What Is a Net Lease REIT and How They Operate

Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-producing real estate. They provide a way for individuals to invest in large-scale properties that generate income, similar to investing in other industries through stocks. A specialized segment is the net lease REIT, focusing on properties leased under agreements where the tenant takes on many property expenses.

Understanding Net Leases

A net lease is a commercial real estate lease where the tenant pays a portion or all of the expenses typically associated with property ownership, in addition to base rent. This contrasts with a gross lease, where the landlord generally covers most operating expenses like property taxes, insurance, and maintenance. The “net” refers to the landlord’s rental income being “net” of these expenses, as they are passed to the tenant.

There are three primary types of net leases, defined by tenant responsibility for property expenses. A Single Net (N) Lease requires the tenant to pay property taxes in addition to base rent. The landlord typically remains responsible for property insurance, maintenance, and repairs. This shifts only a portion of the operating cost burden to the tenant.

A Double Net (NN) Lease mandates that the tenant covers both property taxes and property insurance, alongside base rent. The landlord usually retains responsibility for structural maintenance and building repairs. This type of lease offers the landlord more predictability regarding expenses than a single net lease.

The most comprehensive form is the Triple Net (NNN) Lease, where the tenant assumes responsibility for property taxes, property insurance premiums, and all property operating expenses, including maintenance and repairs, in addition to the base rent.

Operational Framework of Net Lease REITs

Net lease REITs primarily acquire and own properties leased under long-term agreements, often spanning 10 to 20 years or more. This long duration, combined with built-in rent escalators (e.g., fixed annual increases or CPI adjustments), contributes to a highly predictable and stable rental income stream for the REIT. This predictable cash flow is a distinguishing feature, allowing for consistent financial planning and dividend distributions.

Because tenants are responsible for most property-level expenses like taxes, insurance, and maintenance, the REIT’s direct operating expenses are significantly reduced. This is especially true for portfolios heavily weighted towards triple net leases, where the tenant handles nearly all property upkeep. The reduced operational burden means net lease REITs maintain a leaner operational model compared to REITs managing properties under gross lease agreements.

With fewer day-to-day property management responsibilities, the operational focus of a net lease REIT shifts. Instead of extensive in-house property management teams, these REITs concentrate resources on strategic activities: identifying and acquiring new properties, managing and optimizing their existing portfolio for high occupancy and tenant retention, and efficiently accessing capital markets to fund growth and acquisitions. This model allows them to scale portfolios with lower overhead per property.

Common Properties and Tenants

Net lease REITs build portfolios of real estate assets and tenant profiles that align with the long-term, expense-pass-through nature of net leases. Common categories include freestanding retail properties, such as single-tenant buildings occupied by drugstores, fast-food restaurants, and convenience stores. These properties are often strategically located and designed for a specific tenant’s operations.

Industrial properties also frequently feature in net lease REIT portfolios, encompassing large-scale assets like distribution centers, manufacturing facilities, and warehouses. These facilities are often critical for the tenant’s supply chain or production, making them suitable for long-term lease commitments. Some office buildings, such as single-tenant corporate headquarters or data centers, also fit the net lease model.

Healthcare facilities represent another significant asset class for these REITs, including medical office buildings, urgent care centers, and skilled nursing facilities. These properties support essential services, which can contribute to lease stability. Tenants occupying these property types are typically creditworthy companies, from investment-grade corporations to regional operators.

Net lease REITs often target businesses providing essential services or demonstrating recession-resilient operations, such as pharmacies, grocery stores, and quick-service restaurants. This focus on strong financial standing and operational stability helps mitigate the risk of tenant defaults. Many tenants require their physical real estate to be highly integrated into operations, making them less likely to relocate and more inclined to enter long-term net lease agreements.