Table of Contents
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1. What is a Triple Net Lease
A triple net lease (NNN) is a lease in which the tenant takes on all three major categories of property operating expense, on top of base rent. The three "nets" refer to property taxes, property insurance, and common area maintenance (CAM), which includes repairs, landscaping, snow removal, and other upkeep costs. The landlord's rental income comes in "net" of almost every operating expense.
NNN leases started in single-tenant retail and are still most common there: standalone pharmacies, fast-food restaurants, convenience stores, dollar stores, and auto parts retailers. The structure has since spread to single-tenant industrial properties (warehouses, distribution centers), freestanding medical office buildings, and even some office properties. What they share is one tenant in the whole building, which makes it practical for that tenant to handle every property expense directly.
The Three "Nets" Explained
- Property Taxes (N): The tenant pays all real estate taxes directly or reimburses the landlord. In a true NNN lease, the tenant is responsible for any increases in taxes, including those triggered by reassessment after a sale.
- Insurance (N): The tenant maintains and pays for property insurance, including fire, casualty, and general liability coverage. The landlord typically requires minimum coverage levels and is named as an additional insured.
- Common Area Maintenance (N): The tenant handles all property maintenance, repairs, and operating costs including landscaping, parking lot maintenance, HVAC service, roof repairs, and structural maintenance.
2. NNN vs. Gross vs. Modified Gross Leases
You can't compare two properties, or their real returns, without knowing how each is leased. The three main structures differ in one basic way: who pays the operating expenses, landlord or tenant.
Triple Net (NNN)
- • Tenant pays ALL operating expenses
- • Landlord receives pure net income
- • Minimal landlord management needed
- • Common in single-tenant retail/industrial
- • Lowest base rent of the three structures
- • Most passive for the investor
Modified Gross
- • Expenses split between landlord and tenant
- • Typically landlord pays taxes and insurance
- • Tenant pays utilities, janitorial, some CAM
- • Common in multi-tenant office and retail
- • Base year or expense stop provisions
- • Moderate management required
Full Service Gross
- • Landlord pays ALL operating expenses
- • Tenant pays single gross rent amount
- • Highest base rent of the three structures
- • Common in Class A multi-tenant office
- • Expense stops pass through increases
- • Most management intensive for owner
Why It Matters for Investors
When comparing properties with different lease structures, you must normalize to NOI. A property with $500,000 in gross rent and $200,000 in expenses produces $300,000 NOI, the same as a NNN property with $300,000 in net rent. The risk is very different, though. Under a NNN lease, the investor is protected from rising taxes, insurance, and maintenance costs; a gross lease landlord absorbs those increases unless the lease has expense stops. That difference in expense risk shows up as lower cap rates (higher prices) for NNN properties.
3. Tenant Responsibilities in a NNN Lease
Two leases can both say NNN and put very different obligations on the tenant. You have to read the actual lease terms to underwrite the deal correctly. An "absolute NNN" lease and a standard NNN lease can be the difference between income that is truly passive and a surprise capital call.
Absolute NNN (Bondable Net Lease)
In an absolute NNN lease, the tenant pays every cost tied to the property, including structural repairs, roof replacement, and even rebuilding after a casualty loss. The landlord has no obligations at all. These leases are called "bondable" because the income stream is so predictable it can be securitized like a bond. Absolute NNN leases are most common with investment-grade corporate tenants like Walgreens, McDonald's, and Dollar General on new-construction, build-to-suit properties.
Standard NNN Lease
Most NNN leases in practice are standard NNN, where the tenant pays taxes, insurance, and routine maintenance, but the landlord retains responsibility for structural repairs and roof replacement. They are far more passive than a gross lease, but the landlord still has to budget for periodic capital expenditures. Read the lease language to see exactly which obligations fall on each side.
Double Net (NN) Lease
Sometimes confused with NNN, a double net lease requires the tenant to pay property taxes and insurance, but the landlord retains responsibility for structural maintenance, roof, and common area maintenance. NN leases are less common but appear in some multi-tenant properties and ground leases. They require more active management than true NNN leases.
On any NNN deal, go through the lease for landlord responsibilities carved out of the NNN structure. Common carve-outs include roof and structural repairs (the most significant), environmental remediation, compliance with ADA requirements, and capital expenditures above a specified annual threshold. Each carve-out is a potential landlord cost, and each one belongs in your underwriting.
4. NNN Cap Rates & Pricing
NNN cap rates track how much risk buyers see. Lower risk means a lower cap rate and a higher price. Four factors drive the number: tenant credit, remaining lease term, location, and property condition. To price a NNN deal you have to weigh them against each other.
Current NNN Cap Rate Ranges
Interest rates move NNN cap rates a lot. Buyers compare NNN properties to bonds (predictable income, fixed term), so pricing is sensitive to the spread between cap rates and borrowing costs. When rates rise, NNN cap rates typically expand and values fall. When rates drop, cap rates compress and values rise. Always look at a NNN deal against today's financing costs and the cash-on-cash return you'll actually get after debt service.
