As a category, “net leased” properties are popular with both real estate investors and tenants for a variety of reasons. But, this is a broad category and there are several sub-categories that investors should be aware of.
One of those sub-categories, the single-net lease is the subject of this article. We will define what it is, why it is important, and how it compares to other common commercial property lease types. By the end, readers will have a thorough understanding of single net leases and should be able to use this knowledge as part of their pre-investment due diligence process.
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What is a Single Net Lease
A single net lease is a commercial real estate lease structure where the tenant pays a base rent amount plus their share of property taxes. If the tenant is the sole occupant of the property, they are responsible for the entire property tax amount. If the property has multiple tenants, the tax amount is allocated based on the proportionate share of space that each tenant leases.
As a lease structure, the single net lease has both advantages and disadvantages.
Advantages and Disadvantages of Single Net Leases
From a real estate investment perspective, the advantage of a single net lease is that it outsources the job of paying and managing property taxes to the tenant. This can provide some administrative relief for the property owner.
But, the property owner is still responsible for the other costs – like insurance and maintenance – associated with running the property. So, the administrative relief may prove to be somewhat minimal.
How Does The Single Net Lease Compare To Other Lease Types?
To highlight the benefits and risks of the single tenant net lease, it is helpful to compare it with other commonly used commercial real estate lease structures.
Single Net Lease vs. Gross Leases
There are two types of gross leases that are common in commercial real estate investment, full service leases and modified gross leases.
In a full service gross lease, the tenant pays one monthly rental amount and the property owner pays for all of the property’s operating expenses.
In a modified gross lease agreement, the tenant is required to pay for some of the property’s operating costs such as common area maintenance, utilities, or cleaning. The exact costs and the portion that the tenant is required to pay are specified in the details of the lease.
So, in a gross lease the rental amount tends to be higher and the landlord pays for most, if not all of the property’s operating costs. In a single net lease, the tenant pays a lower base monthly rental amount plus their share of property taxes only.
Single Net Lease vs. Other Types of Net Leases
In addition to a single net lease, there are three other types of net leases that are commonly found in commercial properties. The key difference between them rests with which “bucket” of operating costs the tenant is responsible for paying. The other net lease types are:
- Double Net Lease: Tenant pays base rent plus their share of two operating cost buckets, property taxes and building insurance.
- Triple Net Lease: Sometimes called an “NNN lease”, the tenant pays base rent plus their share of three operating cost buckets, property taxes, property insurance, and maintenance.
- Absolute Net Lease: In an absolute net lease, the tenant pays base rent plus all additional costs needed to operate the property. These additional costs could include big ticket items like a roof or HVAC replacement.
Net leases tend to have a lower base rental rate, but the additional costs may or may not make them more expensive on a total basis than a gross lease. The choice of net lease type is driven by a variety of factors including: property owner, property type, tenant needs, and market dynamics. Net leases are particularly common with retail properties.
It should be noted that, of the net lease types described above, triple net leases properties (NNN properties) are particularly popular with investors because the administrative burden of owning an asset with this type of lease is greatly reduced.
Summary & Conclusion
A single net lease is a type of commercial real estate lease that requires the tenant to pay a base monthly rental amount plus their share of the property’s real estate taxes.
The advantage of this lease structure for the landlord is that it offloads responsibility for paying and managing property taxes to the tenant.
The key difference between a single net lease and gross leases is that the tenant pays the property taxes. In a gross lease, these are included as part of the rental rate.
The key difference between a single net lease and other types of net leases is the number of expense “buckets” that the tenant is responsible for paying. In a single net lease, they pay for one bucket (taxes). In a double net lease and triple net lease, they pay for two or three buckets respectively (the other two being insurance and maintenance).
Although they can be used in any property type, single net leases are particularly common in retail properties.
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