Net lease refers to a contractual agreement where a lessee pays a portion or all of the taxes, insurance fees and maintenance costs for a property in addition to rent. Net leases are most commonly used with commercial real estate. In the purest form of a net lease, the tenant is expected to pay for all the costs related to a property as if the tenant were the actual owner.
Breaking Down a Net Lease
Net leases are a popular tool for commercial real estate investors who are buying properties for the income and do not want the headaches of arranging maintenance, paying municipal taxes, and so on. Property owners use net leases to shift the burden of managing taxes, insurance, and fees to the tenant. Although the owner/lessor may charge less overall as a result, they no longer have to worry about the day-to-day administration of that property.
Types of Net Leases
The definition of what constitutes a net lease is quite broad and far from uniform across the country. Instead, net leases are broken down into three primary types that deal with the main cost categories of taxes, maintenance, and insurance fees:
- Single (net): tenant pays one of the three expense categories.
- Double (net-net): tenant pays two of the three expense categories.
- Triple (net-net-net): tenant pays all three expense categories. Triple net leases are usually whole building leases with a single tenant for the long term (10 years or more).
Even with the breakdowns above, the actual definition of a net lease is dependent on the details in each contract. In theory, net leases are the opposite of gross leases, where the landlord covers all of the expense categories in exchange for a fixed payment. In practice, a modified gross lease and a single or double net lease can be the same thing. A modified gross lease might have the tenant paying building insurance costs, for example, and could easily be classified as a single net lease. Again, the details of the lease matter more than whether the lessor considers it a net or gross lease.
Net Lease from the Tenant's Perspective
From the tenant/lessee perspective, a net lease must adequately compensate for the risk the tenant is taking on from the landlord. Stated another way, the difference between a gross lease and a net lease, dollar-wise, must be big enough to offset the unpredictable costs of maintenance and the potentially rising costs of taxes and insurance. The landlord gives up some money in rent to save headaches, and the tenant takes the discount knowing that year-to-year property costs may vary.