What is a Net Lease? Defining Real Estate Investment Terms.
A net lease agreement between the landlord and the tenant in which the tenant agrees pay rent, in addition to, any additional cost associated with the property covered on the lease.
- Net Leases are most common in Commercial Real Estate.
- In a Net lease the Landlord pays no property expenses as opposed to in a Gross lease when the landlord pays all property expenses.
Types of Net Leases
Single Net, Double Net, and Triple Net Leases
- Single Net Lease: The least common net lease agreement. In addition to paying rent the tenant agrees to pay for property taxes as well
- Double Net Lease: In addition to rent, the tenant is responsible for paying for property taxes and building insurance. The landlord is then responsible for building maintenance
- Triple Net Lease: The most common net lease, Triple net leases require the tenant to pay for property taxes, building insurance and building maintenance fees associate with the property. In a triple net lease, the Landlord has very minimal responsibilities
Single Tenant vs. Multi-Tenant
- Single Tenant – The most desirable type of Net Lease property. Typically, a freestanding office, retail, or industrial building that is occupied by one tenant or user. Single Tenant Net Leases are typically over 10 years and can be as long as 25 years with increasing rent over time.
- Mutli-Tenant – Multi-tenant buildings have more than one tenant creating more monitoring and maintenance on the landlord. Leases in multi-tenant properties are usually less than 10 years making the investment more vulnerable to the ups and downs or the market.
Why Buy a Net Lease Property?
- Stable/Predictable – Single Tenant net lease properties are viewed as stable and predictable real estate investments because tenants commit to long-term leases.
- Steady Stream of Income – Due to the steadiness and predictability of these investments they prove to provide investors with a steady stream of income, minimally effected by fluctuations in the market.
- Little Responsibility – landlords do not have to worry about paying taxes or covering maintenance fees. Putting this liability on the tenant lowers risk for the landlord to pay high insurance or maintenance bills due to a bad tenant.
- Flexibility – Net lease can meet the investment goals of individuals as well large institutions.
How are Single Tenant Net Lease Properties Valued?
- Net Lease Property’s values are determined by the quality of the real estate (similar to traditional real estate) as well as other factors such as tenants’ credit, length of the lease and rental escalations.
- It is very important to understand the credibility of a potential tenant in a net lease property.
- It is important to review a tenant’s financials, credit rating, and bond issues before investing in a property with them to determine the quality of the Tenant, therefore the quality of the Investment/Property.
- Tenants with non-investment grade profiles offer higher levels of risk but that risk typically provides a higher return as well.
- Investors need to also think of the “re-leaseability” of a property if the tenant does decide to vacate.
Who Can/Should Invest in Net Lease Properties?
- Net Lease properties are appealing to several different types of buyers such as high worth individuals, partnerships, large institutional investors (REITs), life insurance companies and pension funds.
- If you fall under one of these categories and are currently not investing in net lease assets it might be time to consider if it would be a good investment tool to add to your portfolio!
When is the best time to Invest in Net Lease Properties?
- Net Lease properties are pre-set by rental rates at the beginning of the lease, this creates for a very predictable investment with stable, fixed return.