Single Tenant Net Lease Tips and Strategies
More often than not, investors in the commercial real estate sector are looking for net leases. Here, we have rounded up everything you need to know about Single Tenant Net Lease as well as some tips and strategies to give you an edge in the game.
What is a Single Tenant Net Lease?
Simply put, a single net lease is a commercial real estate lease agreement in which the tenant agrees to pay property taxes in addition to the rent. It is a form of pass-through lease in which the taxes associated with the property become the tenant's responsibility instead of the landlord's. However, under a single net lease, the landlord is still responsible for the operating expenses involved with the property.
Understanding 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. However, it should not be confused with a net lease. Net lease refers to all types of leases, e.g., Single net lease, double net lease, and Triple net lease; whereas, the single net lease is a specific type of lease where the tenant shoulders only one operating expense (primarily property taxes).
How Does a Single Net Lease Work?
As a landlord, you can collect rent for all your commercial tenants, and depending on the type of lease, and you may also be able to bill them for any additional expenses incurred. These expenses are (a) Property taxes, (b) Insurance costs, and (c) Repairs and Maintenance costs. In a single net lease, the tenant is responsible for paying one of the expenses mentioned above: the net property tax. The amount to be paid, however, will ultimately depend upon the agreement between the parties. For example, the agreement may include paying the property taxes as part of the rent, or it may be a separate payment that changes depending on the flow of the current tax rates.
Insofar as multi-unit buildings are concerned, the payment of the taxes will depend on the size of their unit. Hence, if a tenant rents half of the property, they will pay half of the property taxes thereon, and the other tenants will pay the remaining balance.
What are the Pros of Using a Single Net Lease? A single net lease provides you with two main benefits:
- Increased Profits. In a single net lease, you do not have to use the tenant's rent to pay the property taxes since the tenant pays for them. As such, you can keep more of the rent as profit; and
- Protection against Tax Increases. If there is an increase in property taxes, you are not affected because you merely pass the responsibility of paying these taxes to the tenant(s). This ultimately means that while property taxes do indeed go up, your income from the collection of rent will be unaffected.
What are the Cons of Using a Single Net Lease? While a single net lease may have its benefits, it also has its downsides, such as:
- Hands-on approach. While the tenant shoulders the property taxes, there are still costs that should be taken into consideration. Moreover, this type of lease also requires you to manage the property proactively.
- Expenses for Maintenance and Repairs. Probably the most time-consuming part of owning a commercial building is handling all the maintenance costs and repairs. In a single net lease, you may either manage all of this yourself or hire someone to do it for you. In either case, payment of maintenance and repairs are almost always present.
- Sudden Increase in Expenses. It should be noted that the tenant only pays for the property taxes, you must still pay for the other costs such as maintenance, repairs, insurance, etc. Insurance hikes and unexpected or sudden repairs sometimes happen, and the burden of paying these extra costs rests on you. Hence, proper budgeting is needed; otherwise, these costs will negatively impact your earnings.
When to Use a Single Net Lease
As a landlord, if you negotiate a lease contract with a tenant, you may wonder what the best type of lease you should use is.
If you desire more control over how the property is run, then a single net lease might be the best for you. Indeed, looking after the repairs and maintenance is a big responsibility since it allows you to control how things are done according to your schedule and are done your way. Furthermore, if you want to have your property taxes covered and paid for you the single net lease is the best choice. Since the tax rates are covered, you need not worry about any fluctuations in the payment of these taxes and how it affects your property; you transfer its charge to the tenant. Conversely, suppose you want to take an active role in managing your property. In that case, a double net lease is probably the better choice since this allows you to control how the property is managed whilst providing the additional benefit of having your property insurance covered for you.
When Not to Use a Single Net Lease
If you do not want to be responsible for the day-to-day property management, then a single net lease is not a good idea. This is because, in a single net lease, you still have to collect the payments, pay the property insurance, schedule the maintenance, and deal with sudden and unexpected repairs. You will either do this all by yourself or hire someone to do it for you (which is another expense), but the fact remains that this type of lease requires day-to-day management of the property.
Hence, a triple net lease is the better choice and typically the preferred lease type for those interested in investing in properties rather than managing them. Since this type of lease leaves almost everything to the tenants, therefore, it frees up your time to be allotted to other areas of your business.
Tips for Investing in a Single Net Lease
If you are looking at a property that has a single net lease, here are some things to take into consideration:
- What’s included in the lease. Since every lease type is a little different, there may be additional clauses on the lease that may have been agreed upon. Therefore, you have to make sure that you read through the "fine print" of the lease and understand your responsibilities to avoid unnecessary misunderstandings that could ultimately lead to litigation.
- The Condition of the Property. Since you will be responsible for all the repairs, maintenance, insurance, etc., it is imperative to understand what you are getting into. Hence, you have to inspect the property to have an idea or a good understanding of the amount of expenses for repairs and maintenance that you will eventually have to incur. This can be done through an ocular inspection of the property or a tour thereof. But no matter the inspection modality, it is rather essential to keep in mind that as a general rule: "The older the property, the more repairs and maintenance costs will be incurred; conversely, the newer the property, the less repairs and maintenance is required".
- How much work are you willing to take on? Since a single net lease requires the active management of the property, you have to ask yourself then how much effort of work you are willing to give/do. If you can handle all the repairs and maintenance costs, repairs, and the payment of insurance, then this lease type is for you. It must also be remembered that you need not manage or take the necessary property taxes as the tenant covers these.
Summary of the key benefits of a Single Tenant Net Lease:
- A single net lease is a commercial real estate lease agreement where the tenant agrees to pay the property taxes in addition to rent.
- A single net lease is a form of pass-through lease wherein the taxes associated thereto become the responsibility of the tenant instead of the landlord.
- Under a single net lease, the landlord is still responsible for overhead costs related to the maintenance of the property.
- The landlord is not affected by the fluctuations of property taxes since the tenant handles them.
- Due to the landlord not considering the property expenses, the landlord can fully utilize rent income and, therefore, increase his profit.
Even after outlining all the information above, leasing commercial real estate can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at firstname.lastname@example.org.
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Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
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