What are the Major Components of a Net Lease?

In commercial real estate landlords sometimes choose to use a net lease, which requires tenants to pay expenses beyond their rent to contribute to the property's operational costs. The components of a net lease can include base rent, property taxes, insurance, and maintenance costs.

Commercial property landlords use net leases when they want to pass some of the risk onto the tenant. In most cases, the base rent is lower than in a gross lease where the tenant only pays rent. 

Types of Net Leases 

The type of net lease determines the extra costs the tenant pays besides rent. A gross lease is the most common type of commercial lease where the tenant pays rent, but the landlord is responsible for the other operating costs. A net lease is a contract where the tenant pays additional operational expenses. There are three types of net leases:

Single Net Lease 

With a single net lease the tenant pays property taxes in addition to rent. This is a less common type of net lease. The landlord still covers insurance and any maintenance and upkeep of the property. It lessens some financial burden for the landlord, but still isn’t as beneficial as a net lease that requires the tenant to pay more than just rent and property taxes in a double-net or triple-net lease.

In some cases, a single-net lease is a pass-through lease, where the tenant pays the property taxes directly to the local government. However, to ensure the payment isn’t late, a lessor can also require the payment to be made directly to themselves, and they pay the tax. If it is a multi-tenant property, the property tax amount is calculated pro-rata for the tenants. 

Double Net Lease 

Double net leases require the lessee to pay base rent, property taxes, and insurance. In a multi-tenant building, the property taxes and insurance premiums are calculated pro-rata and each tenant pays its share. A landlord might offer a double net lease to attract more tenants, who might be wary of a triple net lease. 

Triple Net Lease 

A triple net lease, where the lessee pays rent plus taxes, insurance premiums, and all property maintenance, is the highest risk for the tenant. The lease is usually a minimum of 10 years, and sometimes as long as 25 years. The lessee is responsible for all costs associated with the property, except for structural problems. 

If all property costs are left up to the tenant, a landlord can use an absolute triple net lease where the tenant is responsible for all property costs, including structural issues. 

Landlords typically do a thorough credit check, because there is a risk if the tenant isn’t credit worthy. For instance, if there are property issues that the tenant fails to repair over the term of the lease, the landlord can end up with major expenses at the end of the lease. 

Net leases are a type of commercial lease agreement that offers benefits to both landlords and tenants. Landlords enjoy stable rental income and reduced expenses, while tenants benefit from the lower base rent and control over their property's operating costs. However, there are also potential drawbacks to net leases, and it is important to understand the terms of the lease and to consult with legal and financial professionals to ensure the agreement aligns with your business structure. Overall, net leases can be a valuable tool for investors and business owners selling a long-term commercial real estate investment.