What it means
The name comes from counting the nets, meaning the costs passed to the tenant on top of rent. In a double net lease, often written NN, the tenant covers taxes and insurance, while the landlord keeps responsibility for the structure, roof and usually the car park and exterior.
For a tenant the appeal is a lower base rent than a gross lease would command, in exchange for accepting two costs that can move year to year. Property tax revaluations and insurance premium increases both land on the tenant, which makes budgeting less predictable than a single all inclusive rent.
For a landlord the structure removes two volatile costs from the income statement while retaining control of the building fabric. That control matters, because a landlord who lets a tenant manage roof repairs on a cheap basis can inherit a very expensive problem at the end of the term.
The arrangement is common in freestanding retail, light industrial units and single tenant buildings where one occupier uses the whole property. Multi tenant buildings usually favour a service charge model instead, because splitting insurance and tax fairly between occupiers is administratively awkward.
Anyone reading a lease should check the definitions rather than the label. The terms NN and NNN are used loosely in practice, and what actually matters is the schedule listing who pays for what, particularly the treatment of the roof, structure and any major plant such as heating systems.
In practice
Real-world examples.
Example
A regional bakery takes a fifteen year double net lease on a standalone unit. It accepts responsibility for the insurance premium and the local property tax bill in return for a base rent roughly $2.00 per square foot below the gross alternative.
Example
A property investor buys a single tenant medical building let on a double net basis. Her lender requires a reserve of $40,000 a year to be set aside for roof replacement, because that cost remains the landlord's obligation for the whole term.
Example
A logistics operator renewing a lease is surprised by a 30% jump in its property tax assessment after the area is rezoned. Under its double net terms the increase passes straight through, adding $15,000 to annual occupancy cost with no change in rent.
Think of it
“Double net means tenant pays taxes and insurance-but not all maintenance costs.
Formula
Calculation
Tenant total occupancy cost = Base rent + Property taxes + Building insurance
A distribution business leases a 20,000 square foot warehouse at a base rent of $18.00 per square foot, giving 20,000 x $18.00 = $360,000 a year. Property taxes run at $2.50 per square foot, or 20,000 x $2.50 = $50,000, and building insurance at $0.60 per square foot, or 20,000 x $0.60 = $12,000.
Total occupancy cost is $360,000 + $50,000 + $12,000 = $422,000, an effective rate of $422,000 / 20,000 = $21.10 per square foot, which is the figure the tenant should compare against a gross lease quote.
From the landlord's side, the $62,000 of taxes and insurance collected is paid straight out again, and the landlord still funds structural and roof costs budgeted at $30,000. Net operating income is therefore $422,000 - $62,000 - $30,000 = $330,000, whereas under a triple net lease the $30,000 would also sit with the tenant.Case study
Seen in the real world.
The following is an illustrative and clearly fictional example. Larkfield Estates, an invented family property company, owned eight small industrial units all let on double net leases. Its owner had chosen the structure deliberately, reasoning that taxes and insurance were unpredictable while roof and structural work could be planned and budgeted.
For six years the logic held, until three of the units needed roof replacement within eighteen months of each other at a combined cost of $340,000. Larkfield had never set aside a reserve, having spent the net rent as income, and the fictional company had to arrange a short term loan against the portfolio.
The lesson its owner drew was not that double net leases were the wrong choice, but that keeping the structural obligation requires funding it. Larkfield subsequently reserved $1.20 per square foot a year across the portfolio for capital works, and treated only the remainder as distributable income.
Watch out
Common mistakes.
- Comparing a double net base rent with a gross rent as if they were equivalent, which understates true occupancy cost by the value of taxes and insurance.
- Assuming NN and NNN are used consistently across markets, when the only reliable guide is the schedule of responsibilities in the lease document itself.
- A landlord treating the whole net rent as spendable income without reserving for the roof and structure that remain their responsibility.
Questions
People also ask.
Who insures the tenant's own stock and equipment?
The tenant does, through separate contents and business interruption cover, since the building insurance passed through under the lease covers the structure only.
What happens if property taxes fall?
The saving normally passes to the tenant, because the pass through works in both directions unless the lease sets a floor.
Is a double net lease better for the tenant or the landlord?
Neither inherently, since it is a pricing question: the tenant accepts two variable costs and should expect a lower base rent to compensate for taking that risk.
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