Triple Net (NNN) Leases Explained: The Ultimate Guide for Investors

Triple net leases represent one of the most passive forms of commercial real estate investing. But "passive" doesn't mean "risk-free." Understanding NNN investments is crucial before diving in.

What is a Triple Net Lease?

In a triple net (NNN) lease, the tenant pays:

Base rent to landlord
Property taxes (first "net")
Building insurance (second "net")
Maintenance and repairs (third "net")

Comparison of Lease Types

Expense	Gross Lease	Single Net	Double Net	Triple Net
Base Rent	✅ Tenant	✅ Tenant	✅ Tenant	✅ Tenant
Property Taxes	❌ Landlord	✅ Tenant	✅ Tenant	✅ Tenant
Insurance	❌ Landlord	❌ Landlord	✅ Tenant	✅ Tenant
Maintenance	❌ Landlord	❌ Landlord	❌ Landlord	✅ Tenant
Landlord Role	Active	Moderate	Moderate	Passive

Why Investors Love NNN Leases

1. Predictable Cash Flow

Fixed rent for entire lease term (10-25 years)
No surprise expenses - tenant handles all
Easy budgeting - one check per month

2. Minimal Management

No property manager needed
No maintenance calls at 2 AM
No CapEx planning (tenant's responsibility)

3. Credit Tenant Quality

Typical NNN tenants:

Fast food chains: McDonald's, Chick-fil-A, Starbucks
Pharmacies: Walgreens, CVS, Rite Aid
Dollar stores: Dollar General, Dollar Tree, Family Dollar
Convenience stores: 7-Eleven, Circle K
Banks: Chase, Bank of America, Wells Fargo
Auto parts: AutoZone, O'Reilly, Advance Auto

4. Long-Term Leases

Typical term: 15-20 years
Options: 3-4 renewal periods (5 years each)
Total potential: 30-40 years of income

5. Inflation Protection

Rent bumps: 1.5-2.5% annually
Or CPI-indexed: Tied to inflation
Over 20 years, compounds significantly

The Economics of NNN Investing

Typical Deal Structure

Example Property:

Single-tenant Walgreens
Location: Suburban Dallas, TX
Building: 14,500 SF
Land: 1.2 acres with drive-thru
Built: 2018

Financial Terms:

Purchase price: $3,500,000
Cap rate: 5.75%
Annual NOI: $201,250
Base rent: $140 PSF annually ($16.67 PSF/month)
Lease term: 20 years remaining
Rent increases: 1.5% every 5 years
Tenant credit rating: Investment grade (S&P A-)

Investor Returns (assuming 70% LTV financing at 6.5%):

Down payment: $1,050,000
Annual cash flow (year 1): ~$70,000
Cash-on-cash return: 6.7%
IRR projection (10-year hold): 9.2%

Understanding Cap Rates in NNN

Why NNN Cap Rates Are Lower

NNN properties trade at lower cap rates (higher prices) because:

Lower risk: Credit tenants, long leases
Lower management: Hands-off investment
Predictable: Known income for years
Inflation-protected: Built-in rent increases

Typical Cap Rate Ranges by Tenant

Investment Grade Tenants (S&P rated):

McDonald's: 4.25-5.25%
Starbucks (corporate): 4.5-5.5%
Walgreens: 5.5-6.5%
CVS: 5.5-6.5%
Chase Bank: 5.0-6.0%

Non-Investment Grade (Strong Regional):

Chick-fil-A: 4.0-5.0% (despite not being corporate, demand is huge)
AutoZone: 6.0-7.0%
Dollar General: 6.0-7.5%
7-Eleven: 5.5-6.5%

Weaker Credit:

Regional chains: 7.0-9.0%
Unrated operators: 8.0-10.0%

Red Flags in NNN Investing

1. Corporate vs. Franchise

Corporate-owned:

Credit of parent company backs lease
Lower risk, lower cap rate
Better financing terms

Franchise-owned:

Credit of franchisee, not brand
Higher risk despite brand recognition
Higher cap rates (1-2% premium)

Always ask: "Is this corporate or franchise?"

