A friend of mine thought he'd cracked the code. He bought a single-tenant retail building leased to a national pharmacy chain on a triple net lease. "It's passive income," he said. "The check arrives every month like clockwork." For five years, it did. Then the chain consolidated, his location closed, and he was left with a dark, custom-built building in a shifting retail corridor. The "passive" income vanished, replaced by vacancy costs, broker fees, and a tough re-lease. That experience taught me more about NNN leases than any textbook ever could.
Let's cut through the hype. A triple net lease (NNN lease) is a commercial real estate agreement where the tenant pays not only the base rent but also all three of the property's major ongoing costs: real estate taxes, building insurance, and maintenance. It's a dominant force for assets like drugstores, banks, and fast-food restaurants. For the right investor with the right tenant, it can be a stable, long-term cash flow machine. For the wrong one, it's a concentrated risk waiting to unravel.
What You'll Learn in This Guide
What Exactly is a Triple Net Lease (NNN)?
Think of it as the ultimate turnkey arrangement for a landlord. You own the land and the building, but the tenant operates it as if they own it—footing the bill for all the variable costs. The "triple net" refers to the three nets (charges) passed through to the tenant:
- Net Property Taxes: The tenant pays the annual real estate tax bill.
- Net Building Insurance: The tenant is responsible for insuring the structure.
- Net Common Area Maintenance (CAM): This is the big one. It covers repairs, roof maintenance, parking lot resurfacing, landscaping, utilities for common areas—essentially, keeping the physical asset running.
Your job as the landlord? Cash the rent check. That's the theory, anyway. In practice, you're still the ultimate owner. If the roof needs a $50,000 replacement and the tenant disputes whether it's "maintenance" or a "capital improvement," you're involved. Deeply.
Here’s how a NNN lease stacks up against other common commercial lease structures, a point of confusion I see all the time.
| Lease Type | Who Pays Property Taxes & Insurance? | Who Pays Maintenance & Repairs? | Landlord's Risk & Involvement |
|---|---|---|---|
| Gross Lease (Full Service) | Landlord | Landlord | Highest. Rent is all-inclusive. |
| Modified Gross Lease | Often shared or negotiated | Often shared or negotiated | Moderate. Common in office spaces. |
| Double Net (NN) Lease | Tenant | Landlord | Lower. Landlord still handles repairs. |
| Triple Net (NNN) Lease | Tenant | Tenant | Lowest in theory, but contingent on tenant quality. |
The Investor's Perspective: Why NNN Leases Are So Popular
From an investment standpoint, NNN properties are valued for their predictable, bond-like income. The cap rate (capitalization rate) you'll see on listings reflects this perceived lower risk. A NNN-leased CVS might trade at a 5% cap, while a multi-tenant retail center with more landlord responsibilities might trade at a 7% cap. You're paying for stability.
The Allure: What Makes NNN Investing Attractive
Predictable Cash Flow: With a strong tenant on a long-term lease (10-25 years is common), you have a clear income stream. Rent escalations are often built-in, either fixed (e.g., 1.5% annual increase) or tied to the Consumer Price Index (CPI).
Minimal Management Headaches: No midnight calls about a broken toilet. The tenant handles it. This allows investors to own properties anywhere in the country without needing a local management company.
Financing Advantages: Lenders love NNN leases with credit tenants (think Fortune 500 companies). They view the loan as being secured by the tenant's creditworthiness as much as the real estate. This can mean lower interest rates and higher loan-to-value ratios.
The Hidden Risks Most Brokers Don't Emphasize
This is where my friend got burned, and where most new investors gloss over the details.
Tenant Credit Risk is Everything: Your asset is no longer a piece of dirt and bricks; it's a financial instrument tied to one company. If that tenant goes bankrupt (remember Blockbuster?), your income goes to zero. And you're left with a building specifically designed for a failed business model. Research from the National Association of Realtors consistently shows tenant credit as the primary valuation driver for single-tenant net leased assets.
Illiquidity at the Wrong Time: A 15-year lease is great for 14 years. In year 15, when the lease is expiring and the tenant is unsure about renewing, the value of your property plummets. Selling becomes difficult. You need to plan for lease rollovers years in advance.
Deferred Maintenance Risk: A struggling tenant might patch the roof instead of replacing it. They might defer parking lot repairs to save cash. When they finally leave, you inherit a capital-intensive problem that can eat years of your "passive" profits. The lease might say they must maintain it, but enforcing that against a departing tenant is costly and often impractical.
The Tenant's Perspective: When Does a NNN Lease Make Sense?
Why would a business sign up to pay for everything? Control. For certain businesses, the location and the building are the brand.
Ideal NNN Tenants:
- National Chains: Starbucks, Chase Bank, Walgreens. They need consistency, have corporate maintenance teams, and value the operational control.
- Businesses with Specialized Build-Outs: A medical clinic, a high-end restaurant, a car wash. The fit-out is so specific and expensive that they need to control its maintenance.
- Businesses Seeking Long-Term Stability: Locking in a location for 20 years with predictable occupancy costs (base rent + estimated nets) is a strategic advantage.
The Trap for Tenants: Underestimating the variable "net" costs. Your base rent is fixed, but the taxes, insurance, and CAM are not. I've seen restaurants fail because a property tax reassessment doubled their annual obligation, and their lease had no cap on the pass-through. You must budget for increases and, crucially, negotiate caps on controllable expense growth.
The Devil's in the Details: Key NNN Lease Clauses You Must Understand
Skimming the lease summary is a recipe for disaster. Here are the sections where you need to put on your reading glasses.
1. Lease Term and Rent Escalation
Is it a 10-year lease with five 5-year options? Who controls the options? The rent increase should be crystal clear: "Fixed 2% annual increase" or "CPI increase, capped at 3% and floored at 1%." Ambiguity leads to disputes.
2. Definition of "Operating Costs" (CAM)
This is the battlefield. Does it include capital improvements? Roof replacement? Compliance with new disability laws? As a landlord, you want it broad. As a tenant, you want it narrow, excluding capital items, structural repairs, and your landlord's legal fees. Never assume.
3. Restoration Clause
What happens when the lease ends? Must the tenant return the space to a "white box" or can they leave their custom build-out? For a landlord, a restoration clause is essential to avoid inheriting a useless, specialized interior. Tenants fight this because demolition is expensive.
4. Continuous Operation Clause
This is a big one for landlords. It prevents the tenant from simply locking the doors and paying rent just to hold the location (called "going dark"). It requires them to remain open for business. Without it, your vibrant corner becomes a dark, dead space that kills value for any neighboring properties you might own.
Making the Decision: Is a NNN Lease Right For You?
As an Investor: Ask yourself: Am I buying a tenant or a piece of real estate? If the tenant's credit is stellar (corporate-guaranteed, investment-grade), you're buying a bond. If it's a local franchisee, you're taking a bet on a small business in a real estate wrapper. Diversify. Don't put your entire portfolio into one NNN property. And always, always underwrite the real estate's value without the current tenant. What's the worst-case scenario if I have to re-lease this in a down market?
As a Business Owner: Run a 10-year pro forma with conservative estimates for tax and insurance increases. Negotiate caps. Get a clear exhibit defining CAM. Understand exactly what you're responsible for fixing. If your business is volatile, a long-term NNN lease can be an anchor that sinks you during a downturn. Consider a shorter term or a lease with landlord-sharing of some costs.
The bottom line? A NNN lease is a powerful tool, not a magic wand. It aligns incentives in a unique way but demands due diligence. It can create true passive income or concentrate risk in a way that keeps you up at night. The difference lies in the details of the contract and the quality of the counterparty across the table.