Absolute Net (Bondable) Lease

The bondable label comes from credit tenant lease financing.

A credit tenant lease rating methodology filed with the SEC by a nationally recognized statistical rating organization describes a bondable lease as one that unconditionally obligates the tenant to pay rent sufficient to pay the debt service and the costs of occupying, operating and maintaining the property, without any set-offs. It says the lease is called bondable, or hell-or-high-water, because it mimics a bond: a pure promise to pay net rent.

Under such a lease the tenant typically pays the property taxes, utilities, insurance, repairs and capital improvements, liens and special assessments. The same methodology describes almost bondable leases, where rent may abate or the lease may be cancelled after a casualty or condemnation, and says specialized insurance has been developed to cover those gaps.

No Code section defines an absolute net lease. The term describes how far the lease shifts cost and risk to the tenant, and the casualty and condemnation clauses are where absolute and merely triple net leases part ways.

In a worked example, a fire shows the difference.

Hypothetical: a building leased for 15 years at $500,000 a year burns in year eight, and the owner's mortgage costs $420,000 a year. Under a bondable lease the tenant keeps paying rent, so the loan stays current. Under a triple net lease with a casualty abatement clause, rent can stop until the building is restored, and the owner must cover debt service from reserves or insurance. Run your own numbers with your CPA.

If the building is destroyed or condemned and the owner receives insurance or award proceeds, section 1033 can defer the gain on reinvestment, which is a separate question from the lease; see condemned or destroyed property and 1031.

It bites in zero cash flow DSTs, where the lease has to carry the loan.

The cash out DSTs we place are built on triple net leased properties with investment-grade tenants and long-term leases, and all operating income goes to service and amortize the non-recourse loan, so investors receive no current distributions. When rent is the only source of debt service, any right to abate it is a risk to the loan, which is why the lease abstract in the offering documents deserves a line-by-line read. See zero cash flow DSTs explained.

The structure also suits the limits in Rev. Rul. 2004-86, where the tenant paid all taxes, insurance, maintenance, ordinary repairs and utilities and the trustee could not renegotiate the lease, re-lease, or refinance. A lease that needs no landlord action fits a trustee who may not act.

The same shift of costs has a tax side: Rev. Proc. 2019-38 excludes property rented under a triple net lease, one where the tenant pays taxes, fees, insurance and maintenance, from its section 199A rental safe harbor.