2. Lease Term Remaining

20+ years: Full value, lowest cap rate
15-20 years: Standard pricing
10-15 years: Value starts declining
<10 years: Significant discount needed
<5 years: Major risk, hard to finance

Why it matters:

Refinancing difficult with short lease term
Re-tenanting risk increases
Property value drops as lease expires

3. Rent vs. Market Rent

Above-market rent:

Tenant may vacate at expiration
Hard to re-tenant
Overpriced for current economics

At or below-market:

Strong renewal likelihood
Easy to re-lease
Lower cap rate justified

Always ask: "What's the market rent for this space?"

4. Location Quality

Even credit tenants close underperforming locations:

A locations: Strong traffic, dense population, can't miss
B locations: Adequate, serviceable long-term
C locations: Marginal, at-risk in downturn
D locations: Why did they build here?

Analyze:

Traffic counts (20K+ ADT ideal for retail)
Demographics (3-mile radius: population, income, age)
Competition (who's nearby?)
Visibility and access

5. Renewal Options

Tenant-favorable renewal:

"Option to renew at fair market value"
"Option to renew at 95% of FMV"
Tenant can walk if market drops

Landlord-favorable:

"Option to renew at greater of: (a) current rent + 5%, or (b) FMV"
Protects landlord downside

No options:

Lease expires, tenant vacates
Re-tenanting risk

6. Termination Options

Major red flag if tenant can:

Terminate for declining sales (common in retail)
Terminate for co-tenancy failure (if anchor closes)
Terminate after 5-10 years with notice

Scrutinize lease carefully for these clauses.

Tax Advantages of NNN

Depreciation

Building basis: ~80% of purchase price
Depreciation period: 39 years (commercial)
Annual deduction: ~2% of building value
Offsets cash flow, reducing taxable income

Example:

Purchase: $3,500,000
Land: $700,000 (20%)
Building: $2,800,000 (80%)
Annual depreciation: $71,795
Taxable income reduced significantly

1031 Exchange Friendly

NNN properties are ideal 1031 exchange targets:

Predictable income (no surprises)
Credit tenants (low risk)
Long leases (stability)
Passive (good for aging investors)

Many investors ladder into NNN over time:

Age 40s: Active value-add properties
Age 50s: Core properties with moderate management
Age 60s+: NNN for passive income and estate planning

Estate Planning

NNN properties work well for:

Trusts - predictable distributions
Heirs - easy to manage, no expertise needed
Passive income - supplements retirement
Step-up basis - at death, heirs receive FMV basis

Financing NNN Properties

Typical Loan Terms

LTV: 70-80% (higher for strong credit tenants)
Interest rate: 6.0-7.5% (2025 rates)
Term: 10-25 years
Amortization: 20-30 years
Recourse: Non-recourse available for strong properties

Lender Preferences

Favorable:

Investment-grade tenant (corporate)
15+ years lease term
Above-market rent coverage (1.25x+ DSCR)
Class A location

Challenging:

Franchise operator
<10 years remaining
Below-market rent
Weak location

CMBS and NNN

CMBS loans available for NNN portfolios
Minimum $3-5M per property
Non-recourse
Prepayment penalties

Building a NNN Portfolio

Diversification Strategies

Geographic Diversification:

5+ states minimum
Mix of primary, secondary, tertiary markets
Avoid concentration in single MSA

Tenant Diversification:

No more than 20% in single tenant
Mix investment-grade and non-investment grade
Variety of industries (QSR, pharmacy, dollar, auto)

Lease Maturity Diversification:

Stagger lease expirations
Avoid "maturity wall" (all leases expiring in 2-3 years)
Maintain 10+ year weighted average lease term

Sample $10M Portfolio

Property 1: Walgreens (Dallas, TX)

Value: $3,500,000
Cap: 5.75%
Lease: 20 years
Credit: A-

Property 2: Dollar General (Nashville, TN)

Value: $1,200,000
Cap: 7.25%
Lease: 15 years
Credit: BBB

Property 3: AutoZone (Phoenix, AZ)

Value: $2,100,000
Cap: 6.5%
Lease: 12 years
Credit: BBB+

Property 4: Starbucks (Portland, OR)

