Single net lease – what is it and how does it work?

Author Charlie Cutler Read bio
Tags: lease single net lease
Date: January 14, 2021

A single net lease is a contract in which the tenant agrees to pay a predetermined price for rent as well as coverage for additional expenses associated with the property he uses. That usually includes:

  • Property taxes, 
  • Insurance, 
  • Maintenance, 
  • Repairs, and
  • Clarifies all the additional expenses that the tenant is responsible of

A single net lease is the least common type of net lease which states that the tenant is responsible for paying all or a portion of the property taxes, in addition to the pre-established rental rate.

Although these financial responsibilities can shift from the landlord to the tenant, most landlords still prefer the payment to pass through them to ensure the payment is correct and on time. 

Bear in mind that all of the information provided in this article can be impacted by many unique variables of your single net lease, so always consult with a qualified real estate professional before taking action.

Single Net Leases Explained – What Is A Single Net Lease Property?

In a single net lease agreement, also known as a Net or N lease, the resident assumes accountability for paying the cost of the building’s property taxes in addition to the conventional rent. The proprietor may (or may not) include utilities with the rent, as negotiated between the two parties.

To compensate for the additional investment, landlords will typically offer a more moderate monthly rent. Nevertheless, the amount of rent will intensify periodically to reckon for buildup as well as to pay the required increase of real estate taxes and assessments, with residents paying roughly the same amount in a given year. 

A single net lease gives the tenant more transparency regarding the amount of real property tax that it is paying. It is more suitable for the landlord because the landlord does not need to be involved in the process of paying real property taxes.

Single net leases remain less common – Why?

If the tenant fails to pay property taxes, the local government puts a claim against the property, which is ultimately the landlord’s problem rather than the tenant’s. To solve this problem, landlords utilizing single net leases will usually collect the property tax costs from the tenant using a monthly escrow, then pay the bill themselves.

However, landlords who want to assign responsibility for property taxes typically do so as a part of a double net lease or a triple net lease, rather than a single net lease.

Two large office buildings

The influx of foreign capital affected the single tenant net leasing market

In our practice, we have witnessed a large introduction of international assets over the past few years, which has largely explained the growth in real estate values throughout California. 

Foreign investors, who are looking for safety and stability of the USA market are willing to stay invested for a long period and do not require the same returns as other, more opportunistic capital sources

Therefore, foreign investors are willing to pay a higher acquisition price for real estate than other customers. The outcome is magnified in cases where a foreign investor acquires debt funding at historically low rates to finance purchases. 

In the context of net lease transactions, a party that wants to lease rather than buy its space, for the reasons described above, can lower its financing costs (which is the rent in a net lease transaction) by tapping foreign capital sources that require a lower current return.

Market affecting landlords’ and tenants’ negotiating leverage

The oscillator has turned toward the tenants, as capital sources (including foreign capital) are exploring the pressure to deploy their capital in transactions that make sense, but there is no doubt that the machine will turn the other way as interest rates rise and capital becomes more limited.

Single net lease is the most sought-after property type for investors seeking lower management-intensive products, fewer owner costs, and stable monthly incomes, through the most yielding of real estate investments – indicating the proprietor owns the fewest responsibilities for the goods.

The freestanding property can be a retail, industrial, or office building, and because it is a net lease, tenants pay repairs and maintenance, property taxes, and insurance.

Benefits Of Investing In Single Tenant Properties

Single-tenant net lease investments are typically turnkey purchases, providing a consecutive stream of cash flow that can be scored month after month, year after year. 

A single tenant net lease also makes an ideal investment for retirees, busy professionals, new investors, or investors simply looking to add a hassle-free property to their portfolio, with minimal responsibility required.

Unlike multi-tenant properties, single-tenant net lease proprietors are excluded even from capital repairs, allowing the owner to spend both his time and money on separate ventures. 

Single-tenant net lease investments are ideal turnkey properties, whether you’re looking to diversify your portfolio or simply would like to add a no-hassle revenue stream – single net lease assets are the ideal investment. The IPG team is ready to guide you through your next N commercial real estate purchase.

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