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What is a Net Lease?

A net lease is a contractual arrangement under which the lessee pays for all costs associated with a property. In essence, the lessee makes payments as though it is the owner, without actually owning the property. The basic rent payment is typically lower under a net lease, because the lessee is absorbing so many other expenses instead. However, the lessee must balance the risk of incurring large additional costs at unpredictable intervals, as well as the potential for gradually increasing tax and insurance payments, over making a lower rent payment.

Net leases are useful for commercial real estate investors, who can shift the administrative burden of paying for property costs to their tenants, leaving them to only deal with property financing.

What Costs are Included in a Net Lease?

Net lease costs include the insurance, maintenance, and taxes for a property, as well as the rent. Three variations on the concept are described below:

• Single net lease. Under a single net lease, the lessee pays for one of the three classifications of expenses. The usual arrangement is that the lessee agrees to pay for the property taxes associated with their rented space. This means that the obligation passes through to the lessee.

• Double net lease. Under a double net lease, the lessee pays for two of the three classifications of expenses. Also known as a net-net lease. For example, the lessee might pay for property taxes and insurance.

• Triple net lease. Under a triple net lease, the lessee pays for all three classifications of expenses. This is also known as a triple net lease.

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Example of a Single Net Lease

Songbird Marketing enters into a net lease agreement with the owner of a commercial office building in downtown Chicago. Under the terms of the lease, Songbird agrees to pay a base monthly rent of $5,000, as well as cover the annual property taxes associated with the portion of the building it occupies. The landlord, however, remains responsible for the building's insurance premiums and structural maintenance. This arrangement, known as a single net lease, shifts some of the financial responsibilities—specifically the property taxes—from the landlord to the tenant. For Songbird, this means that in addition to their base rent, they must budget for approximately $6,000 per year in property taxes, paid either in a lump sum or in monthly installments. This lease structure benefits the landlord by reducing their tax burden, while the tenant gains the advantage of a slightly lower base rent compared to a gross lease, where the landlord would cover all operating expenses.

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What is the Difference Between a Net Lease and a Gross Lease?

A net lease requires the tenant to pay rent plus some or all property-related expenses such as taxes, insurance, or maintenance. A gross lease requires the tenant to pay a single rent amount while the landlord covers most operating costs. Net leases shift more financial responsibility to the tenant, while gross leases provide more predictable costs.

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