5. NNN Investment Analysis
A NNN property gets analyzed differently from a multi-tenant value-add deal. The lease largely fixes the income, so the work is in lease quality, residual value, and the downside case, with less weight on NOI growth.
Key Metrics to Evaluate
- • Cap rate relative to tenant credit and lease term
- • Cash-on-cash return after debt service
- • Rent escalation structure (fixed %, CPI, periodic)
- • Rent-to-sales ratio (retail tenants)
- • Remaining lease term and renewal option terms
- • Reversion cap rate and residual property value
Risk Factors to Assess
- • Tenant bankruptcy or store closure risk
- • Location quality and retenanting potential
- • Building functionality for alternative users
- • Environmental liability (gas stations, dry cleaners)
- • Roof and structural condition (if landlord responsible)
- • Above-market rent creating re-leasing risk at expiration
The Dark Store Theory: Plan for the Empty Building
One of the biggest risks in NNN investing is the tenant leaving at lease expiration, which leaves you with a vacant single-tenant building built for one use. That "dark store" outcome can be very expensive if the property is purpose-built (a drive-through pharmacy or quick-service restaurant, for example) in a location where few other users want the space. Always ask what happens if the tenant leaves. Properties on busy corners with flexible layouts and strong demographics sell for more because they are easier to re-tenant.
6. Credit Tenants & Lease Quality
In a NNN investment, the tenant matters more than anything else. A multi-tenant building spreads the risk across many tenants; a NNN property's entire income depends on one tenant paying. Tenant credit is where the underwriting starts.
Tenant Credit Tiers
- Investment Grade (BBB- or higher): Publicly traded companies with S&P or Moody's ratings. Examples include Walmart, Home Depot, CVS Health, Starbucks (corporate), and FedEx. The lowest risk and lowest cap rates, and the deepest demand from investors and 1031 exchange buyers.
- National Non-Rated: Large companies without formal credit ratings but with strong financials. Many franchise systems (Chick-fil-A, McDonald's franchisees) and large private companies fall here. Requires analysis of guarantor financial statements and corporate structure.
- Regional/Local: Smaller operators including single-unit franchisees, independent businesses, and local chains. The most risk, with the potential for the highest returns. Here the operator's personal guarantee and the strength of the real estate itself carry the deal.
After credit, look at how the lease is guaranteed. A corporate guarantee from a parent company is stronger than a franchise operator guarantee. A franchise guarantee backed by a multi-unit operator with 50 locations is substantially stronger than one from a single-unit franchisee. Also examine whether the guarantee is full or limited, whether it survives lease assignment, and whether there are any guarantee burn-off provisions that reduce the guarantor's liability over time.
Skyline Properties sources NNN investments from investment-grade credit tenants to higher-yield regional operators. Robert Khodadadian matches each investor's risk tolerance and return target to the right NNN property, for a 1031 exchange, for diversification, or for passive income.
7. Frequently Asked Questions
What is the difference between a triple net lease and a gross lease?
In a gross (or full-service) lease, the landlord pays the operating expenses, including property taxes, insurance, and maintenance, and builds them into one gross rent number. In a triple net lease, the tenant pays all three expense categories separately, on top of base rent. A modified gross lease sits in between, with some expenses on the tenant and the rest on the landlord. Gross leases are common in multi-tenant office buildings; NNN leases dominate single-tenant retail and industrial properties.
What is a triple net (NNN) lease?
A triple net (NNN) lease is a commercial lease in which the tenant pays all three categories of operating expense (property taxes, building insurance, and common area maintenance) on top of base rent. The landlord collects net rent with few or no operating expense obligations. NNN leases are most common in single-tenant retail, industrial, and freestanding office properties. They usually carry long initial terms (10-25 years) with rent escalations written in, and investors like them because the income is passive.
What is a good cap rate for a NNN lease property?
NNN cap rates depend on tenant credit, lease term, location, and property quality. Investment-grade tenants with 10+ year terms typically trade at 5.0%-6.0% cap rates. National non-rated tenants with 7-10 year terms command 6.0%-7.0%. Regional and local tenants or shorter terms price at 7.0%-10.0%+. What counts as a "good" cap rate depends on your goals: a lower cap rate means lower risk and a lower return, and a higher one means more income with more tenant credit and vacancy risk.
What is the difference between NNN and gross lease?
In a gross lease, the landlord pays all operating expenses and builds those costs into a higher base rent. The tenant pays one all-inclusive amount. In a NNN lease, the tenant pays a lower base rent plus all operating expenses separately. The key difference for investors is who carries the risk: under a gross lease the landlord absorbs expense increases, and a NNN lease moves that risk entirely to the tenant. Modified gross leases split expenses between the parties, typically with a base year provision.
Are NNN properties good for 1031 exchanges?
NNN properties are among the most popular 1031 exchange replacement properties. Exchangers like the predictable income for retirement planning, the light management, the national inventory (which makes it easier to identify properties inside the 45-day window), and the range of price points, from under $1 million to over $20 million. Many investors exchange from management-intensive multi-tenant properties into passive NNN investments as they approach retirement. Delaware Statutory Trusts (DSTs) invested in NNN properties are an even more passive option for 1031 exchangers.