Net lease

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In the field of commercial real estate, especially in the United States, 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 (known as the "landlord" or "lessor"). [1] These include expenses such as property taxes, insurance, maintenance, repair, and operations, utilities, and other items. [2] [1] These expenses are often categorized into the "three nets": property taxes, insurance, and maintenance. In the US parlance, a lease where all three of these expenses are paid by the tenant is known as a triple net lease , NNN Lease, or triple-N for short and sometimes written NNN.

Contents

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. Gross leases typically have higher rent charges to recuperate some of these expenses in the rent line, as opposed to doing so through a net arrangement.

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 on to the tenants are usually pro-rated among the tenants based on the size (square footage) of the area occupied by each tenant. Many variations exist, with options to control any year-to-year variations in fees and such.

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 (sometimes shortened to Net or N), the lessee or tenant is responsible for paying property taxes. These are generally not common. [3]

Double net lease

In a double net lease (Net-Net or NN), 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. [4]

Triple net lease

A triple net lease (triple-Net or NNN) is a lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three "nets") on the property in addition to any normal fees that are expected under the agreement (rent, utilities, etc.). [5] In such a lease, the tenant or lessee is responsible for all costs associated with the repair and maintenance of any common area (also known as CAM - Common Area Maintenance). CAM fees typically are negotiated up front as a set dollar figure per square foot.

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 (also called an "absolute triple net lease", "true triple net lease", "hell-or-high-water lease", or "absolute net 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. [6]

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. [7]

Ground lease

A "ground lease" is another variation of a net lease. Under a ground lease, the landowner leases the land to the lessee which gives the lessee the opportunity to construct a building. The lessee will then have a leasehold interest in the property. Under a ground lease the tenant will typically pay for the same items they pay for under a Triple Net Lease or Bondable Lease. Generally, ownership of the building will revert to the landowner at conclusion of the lease. [8]

Economics

Typically, the buildings in which landlords use triple net leases (NNN) 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 (positive cash flow), 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.[ citation needed ]

Related Research Articles

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<span class="mw-page-title-main">Renting</span> Payment for temporary use; hiring

Renting, also known as hiring or letting, is an agreement where a payment is made for the use of a good, service or property owned by another over a fixed period of time. To maintain such an agreement, a rental agreement is signed to establish the roles and expectations of both the tenant and landlord. There are many different types of leases. The type and terms of a lease are decided by the landlord and agreed upon by the renting tenant. For more information on types of leases, check the "Rental Agreements" details below. Likewise, for types of rentable goods, check the "Reasons for Renting" and "Leasing" sections of this article.

<span class="mw-page-title-main">Landlord</span> Owner of a rented building, land or real estate

A landlord is the owner of a house, apartment, condominium, land, or real estate which is rented or leased to an individual or business, who is called a tenant. When a juristic person is in this position, the term landlord is used. Other terms include lessor and owner. The term landlady may be used for the female owners. The manager of a pub in the United Kingdom, strictly speaking a licensed victualler, is referred to as the landlord/landlady. In political economy it refers to the owner of natural resources alone from which an economic rent, a form of passive income, is the income received.

<span class="mw-page-title-main">Lease</span> Contractual agreement in which an assets owner lets someone else use it in exchange for payment

A lease is a contractual arrangement calling for the user to pay the owner for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial or business equipment are also leased. Basically a lease agreement is a contract between two parties: the lessor and the lessee. The lessor is the legal owner of the asset, while the lessee obtains the right to use the asset in return for regular rental payments. The lessee also agrees to abide by various conditions regarding their use of the property or equipment. For example, a person leasing a car may agree to the condition that the car will only be used for personal use.

<span class="mw-page-title-main">Lease purchase contract</span>

A Lease-Purchase Contract, also known as a lease purchase agreement or rent-to-own agreement, allows consumers to obtain durable goods or rent-to-own real estate without entering into a standard credit contract. It is a shortened name for a lease with option to purchase contract. For real estate, a lease purchase contract combines elements of a traditional rental agreement with an exclusive right of first refusal option for later purchase of the home.

A rental agreement is a contract of rental, usually written, between the owner of a property and a renter who desires to have temporary possession of the property; it is distinguished from a lease, which is more typically for a fixed term. As a minimum, the agreement identifies the parties, the property, the term of the rental, and the amount of rent for the term. The owner of the property may be referred to as the lessor and the renter as the lessee.

Capitalization rate is a real estate valuation measure used to compare different real estate investments. Although there are many variations, the cap rate is generally calculated as the ratio between the annual rental income produced by a real estate asset to its current market value. Most variations depend on the definition of the annual rental income and whether it is gross or net of annual costs, and whether the annual rental income is the actual amount received, or the potential rental income that could be received if the asset was optimally rented.

A lease option is a type of contract used in both residential and commercial real estate. In a lease-option, a property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property.

<span class="mw-page-title-main">Real estate investing</span> Buying and selling real estate for profit

Real estate investing involves the purchase, management and sale or rental of real estate for profit. Someone who actively or passively invests in real estate is called a real estate entrepreneur or a real estate investor. Some investors actively develop, improve or renovate properties to make more money from them.

A credit tenant lease is a method of financing real estate. A "credit tenant lease" is a lease from a landlord to a tenant that carries sufficient guarantees that lenders will perceive the rent cash flows from the lease are as reliable as a corporate bond. This typically requires that the tenant have exceptionally good credit, often that the property is essential to the tenant, and contractual obligations that ensure that these rents will be among the tenant's highest obligations. Usually, the lease is structured as a triple net lease, in which a tenant is responsible for insurance, property taxes, and most or all repair and maintenance costs.

