There are many forms of a net lease, ranging from single to triple. The differences between the three all lie within the expenses that the tenant is responsible for paying on the asset. The three categories in question are taxes, insurance, and maintenance costs. In a single net lease, the tenant pays only one of the three expense categories. In a double net lease, the tenant is responsible for paying for two of the expenses. And a triple net lease requires the tenant to pay for all three of the expense categories. Regarding the single and double net leases, it is up to the landlord to assign which expenses the tenant will have to pay in addition to the monthly rent.
Every investor knows that income can vary depending on the market strength. A building’s insurance and taxes can fluctuate with the changing market. A building’s maintenance costs can vary depending on the building itself. Regardless of how much these expenses increase or decrease throughout the lease term, the party responsible for making payments needs to abide by these changes.
In a gross lease where the tenant is only required to pay for the monthly rent, the landlord needs to pay for all the other expenses on the asset. This includes the taxes, insurance, and any maintenance costs the building needs. But in a net lease agreement, the tenant is required to pay for all those extra expenses including any fluctuations in costs from the changing market.
In regard to all three different types of net lease agreements, the landlord will receive a relatively fixed income. The more expenses the tenant is required to pay, the less the landlord does. This creates a steady cash flow for the landlord. Since the tenant is responsible for paying for the taxes, insurance, and maintenance, the landlord will receive the monthly rent established through the lease agreement. Shifting the responsibility from the landlord to the tenant assures that the landlord won’t be stuck paying for high insurance or maintenance bills.
When the responsibilities are given to the tenant, this creates a relatively hassle-free investment for the landlord. Without being in charge of any part of the asset except owning the actual building, the landlord is not needed to make any decisions. For example, if the air conditioning needs to be fixed, the tenant can hire anyone of their choosing. The lack of management responsibilities creates an easy job for the landlord. Their only responsibility is filling the asset when the lease expires or is renewed.
If the tenant were to complain about fluctuations in the market, resulting in increased expenses, the landlord is protected under the net lease and is therefore only responsible for the terms agreed in the original contract.
As a net lease investment that is truly hands free, an absolute NNN lease, the landlord can rely on a stable monthly cash flow for many years. If the lease contained any rent increases, it is a further assist in hedging against inflation. If you are interested in exploring net lease investments as a fixed income alternative, please reach out to us. You can learn more about Net Lease properties on our site, or feel free to give us a call at 703.787.4714. Calkain has a team of experts ready to help you find the perfect investment.