The main thing to remember about NET Leases is what is the NET to the owner. Which simply means, if the owner/lessor is willing to accept the lessee at a lower lease net, then the net is a simplier net lease. This means the owner/lessor is not willing to take as much risk with the lessee and will charge the costs of operation to the lessee in the form of actual rent. If the owner/lessor is willing to take a larger risk they will increase the liability of the nets to the lessee. It would seem the opposite is true, however, in truth by allowing someone else to be responsible for paying the insurance, taxes, operating expenses, ecetera, on a building you own, you in fact are taking a higher risk with that tenant. The usual definitions of Net, whether single, double or triple is actually a misnomer and has been classified falsely. The fact is all leases are a NET of some class. Whether the lease be full service (all inclusive), or separate clauses are made for expensing operational costs, each is a net lease to the owner/lessor since the owner will recieve a final compensation, either profit or loss. The reason this is true is because of the factor called debt service, which is not a direct cost to the lessee, but is in the end how the DS gets serviced. A college professor explained it to me this way years ago (my major was real estate). What does this mean, it means that NETS are separate and added as many times as negotiated. There can be a single net or you could have ten. But, for simplicity it is easier to explain it to others the way common definitions are used. If representing a tenant it is advisable to explain to them that Net leases are not always the best route since the usual PSF costs is represented in an attractive manner and the REAL PSF costs are hidden. When broken down the taxes, insurance and operational expenses PLUS the tenants additional tax, insurance and operational expenses increase the overall NET expense to the tenant while increasing the overall profit potential for the owner. In short, there are two sides to the story.
Also, nice presentation Gregory.
Oct 7, 2010