building sells it and leases it back. Sellers may accept net obligations because they have already been managing the property. A 2010 Area Development article even suggests sellers consider assuming capital expenses such as roof and structure, especially on longer leases, to increase value to a buyer.

The sale-leaseback case illustrates the trade-off. A company taking on these obligations may receive a better sale price, because the buyer has a cleaner income stream. That is a real exchange of value, and it should be priced as one. Our sale-leaseback guides cover it in more detail.

If you are offered one of these leases, or a proposal uses any of these labels, treat the following as the minimum review. A few paragraphs can decide who carries very large future obligations, and the label is no substitute for reading the document.

• ✓Does the lease truly make us responsible for roof and structure replacement, or only for maintenance?
• ✓Must we rebuild after a casualty, and what happens if insurance proceeds are not enough?
• ✓Is there any right to terminate or abate rent after a major casualty or condemnation?
• ✓Who receives insurance proceeds and condemnation awards?
• ✓Are we responsible for environmental conditions that existed before we took possession?
• ✓What is the current condition and age of the roof, structure and major systems?
• ✓Can we limit capital obligations in the last years of the term?
• ✓Do we have the right to contest property taxes?
• ✓Does the lease restrict our right to assign or sublease if our business changes?
• ✓Have our CPA and attorney reviewed the accounting and legal effect of these obligations?

Many of these are negotiable, particularly for a tenant with good credit and alternatives. Requests worth raising include carve-outs for pre-existing conditions, a sharing of capital costs in the final years and a termination right after a major casualty late in the term.

Tenant Advisory Group represents occupiers, so when a client is offered absolute net terms we set out what each obligation could cost across the full term and compare that with the rent or sale price offered in exchange. The attorney’s review of the casualty, condemnation and environmental sections is not optional here.