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.
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.
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.