Net Lease Investments
why net lease
types of net lease
OTHER TYPES OF LEASES
SINGLE VS MULTI TENANT
The General Definition of a Net LeaseA provision that requires the tenant to pay a portion, or all of the taxes, fees and maintenance costs for the property in addition to rent. Net lease requirements are most commonly used with commercial real estate. There are three primary types of net leases: single net (net)double net (net-net)triple net (net-net-net)
Why Net Lease Investments?Net Leased Investment Opportunities are sought after by investors because of the attractive rate of return. Depending of the tenant and the type of lease in place, these properties can bring a safer, steady rate of return for many years with little to no involvement from the landlord.. Investor demand for net-leased properties often exceeds the number of available listings on the market, since tenants typically pay for maintenance costs and taxes and they have proven to hold their value over time.. To find out more about acquiring or disposing of Net Leased Opportunities and our brokerage services please visit our Real Estate Services Page and contact us today.
Single Net Lease
A commercial real estate lease agreement in which the tenant is required to pay property taxes in addition to rent.
A Single Net Lease is a form of pass through lease in which taxes associated with the property become the responsibility of the tenant instead of the landlord.
The landlord is responsible for the other operating expenses incurred of the property.
Double Net Lease (NN)
An agreement in which the tenant is responsible for both property taxes and premiums for insuring the building.
Unlike a Single Net Lease which only requires the tenant to pay property taxes, a Double Net Lease passes more expenses along in the form of insurance payments.
The landlord is still held responsible for structural maintenance expenses. Each month the landlord received the base rent plus the additional payments.
Triple Net Lease (NNN)
A lease agreement that designates the lessee (tenant) as being solely responsible for all of the cost relating to the asset being leased in addition to the rent fee applied under the lease.
The structure of this type of lease requires the lessee to pay for net real estate taxes on the leased asset, net building insurance and net common area maintenance.
The lessee has to pay the net amount of three types of costs, which is how this type of lease got its name.
A gross lease is a type of commercial lease where the landlord pays for the building's property taxes, insurance and maintenance.
A gross lease can be modified in a number of ways to best meet the needs of a particular building's tenants (for example, a gross lease may or may not require the tenant to pay utility bills)
Under a gross lease, by contrast, the owner/landlord covers all of the property’s operating expenses including real estate taxes, property insurance, structural and exterior maintenance and repairs, common area maintenance and repairs, unit maintenance and repairs, utilities and janitorial costs
The opposite of a gross lease is a net lease.
Modified Gross Lease
A modified gross lease is a type of real estate rental agreement where the tenant pays base rent plus a proportional share of some of the other costs associated with the property, such as property taxes, utilities, insurance and maintenance..
Under a modified gross lease, the tenant takes over expenses that are directly related to his or her unit, including unit maintenance and repairs, utilities and janitorial costs, while the owner/landlord continues to pay for the other operating expenses and can pass them through in the for of additional rent, or reimbursements
A modified gross lease falls somewhere between a gross lease and a net lease. Which expenses the tenant is responsible for can vary significantly from property to property, so a prospective tenant must ensure that a modified gross lease clearly defines which expenses are the tenant’s responsibility.
Single Tenant Assets
Just like any real estate investment, there are some advantages and disadvantages to owning single tenant vs multi-tenant.
Easy to structure as NNN lease.
No landlord responsibilities.
Generally longer leases
Usually better credit tenants with
strong corporate guaranteed leases
Usually trade at lower cap rates
If the tenant vacates the income stream is reduced to zero.
May go for longer terms without rent increases
Usually Trade at Lower Cap Rates
As some investors only acquire NLSTA, other prefer multi-tenant properties.
If one tenant vacates the income stream does not dry up
Smaller spaces generally rent faster
Can potentially get higher rents
Rent Escalations are more often
Landlord can pass through expenses t tenant in the form of CAM
Owner may benefit of higher rates of return
Usually shorter leases
Some are personally guaranteed by tenants instead of corporate
Landlord may have to contribute to the TI.
Requires more landlord involvement
Valuation of Net Lease Assets
The valuation of net lease assets is normally achieved by using the income capitalization approach. These properties trade almost like bonds, at various cap rates that in addition to demand are directly related to a few factors.
The strength and credit rating of the tenant.
The strength and type of the lease guarantee..
The length of the lease(s).
The rent escalations and renewal options.
The type of lease(s).
Single Tenant or Multi-Tenant.
The age of the asset.
The location of the asset.
We analyze these variables and current market trends to assign the appropriate CAP RATE. Based on the cap rate and the asset's net income we establish a fair market value.