<span class="mw-page-title-main">Hell or high water clause</span>

A hell or high water clause is a clause in a contract, usually a lease, which provides that the payments must continue irrespective of any difficulties which the paying party may encounter, usually in relation to the operation of the leased asset. The clause usually forms part of a parent company guarantee that is intended to limit the applicability of the doctrines of impossibility or frustration of purpose. The term for the clause comes from a colloquial expression that a task must be accomplished "come hell or high water", that is, regardless of any difficulty.

Leaseback, short for "sale-and-leaseback", is a financial transaction in which one sells an asset and leases it back for the long term; therefore, one continues to be able to use the asset but no longer owns it. The transaction is generally done for fixed assets, notably real estate, as well as for durable and capital goods such as airplanes and trains. The concept can also be applied by national governments to territorial assets; prior to the Falklands War, the government of the United Kingdom proposed a leaseback arrangement whereby the Falklands Islands would be transferred to Argentina, with a 99-year leaseback period, and a similar arrangement, also for 99 years, had been in place prior to the handover of Hong Kong to mainland China. Leaseback arrangements are usually employed because they confer financing, accounting or taxation benefits.

A gross lease is a type of commercial lease where the tenant pays a flat rental amount, and the landlord pays for all operating expenses regularly incurred by the ownership, including taxes, electricity and water. Most apartment leases resemble gross leases. The term "gross lease" is distinguished from the term "net lease".

A common area is, in real estate or real property law, the "area which is available for use by more than one person..." The common areas are those that are available for common use by all tenants, (or) groups of tenants and their invitees. In Texas and other parts of the United States, it is "An area inside a housing development owned by all residents or by an overall management structure which charges each tenant for maintenance and upkeep."

In commercial real estate leases in the United States, the landlord, rather than the tenant, is usually responsible for real estate taxes, maintenance, and insurance. In a "net lease", in addition to base rent, the tenant or lessee is responsible for paying some or all of the recoverable expenses related to real-estate ownership. As the rent collected under a net lease is "net" after expenses are passed through to tenants to be paid, the rent tends to be lower than rent charged under a "gross lease".

In United States real estate, a bond lease, also called an absolute triple net lease, true triple net lease or even a hell-or-high-water lease is the most extreme form of the NNN lease, in which the tenant is responsible for every fathomable real estate risk related to the property and is responsible for every single property related expense, even in instances of a material casualty/condemnation.

In the real estate industry within the United States a N Lease is one of the less widely utilized net lease structures, in which the tenant takes responsibility for some of the property's real estate expenses in addition to their business' operating expenses, unlike a gross lease. "N" stands for "Net", is pronounced "Single Net" and represents the property tax expense, which the tenant is responsible for paying in addition to operating expenses, in a single net lease. Unlike double and triple net leases, the landlord/lessor remains responsible for paying any insurance and maintenance expenses.

Common Area Maintenance charges, or CAM for short, are one of the net charges billed to tenants in a commercial triple net (NNN) lease, and are paid by tenants to the landlord of a commercial property. A CAM charge is an additional rent, charged on top of base rent, and is mainly composed of maintenance fees for work performed on the common area of a property.

<span class="mw-page-title-main">Retail leasing</span>

A retail lease is a legal document outlining the terms under which one party agrees to rent property from another party. A lease guarantees the lessee use of an asset and guarantees the lessor regular payments from the lessee for a specified number of months or years. Both the lessee and the lessor must uphold the terms of the contract for the lease to remain valid.

In commercial real estate, recoverable expenses are those expenses of running a property that are billed back to the tenants as a form of additional rent. A simple example is the electricity bill for a large complex that is then divided up among the tenants. Water, natural gas, cleaning and other operating expenses are often considered recoverable, as well as some periodic capital expenses. Not all expenses are recoverable, those that directly benefit only the landlord are generally not included. For instance, spending on advertising to attract new tenants does not directly benefit existing tenants, and thus is not generally included as a recoverable item.

References

  1. 1 2 Helewitz, Jeffrey A. (2015). Basic Real Estate and Property Law for Paralegals (5th ed.). New York: Wolters Kluwer. p. 203. ISBN   978-1-4548-5122-6.
  2. ↑ Principles and Practices of New Jersey Real Estate 6th Ed by Frank W. Kovats, DREI.
  3. ↑ "How The Single Net Lease Works". PropertyMetrics. 2020-06-22. Retrieved 2023-06-14.
  4. ↑ Twentytwo, Bureau (2021-03-24). "Double Net Lease - What Is a NN Lease and How Does It Work?". IPG. Retrieved 2023-06-14.
  5. ↑ "Triple Net Lease (NNN) Meaning, Uses, and Benefits for Investors". Investopedia. Retrieved 2023-06-14.
  6. ↑ Inc., US Legal. "Bondable Lease Law and Legal Definition - USLegal, Inc". definitions.uslegal.com.{{cite web}}: |last= has generic name (help)
  7. ↑ Napoli, Michelle. The CTL Market Is Back (n.d.): n. pag. Calkain.com. Real Estate Forum, Oct. 2009. Web.
  8. ↑ http://www.investopedia.com/terms/g/ground-lease.asp Ground Lease | Investopedia
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