Net lease
Encyclopedia
In commercial real estate, a net lease requires the tenant
to pay, in addition to rent
, some or all of the property expenses which normally would be paid by the property owner (known as the "landlord" or "lessor"). These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities and other items.
The precise items that are to be paid by the tenant are usually specified in a written lease
. For properties that are leased by more than one tenant, such as a shopping center, the expenses that are "passed through" to the tenants are usually prorated among the tenants based on the size (square footage) of the area occupied by each tenant. The term "net Lease" is distinguished from the term "gross lease
". In a net lease, the property owner receives the rent "net" after the expenses that are to be passed through to tenants are paid. In a gross lease, the tenant pays a gross amount of rent, which the landlord can use to pay expenses or in any other way as the landlord sees fit.
es as well as the base rent. Double- and triple-net lease
s are more common forms of net leases because all or the majority of the expense
s are passed on to the tenant.
This form of lease is most frequently used for commercial freestanding buildings however, it has also been used in single family residential rental real estate properties.
s permissible. The concept is to make the rent absolutely net under all circumstances, equivalent to the obligations of a bond
: hence the "hell-or-high water" moniker. An example of this type of lease would be a leaseback
arrangement in which a retailer leases back the building it formerly owned and continues to run the store.
Bondable leases are typically used in so-called "credit tenant lease" deals, where the main driver of value is not so much the real estate, but the uninterrupted cash flow from the usually investment-grade rated "credit" tenant.
s afforded to the investor through the use of leverage or gearing. The resulting property is then sold after a period of equity-building, usually five years - the typical commercial mortgage term.
Leasehold estate
A leasehold estate is an ownership of a temporary right to land or property in which a lessee or a tenant holds rights of real property by some form of title from a lessor or landlord....
to pay, in addition to rent
Renting
Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
, some or all of the property expenses which normally would be paid by the property owner (known as the "landlord" or "lessor"). These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities and other items.
The precise items that are to be paid by the tenant are usually specified in a written lease
Lease
A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
. For properties that are leased by more than one tenant, such as a shopping center, the expenses that are "passed through" to the tenants are usually prorated among the tenants based on the size (square footage) of the area occupied by each tenant. The term "net Lease" is distinguished from the term "gross lease
Gross lease
In a gross lease, the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership. Most apartment leases are gross leases.-References:...
". In a net lease, the property owner receives the rent "net" after the expenses that are to be passed through to tenants are paid. In a gross lease, the tenant pays a gross amount of rent, which the landlord can use to pay expenses or in any other way as the landlord sees fit.
Types of net leases
There are standard names in the commercial real estate industry for different sets of costs passed on to the tenant in a net lease.Single net lease
In a single net lease (sometimes shortened to Net or N), the lessee or tenant is responsible for paying property taxProperty tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
es as well as the base rent. Double- and triple-net lease
Lease
A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
s are more common forms of net leases because all or the majority of the expense
Expense
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...
s are passed on to the tenant.
Double net lease
In a double net lease (Net-Net or NN) the lessee or tenant is responsible for property tax and building insurance. The lessor or landlord is responsible for any expenses incurred for structural repairs and common area maintenance. "Roof and structure" is sometimes calculated as a reserve, the most common amount is equal to $0.15 per square foot.Triple net lease
A triple net lease (Net-Net-Net or NNN) is a lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three 'Nets') on the property in addition to any normal fees that are expected under the agreement (rent, premises utilities, etc.). In such a lease, the tenant or lessee is responsible for all costs associated with the repair and maintenance of any common area.This form of lease is most frequently used for commercial freestanding buildings however, it has also been used in single family residential rental real estate properties.
Bondable lease
A bondable lease (also called an "absolute triple net lease", "true triple net lease", or a "hell-or-high-water lease") is the most extreme variation of a triple net lease, where the tenant carries every imaginable real estate risk related to the property. Notably, these additional risks include the obligations to rebuild after a casualty, regardless of the adequacy of insurance proceeds, and to pay rent after partial or full condemnation. These leases are not terminable by the tenant, nor are rent abatementAbatement
Abatement may refer to:*Abatement of debts and legacies, a common law doctrine of wills*Abatement in pleading, a legal defense to civil and criminal actions based purely on procedural and technical issues involving the death of parties...
s permissible. The concept is to make the rent absolutely net under all circumstances, equivalent to the obligations of a bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
: hence the "hell-or-high water" moniker. An example of this type of lease would be a leaseback
Leaseback
Leaseback, short for sale-and-leaseback, is a financial transaction, where one sells an asset and leases it back for the long-term; therefore, one continues to be able to use the asset but no longer owns it...
arrangement in which a retailer leases back the building it formerly owned and continues to run the store.
Bondable leases are typically used in so-called "credit tenant lease" deals, where the main driver of value is not so much the real estate, but the uninterrupted cash flow from the usually investment-grade rated "credit" tenant.
Economics
Typically, triple net leases (NNN) are 'equity investments', rather than 'cash flow investments'. For example, the investor will finance a significant portion of the purchase price on a property and pay the resulting mortgage with the lessee's monthly owed rent. There is usually a small amount left over as monthly profit for the investor (positive cash flow), but the greater investment payoff comes from the tax shieldTax shield
A tax shield is the reduction in income taxes that results from taking an allowable deduction from taxable income. For example, because interest on debt is a tax-deductible expense, taking on debt creates a tax shield...
s afforded to the investor through the use of leverage or gearing. The resulting property is then sold after a period of equity-building, usually five years - the typical commercial mortgage term.