A net lease is a type of real estate lease where the tenant not only pays for the rent of the property but also part or all of the property expenses which would typically be paid by the property owner (the landlord). These expenses can include property taxes, insurance, maintenance, repairs, utilities, and other related costs.
There are three main types of net leases:
- Single Net Lease (N Lease): In this lease, the tenant pays rent and property taxes.
- Double Net Lease (NN Lease): In this lease, the tenant pays rent, property taxes, and insurance.
- Triple Net Lease (NNN Lease): In this lease, the tenant pays rent, property taxes, insurance, and maintenance costs. This is the most common type of net lease for commercial and retail properties.
The specific obligations for each party will be spelled out in the lease agreement. Net leases are commonly used in commercial real estate. They can benefit landlords as they pass on many of the costs of property ownership to the tenant. For tenants, while their costs might be higher, they usually benefit from lower base rent in a net lease agreement compared to a gross lease agreement (where the tenant pays a flat fee and the landlord pays the property expenses).
Example of a Net Lease
Let’s consider a commercial real estate scenario involving a triple net lease (NNN Lease), which is a common type of net lease.
Imagine you are the owner of a small strip mall and you lease one of the spaces to a coffee shop. In a triple net lease agreement, the coffee shop owner (the tenant) would be responsible for paying not only the base rent for their particular space, but also their proportional share of the property taxes, insurance, and maintenance costs for the entire mall.
Let’s say the details of the costs are as follows:
- Base Rent: $3,000 per month
- Property Taxes: $1,000 per month
- Insurance: $500 per month
- Maintenance: $500 per month
In a triple net lease scenario, the coffee shop owner would be responsible for all of these costs, making their total monthly payment $5,000 ($3,000 + $1,000 + $500 + $500).
Keep in mind that the exact details can vary depending on the specific lease agreement. For example, the proportional share of property taxes, insurance, and maintenance costs could be divided among multiple tenants in the case of a strip mall or a multi-tenant office building.
As always, it’s important for all parties to clearly understand their responsibilities before entering into a lease agreement. The specific terms should be clearly defined in the contract.