What is Net Lease Real Estate?

Net lease real estate refers to commercial properties that have a Triple Net Lease (NNN) in place between the landlord and the tenant.   The NNN lease is very different from gross leases because the tenant is responsible for maintenance, property taxes, and insurance – in addition to paying rent.  This is the opposite of the leases that many are familiar with in a residential context in which a tenant pays rent and the landlord must cover all other aspects.  

This sounds like a pretty good deal for the landlord… and it is…. so why would tenants enter into such a lease obligation?

Leasing as opposed to purchasing the required real estate space offers the tenant the flexibility to make greater investments into their core operational business, freeing up precious capital and accelerating their own corporate growth.  Especially in businesses that have a lot of locations – the amount of capital that could be locked up in the real estate could be a huge number.  Leasing saves cash – and enables that cash to be invested in higher return activities such as M&A, entering new markets, developing new products, etc. 

The terms and conditions of any given NNN lease are specific to the asset under consideration, but the majority of NNN leased properties share the same characteristics: The landlord maintains ownership of the property, but the tenant is responsible for the taxes, maintenance, insurance and utilities at the property level. Therefore, the rent paid by the tenant to the landlord is essentially all profit. Lease lengths vary but are generally longer than most commercial property types and can be as short as 5yrs or as long as 50yrs. Some carry rental escalators on an annual basis and all carry some inflation protection at agreed upon lease extension dates (typically at years 5 & 10).  

Tenant credit varies across and within industry verticals, meaning the most important determinant of sustainable investment returns is the ability to appropriately underwrite tenant risks, identify mispriced assets and formulate ongoing asset management and disposition strategies.