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What Is a Net Lease in Commercial Real Estate?

One of the first decisions when starting a business is choosing between leasing and buying a space. If you’re considering a lease space in a commercial building, you’ll encounter many types of lease agreements as you start to narrow down your choices. One of the most common types of commercial leases is a net lease, and the details of a net lease vary according to the landlord’s preferences.

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Basics of net leases

What is a net lease? By definition, a net lease is a commercial real estate lease where the tenant pays for their rental space plus one or more additional expenses. These expenses are related to the operation, maintenance and usage of the property that a landlord would typically pay. Some examples of additional expenses include property taxes, insurance premiums, landscaping services, snow removal, utilities, repairs and other costs related to owning a property.

Pros and cones of a net lease

It’s essential to understand the details of a net lease before agreeing to it. Looking at the pros and cons of the arrangement can help you decide if it’s right for you.

Pros of a net lease

Potential pros of choosing a commercial property with a net lease include:

  • Lower payments: This option usually results in lower monthly payments than you would pay with a gross lease, where you pay one rent payment to cover everything. Landlords sometimes decrease the rent on a net lease, since you’re assuming some of the responsibility for them. A gross lease is typically higher to ensure the landlord has enough money to cover the expenses.
  • Pay actual amounts: A related benefit is only paying the actual amounts for things. For instance, in a gross lease, the landlord might charge a larger amount to cover utilities than you actually spend. When you’re paying the utility bills, you only pay for the amount you use.
  • Prime locations: Being willing to consider all types of net lease terms gives you more options for prime commercial spaces. If you limit yourself to spaces with gross leases, you might miss out on the ideal spot for your business. Highly sought-after commercial spaces often require net leases.
  • More control: Even though you don’t own the property, you typically have more control over things like maintenance and repairs if you’re paying for them. You can choose the contractors you use and decide how they do the work.

Cons of a net lease

Some drawbacks of the arrangement include:

  • No ownership: The agreement requires you to take on much of the responsibility for the property like an owner, but you don’t actually own it.
  • Fluctuating costs: Since you’re paying part or all of the actual expenses, your monthly payments can fluctuate. Insurance rates and taxes can increase periodically. You might face a sudden, major maintenance issue that you have to pay for. This can make it difficult to budget for your overhead expenses.
  • More work: Since you’re paying for the extra expenses on top of your rent, you have to ensure they’re paid on time and handle all the documentation that comes with paying those business expenses. You might also have to coordinate things like lawn care services and snow removal directly with those companies, instead of letting the landlord handle it.

Types of net leases

Depending on the type of net lease, the tenant might pay only a portion or all of the specific expenses listed. Here are the four main types of net leases:

  1. Single net lease
  2. Double net lease
  3. Triple net lease
  4. Modified net lease

1. Single net lease

Also known as net or N leases, the single net lease definition requires the tenant to pay property taxes in addition to rent. This type of lease involves the least amount of risk for the tenant, who pays property taxes through the landlord. This way, the landlord can verify that tax payments are accurate and timely. While the property taxes can increase, it’s usually a small jump and only when property taxes are reassessed. This gives you a fairly consistent monthly expense and time to adjust your business budget if it’s going up. Tenants with this arrangement typically pay a lower rent than a standard lease due to the added costs.

2. Double net lease

In this type of lease (commonly known as net-net or NN), the tenant pays for the property taxes and insurance premiums. They’re the most common type of lease in commercial real estate. The rental fee is lower due to the higher associated costs. Landlords are responsible for any maintenance fees related to the property, so your monthly payments should be fairly consistent. Insurance premiums and property taxes can increase, but it shouldn’t be a major increase. Similar to the single net lease, the double net lease typically requires you to pay the property taxes and insurance premiums directly to the landlord, so they can verify payment and distribute funds to the appropriate places.

3. Triple net lease

Also known as a net-net-net lease, an NNN agreement or triple net lease means the tenant pays rent and all additional expenses. A triple net lease example is a tenant who pays for the taxes, insurance premiums and maintenance for the property. Landlords have the least amount of responsibility in these agreements because, in addition to the rent, tenants are paying for most other costs of operating the building. Base rent is less for this reason. Tenants who find that they’re paying higher than expected maintenance costs often try to terminate the contract. Landlords often set up bondable net leases for this reason, which cannot be modified until the contract expires.

4. Modified net lease

Any net lease that has special conditions is considered to be a modified net lease. It’s the hybrid of a traditional (gross) lease and a triple net lease. Modified leases are most common in the retail or industrial sectors or for other properties with multiple tenants. Tenants looking to avoid the costly obligations of a triple net lease often create special terms with their landlords that satisfy both of their needs. For example, they may choose to share costs related to the operation and maintenance of the business.

Crucial tips to know

Leasing a building space provides many opportunities for businesses to make money. There are a few things you should know about net leases before getting into a contract. The most important thing to remember is that you should always take steps to ensure you fully understand the details of a contract and what you’re responsible for. Here are some of the most crucial tips to know when it comes to commercial net leases:

  • Net leases appeal to landlords because they can split the costs associated with the lease while still owning the property.
  • Net leases are negotiable. If you find a commercial property that works for you but you don’t love the net lease terms, you can work with the landlord to find a mutually beneficial agreement.
  • Tenants should ensure the details of their net leases include caps that set a maximum amount on what they’re liable for beyond rent payments. This mitigates some of the financial risks of a net lease.
  • Your rent payment in a net lease should cost less than a standard lease agreement after additional costs are applied.
  • Landlords often use bondable net leases, so tenants can’t alter the triple net commercial lease when expenses increase.
  • A gross lease may appeal more to tenants looking for a flat rental rate.

Just like any business deal, leases involve a series of negotiations that benefit both parties. Consult with your lawyer or business advisor if you’re unsure how to handle the lease negotiations.

Net lease FAQs

The details of a net lease depend on many variables, including the location, cost and needs of the landlord and tenant. Here are some of the most frequently asked questions about net leases:

  • How do net leases differ from a gross lease?
  • How do I know if a net lease is right for me?
  • Do I need a down payment on a triple net lease?
  • How long are triple net lease contracts?

How do net leases differ from a gross lease?

In general, rent is typically lower with a net lease than a traditional or gross lease. A gross lease is the most common type of lease in residential real estate, but it also applies to the commercial sector in some cases. In a gross lease agreement, tenants pay a set amount of rent to the property owner, who is responsible for paying all fees associated with the property. However, gross leases can be similar to net leases when they get modified. For instance, the details of a gross lease may include rent, plus utilities or insurance.

How do I know if a net lease is right for me?

The best way to determine if a net lease is right for you is to consult with other business owners or your accountant. Do some research to learn more about negotiating a lease and how the different types of net leases may benefit your business. Because property taxes tend to increase over time, tenants should plan for an increase in rent. That’s why it’s important to understand the specifics of a contract.

Do I need a down payment on a triple net lease?

To finance a NNN property, you must have a down payment of at least 30%.

How long are triple net lease contracts?

The majority of triple net leases have a 10- to 15-year term and often include concessions for rent increases. While this is a long-term commitment, it also gives you stability and reduces the risk of having to move your business if the landlord majorly raises the rent or decides not to renew the lease.

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