In a commercial real estate, a net lease requires the tenant to pay, in addition to rent, some
or all of the property expenses that normally would be paid by the property owner.
These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities,
and other items.
The precise items that are to be paid by the tenant are usually specified in a written
lease.
For properties that are leased by more than one tenant, such as a shopping center, the
expenses that are "passed through" to the tenants are usually pro-rated among the tenants
based on the size of the area occupied by each tenant.
The term "net lease" is distinguished from the term "gross lease".
In a net lease, the property owner receives the rent "net" after the expenses that are
to be passed through to tenants are paid.
In a gross lease, the tenant pays a gross amount of rent, which the landlord can use
to pay expenses or in any other way as the landlord sees fit.
Types of net leases There are standard names in the commercial
real estate industry for different sets of costs passed on to the tenant in a net lease.
Single net lease In a single net lease, the lessee or tenant
is responsible for paying property taxes.
Double- and triple-net leases are more common forms of net leases because all or the majority
of the expenses are passed on to the tenant.
Double net lease In a double net lease, the lessee or tenant
is responsible for property tax and building insurance.
The lessor or landlord is responsible for any expenses incurred for structural repairs
and common area maintenance.
"Roof and structure" is sometimes calculated as a reserve, the most common amount is equal
to $0.15 per square foot.
Triple net lease
A triple net lease is a lease agreement on a property where the tenant or lessee agrees
to pay all real estate taxes, building insurance, and maintenance on the property in addition
to any normal fees that are expected under the agreement.
In such a lease, the tenant or lessee is responsible for all costs associated with the repair and
maintenance of any common area.
This form of lease is most frequently used for commercial freestanding buildings.
However, it has also been used in single-family residential rental real estate properties.
Bondable lease A bondable lease is the most extreme variation
of a triple net lease, where the tenant carries every imaginable real estate risk related
to the property.
Notably, these additional risks include the obligations to rebuild after a casualty, regardless
of the adequacy of insurance proceeds, and to pay rent after partial or full condemnation.
These leases are not terminable by the tenant, nor are rent abatements permissible.
The concept is to make the rent absolutely net under all circumstances, equivalent to
the obligations of a bond: hence the "hell-or-high water" moniker.
An example of this type of lease would be a leaseback arrangement in which a retailer
leases back the building it formerly owned and continues to run the store.
Bondable leases are typically used in so-called credit tenant lease deals, where the main
driver of value is not so much the real estate, but the uninterrupted cash flow from the usually
investment-grade rated "credit" tenant.
Because bondable lease investments offer such low risk, higher investment rates can indicate
a recovery in not only the bond market, but also in the overall real estate market.
Economics Typically, the buildings in which landlords
use triple net leases are 'equity investments', rather than 'cash flow investments'.
For example, the owner will finance a significant portion of the purchase price on a property
and pay the resulting mortgage with the lessee's monthly owed rent.
There is usually a small amount left over as monthly profit for the owner, but the greater
investment payoff comes from the tax shields afforded to the owner through the use of leverage
or gearing.
The resulting property is then sold after a period of equity-building, usually five
years – the typical commercial mortgage term.
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