What Are Net Leases?

Typically, leases will address three areas of expenses.  Which expenses that are covered, determine the type of lease.

Property Taxes & Insurance

All costs for property taxes and building insurance shift to the tenant.  Tenants entering into such leases should understand and document the records for the property, and be prepared for any increases that the city and/or county may impose.

Electrical & Maintenance Costs

This includes landscaping, snow removal, electrical and other maintenance as well as any repairs that are required. For example, if there is an issue with the HVAC system, it is the tenant who is responsible for getting the equipment repaired as well as having to cover the costs.

Roof & Structure

When a lease is NN, the most common landlord expense is the roof and structure.  If true triple net, any repairs to the building for roof and structure would be solely the burden of the tenant.  Before entering into such a lease, due diligence should be done to find out the current shape of the roof and structure and if any warranties exist.

Based off of what expenses are covered under the net lease, the agreement may come in one of these three varieties:

Single Net Lease

With a single net lease, the tenant pays the agreed upon rent for the property and also agrees to pay one category of expenses, for example, the property taxes. (This arrangement is similar to a pass-through lease whereby the landlord can raise a tenant’s rent if property taxes increase.) The landlord is still responsible for all of the other operating expenses associated with the property. In multi-tenant buildings, it is common for a lease to exclude electrical when the tenant operates around the clock, i.e., a call center or a data center.  This would become a net of electric lease.  In the single tenant net lease market (building occupied by one tenant only), a single net lease is the least common.

Double Net Lease

Also referred to as an NN lease, in this type of lease the tenant pays the agreed upon rent and is responsible for paying for at least two types of building expenses. This places more building expenses on the tenant’s shoulders as compared to a gross or a single net lease. The property owner is still responsible for one area operating expenses for the building.

Triple Net Lease

This is also referred to as an NNN lease. With a triple net lease, the tenant is responsible for not only the agreed-upon rent, but also for any operating expenses that the building requires. The tenant pays property taxes, insurance premiums, and all other operating expenses for the property. NNN leases are usually between a property owner and a single building tenant. The leases are typically long term and of at least a 10 year duration.

There are pros and cons to each of these types of leases. With gross leases, the cost of rent is higher because the owner has factored in the price of all expenses into the rent amount. The result is that the tenant has the benefit of knowing the exact amount each month they will need to pay. However, they may end up paying more than the expenses in the long run, which is to the property owner’s benefit. With net leases, the amount of rent is less expensive because the tenant will be covering those other expenses directly. This means the amount may fluctuate each month, though the tenant has more control over the cost of their other expenses.

How Can We Help You With a Net Lease Investment?

Net leases are becoming more popular with commercial property investors as well as their tenants. In a net lease, the tenant pays a portion or all of the operating expenses for the property, expenses that are normally paid for by the owner in a gross lease or full service agreement.

Leases are contracts between a property owner and a tenant who will occupy the property. Most people are familiar with gross or full service leases. In a gross lease, the tenant will pay one fixed price each month to the property owner for rent. The property owner is then responsible for all of the property’s expenses, such as taxes, insurance, electric, maintenance, etc.

Commercial real estate investors are attracted to net leases because it allows them to purchase income producing properties without having to deal with the financial responsibilities associated with gross leases. In this way, investors can enjoy the benefits of earning income without the day-to-day headaches that often go along with commercial property administration and maintenance costs.

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    Traci BidingerWhat Are Net Leases?