When you think of a net lease, you should consider them in relation to investors, landlords, and tenants. That can be in a residential property but the term tends to be used in commercial real estate. But what is a net lease?
The main takeaway here for a tenant is that a net lease gives the impression of owning a piece of property though does not come with a legal title applied over it. In this effect, the net lease will be an agreement between the tenant and landlord.
The net lease has a specific arrangement for the various costs associated with the property such as taxes, bills, and maintenance which could lead to a lower rental payment.
In this guide, we will look at what a net lease is, the difference between a net lease and a gross lease, and why a net lease is so popular in commercial real estate.
We will also look at what a net lease means for the tenant of a property and why a net lease should be considered.
What Is A Net Lease?
When you see the term ‘net lease’, you should be dealing with commercial real estate. Net lease will refer to a certain contractual agreement, this is where a tenant will pay for a portion of the fees that apply to a property or all of them altogether.
These fees will typically include the insurance fees, bills, taxes, as well as the maintenance costs on top of the rest for a property.
In the most authentic form of the term, a net lease will mean that the tenant will be expected to pay every single cost that relates to a property as if they were the owner.
The Difference Between A Net Lease And A Gross Lease
If you are considering leasing a commercial property then it is important to check what type of lease is on offer. The net lease will include the added costs that go into maintaining and insuring the property.
A key difference between a net lease and a gross lease will be that they are strictly opposites. A gross lease is where a tenant will pay one flat rental fee while the landlord will be responsible for the rest of the costs.
Why A Net Lease Is Popular In Commercial Real Estate?
An investor in commercial real estate should consider a net lease arrangement as they are understandably popular.
This is because an investor can purchase a property for the income it generates after being leased yet with a net lease they forgo the maintenance and other associated costs that come with it.
That could mean enjoying the income from the rent without the worry and hassle of maintaining the property, managing the taxes, and any fees as those are dealt with by the tenant.
The net lease may lead to a lower rental charge being applied yet that could be worth it considering that the stress of that day-to-day looking after of the property is removed.
What A Net Lease Means For The Tenant Of A Property?
If a tenant is going to go for a net lease, they have to be prepared to look after a property as if they owned it. Sure, the regular rent payments may be reduced but that does come with a lot of added responsibilities and costs.
Put simply, the difference in cost between a gross and a net lease should be substantial enough to cover the estimated maintenance costs which can be unpredictable.
However, the cost of taxes and insurance can be more easily factored in though the associated property costs may differ year-on-year.
Why A Net Lease Property Should Be Considered?
A property with a net lease should have some flexibility with the payments so can be an ideal option to have in an investor or institution’s portfolio.
Those investors can also benefit from a relatively predictable, stable real estate investment, especially when tenants are obliged to commit to a long-term net lease.
Even if the rent payments are lower, they still represent a steady and frequent form of income which can be attractive to investors.
For a landlord, a net lease can signal little responsibility and a lower risk as the costs and maintenance are both dealt with by the tenant.
As an investor or landlord, it is important to consider the credibility and creditworthiness of a potential tenant if you do want a net lease to succeed.
Take the time to go over the tenant’s credit history, credit rating, financial history, and any bond issues before allowing them to take the net lease.
There could be a higher risk once you see a tenant’s non-investment grade profile yet as long as they stick to the net lease, there should be a good return.
Should the tenant decide to vacate the property then an investor or landlord should consider how easy it is to lease a property again.
Frequently Asked Questions
What Are The Different Types Of Net Leases?
There are typically three different types of net leases that you may come across. Each one relates to the associated costs of maintaining a property and there are three to consider.
Those are insurance fees, maintenance fees, and taxes. For instance, a single net lease will involve paying one of those three costs. A double net lease (also known as a net-net lease) will mean a tenant pays two of the three costs.
Then there is the triple net lease (a net-net-net lease) will involve the tenant paying all three of those costs.
This final type of net lease is typically for a whole building and applies to a single tenant who intends on leasing the building for the long-term such as a decade or longer.
Who Should Consider Investing In A Net Lease Property?
A property with a net lease should be appealing to a range of buyers including partnerships, pension funds, life insurance companies, high worth individuals, and large institutional investors.
A net lease can provide a steady stream of income with the comfort that the maintenance and associated costs of a property is taken care of by the tenant.
Paul Martinez is the founder of BendingDestiny.com. He is an expert in the areas of finance, real estate, and eCommerce.
Join him on BendingDestiny.com to learn how to improve your financial life and excel in these areas. Before starting this blog, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.