Net leases have become a staple in real estate for one reason alone: they are often a necessity for startups. After all, most business operations need to choose whether they will lease or buy a space.
Those who opt for the former will often choose a commercial building, which brings them one step closer to net lease real estate. Although commercial buildings include their fair share of pros and cons, they also serve as an introduction to lease agreements, of which there are too many to count. Net leases, for example, are one of the more common types of commercial leases that startups come across, but even among them, there are many variations.
The purpose of this article is to give you, the reader, a more detailed look into how net leased property has shaped real estate investing in addition to the benefits and drawbacks that come with it. So, what exactly is a net lease in real estate, and why should you care?
- Each net lease comes with a specific set of benefits and drawbacks.
- The types of net leases differ based on the number of additional expenses paid.
- Both the landowner and the tenant can benefit from a proper net lease.
- Understanding the difference between the types of net leases is crucial for many businesses.
What’s in a net leased property?
Net leases and net leased property imply that the tenant will pay for more than just the space. Often, the tenant is contracted to pay for maintenance, property taxes, and utilities. This is part of why net lease investing is becoming popular, as the investor can potentially reduce plenty of costs. At its core, that is what a net lease in real estate means. However, there is more to it.
In fact, net lease real estate comes in many shapes. Net leases are contracts that remain malleable until signed. Therefore, a net leased property can include various additional expenses based on the contract form, which may even include things such as insurance and repairs. As a future tenant, it would be best to choose a net lease that fits your needs and the needs of your business. After all, startup businesses specifically need to cut down on as many costs as possible.
As a result, knowing the pros and cons of different net leases is a requirement. At least if you are planning on running a successful business. But before that, you should be familiar with the most common types of net leases in real estate.
Net lease types in real estate
The net leases are influenced by whether the tenant pays a part or all of the expenses. As mentioned, the payment can include maintenance, taxes, utilities, and other costs of owning a property. In short, there are four general types of net leases that you can expect as a tenant:
- Single net lease
- Double net lease
- Triple net lease
- Modified net lease
Single net lease
The single net lease, by definition, is a type of lease where the tenant is required to pay property taxes in addition to the fixed rent fee. This type of net lease is considered the most risk-free lease for the tenant, as the property taxes are paid directly through the landlord. The process allows the landlord to ensure that the payment is enough to cover the costs on time.
Tenants should keep in mind that property taxes can increase over time. However, these increases are often negligible and would not impact the majority of business tenants. Unlike double and triple net leases, the single net lease allows businesses to plan their budget ahead of time because tax-related expenses rarely vary. In some cases, the overall rent of single net leased properties is lower than the fixed rent fee because of added costs.
Double net lease
The term double net lease answers the question of what a net lease in real estate is. After all, the double net lease is the most common commercial real estate lease type. Tenants who opt for a double net lease pay taxes and insurance. Similar to the single net lease, the fixed rent fee is often lower when under a double net lease.
Since the tenant does not pay for maintenance, businesses can still have an accurate budget plan. The double net lease remains a valuable tool for net lease investing because it adds an extra layer of security for the landlord, who no longer has to worry about timely payments.
Triple net lease
The triple net lease has the tenant pay a considerably lower fixed rent fee while covering all other costs. Such costs, for example, often include taxes, insurance, and maintenance. The triple net lease is not common in commercial real estate because while the fixed rent fee may be low, the tenant can end up with plenty of additional costs.
The triple net lease in real estate allows the landlord to have a lot less responsibility and freedom, but then again, very few tenants look for triple net lease commercial real estate. After all, fewer businesses are looking to spend more money on additional costs than they would have under a gross lease.
And what if the tenant does not want to pay any additional fees? That type of lease is called a gross lease. Gross leases, unlike net leases, would allow the tenant to use the property by only paying the flat rental amount. Therefore, all additional expenses fall on the landlord, and the tenant is free of any additional charges.
In addition to gross leases, tenants can opt for a modified net lease, which would allow them to follow a specific set of terms that they have agreed upon with the landlord.
Net lease – pros and cons
At this point, you are more than aware that businesses can argue for a better net lease. Moreover, you have a general idea of the expenses that each net lease involves. Still, there are a set of benefits and drawbacks that might not be evident for those who are new to neat leases in real estate, and they are:
As we mentioned, fixed rent fees for net leases are often significantly lower than those of a gross lease. The main reason is that the tenant pays for additional costs, such as taxes and insurance. Consequently, the landlord can lower the fixed rate to compensate for those costs.
You own the property for the duration of your lease. Yet, many landlords tend not to include tenants in matters such as maintenance. However, if you are paying for said maintenance, you have a greater degree of control regarding how that maintenance is done. As a result, you can decide what type of maintenance your property needs since you pay all related costs.
In reality, even fixed rent fees can change. Despite that, when you are paying for additional expenses, planning your business budget becomes exponentially more difficult. Some net lease expenses, such as insurance, can increase over time. There might even be a period when more maintenance is required.
Each additional expense you are paying comes with a set of challenges. Maintenance work, for example, means that you might need to oversee the contractors you have hired. More often than not, the landlord will not be willing to delegate any additional work done on the property.
For the time being, you understand why net leases have become a staple in real estate. Ultimately, they can offer many benefits to both tenants and landlords. It is worth mentioning that startup businesses should have a stable budget that plans for potential expenses from a net leased property.
While net leases come in many shapes, some are naturally more favorable than others. If you are looking to rent a commercial building for your business, you cannot avoid net leases, which is why it is better to know how they work.