Commercial Investing: Leases Defined – Triple Net Lease And Other Investment DefinitionsBy
The real estate investment arena is filled with its own language and often features terms from property law, banking concepts and feudal times. Terms like “triple net lease” are not intuitive. Rather, a triple net lease refers to a lease where the lessee (person leasing the property) pays rent, insurance, maintenance and property taxes. Triple net leases usually involve single-tenant retail properties leased to tenants with high credit ratings on “NNN” terms.
As a continued segment to help you navigate the real estate investment lingo, we will be periodically posting commonly used real estate investment terms and definitions provided by many sources including www.investorwords.com and www.creonline.com. This posting will focus on types of leases.
Double Net Lease
A double net lease is a written agreement or contract where the lessee (person, people or entity acting as tenant) pays rent, taxes and insurance expenses to the lessor. The lessor pays maintenance feels.
A capital lease is considered a purchase of the property by the lessee (person, people or entity acting as tenant) when at least one of the following items occur:
- The lease includes an option to purchase the property for less than fair market value.
- The lease term is greater than ¾ of the property’s estimated economic life.
- The lease transfers ownership of the property to the lessee at the end of the lease term.
- The present value of the lease payments exceeds 90% of the fair market value of the property.
A direct lease is a financing contract that requires the lessor to purchase the property directly from the manufacturer and lease the property to the lessee. In direct leases, the lessor is usually a financial institution or bank.
A land lease is a written agreement or contract that specifies only the land or ground is the rented property.
A lease is a written agreement or contract where a property owner allows use of the property to a named tenant for a specified time and rent.
A leaseback is a written agreement where one party sells property to a buyer and the buyer immediately leases the property back to the seller. Leasebacks allow the buyer to have full access to the asset without capital constraints. Leasebacks can also provide tax benefits.
A leasehold is a legally recognized property interest that gives the leaseholder the right to hold or use a property for a fixed period of time at a stipulated price without transfer of ownership under a lease contract.
A lease purchase agreement is a written contract under which the lessee can apply lease payments toward the purchase of the property.
A lessor is the person, group of people or named entity who is leasing a property to a tenant under a written agreement for a specified time and rent.
A lessee is a person, group of people or named entity acting as tenant for a specified time and rent.
A leveraged lease is a written contract that requires the lessor to supply some of the capital required to purchase the property and borrow the remainder from a lender. The lender is given a mortgage on the asset and an assignment of the lease and lease payments. In a leveraged lease, the lessee makes payment directly to the lender.
Open-End Lease (Finance Lease)
An open-end lease is a written contract that requires the lessee to pay an additional sum, with the amount of the additional sum dependent on the value of the property when it is returned.
A sandwich lease is a written contract where an entity leases property from one party and leases the same property to another party. Under this type of lease, the entity is both a lessee and a lessor, which means the entity both pays and collects rent on the same property.
Step-Down Lease and Step-Up Lease
Both types of leases are written contracts that stipulate specified increases or decreases to rents on certain future date. With step-down leases the rents decrease at future dates; with step-up they increase.
A synthetic lease appears as a lease from an accounting viewpoint, but as a loan for tax purposes. This allows for an off-balance sheet account of the financing and tax benefits that accompany the financed asset.
*Please note, TheRealWealthblog.com cannot guarantee the accuracy of the information of the following article as it pertains to individual leases. The above information is provided as an overview. When considering what lease options to pursue, please seek the advice of an attorney, accountant or other professional as it pertains to your individual circumstances.