What is a Net Lease Property?
Net Lease Property is a subcategory of Fee-Simple Property and includes all Fee-Simple Property with a long-term structured net lease. A net lease is a lease that is typically long-term in nature, ranging generally anywhere from 3 to 50 years. Within a net lease arrangement, the tenant agrees to bear the majority of the operating costs associated with the property. Generally, Net Lease Property falls in the following property types: retail, commercial office, medical office, services, food services, financial institutions/banks and gas stations.
How Does It Work?
Often Net Lease Property are built to suit for specific tenants, customized to the tenant’s needs and specifications. Once constructed, the tenant (often a large corporate entity) will sign a long-term lease with language defining what costs (if any) the landlord will be responsible for and what the tenant will be responsible for. Absolute Net Lease Property have no management responsibilities held by the owner of the property. Triple Net Lease (NNN) means that generally the tenant is responsible for all operating expenses with the exception of limited structural repairs and roof repairs. Double Net Lease (NN) generally means the property owner is responsible for the structure, roof and one major operating expense item – usually either insurance or property taxes. Due to the fact the leases are long-term in nature, they usually have built-in rent escalators with the intent of, at a minimum, keeping up with inflation.
Benefits of Net Lease Property
Owners predominately acquire Net Lease Property for the stable, income potential that results from a long-term lease arrangement with a with a credit worthy tenant. Furthermore, due to the custom nature of the construction, owners tend to have limited bargaining power when negotiating lease renewals. In addition to the income and limited management requirement, the ability to control the financing associated with the property is also a benefit. While income is a worthy benefit, it should also be noted that Net Lease Property is sensitive to interest rate risk. Traditionally, Net Lease Properties have struggled from a value standpoint during increasing interest rate environments.