Value: $2,400,000
Cap: 5.0%
Lease: 10 years
Credit: Corporate (A)

Property 5: 7-Eleven (Atlanta, GA)

Value: $800,000
Cap: 6.75%
Lease: 15 years
Credit: BBB-

Portfolio Metrics:

Weighted avg cap rate: 6.1%
Weighted avg lease term: 15.4 years
Annual NOI: $610,000
5 states, 5 tenants, 5 industries

Alternatives to NNN

DST (Delaware Statutory Trust)

Pros:

Fractional ownership (invest $100K+)
Fully passive (no management)
1031 exchange eligible
Institutional quality properties

Cons:

Illiquid (5-10 year hold typical)
Fees (2-4% upfront)
No control over decisions
Lower returns than direct ownership

NNN REITs

Public REITs:

Realty Income (O) - Monthly dividends
National Retail Properties (NNN)
Agree Realty (ADC)

Pros:

Liquid (trade daily)
Diversified instantly
Professional management
Low minimum ($100+)

Cons:

Market volatility
Dividend tax treatment
Management fees
No depreciation benefit

REIT vs. Direct Ownership

Factor	Direct Ownership	REIT
Minimum Investment	$500K-1M+	$100+
Liquidity	Low	High
Control	Full	None
Tax Benefits	Depreciation	Dividend income
Management	Minimal	None
Returns (est.)	8-12%	6-10%
Leverage	70-80% LTV	Limited

When NNN Makes Sense

✅ Good fit if you:

Want passive income
Have limited time for management
Are nearing retirement
Need predictable cash flow
Value sleep over returns
Have completed 1031 exchanges

⚠️ Not ideal if you:

Want active involvement
Need higher returns (15%+ IRR)
Have limited capital (<$500K to invest)
Are young and aggressive (better in value-add)
Can't handle illiquidity (10-year hold)

Case Study: 20-Year NNN Investment

Initial Purchase (Year 1):

Property: Walgreens, Austin, TX
Purchase price: $2,800,000
Down payment: $840,000 (30%)
Loan: $1,960,000 at 5.5%, 20-year amortization
Lease: 20 years, 1.5% increases every 5 years
Cap rate: 6.25%

Year 1 Cash Flow:

NOI: $175,000
Debt service: -$162,000
Cash flow: $13,000
Cash-on-cash: 1.5% (😱 Common for NNN!)

Year 5 Cash Flow:

NOI: $177,625 (1.5% bump)
Debt service: -$162,000
Cash flow: $15,625

Year 10 Cash Flow:

NOI: $180,298 (another bump)
Debt service: -$162,000
Principal paydown increasing
Cash flow: $18,298

Year 20 Cash Flow:

NOI: $186,137
Debt service: $0 (paid off!)
Cash flow: $186,137

Sale in Year 20:

Property value: $3,300,000 (assume modest 0.8%/year appreciation)
Loan balance: $0
Net proceeds: ~$3,100,000 (after selling costs)

Total Returns:

Cash flow collected: ~$540,000 over 20 years
Sale proceeds: $3,100,000
Total profit: $2,800,000 on $840,000 invested
IRR: 9.1%

Not spectacular, but achieved with:

Zero management time
Zero surprise expenses
Zero vacancies
Zero stress

The Bottom Line

Triple net leases offer:
✅ Passive income - truly hands-off
✅ Stability - credit tenants, long leases
✅ Simplicity - one tenant, one check
✅ Tax benefits - depreciation, 1031 eligible
✅ Financing - readily available for strong properties

But require:
⚠️ Due diligence - corporate vs. franchise, lease terms, location
⚠️ Lower returns - expect 8-10% IRR, not 15-20%
⚠️ Long-term hold - 10-20+ years ideal
⚠️ Large capital - minimum $500K-1M investment
⚠️ Acceptance of illiquidity - can't sell quickly

NNN investing works best as a core holding in a diversified CRE portfolio, especially for investors prioritizing stability over growth.

At USLand, we specialize in single-tenant net lease properties with credit tenants, providing detailed lease analysis, tenant credit reports, and market positioning to help you invest with confidence.

Browse NNN investment opportunities at USLand.com/search?leaseType=nnn