Net Lease Explained
When you’re thinking about investing in commercial property, knowing the different types of lease structures is important. There’s gross lease, which is where the tenant pays a single fee, and the owner pays all of the regular operating costs for the space. Then there’s net lease, which is where the tenant pays a portion or all of the taxes, insurance, and maintenance costs (TICAM) in addition to rent. While a gross lease is right for some investors, there are advantages to choosing to operate a space under a net lease structure. Our team of net lease experts, made up of brokers Deuce Harris II, Graham Storey, and Charles Bartscher, is here to explain what those advantages are.
Q: Why should I choose net lease for my commercial property investment?
A: We want to reduce as much risk as we can for our investors. In general, the less risk we can have as an investor, the better. With net lease properties, especially an absolute net lease property where the owner doesn’t have to pay for expenses, the owner is just collecting rent, that's all it is. You’re guaranteed this income for usually 15 years.
Net lease, especially triple net lease, is what the market is dictating right now because it’s a stable investment. While the price of that stability will be reflected in the return, it’s usually ultimately worth it because there aren’t a lot of headaches.
In other words, as an investor, you should be getting a higher return for a gross lease or even a double net lease since you are taking on the financial risk of the building structure/ HVAC. For example, should someone hit a column of a structure, you would either have to have carried insurance and subsequently file a claim or pay out of pocket for repairs. This risk should be accounted for in lease amounts versus absolute triple net leases where you don’t not have this risk.
If you’re an investor in a higher risk lease structure and aren’t seeing a higher return, you should either move to a triple net or hire a management firm.
Q: Why are older investors in particular choosing net lease?
A: What we see with our clientele base is that a lot of the older clientele are looking for triple net properties. They don't want to deal with the headaches. They want something that’s easier and where they can just collect rent - otherwise known as “mailbox money.” They may be getting a lower return, but they’re dealing with less risky tenants who take care of everything themselves because they're responsible for doing that.
Q: What type of investor might not want to choose net lease?
A: We see younger clients often looking more for multifamily and local retail that they outfit themselves and lease out. Added sweat equity doesn't help you in net leasing. You can increase your return with sweat equity, and not net leases. For example, we have a client in multifamily who literally says “the worse that is, the better it is for him” because he can do the sweat equity cheaper than anyone else. Because of that, he can get a good property for a very cheap price, and he's not interested in triple net.
If that is the case the investor will have more work to do in terms of managing the property, keeping tenants happy, and replacing things as they break. It completely depends on the investor and their goals.
Ask a Net Lease Question
Our brokers are happy to answer your questions through the Net Lease Explained series. If you have a net lease question, our team wants to hear from you at marketing@westandwoodall.com.