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For investors seeking to reduce the burden of managing their commercial real estate investments, net-leased properties are an appealing class of investment property, with double-net (NN) and triple-net (NNN) tenancies being among the most popular. The term “net lease” refers to a lease agreement between a landlord and tenant in which the tenant will pay rent plus additional costs associated with the maintenance, operation, and ownership of the property, such as insurance, property taxes, utilities, maintenance and repair costs, and/or other operational costs.

Types of Net Leases

Net leases are classified as single (N), double (NN), and triple (NNN) net leases, depending on the different sets of costs that the tenant pays.

Single Net Leases

The landlord is responsible for paying all maintenance and operating expenses, while the tenant is responsible for property taxes in addition to rent.

Double Net Leases (NN)

The landlord is responsible for the maintenance of the roof and structure of the property. The tenant pays rent and is also responsible for real estate taxes and insurance, utilities, and the maintenance of other parts of the property.

Triple Net Leases (NNN)

These are the gold standard for simplicity from an owner’s perspective—the tenant pays rent and is also responsible for real estate taxes, insurance, utilities, and maintenance of all aspects of the property. The landlord may retain some responsibility for environmental and other legal obligations that predate the start of the lease.

NNN leases are commonly used for commercial buildings with a single tenant. These leases typically contain built in rent increases, initial terms of at least 10 years, and several renewal options beyond the initial term. Tenants assume responsibilities that would otherwise belong to the landlord, resulting in lower rent charges. In exchange, the building owner is protected against any unforeseeable increase in expenses and liberated from the day-to-day responsibilities associated with property ownership and management.

It is advisable for landlords to obtain their own insurance policies for added protection. In addition to carefully reviewing the financial terms of the lease, it is recommended that investors interested in purchasing NNN-leased properties consider the property’s location, applicable zoning restrictions, associated tax consequences, location profitability, lease guarantor, and market for tenant’s product or service.

Sale Lease-Backs

Sale lease-backs are transactions where the owner sells the property and then leases it back from the buyer under a NNN lease. This arrangement provides the seller with capital while maintaining operational continuity.

Structure of a Net Lease

While any type of commercial property can utilize a net lease—whether it is single tenant net-leased property or a multi-tenant net-leased property—they are particularly common in certain property types, such as office buildings, shopping malls, industrial parks, or free-standing buildings operated by third parties. Investors often favor large regional or national brands due to their corporate guarantee and willingness to commit to long-term leases. Similarly, franchisees who manage a significant portfolio of properties provide investors with a proven track record of reliability for stable, long-term investment opportunities.

Benefits of Net-Leased Properties

Landlords and investors alike find the following benefits in a net-leased property as opposed to a gross lease property:

  • Predictability and Stability: Landlords are shielded from the unpredictability of costs associated with property taxes, insurance, and property maintenance, reducing financial uncertainty and making it easier to budget and plan for the future.
  • Reduced Management Responsibilities: Tenants assume the burden of management, and landlords can enjoy a more hands-off approach.
  • Longer Lease Terms and Built-in Rent Increases: This minimizes the need for frequent lease renewals and rental rate negotiations, saving landlords valuable time and money in the management of their real estate investments.

While net leases offer substantial benefits, it’s important to note that they are not entirely free of management responsibilities. Landlords should ensure tenants adhere to the obligations of the lease, and landlords should be prepared to visit the property to inspect and monitor issues that may arise, particularly towards the end of the lease term. However, these responsibilities are materially lighter than those associated with other property investments, such as multifamily properties, making net-leased properties an attractive option for those seeking a reliable and less labor-intensive investment option.

When to Consider a Net Lease

Investors seeking to avoid the intensive management responsibilities of properties like multifamily units find net leases to be an attractive alternative. Net leases are also conducive to estate planning, offering a streamlined approach to intergenerational wealth transfer, such as allowing for the creation of an LLC structure to distribute rental income among multiple beneficiaries.

Net-leased properties have the added benefit of being manageable for property owners who are not geographically close to their investment properties. The need for physical proximity and constant oversight over day-to-day operations, such as maintenance and repair, is greatly reduced and sometimes even entirely removed.

A net lease may also be necessary to attract selective investors who favor properties with NNN tenancies due to the inherent advantages they offer. NNN leases provide a combination of stability, reduced management demands, and long-term commitments that aligns with the goals of investors seeking a secure and hassle-free source of income.

How a Commercial Real Estate Attorney Can Help

While net leases minimize management responsibilities for the investor, they don’t eliminate the need for meticulous due diligence. A commercial real estate attorney can guide you through the entire process, ensuring clarity over responsibilities, lease structure, and options for holding title. Moreover, when venturing into unfamiliar state territory, the expertise of a commercial real estate attorney is invaluable in guiding you through local laws and regulations.

Consult Our Experienced Commercial Real Estate Attorneys

At Holm & O’Hara LLP, our attorneys have an outstanding track record of facilitating net lease transactions, backed by a detailed lease review and due diligence process. We also have access to a national network of local counsels to ensure a seamless experience across state lines.

Choosing us for your net-leased property transaction means partnering with a team with deep expertise in this investment type. Contact Holm & O’Hara LLP today for help guiding you through the complexities of your net lease agreements. Our attorneys are committed to ensuring your investment is as secure as it is profitable.

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