What is a Net?
A “net ” is an expense that is a cost incurred by owning a property. There are usually 3 main costs, which are: property insurance, real estate taxes, and operating expenses (or common area maintenance expenses).
What kind of commercial leases don’t have net costs?
In any lease, the tenant is always going to pay rent. If there are no other expenses, and it’s one price, all-inclusive, this is usually referred to as a “gross” or “all-inclusive” real estate lease. These are attractive because the tenant can accurately predict the exact cost of leasing a location every year, and will know that all of the utilities and maintenance and other expenses are covered. The net costs are included in the rent price, so the rent itself is higher, because there are no additional costs to pay.
If there is one price for rent plus other expenses (such as utilities or janitorial), this is referred to as a “modified gross” lease agreement. This is because the tenant pays the other expenses directly to the provider, and the cost is within the control of the tenant. The tenant can get various price quotes for janitorial service or decide what the temperature will be inside of its location. These other costs are paid directly to the provider and do not get paid to the landlord. The landlord pays the net costs from the gross rent it receives from the tenant, and the tenant pays for any other non-rent costs it incurs.
What are “net” leases?
An absolute net lease means that the tenant only pays a base rent (lower than a gross rent amount) to the landlord and in return, the tenant gets to use the land, and if there is a building or facility on the land, the tenant gets to use that as well. All of the rent money goes to the landlord, and it’s usually considered a low-risk, low-involvement, income-producing investment for the landlord. The tenant pays all of the net costs- for insurance, for repairs and replacements, and for the taxes, etc., on the land and on its personal property. Often, an absolute net lease is a ground lease. A ground lease is just that- the tenant is paying rent on the actual dirt and no other cost to the landlord.
An absolute net lease often gives the tenant more control- the tenant can protest property taxes, build and maintain a building as it sees fit, and carry the insurance it wants. At the end of the lease term, the tenant can walk away from the location, leaving the landlord to deal with the building or whatever structure the tenant leaves behind.
It’s rare, but occasionally there are single or double- net leases, where the tenant is paying only one or two of the three net costs. It might be due to a tax or insurance situation, because of the tenant’s use of the property, or a cost decision made by the landlord’s investors. The reason isn’t important, the fact that there are some costs covered by each party is what matters in this lease agreement type.
What is Triple Net?
A triple net lease means that the tenant is contributing to all three of the net costs. This is more common when there are multiple tenants in a single property, like a retail or office building. The landlord (or its property manager) is more actively involved and the tenants don’t have the burden of performing the maintenance and repair of the shared building.
There’s a lot of definitions and costs involved in a commercial real estate lease. The Law Office of Jenna Zebrowski, PLLC can help you assess your options, so sign up for a no-obligation discovery call today!