A net lease is a contractual agreement where the lessee pays the rent in addition to property costs that the owner would usually pay.
Real estate students should learn the details of how net lease agreements work before taking the licensure exam. Because this is a complicated topic, you’ll need guidance from trusted professionals in the industry. Luckily, we have years of hands-on experience to help you learn everything you need to know.
In this post, we’ll define net lease, explain how it works in real estate, and break down the five types of net leases. Keep reading to learn more!
What Is a Net Lease?
A net lease is an agreement where the lessee pays for rent plus additional property expenses. In a net lease structure, the tenant is responsible for costs related to the property as if they were the actual owner.
This is the opposite of a gross lease, where the tenant pays one flat fee that covers all additional costs. The exact costs a tenant is responsible for in a net lease vary depending on which type of net lease agreement the lessee signs.
Examples of additional property costs include:
- Property insurance fees
- Maintenance and repair costs
- Property taxes
Why Is it Called a Net Lease?
These agreements are called “net leases” because the lessee receives the rent or “net” after the lessor pays additional expenses.
Think of the rent money passing through the holes of the net to the lessor while additional expenses get trapped in the net’s ropes.
What Are Net Leases Used for?
Net leases are typically used in commercial real estate. Commercial real estate refers to property that tenants use for business-related purposes.
Examples of commercial property include:
- Hospitals
- Warehouses
- Office buildings
- Assembly plants
- Shopping centers
- Industrial properties
- Any commercial building
The Five Types of Net Leases
Real estate professionals must know the five types of net leases that property owners can offer tenants:
- Single net lease
- Double net lease
- Triple net lease
- Bond net lease
- Modified net lease
Single Net Lease (N Lease)
A single net lease requires that the tenant pays rent and property taxes. Because the tenant pays taxes directly to the property owner, the single net lease offers the least amount of risk.
In a single net lease, the property owner is still responsible for paying insurance plus the cost of maintenance and repairs.
Double Net Lease (NN Lease)
A double net lease is an agreement where the tenant pays rent, property taxes, and insurance. The tax and insurance costs are paid directly to the property owner, which helps lower the tenants’ risk factors.
In a double net lease agreement, the landlord still pays for maintenance and repairs.
Triple Net Lease (NNN Lease)
A triple net lease requires that the tenant pays rent, property taxes, insurance, and additional expenses. The only costs that landlords must pay for in a triple net lease are maintenance of the property’s roof and structure.
Of all the net lease types, the triple net lease is the most common, offering benefits for lessors, lessees, and investors.
Bond Net Lease (Absolute Net Lease)
A bond lease is an agreement that requires the tenant to also pay for the maintenance of the property’s roof and structure. For example, if a hurricane were to come and destroy the property, the lessee would be responsible for reconstruction costs.
This type of net lease is the riskiest for tenants, as they are responsible for all property expenses.
Modified Net Lease
In a modified net lease, the lessor and lessee agree on special terms that suit both of their needs.
What Terms Are Covered in a Net Lease Agreement?
According to Forbes, a net lease agreement should include the following terms:
- Names of every tenant living in the unit
- Occupancy limitations
- The term length of the agreement
- Rent (amount, payment schedule, payment method)
- Fees and deposits
- Maintenance and repairs
- Legal rights of access
- Restrictions on illegal activity
- Restrictions regarding pets
- Other restrictions
Pros and Cons of a Net Lease
Let’s discuss some pros and cons of net leases for landlords and tenants.
For Landlords
Net leases are beneficial for landlords looking to make passive income. With triple net leases, the owner has fewer responsibilities regarding property management. They can sit back and enjoy the tax benefits of owning multiple properties.
However, net leases typically have longer terms, which means the price remains fixed for up to 10-15 years. This means landlords cannot increase rent prices even if market conditions change.
For tenants
Of course, this fixed rate is highly beneficial for lessees, who never have to worry about changing lease terms. The biggest problem with net leases for tenants is that they are responsible for property maintenance. If something breaks, it’s up to the tenant to fix it.
