Many retail and industrial leases are structured as net leases, but what does “net lease” mean?
A “net lease” is a lease transaction in which the landlord receives a monthly payment composed of two items: first and foremost is the rent, net of the property operating expenses and secondarily a portion of real estate taxes upon the property, casualty/liability insurance upon the property and common area expenses for the property.
The property owner is still responsible for structural and roof repairs and repairs involving capital expenditures.
The property real estate taxes, insurance and operating expenses for a multitenant property are divided between the tenants occupying space in that property, usually on the basis of a percentage of their tenant floor area divided by the total building area upon the property.
Thus, the real estate taxes for the property are paid from these monthly percentage payments. The casualty/liability insurance premiums for the property are paid from these monthly percentage payments.
The property common area expenses for the property are paid from these monthly percentage payments. If there are vacant spaces, the property owner must assume responsibility for those payment shortages.
Certain slang terms for net leases, such as “single net,” “double net” or “triple net” leases only create confusion for meaning in the transaction. A “modified net” lease is a hybrid type lease structured in several manners without exact definition.
One should ask for an exact definition of that lease structure.
An extreme type of “net lease” is an “absolute net” lease, in which the tenant accepts responsibility for all repairs to the property as well as all real estate taxes, property insurance and exterior expenses.
Absolute net leases are commonly used in free-standing, single-tenant buildings as a result of a “sale-leaseback” transaction, which will be explained in a future column.
Are net leases good or bad? I view them as good. A tenant knows what occupancy expenses there are and can receive an accounting of those annual expenses.
Can a tenant insist upon the property owner assuming all the real estate taxes, property insurance expenses and common area operating expenses? In my opinion, the answer is NO. The property owner may have mortgage loan requirements for all tenant leases being structured as “net leases” and with those leases being automatically assigned to the lender. The lease structure, i.e., a “net lease,” and maybe even the wording in the lease document, may be dictated by the lender.
If this article still leaves questions unanswered, I suggest you contact a Memphis-area CCIM for guidance in your next lease transaction.
Clayton Watson is director of leasing at American Properties GP in Bartlett.