Net Lease Investment Terms
- NNN (“Triple Net”) Lease – a net lease where the tenant agrees to pay a monthly lump sum base rent as well as the property taxes, property insurance, and all property maintenance expenses. Also known as an absolute net lease, referring to all income being net to the property owner.
- NN (“Double Net”) Lease – a net lease where the tenant agrees to pay a monthly lump sum base rent as well as the property taxes and insurance. The property owner may be responsible for the maintenance of the roof, structure of the building, and possibly the parking lot. Many variations of this net lease type, but it means the property owner will ultimately have some responsibilities.
- Fee Simple – ownership of both the land and building. Recognized as the highest form of real estate ownership.
- Ground Lease – landlord/investor owns the land only, which they then lease to a tenant that constructs their own building. Building ownership generally reverts to the land owner if the tenant ever vacates, which basically provides the owner with a free building on the land they purchased.
- Leasehold – refers to the right to hold or use a building for a fixed period of time at an agreed upon price without transfer of ownership. Leasehold refers to the structure only, not the land upon which it was built. Opposite of a ground lease.
- Capitalization Rate (“Cap Rate”) – annual net operating income ÷ capital cost or market value. Example: building purchased for $1M and produces $100,000/year in net income = 10% cap rate.
- Cash on Cash Return – annual net cash flow ÷ net investment. Example: annual net cash flow from a property is $50,000 after debt service and cash invested in the property is $500,000 = 10% cash on cash return.
- Outparcel – building lots separated or separable from a commercial development.
- Depreciation – that portion of an investment’s value that may be deducted against taxable income in a given operating period.
- Net Operating Income – total cash income of a property reduced by its operating expenses.
- Credit Tenant – a tenant recognized regionally or nationally by a legitimate credit rating service (Standard & Poor’s, Moody’s).
- Percentage Rent – vehicle for property owner to share in success of tenant’s business. A percentage rent provision notes that if a tenant achieves a certain level of gross sales, known as a “breakpoint”, the tenant will pay a percentage of any breakpoint overage to the property owner as additional rent.
