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What is a Net Lease?
A net lease is a legal contract for leasing commercial real estate. In this type of lease agreement, the tenant pays for both the rental space and additional expenses that may include:
- Utilities
- Repairs
- Property taxes
- Insurance
- Landscaping
- Snow removal
Net leases are very appealing to landlords because landlords can split the property's costs with the tenant. Tenants may also benefit from net leases because typically rent payments are lower due to the additional costs associated with the lease.
There are four different types of net lease:
- Single net lease
- Double net lease
- Triple net lease
- Modified net lease
Triple net leases are the most common type of net lease, and often if you hear the term "net lease," it refers to a triple net lease.
Net leases are negotiable, and it is crucial to ensure that all aspects of the agreement are documented in a detailed lease agreement . Tenants can include caps on their net lease agreement that set a maximum amount they are responsible for paying.
Click here for more information about net leases.
Difference Between Gross Lease and Net Lease
A gross lease, sometimes called a "full-service lease," is the opposite of a net lease and is most commonly found in residential real estate or when a single building shares multiple tenants. In a gross lease, tenants are only responsible for a set rent payment, and then the property owner is responsible for all additional fees and expenses. Some gross leases will stipulate that the tenant is required to pay utilities; however, the landlord almost always covers the following costs:
- Property taxes
- Insurance
- Maintenance
- Repairs
When operating under a gross lease, landlords tend to charge more for rent than a net lease because the landlord is taking on all responsibilities for additional expenses.
Gross leases are appealing for tenants because they have the simplicity and consistency of a set rent payment every month. In addition, the tenant isn't responsible for any property maintenance or repairs.
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Types of Net Leases
There are four types of net leases. It is common to see all of them used in commercial real estate; however, a triple net lease is the most common.
Single Net Lease
A single net lease, also called an N Lease, requires that the tenant pay rent and property taxes. This is the net lease with the least amount of risk for the tenant because the taxes are paid through the landlord, who ensures that the tax payments are made on time.
Double Net Lease
In a double net lease, or an NN lease, the tenant pays rent, property taxes, and insurance on the property. The landlord is responsible for all maintenance and repairs on the property. Like in a single net lease agreement, taxes and insurance are usually paid directly to the landlord, ensuring that the payments go to the correct places on time.
Triple Net Lease
When operating under a triple net lease, or an NNN, the tenant pays rent, property taxes, insurance, and additional expenses. This lease provides landlords with the least amount of responsibility for the property. Generally, the base rent will be considerably less in this type of lease because the tenant has to pay for all additional expenses associated with the property.
Modified Net Lease
A modified net lease falls somewhere between a triple net lease and a gross lease. This type of lease has special conditions in which the terms are negotiated to suit the needs of both the landlord and the tenant.
Net Lease Examples
Two examples of net leases can include single-tenant net leases and multi-tenant net leases. Both of these lease agreement examples provide the landlord and tenant with unique benefits.
Single-Tenant Net Lease Example
A single tenant net lease is often a triple net lease and is abbreviated to "STNL" or "NNN." In this lease agreement, the entire property is leased to only one lessee, and the lessee is solely responsible for all property expenses . In this situation, the landlord has little to no responsibility regarding the property.
This type of lease is often seen in real estate investments where the owner doesn't actively manage the property. A benefit of this type of lease is that they are often long-term leases with terms of 10 or more years.
Single-tenant net leases are most often seen utilized for the following property types:
- Fast food restaurants
- Office space leases
- Convenience stores
- Gas stations
- Big box stores
- Banks
- Warehouses
- Retail stores
Multi-Tenant Net Lease Example
Multi-tenant net leases are usually double net lease agreements and are used when one building has more than one tenant. Each tenant will have their own net lease agreement with the landlord in which the tenant pays rent, property taxes, and insurance.
Examples of properties that commonly have multi-tenant net leases include:
- Retail strip malls
- Shopping malls
- Apartment complexes
- Healthcare centers
- Office buildings
Landlords generally see higher yields from a multi-tenant property; however, more work is involved because the landlord has to manage several leases and is still usually responsible for maintenance and repair costs for the property.
Multi-tenant lease agreements tend to be for shorter durations than single-tenant agreements, and it is rare to see a multi-tenant lease agreement longer than seven years.
For more information about commercial real estate, click here .
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When To Use a Net Lease
Net leases are most commonly used by real estate investors who want to buy properties and reap the financial benefits of real estate ownership without the work of maintaining a property. For this reason, a landlord doesn't mind accepting a lower rent payment because they don't have the headache of property management.
Essentially, property owners use net leases to shift the burden and responsibility of taxes, insurance, maintenance, and repairs to the tenant. In return, the tenant pays a reduced rental rate and usually benefits from a long-term lease.
Read this article for more information about when to use a net lease.
What is Included in a Net Lease
Net lease agreements can be negotiated, so both the landlord and the tenant are accommodated. It is essential to ensure that the net lease agreement details all negotiations and clearly documents who is responsible for what expenses.
Lease agreements will vary depending on the landlord, tenant, and property type; however, most leases include the following essential terms:
- Agreement Date. Date the agreement is made
- Names and contact information for the landlord and the tenant
- The physical address of the property to be leased
- Property Description. A description of the property, including square footage
- Property Use. A description of what the tenant's use of the property will be
- Lease Term. When the lease will begin, end, and renewal options
- Rent Payments. Amount and frequency the tenant will pay rent including what constitutes late rent and amount of late fee if any
- Rent Increases. Information about rent increases
- Security Deposit. Security deposit requirements
- Insurance coverage the tenant is required to maintain
Because this document is so important and must be written correctly, many landlords consult with a real estate lawyer to ensure the lease agreement includes all necessary terms.
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