When it comes to the leasing element of property management, the devil is always in the detail. Many terms and conditions are involved when leasing a property. Thus, you must understand the fundamentals of some, if not all, the concepts that entail leasing. One of the terms often thrown around when it comes to leasing is Net lease REIT. In this article, we will try and break down into digestible pieces everything that neat leasing entails.
What exactly is net leasing?
According to Investopedia, a net lease in its most fundamental of forms, is a contractual agreement between a real estate owner and a lessee that states that the lessee is to pay a portion, or the entirety, of the taxes the insurance, and the maintenance of the said property, in addition to paying a specified amount in rent. Essentially, for the purest form of a net lease, the lessee is supposed to handle and cater to every single cost that the property may incur, as if the lessee was, in fact, the actual owner of the property. These types of lease are especially common when it comes to commercial real estate.
What is a net lease REIT?
A net lease REIT is a real estate investment trust that owns a portfolio of properties mainly comprised of properties rented out to single tenants under net leases. The major difference between other real estate sectors and the Net Lease Sector is that REITs in the later are grouped and defines by the type of lease instead of the type of property (retail, office, industrial). This site reports that the net lease is among the fastest-growing REIT sectors in the market. Many firms are opting to lease instead of owning the properties they need to run their operations and businesses.
The difference between a net lease and gross lease
As stated earlier, the net lease specifies that the lessee is obligated to take care of a portion of all the fees the property may incur. The more common type of lease, the gross lease, is a contract that stipulates that the lessee is obligated to pay a specified amount in rent, while the owner of the property, the landlord, handles every other cost. The amount paid in a net lease is considerably larger than that the lessee would pay had a gross lease been used. This is because of the additional insurance, maintenance, and tax fees that the lessee is responsible for. Nevertheless, the net lease is as dynamic as leases come. It is sometimes difficult to identify whether a contract is, in fact, a modified gross lease or a net lease. This is because the leases are tailor-suited to cater to the needs of the parties involved, and the said needs and agreed terms might differ from one individual to another.
Why are net leases used?
Net leases offer considerable advantages to both the landlord and the lessee. For the former, they have no obligation to take care of the somewhat cumbersome costs of the buildings. It may be easy for them to take care of said costs from a monetary perspective, but the processes used to clear things like taxes and making sure the property is regularly maintained can prove to be somewhat of a bother. Ergo, investors why purchase commercial real estate projects and entities often prefer to hand over all the running of the property to the individual or party that leases it. That way, they rid themselves of the burden of the day-to-day administration of the property. From the lessee’s perspective, being a landlord in every sense except owning the title deed gives you ultimate control of the property. Since it is their responsibility to maintain the building, they don’t have to push the landlord around to do so.
In monetary terms
Net leases are mostly used when large commercial properties are involved, and when the party that wants to lease wants to do so over a long period of time, say ten years. From the lessee’s perspective, the net lease contract only works if the difference between the amount they pay for the net lease fees and the amount they would pay had a gross fee been used is enough to offset the costs of the insurance, taxes, and maintenance. Simply put, the feasibility of the net lease should show that even when unpredicted rises occur in terms of the taxes, maintenance, and insurance, they will be able to handle lit without incurring losses. The property owner, on the other hand, reduces the amount of money they charge for rent because a burden has been lifted from their shoulders.
Types of net leases
Like any other contract, even though the center can be defined, the edges are often a bit blurry. When it comes to net leases, the terms are mainly dictated by the parties involved. The costs that each party handles are stipulated on the specific contract. Consequently, it may be a bit difficult to break net leases into categories. Notwithstanding, in broad terms, net leases are broken down into three categories. They include:
Single Net Lease
Single net lease is the type of the net lease where the lessee is obligated to cover one additional cost on to rent. This may be maintenance, taxes, or insurance fees. The specific cost the take on is agreed upon by both parties and the terms are stipulated on the contract they sign.
Double Net Lease
As the name would suggest, this type of net lease is used to refer to terms where the lessee takes on two of the three obligatory fees from the landlord. Thus, the landlord, is left to take care of the remaining fees. These types of leases are commonly referred to as net-net leases
Triple Net Lease
You’ve probably deciphered the pattern now. Triple net leases are used when the lessee takes on all of the additional fees, while also paying rent. With the added expenses, it is commonplace for the landlord to agree to reduce the amount of rent paid. These types of leases are used for large commercial properties, with the lease spanning over many years. Even with these definitions as stepping manuals, the lines that separate these categories, and the ones that separate net leases and gross leases are often very blurred. In some instances, you will find that the gross lease is modified to become a hybrid version of the net lease. In some scenarios, the lessee is obligated to pay a specific amount of money that caters to, say, the insurance fees.