In the world of commercial real estate, there are various types of leases, including net leases and gross leases. Gross leases, for instance, only require a tenant to pay monthly rental payments for the space, while the landlord remains responsible for all other expenses. Tenants might think a gross lease is a good option—but landlords often bundle these other expenses in a higher monthly rent than you may otherwise pay and often for less than desirable leasing terms. More on gross leases in a moment.
If you’re a real estate investor or you’re looking to find a property for a business you own, researching the various lease types available can help you discover what’s in line with your long-term goals. While single net leases are less common, they can be beneficial for tenants. Let’s take a look.
Single Net Lease Definition
Single net leases are commercial real estate (CRE) lease agreements where the tenant is responsible for monthly rental payments and property tax payments. Even though the tenant does not own the property, the property is typically a standalone structure or business that accommodates just one tenant. So, in this pass-through lease agreement, the tenant agrees to take on property taxes on top of rent.
In this type of lease arrangement, landlords must still provide all other expenses, including maintaining the property—and this is one of the reasons this type of lease isn’t as common as a double net or triple net lease.
While it can be part of the agreement—in writing—that the property taxes are the responsibility of the tenant, the majority of landlords prefer tenants to pay the property tax to them. This is to ensure payments for property taxes are paid and paid on time. A property owner can lose ownership if too many property tax payments are missed.
Keeping the above in mind, every lease is unique and may have variables that the tenant and property owner agree to. It’s always prudent to speak with a knowledgeable real estate professional before signing anything.
Why Aren’t Single Net Leases More Common?
Single net leases aren’t quite as advantageous from a landlord’s perspective. If a tenant falls behind or fails to make property tax payments, the county or other municipal government can put a claim on the property. This is a problem for both the landlord and tenant but more so for the landlord. If using a single net lease, a landlord typically will use an escrow service to collect property tax payments from the tenant and then make the tax payment themselves.
This doesn’t mean that landlords won’t assign the responsibility for property taxes to a tenant. When a landlord assigns property tax responsibilities to a tenant, it’s usually tied to a double net or triple net lease, not a single net.
Net or Gross? Other Lease Forms
Net leases are the typical go-to lease type in commercial real estate. A gross lease tends to be fixed, whereas net leases can be adjusted. Tenants appreciate net leases because base rent is typically lower—but there can be a lot of variation in fees for things like insurance premiums and property maintenance. And there are even more variables depending on the type of net lease chosen.
Gross leases, on the other hand, bundle all those additional costs into the rent so tenants pay one fixed payment every month. The property owner then pays the property’s expenses out of the lump sum rents.
Gross leases work well for tenants who don’t want to worry about fluctuating bills from month to month, which makes it easier to budget and project cash flow. At the same time, tenants with a gross lease should expect higher than average base rents. Tenants just won’t have to calculate for variable expenses, such as electricity, each month.
That said, even a gross lease can fluctuate if, for instance, a tenant uses an excessive amount of electricity or water. In this case, the rent may go up for the month(s) this occurred.
Property owners are encouraged to add a clause in any type of lease that states rents can rise if property taxes, insurance premiums or other expenses arise during the course of a lease.
Is a Single Net Lease Best for Tenants? For Landlords? Investors?
The single net lease presents various pros and cons from the perspective of a landlord. As a passive investment, property investors prefer triple net leases—there aren’t any hassles of property issues that a typical landlord usually wrestles with. Tenants might not want to be responsible for all the maintenance, however, so a double net or single net lease can be a deal-striking compromise.
Landlords shift all cost burdens using a single net lease, as well as negotiation power regarding property taxes.
Theoretically, a property owner that doesn’t live in the same area as the property itself or that has multiple properties in several areas can contract with a property management company to provide maintenance and let tenants figure out the local property taxes. Single net leases pose more work, but they are still more advantageous than a gross lease for the landlord.
Additional Disadvantages of a Single Net Lease From an Investor or Property Owner Standpoint
If you’re investing in commercial real estate for the first time, a single net lease property might not be in your best interest—they’re a lot of work. This is the case if you have a full-time job or other commitments that eat a lot of your free time.
If you’re the property owner, you’ll have to be at the ready in case your tenant calls on you for maintenance or in the event of a disaster. And this can happen at any time, which means your schedule has to be pretty accommodating.
Not to mention, calculating actual profits can be a challenge. Maintenance expenses will be irregular and insurance premiums can be an added burden.
But, single net lease properties are perfect for investors or landlords who have plenty of time available and don’t mind if ROI isn’t quite so steady.
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