Net Lease

A net lease is a commercial lease agreement where the tenant pays base rent and some or all property-related expenses, such as taxes and maintenance. It benefits both landlords and tenants. Tenants have more control over operational expenses and are frequently responsible for property maintenance, while landlords benefit from consistent rental income and fewer property management duties. Let us learn more about net lease in the blog below.

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.

Considerations for a Net Lease

The following are the factors to keep in mind for a net lease:

• Maintenance and Repairs: By asking this question, determine who is in charge of property maintenance and repairs. Tenants frequently handle maintenance and repairs in triple-net leases. Therefore, it's vital to create clear expectations for these duties.
• Rent Structure: Recognise the rent structure, including the base rate sum and any escalations or rent increases during the leasing duration. Ensure one can pay the rent and that it is reasonable for the market.
• Lease Term: Determine the lease term's length, considering any potential extensions. When choosing the lease period, consider the long-term business ambitions and the consistency of the income.
• Rent Escalations: Recognise how rent increases are determined and when they occur. Fixed increments, percentage increases, and adjustments based on the Consumer Price Index (CPI) are normal tactics.
• Maintenance and Repairs: It is essential to decide the property renovation and maintenance price by asking this query. Tenants frequently handle maintenance and repairs in triple-net leases. Therefore, it's necessary to create clear expectations for these duties.

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.

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.

Inclusions 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.

Benefits of Engaging a Lawyer for a Net Lease

A net lease is a commercial real estate lease that can benefit from seeking legal counsel in several ways. Net leases are intricate legal contracts that need considerable thought and discussion to safeguard the interests of both landlords and tenants. Here are some major advantages of hiring a lawyer for the net lease:

• Legal Knowledge: Attorneys are qualified and skilled in analyzing and creating contracts, especially business leases. They may guarantee the leasing agreement complies with all applicable rules and legislation.
• Support During Negotiations: An attorney can advocate for the rights during lease talks, assisting in obtaining favorable terms and circumstances. They can also advise an individual on what conditions are typical in the sector and whether any concessions are possible.
• Risk Assessment: Lawyers can help to comprehend the potential legal ramifications of specific conditions and assess the risks involved with the lease. This includes recognizing potential risks and offering solutions to reduce them.
• Customization: A lawyer can modify the contract to suit the needs and goals since each commercial lease differs. They can create specific phrases and provisions that safeguard the interests.
• Clarity and Understanding: To ensure that you completely comprehend the rights and obligations under the lease, lawyers can explain any confusing legal jargon in the lease agreement.
• Due Diligence: To confirm property titles, zoning laws, and other legal requirements, the lawyer can perform due diligence. By doing this, one can make sure that the lease you sign has a solid legal foundation.
• Tax Law Compliance: Certain property-related expenses are frequently shared in net leases. Lawyers can offer guidance on the tax ramifications of these agreements and assist in structuring them to minimize taxes.
• Resolution of Disputes: If there is a disagreement between the landlord and the tenant, a lawyer can defend the interests and assist in settlement negotiations. They can also help one navigate the relevant legal procedures.

Final Thoughts on Net Leases

In commercial real estate, net leases are essential for businesses' survival and expansion and landlords' capacity to hold onto lucrative assets. Stakeholders can successfully negotiate this leasing structure and accomplish their long-term goals in the dynamic world of commercial property management and tenancy with a complete understanding of the subtleties of net leases.

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