LEASE LANGUAGE: Net lease basics
Apr 1, 2001 12:00 PM, Christian Marabella
There are a variety of net leases, one of which is a double net lease. The double net lease is a lease in which the tenant is responsible for the majority of all expenses, excluding roof and structure, while the landlord may be responsible for other items such as HVAC and parking lot maintenance. With a triple net lease, also known as a true net lease, the landlord has no responsibility for maintenance or expenses. Bondable leases are even more strongly in favor of the landlord, making tenants responsible for all expenses and maintenance, as well as casualty insurance. Under a bond lease the tenant has no termination or abatement rights.
Insurance requirements
Typically the general insurance coverage should be specified in the net lease. This would include commercial general liability, commercial property insurance, and all other insurance mentioned in the lease. It is always a good idea to get a copy of the insurance certificate, which should specify all insurance coverage and deductibles. An investor evaluating a net lease property should reconcile the insurance coverage indicated in the net lease and insurance certificate with the lender's insurance requirements. In certain instances the insurance coverage in the lease will not meet the lender's insurance requirements, requiring the investor to negotiate with the lender. If the lender will not ease the insurance coverage requirements, the investor can have the tenant increase its insurance coverage to meet the lender's specifications. If the previous two methods are not successful, the investor will be required to get a gap insurance policy.
Property taxes and insurance
"It is always wise for an investor to have an attorney, accountant and insurance professional, all with experience in net lease properties, review the lease."
An investor considering purchasing a net leased property should review the lease to determine how the payment of property taxes and insurance are handled. Most lenders prefer for the tenant to receive the bill for these items and handle payment of the property taxes and insurance directly. When the lease is setup in this manner, the lender will usually be able to waive impound accounts for property taxes and insurance. If the net lease indicates the landlord will be responsible for payment and will be reimbursed for these costs, once the landlord submits proof of payment to the tenant, there is a good chance the lender will require an impound account for the property, taxes and insurance.
Attorneys and accountants
It is always wise for an investor to have an attorney, accountant and insurance professional, all with expertise in net lease properties, review a copy of the lease. Attorneys are best utilized to examine the lease and advise the investor of any changes that should be made to the lease that would benefit the investor. The attorney should review the lease to make sure the lease is truly a double net, triple net or bondable lease, depending on how it is being represented to the investor by the seller. Accountants can advise the investor if the transaction is economically viable and if any tax implications will be created by the purchase of the property. It is also a good idea for an investor to have an insurance agent/consultant review the insurance coverage in the lease and Insurance Certificate to verify it will meet a potential lender's insurance requirements.
Christian S. Marabella is owner of Marabella Commercial Finance, which specializes in arranging permanent financing for net leased properties from $400,000.
