Netting Leases in Commercial Real Estate

– Howard Freedland

If you are as old as I am, you remember the Michael Jordan vs Larry Bird commercial for McDonalds. They play a game of horse where the loser watches the winner eat a Big Mac. Simple, right? Only, neither of them would miss a shot. The shots got more and more difficult, until they became ridiculous. “Off the scoreboard, bouncing twice, nothing but net!” And then, swish. Today’s discussion talks about nothing but net, more specifically, single, double, and triple net in Commercial Real Estate. I am Howard Freedland, and this is your Echo Commercial Tip of the Week.

So, what exactly is net billing?  With leasing, there are several ways to build the cost for the tenant. Let’s focus on the three nets. Each has a certain number of benefits and risks to both tenant and landlord.

Single net is not very common. This is where the tenant pays for property taxes, but insurance, maintenance, repairs and utilities are the landlord’s responsibility. This is risky for the landlord, because if the tenant is late or does not pay, they are on the hook for the expenses. Therefore, they are usually included in the rent payment. This leads us to-

Double net, which is a more popular choice, especially in Commercial Real Estate. This is where the tenant pays the property taxes and insurance in addition to their rent. The rent is more often lower because of the expenses. All maintenance is the responsibility of the landlord. There is more security in that the larger costs for the property are amortized into the monthly rent, with only upkeep being held out.

The least risky program is the Triple Net. This billing format rolls every cost into the rent. This will lower the base rent quite a bit, and help the landlord make their responsible payments on time. The benefit to the tenant is that with rent lower, and the other costs at a pass-through level, they have more control over the long haul to control their overall rent cost. Obviously, the cost is that the tenant is responsible for paying all the other costs up front every month instead of having the landlord pay for them.

What happens when the maintenance costs are higher than expected? One scenario can include tenants trying to get out of their leases or obtain concessions. To pre-empt this, landlords can set a bondable double net lease, which cannot be terminated before the term date. The benefit is that rent is locked in for a longer term and have a more favorable rent cost.

So, now you know the type of net leases. Simple as draining a jump shot from the rafters that bounces off the mascot, off a seat in the crowd and *Swish*. Remember, though there are choices, landlords often choose nothing but net!

Howard Freedland is our Echo Commercial Properties Real Estate Specialist. As an independent wine broker, Howard has executed international deals with corporations and conglomerates. While working with Echo Fine Properties, Howard is a part of a team currently managing the interests of national and international companies wanting to secure land and property in South Florida. All of his prior business experience has brought him to this point as a professional, effective real estate leader. You can contact him on 561.889.2735 or [email protected].

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