Commercial lease structures vary widely depending on the type of property you’re looking at, as well as the specific terms a landlord or tenant is seeking out. Different leases benefit commercial real estate investors differently, and one such lease you might come across is an absolute net lease.
What Is an Absolute Net Lease?
An absolute net lease, sometimes called a bondable lease, or abbreviated as an Abs NNN lease, is a type of commercial lease between a commercial property owner and a tenant in which the tenant is responsible for all costs related to the property. The tenant must pay monthly base rent, as well as any additional property expenses. These expenses include insurance, property taxes and building maintenance and repairs, including anything related to the building structure and roof.
With an absolute net lease, the landlord has zero responsibility for any costs to the property, unlike other lease structures in which the landlord is responsible for certain additional expenses.
What’s the Difference Between an Absolute Net Lease vs Triple Net Lease?
An absolute net lease and a triple net lease (NNN) are similar in many respects and, often, people confuse the two. However, with a triple net lease, the landlord does have some responsibility for expenses.
With a triple net lease or single-tenant net lease, tenants are responsible for paying property taxes, insurance costs and maintenance costs on the property. The main distinction between an absolute net lease and a triple net lease is that, with an NNN, the landlord is responsible for the roof and any repairs to the structure of the building. Sometimes there are a few additional expenses and responsibilities the landlord must deal with in a triple net lease, such as parking lot and common area maintenance.
For instance, a tenant might be “responsible for maintenance of the HVAC system, but the landlord is responsible for replacing that system,” said Marc Imrem, Managing Director of Transwestern’s National Net Lease and Sale Leaseback Group.
The NNN lease and absolute net lease are more similar to each other than a gross lease. In a gross lease, the tenant pays a flat fee each month that takes care of base rent and all additional expenses associated with the piece of real estate, such as property taxes.
Benefits of an Absolute Net Lease: Tenant vs Landlord
For the tenant, there are a few benefits of an absolute net lease. For starters, said Lyle Solomon, Principal Attorney at Oak View Law Group, “the lease is longer, and the rent is also lower” because “an absolute net lease comes with a predictable and minimal rent increase.” Tenants know in advance how much they will have to pay each year, and there are no surprises when it comes to rent increases.
According to Solomon, “The potential clients of the absolute net lease are national retail chains, the retail healthcare sector, and quick-service restaurants. They prefer long-term leases with lower rent at prime locations, from a business standpoint.”
In addition, “The main benefit of an absolute net lease for a tenant is they can basically operate the property as if they own it,” Imrem explained.
Tenants do not have to interact with the landlord outside of paying their monthly base rent, and they can go about their business unbothered by landlord restrictions.
For landlords, “They can predict the ROI [return on investment] for the property, keeping the risk factor low,” Solomon said. Because of the long lease terms and the guaranteed rent, landlords are guaranteed a steady income and can predict what they will be getting year-to-year.
In addition, tenants have to pay for all maintenance and repairs, which takes the burden away from landlords.
For the landlord, “It is a true armchair investment,” Imrem said, meaning that they essentially “receive their rent check and otherwise do nothing for the property.”
When Are Absolute Net Leases Used?
Absolute net leases are used primarily for commercial real estate properties with only one tenant, especially if they are credit tenants. Imrem noted, “They are common for many retail properties and some office (including medical) and industrial properties.”
Absolute net leases are also quite common in sale leaseback situations, Imrem added. Sale leasebacks occur when a company sells a property it owns and operates and then leases the property back to itself.
“So, the company which sells their property becomes the tenant in that property, but they continue to have the exact same responsibilities, regarding expenses for and maintenance of the property, as when they owned it,” Imrem explained.
3 Best Practices for Navigating Commercial Real Estate Leases
1. Hire an Attorney
Leases are difficult to navigate without an attorney, and so Imrem’s number one piece of advice is to hire a real estate attorney to make sure the lease really is absolute net. An attorney will also ensure that the lease terms are clear and fair for both the tenant and the landlord.
2. Vet Your Tenants
Make sure to find trustworthy and responsible tenants for your property, as this is a long-term lease.
Solomon noted, “As far as the landlords are concerned, they have to be extremely careful when choosing tenants. Since the lease can’t be terminated in most cases and the property can house just one tenant, landlords should try to find reliable tenants.”
3. Research the Property
For tenants and commercial real estate investors, it’s essential to complete your due diligence and fully research the type of property you’re looking for, as well as the location, since this is a long-term lease that usually can’t be terminated, Solomon pointed out.
For Single-Tenant Commercial Properties, an Absolute Net Lease May Be Ideal
Absolute net leases are great situations for tenants and landlords looking for a long-term, predictable net lease. When there is only one tenant on the property, absolute net leases make sense. Nonetheless, make sure to research the different types of commercial leases that exist. That way you can ensure an absolute net lease is right for you.