What is a “Net Lease”?

The term “net lease” refers to a type of lease where the tenant pays rent “net” of most, if not all, property expenses. The most common net lease is a “triple-net lease” where the tenant pays rent to the landlord and maintains direct responsibility for the property expenses, namely (1) property taxes; (2) insurance; and (3) property maintenance.

This structure allows the tenant to maintain control of its facilities without reliance upon third party property managers, and property owners to receive consistent rental revenue without exposure to fluctuating property management expenses. In addition, net leases generally have initial lease terms of 10-25 years, providing long-term predictability to both the tenant and the property owner.

Long lease terms, combined with built-in rent escalations, make revenue projections straightforward and understandable for the property owner and long-term occupancy costs predictable for the tenant.

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Why do businesses choose to lease rather than own their real estate?

Businesses have historically chosen to own their operating real estate as both a method to control their facilities and a long-term investment. Ownership requires businesses to finance their investment by both borrowing and, importantly, parting with precious equity. In doing so, businesses implicitly allocate capital to an investment with inferior returns relative to their underlying business.

 

Net lease offers businesses a solution that mimics the control of ownership while freeing up valuable capital for higher return investments such as expansion, acquisition, and reinvestment. As business owners, CEOs, and CFOs evaluate the most efficient way to grow and finance their business, more and more are choosing to lease rather than own their real estate.