Learn your lease (Part 2)

Texas Mdecial Center

 

In our second informational post, we will look at the Single Net Lease:

 

What is a Single Net Lease

A single net lease is a commercial real estate lease agreement in which the tenant agrees to pay property taxes in addition to rent. A single net lease is a form of pass through lease in which taxes associated with the property become the responsibility of the tenant instead of the landlord. The landlord is responsible for the other operating expenses involved with running the property. Single net leases are a less common form of a commercial lease.

BREAKING DOWN Single Net Lease

A single net lease is a type of net lease where the tenant takes on some or all of the operating costs of a building. Single net lease is sometimes confused with the concept of a net lease. Net lease refers to all the types of net leases — single net leases, double net leases, and triple net leases — whereas single net leases are specifically the net lease with the tenant taking on only one operating expense, most commonly the property taxes.

Single Net Lease vs. Other Lease Types

Net leases are the other side of the coin from gross leases. In a gross lease, the tenant pays an agreed-upon amount for rent, and the landlord is responsible for everything related to the property. Most rental agreements for non-commercial properties are gross leases or a modified gross lease where the tenant is responsible for personal utilities and nothing else. As for other net leases, double net leases and triple net leases have the tenant paying two and three of the major operating expense categories, respectively. The major operating expense categories are taxes, insurance, and maintenance.

The Landlord’s Perspective on a Single Net Lease

From a passive investment standpoint, a property investor would prefer a triple net lease, as there are no headaches from dealing with the property like a traditional landlord. The tenant company may not be interested in carrying all the building costs, so the double and single net leases may be a compromise between the two parties. In addition to shifting the cost burden in a single net lease, the landlord also shifts any negotiation or lobbying with local authorities on commercial property tax rates.

In theory, an absentee property owner with properties in different regions of the country could contract out maintenance, gain economies of scale by ensuring across the portfolio and leave local taxation issues for the tenants to sort out. While a single net lease is more work than a triple net lease, it is still superior to a gross lease in terms of the burden it places on the property owner.