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A net lease is a commercial real estate agreement where the tenant pays base rent plus some or all of the operating expenses associated with the property. The "net" in the name refers to what the landlord receives: income that is net of some or all property costs, because the tenant has absorbed them. The more costs the tenant assumes, the higher the "net" level of the lease.
Triple net leases, abbreviated NNN, are the most common form in U.S. commercial real estate, especially in single-tenant properties like fast-food restaurants, pharmacies, and gas stations.
The number of "nets" tells you exactly which expenses the tenant pays beyond base rent.
A fourth variation, the absolute net or bondable lease, shifts even structural responsibility to the tenant. These are rare and appear mostly in sale-leaseback transactions with investment-grade tenants.
In a standard NNN lease, the tenant sends two streams of payment to the landlord. The first is base rent, which is agreed to upfront and typically escalates annually by a fixed percentage or by the Consumer Price Index. The second is a share of operating expenses, which the tenant pays as a pro-rata share of the building's total expenses based on the percentage of total building square footage they occupy.
Lease terms for triple net structures typically run 10 to 25 years, which makes them function more like long-duration bonds than typical leases. Investors price NNN properties using capitalization rates, compared directly to Treasury yields.
A NNN lease creates predictable income with minimal operational responsibility. The landlord is not fielding calls about broken HVAC units or parking lot repaving. Property management costs fall to near zero. As long as the tenant honors the lease, the landlord collects essentially passive income for years, sometimes decades, at a time.
The main landlord risk is tenant credit quality. A NNN lease is only as reliable as the company behind it. Investors accept lower returns, reflected in compressed capitalization rates, for investment-grade tenants like major pharmacy chains or national fast-food franchises because the risk of missing a payment is low.
NNN tenants get something in return for assuming the extra costs. Base rent is lower than in a gross lease where the landlord bundles all expenses into a single fee. Tenants also gain control over how maintenance is done and which service providers they use, which matters to national chains running thousands of locations that need consistent standards.
In a gross lease, the tenant pays one fixed monthly amount and the landlord handles all property expenses from that sum. In a NNN lease, the tenant's monthly cost is variable because tax and insurance changes flow through directly. NNN tenants must budget for expense volatility; gross lease tenants do not.
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