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What is a Net Lease?

In commercial real estate, a net lease is an agreement between a property owner and a tenant which stipulates that the tenant is required to pay part of the property expenses such as property taxes, maintenance fees, insurance fees, among other expenses. These expenses are meant to be paid by the property owner or leaser ordinarily. In the case of net lease, the lessee or tenant pays some part of the expenses after paying for the rent.

How Does a Net Lease Work?

In a net lease, all or part of the administration costs of a property are paid by the tenant or lessee. Landlords and property investors who do not want to pay expenses on the property settle for net leases. This is common in commercial real estate, under a normal net lease agreement, all costs relating to the property such as maintenance costs, management costs, utilities and taxes are paid by the lessee. However, in many cases, lessee pay part of the costs relating to the property. Property owners and investors used the net lease as an approach to minimize the burden of paying for maintenance costs, taxes, utilities and other costs.

Types of Net Leases

There are three major types of net leases, these are; single net lease (net), double net lease (net-net) and triple net lease (net-net-net). These categorization are determined by the level of expenses or administrative costs paid by the lessee. In a single net lease, the lessee is required to pay only one out of the three expense categories of the property in addition to rent payment, this is the property tax. In the double net lease, the lessee pays two categories, the property tax and insurance costs. The triple net lease which is the last category requires that all the additional expenses of the property are paid by the lessee in addition to the rent. It is important to note that the terms of a contractual agreement in a commercial real estate determines what the net lease holds for the lessee. Unlike a gross lease where all expenses relating to the property are paid by the landlord, the tenant or lessee pays the expenses in a net lease. A single net lease can also be a modified gross lease.

Net Lease from the Tenant's Perspective

In a typical net lease agreement, the landlord or property owner also agrees to shed some part of the rent that the tenant pays. This is from the perspective of the lessee, the amount that the landlord gives up from the rent must be significant amount that will cater for maintenance costs and other administrative costs that the lessee is subjected to.

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