Check out this table for a clear breakdown of the advantages and disadvantages of net leases:
| Pros of a Net Lease Agreement | Cons of a Net Lease Agreement |
| Long-Term Occupancy for Lessees | Lessors Cannot Increase Rent for Long-Term Leases |
| Lower Risk for Commercial Real Estate Investors | Vacancy Risk if Lessee Defaults on the Lease |
| Consistent Stream of Income for Real Estate Investors | Lessee Has More Financial Responsibilities |
| Builds Equity for Investment Portfolios | Tax Liabilities for Lessees |
| Lessor Has Fewer Responsibilities | |
| Tax Benefits |
Who Should Use a Net Lease?
Considering these pros and cons, net leases work best for the following types of people:
- Lessees with good credit history
- Lessees using the rental property for office space
- Tenants who want more flexibility and control over the property
- Commercial real estate investors
- Landlords who want to make passive income
Example of a Net Lease in Real Estate
If you’d like to see some examples of net leases in real estate, you won’t have to look much further than your own neighborhood. Examples of popular triple net lease companies include:
- McDonald’s
- Taco Bell
- Walgreens
- Dollar General
- CVS
- 7-Eleven
- O’Reilly Auto Parts
- AutoZone
These companies rent out spaces where they can run their businesses using NNN leases.
McDonald’s as an NNN Lease Investment
McDonald’s, the popular fast-food chain, is considered one of the safest investments for commercial real estate investors. With its strong credit history and competitive advantage, investors who sign a triple net commercial lease with McDonald’s receive a steady income stream and help build their portfolios.
In return, McDonald’s can occupy these spaces for long periods while enjoying a fixed rate regardless of changing market conditions.
What Lenders Look For in a Net Lease Loan Application
Lessees interested in taking on net loans must possess certain qualities that lenders look for. While lenders have different qualifications, most adhere to the 5 Cs of Credit:
- Capacity
- Capital
- Collateral
- Conditions
- Character
Capacity
One of a lender’s first questions before agreeing to a net lease loan is, “Does this borrower have the resources to pay this loan?” Lenders answer this question by looking at a lessee’s revenue, expenses, cash flow, and proposed payment schedule.
Capital
Many lenders require that borrowers meet their loan-to-value threshold. This generally means that the lessee must have the resources to pay for 80% of the remaining net loan cost.
Collateral
For net leases specifically, collateral is one of the most important factors that lenders consider. Lenders want to ensure that lessees who fall behind on rent payments have other sources of loan repayment. Examples of collateral include real estate and other assets that renters can sell to help pay for the loan.
Conditions
Lenders will also study market conditions to ensure the loan can be repaid. They will analyze the economy, competition, and overall industry to help determine the loan risk.
Character
Lenders will look at a lessee’s credit history, education, business background, and references to ensure a good reputation.
Are There Other Types of Leases in Real Estate?
There are other types of leases in real estate besides net leases. Examples include:
- Gross leases
- Modified gross leases
- Full service leases
- Operating leases
- Capital leases
Frequently Asked Questions
Let’s address some frequently asked questions real estate students have about net leases.
What Is the Difference Between a Gross Lease and a Net Lease?
Under a gross lease, the tenant pays a single fee that covers both rent and property expenses. This means that if a rented property has maintenance issues, the lessor is responsible for paying repair costs.
This is unlike a net lease, which requires the lessee to pay for maintenance, repairs, and other operational costs.
How Do You Calculate a Net Lease?
Lessors can calculate a net lease by adding property taxes, insurance, maintenance costs, and common area expenses, then dividing by 12. This provides the monthly cost.
In properties with multiple tenants, lessors add the monthly cost to the monthly rental rate per square footage. Then, they multiply by the number of square feet each tenant leases.
What Is a Single-Tenant Net Lease vs. Multi-Tenant Net Lease?
A single-tenant net lease is an agreement where the lessor is renting property to only one tenant.
A multi-tenant net lease is an agreement between a lessor and multiple tenants or renters.
What Is the Difference Between the Lessor vs. Lessee?
A lessor is a property owner who rents their property to a person, business, or family. In real estate, lessors are often referred to as landlords.
A lessee is a person, business, or family renting a property from a lessor. In real estate, lessees are often referred to as tenants.
What to Know Before the Real Estate Exam
A net lease is a contractual agreement where the tenant pays for rent and additional property costs. Lessors can offer lessees five different net lease agreement types.
Real estate professionals must be knowledgeable about net leases and how they work before the test. Luckily, you should have no problem nailing this section on your exam after reading this post.
Learn other key terms using our online Real Estate Flashcards and make sure you’re prepared.
