Net Lease Explained: Understanding Landlord & Tenant Responsibilities

A net lease is a contractual arrangement where one party conveys land or property to another party in exchange for payment of a combination of rent, property taxes, insurance and various operational costs. The commercial property is provided by the lessorLessor vs LesseeThere are two principal parties in a lease agreement, and every finance professional needs to know how to differentiate between the lessor vs to the lessee, who will pay the lessor for the use of their property over a period of time.

How Net Lease Works

A lease is a contract in which one party grants the use of land or property to another party in exchange for regular payments over a specified period of time. Leases are a binding contract, usually for real estateReal EstateReal estate is real property that consists of land and improvements, which include buildings, fixtures, roads, structures, and utility systems. Property rights give a title of ownership to the land, improvements, and natural resources such as minerals, plants, animals, water, etc. and other personal property. Lease contracts state the duties of each party and are legally enforceable to each party. Consequences may be enforced in court and may be mild to severe depending on the clauses of the lease that are broken.

A net lease is structured so that the lessee essentially covers many or all of their portion of costs to manage and operate the property. It benefits property owners who can reduce their risk for increases in property taxes, insurance, and other fees, as well as the day-to-day operations of the property.

For the lessee, they usually will agree to take on the extra fees and risk of their increases, for a reduction in the rent portion of the property lease payments.

Gross Lease vs. Net Lease

A net lease involves payment of additional costs associated with the property, which is in contrast to a gross lease where only a flat fee is paid, and all other costs are covered by the lessor. The costs include several items, such as:

• Taxes
• Insurance
• Maintenance
• Repairs
• Utilities
• Other operational costs

Types of Net Leases

A net lease can be classified under many different types of leases, but typically, they are structured in a way that will cover the cost categories of insurance, operating costs, and property taxes. They can be structured in the following ways:

A single net lease entails paying property taxes in addition to rent.

A double net lease or “net-net lease” entails paying for property taxes and building insurance, in addition to rent.

A triple net lease or “net-net-net lease” entails paying for property taxes, building insurance and operation costs in addition to rent.

Use of Net Leases

Net leases are usually used in practice for commercial real estate agreements where the tenant (lessee) will pay rent in addition to the landlord’s (lessor) other operational costs. It makes the management process simpler for the landlord, which may be favorable if the landlord must manage multiple properties.

Additional Resources

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