Double Net (NN) Lease

The term comes from lease practice, and filed annual reports show how owners use it.

A net lease retail REIT's Form 10-K for 2012 says a double net lease typically requires tenants to pay property taxes and insurance in addition to rent, while a triple net lease requires them to pay all or most operating expenses, including taxes, utilities, maintenance, insurance and building repairs. The same report says certain of its net leases required the landlord to maintain the roof and structure.

Another owner's Form 10-K for 2018 warns that under leases that are not triple net, including double net arrangements, it may be primarily responsible for expenses such as insurance, taxes, maintenance or other expenditures. The label tells you roughly where costs fall; only the lease tells you exactly.

No Code section or Treasury regulation defines a double net lease. The closest IRS text is a definition of a triple net lease in a revenue procedure on the qualified business income deduction, covered below.

In a worked example, the roof is the cost that separates NN from NNN.

Hypothetical: two identical single-tenant buildings each bring in $100,000 a year of rent, and both tenants pay taxes and insurance. Under the NN lease the owner must replace the roof in year six for $150,000; under the triple net lease the tenant pays. Over a ten-year hold that is $15,000 a year, so the NN building's cash behaves like $85,000 of rent, not $100,000. Run your own numbers with your CPA.

The tax treatment differs from routine upkeep. IRS Publication 527 lets an owner deduct repair and maintenance costs that need not be capitalized, but lists a new roof as an improvement, recovered by depreciation over the same period as the property it is added to.

So compare net operating income across NN and NNN offerings only after setting aside a reserve for the owner's retained items, and check the roof's age against the remaining lease term.

It bites in DST replacement property and in the section 199A safe harbor.

In Rev. Rul. 2004-86 the tenant paid all taxes, insurance, maintenance, ordinary repairs and utilities, and the trustee could make only minor non-structural modifications unless required by law and could not accept new contributions of money. A DST that owns an NN-leased building therefore has to meet any retained owner obligation from reserves or property cash flow; how a given trust handles a major structural repair is set by its offering documents. See DST repairs and reserves.

Rev. Proc. 2019-38 excludes real estate rented under a triple net lease from its rental enterprise safe harbor, defining one as a lease that requires the tenant to pay taxes, fees and insurance and to pay for maintenance in addition to rent and utilities. It does not use the term double net, so whether a lease that leaves the roof and structure with the owner falls inside that definition depends on its terms, and the safe harbor also requires 250 or more hours of rental services a year, or in three of every five years once the enterprise is four years old. See DST income and the QBI deduction and net lease DSTs.