Table of Contents
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1. What is a Triple Net Lease
A triple net lease (abbreviated as NNN) is a lease agreement in which the tenant assumes responsibility for all three major categories of property operating expenses in addition to paying 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. This structure means the landlord's rental income is "net" of virtually all operating expenses.
NNN leases originated in the single-tenant retail sector and remain most common there -- think standalone pharmacies, fast-food restaurants, convenience stores, dollar stores, and auto parts retailers. However, the NNN structure has expanded to single-tenant industrial properties (warehouses, distribution centers), freestanding medical office buildings, and even some office properties. The common thread is a single tenant occupying an entire building, making it practical for that tenant to manage all property expenses 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
Understanding the spectrum of commercial lease structures is essential for comparing properties and evaluating true investment returns. The three primary structures differ fundamentally in how operating expenses are allocated between landlord and 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. However, the risk profiles differ significantly. With a NNN lease, the investor is insulated from expense increases (taxes, insurance, maintenance costs), while a gross lease landlord absorbs these increases unless expense stops are in place. This expense risk difference is reflected in lower cap rates (higher prices) for NNN properties.
3. Tenant Responsibilities in a NNN Lease
Not all NNN leases are created equal. The scope of tenant responsibilities varies significantly depending on the specific lease terms, and understanding these nuances is critical for accurately underwriting a NNN investment. The distinction between an "absolute NNN" lease and a standard NNN lease can mean the difference between truly passive income and unexpected capital calls.
Absolute NNN (Bondable Net Lease)
In an absolute NNN lease, the tenant is responsible for every conceivable cost associated with the property, including structural repairs, roof replacement, and even rebuilding after casualty loss. The landlord has zero obligations. 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. While far more passive than a gross lease, these leases require the landlord to budget for periodic capital expenditures. Always read the specific lease language to understand exactly which obligations fall to each party.
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.
When evaluating a NNN investment, carefully review the lease for landlord responsibilities that are often 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 represents a potential cost to the landlord that must be accounted for in your underwriting.
4. NNN Cap Rates & Pricing
NNN property cap rates are a direct reflection of perceived risk. The lower the risk, the lower the cap rate (and the higher the price). Four primary factors drive NNN cap rates: tenant credit quality, remaining lease term, location quality, and property condition. Understanding how these factors interact is essential for evaluating NNN investment opportunities.
Current NNN Cap Rate Ranges
Interest rates significantly affect NNN cap rates. Because NNN properties are often compared to bonds (predictable income stream, fixed term), they are sensitive to the spread between cap rates and borrowing costs. When interest rates rise, NNN cap rates typically expand, reducing property values. Conversely, when rates fall, cap rate compression pushes NNN property values higher. Investors should always evaluate NNN deals in the context of current financing costs and the resulting cash-on-cash return after debt service.
5. NNN Investment Analysis
Analyzing a NNN property requires a different framework than multi-tenant value-add investments. Because the income stream is largely fixed by the lease, the analysis focuses on lease quality, residual value, and downside scenarios rather than NOI growth potential.
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: A Critical Risk
One of the most significant risks in NNN investing is tenant departure at lease expiration, leaving you with a vacant single-tenant building designed for a specific use. This "dark store" scenario can be devastating if the property is purpose-built (such as a drive-through pharmacy or quick-service restaurant) in a location with limited alternative demand. Always evaluate the property's "Plan B" -- what happens if the tenant leaves? Properties on well-trafficked corners with flexible layouts and strong demographics command premium prices precisely because they offer more retenanting options.
6. Credit Tenants & Lease Quality
The tenant is the single most important factor in a NNN investment. Unlike multi-tenant properties where diversification reduces single-tenant risk, a NNN property's entire income depends on one tenant fulfilling its lease obligations. Understanding tenant credit quality is therefore paramount.
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. Lowest risk, lowest cap rates, highest 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. Highest risk but potentially highest returns. The personal guarantee of the operator and the strength of the underlying real estate location become critical.
Beyond credit quality, evaluate the lease guaranty structure. 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 investment opportunities ranging from investment-grade credit tenants to higher-yield regional operators. Robert Khodadadian helps investors match their risk tolerance and return requirements with the right NNN properties, whether for 1031 exchange acquisitions, portfolio diversification, or passive income generation.
7. Frequently Asked Questions
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 expenses -- property taxes, building insurance, and common area maintenance -- in addition to base rent. The landlord receives net rent with minimal or no operating expense obligations. NNN leases are most common in single-tenant retail, industrial, and freestanding office properties. They typically feature long initial terms (10-25 years) with built-in rent escalations and are prized by investors for their passive income characteristics.
What is a good cap rate for a NNN lease property?
NNN cap rates vary based 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%+. A "good" cap rate depends on your investment objectives -- lower cap rates indicate lower risk but lower returns, while higher cap rates offer more income but greater 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 risk allocation: with a gross lease, the landlord bears the risk of expense increases, while a NNN lease shifts 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. Their appeal for exchangers includes predictable income for retirement planning, minimal management requirements, national availability (making it easier to identify properties within the 45-day window), and a wide 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 offer an even more passive alternative for 1031 exchangers.