What Is an NNN Lease

Commercial leases fall along a spectrum based on how operating expenses are allocated between landlord and tenant. A gross lease places nearly all operating costs, including property taxes, insurance, and maintenance, on the landlord, who collects a single rent figure meant to cover those expenses. A modified gross lease splits certain expenses between landlord and tenant, often with the tenant covering utilities and janitorial costs while the landlord retains responsibility for taxes, insurance, and structural maintenance. A triple net, or NNN, lease sits at the opposite end of the spectrum, placing property taxes, insurance, and maintenance directly on the tenant.

Within NNN leases, there is further variation in exactly how maintenance responsibility is defined. Some NNN leases make the tenant responsible for all maintenance, including roof and structural repairs, sometimes called an absolute or bondable NNN lease, while others carve out roof and structural responsibility for the landlord, which is a meaningful distinction since roof replacement can be a significant unplanned expense. An investor evaluating a property marketed as NNN should have the lease reviewed line by line rather than relying on the marketing description alone.

Other lease terms that affect the value and risk of an NNN investment include rent escalation clauses, which specify how and when rent increases over the lease term, renewal option terms, which affect the tenant's likelihood of staying long term, and any co-tenancy or exclusivity clauses that could affect rent if a nearby anchor tenant vacates. Orange County investors sourcing NNN replacement property for a 1031 exchange should request a full lease abstract before the 45 day identification deadline, since discovering an unfavorable expense allocation or escalation structure after identification can complicate the exchange timeline.