I am especially anxious and excited to dive into the minutia of the “Net Lease” world. So much so that I am going to write a whole series on it because commercial net leases cannot be truly explained within one article or blog. You just can’t, there’s no way possible, plus it gives me that many more episodes for “Best 1031 Online” YouTube channel and if you haven’t been there yet to subscribe, please get on over there and check it out!
There are so many different forms of commercial leases, including gross, modified gross, full service, triple net, double net, and absolute net. There are also different forms of commercial leases for single tenant buildings and multi-tenant buildings, and then crafted specifically for office, retail or industrial and even ground or land leases. I mean I get why so many are confused, including many commercial brokers who do not specialize in leasing.
Five Thousand Years Ago?
Did you know that the first commercial lease dates all the way back to 3000 BCE Mesopotamia during the Sumerian civilization? 5024 years ago! Crazy!!
The net lease was actually the first form, but somewhere along the line, some super creative property owner or broker who had a flare for marketing produced a gross lease. “Gross” meaning all costs are included, like gross pay or gross commission. The “marketing” or the idea was to make it easier on the tenants and meant to sound simpler. With a net lease, there is the base rent, the net expenses all on top of the rent versus a gross lease where everything is included. Tenants like knowing exactly what their rent would be on the 1st of each month. What tenants learned over time was that they were at the mercy of the landlord’s accounting of the expenses.
Just what are those expenses you ask?
For the purposes of this explanation, I will keep it simple. Building expenses or “nets” as they are referred to, are made-up of property taxes, insurance, and maintenance. Notice there are three “nets,” hence the triple net terminology.
- Property Taxes – a “fixed” cost that increases annually
- Property Insurance – a “fixed” cost that increases annually
- Property Maintenance – An Absolute Variable!
Maintenance – the ever-changing variable that is the true cog of how so many lease forms were born.
Even today leased assets are marketed in ways that are still very confusing especially to first time net lease investors. The term “triple net” has become quite common place in the world of net lease investment properties, and it drives me crazy to see how properties are marketed using the term “triple net” when some are, but many are not actual or true triple net leases. Ugh! Further, single tenant net lease has become such a popular exchange choice, yet so many investors are unclear because of how these net leased properties are marketed and in a way that many times ends badly for the investor –
“What, I have to buy an AC? I didn’t know I was responsible for the mechanical!”
“Roof? I have to pay for the roof to be replaced?”
It all comes down to how the lease is written. Ask me about a client I had who had to replace a pylon sign. At the end of the day, it comes down to that variable net, maintenance and there are so many different ways that leases are written to cover the cost of such maintenance.
In this series I am going to breakdown the commercial lease starting from the modern-day gross lease to today’s net lease which are three different leases, double net, triple net, and absolute net. I am going to highlight as many different nuances as I can, including the pros and cons of each and even share some real-world examples. So, sit back and enjoy and I will see you next month!
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