Net leases generally are for single-tenant properties. They are often associated with office buildings, warehouses, and retail spaces. Retail properties probably utilize net leases more than any other category. These include fast food restaurants, convenience stores, gas stations, and big box stores.
For landlords, net leases are low maintenance with high-profit margins. Let's look at what a net lease is in more detail, along with an example.
What Is A Net Lease?
A net lease is also called a triple net lease or NNN. The three N's outline the tenet's primary responsibilities. These include paying insurance, property taxes, and property maintenance or operating expenses. These expenses are in addition to the rent.
Net leases are used with commercial properties such as retail spaces, office buildings, warehouses, and other industrial buildings. These types of leases are preferred by landlords who don't want property management responsibilities. A net lease also shifts much of the financial responsibility for the property onto the tenant while still providing predictable rental income.
The exact tenant responsibilities are outlined in the lease agreement. Except for the three expenses mentioned above, there isn’t a specific requirement to meet net lease qualifications, as the lease agreements can vary from property to property. Net leases can range from 10 to 25 years.
Net Lease Example
Let's say an investor owns a commercial building he leases to a clothing retailer. Under a triple net lease, the tenant pays property taxes, insurance, and maintenance costs, plus their monthly rent payment. Property taxes on the building are $1,000 per month, insurance premiums are $500 per month, and maintenance costs are $500 per month for a total of $2,000. Additionally, the rent is $2,000 per month. The tenant's total monthly cost is $4,000.
Benefits to the tenant with this type of lease are control over expenses and flexibility to customize the property to fit their needs.
Triple net lease agreements can be complex to set up. It’s best to work with a real estate attorney when creating a NNN lease.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Hypothetical examples shown are for illustrative purposes only.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Programs that depend on tenants for their revenue may suffer adverse consequences because of any financial difficulties, bankruptcy or insolvency of their tenants.
