Structuring commercial real estate investment sales I have found that there is a wide range of disagreement regarding how sellers of property refer to the leases on the properties that they are selling.  I have also found that many investors expectations regarding how leases are identified are varied.  There are many types of leases including gross leases, full-service leases, modified-gross lease, net leases, NN leases NNN leases, absolute net leases, etc and many of these leases mean different things to different people.  Most often I see confusion in relation to NNN leases and absolute net leases.  I thought that it may be helpful to discuss these two types of leases in detail.  First let me start with the definitions:

• NNN Lease – This is a lease where the base rent is net to the Landlord.  The tenant is responsible for property taxes, insurance and maintenance, hence the   N-N-N.  What is typically not included in a NNN lease is roof and structure and that is why you will often see a “reserve” being taken out of net income prior to calculating value to account for roof and structure.
• Absolute Net Lease – This type of lease is often referred to as a bond-able lease or a hell or high-water lease meaning that the tenant is responsible for all of the expenses and repairs relating to the building including the roof and structure.

The confusion comes when a property is advertised as one type of lease such as a NNN Lease and upon review of the lease it is discovered that it is different or actually an absolute net lease.  The most common frustration that I see is when an investment property is being advertised as a NNN lease rather than an absolute net lease and an investor assumes that means that the roof and the structure are the tenant’s responsibility.  I often hear the comment, “The seller told me this was a NNN lease and now I find out that I am responsible for the roof and structure”.  Definitionally, a NNN lease typically does not include the roof and structure but some investors interpret a NNN lease as meaning something different.  Parking lot replacement often comes into this discussion as well.

With that being said, regardless of how a commercial real estate investment property is being advertised, it is important to ask specific questions about the lease prior to submitting offers to avoid any surprises when expectations are different from reality.  This will help you determine if it is a NNN Lease or an Absolute Net Lease. A little bit of additional due diligence and underwriting up front can save a lot of time and money on the back end.  I hope that is helpful.

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