Net Lease

A Net Lease is a type of commercial real estate lease agreement where the tenant is responsible for paying not only the base rent but also some or all of the property's operating expenses. Think of it as an “à la carte” menu for property costs. In a standard lease, the landlord pockets the rent and pays all the bills. With a net lease, the landlord shifts some or all of those bills—typically property taxes, insurance, and maintenance—over to the tenant's side of the table. This arrangement is especially common with single-tenant commercial buildings, like a standalone pharmacy, fast-food restaurant, or bank branch. The primary benefit for the property owner (the investor) is a more predictable and stable income stream, as they are insulated from the fluctuating costs of running the building. The specific expenses the tenant pays determine whether it's a Single, Double, or the ever-popular Triple Net Lease.

The “net” in net lease refers to the specific categories of operating expenses that the tenant covers. The more “N's” in the lease's name, the more responsibility the tenant takes on.

This is the simplest and least common type of net lease. Here, the tenant pays the base rent plus one of the three main operating expenses—usually the Property Taxes. The landlord remains responsible for Property Insurance and all Maintenance Costs. Because the landlord still carries significant financial and management burdens, an N lease offers them the least amount of protection against rising costs compared to other net lease types.

Taking it a step further, the Double Net (or NN) Lease requires the tenant to pay for both property taxes and property insurance in addition to their rent. The landlord is typically left to cover the costs of maintaining the building's structural integrity—think roof repairs, foundation work, and parking lot maintenance. This is a popular arrangement in multi-tenant commercial properties like shopping centers, where the landlord handles the “shell” of the building and common areas, while tenants pay their proportional share of taxes and insurance.

The Triple Net Lease (NNN Lease) is the gold standard for investors seeking a truly passive real estate investment. In this arrangement, the tenant is responsible for virtually all the property's operating expenses: property taxes, insurance, and all maintenance, including major structural repairs. The landlord's only job is to collect a rent check. This structure effectively transforms a real estate investment into something resembling a long-term corporate Bond, providing a steady stream of Cash Flow with minimal landlord involvement.

From a Value Investing perspective, a property with a strong NNN lease can be an incredibly attractive asset, but only if you understand the underlying dynamics.

The appeal of a NNN lease is its simplicity and predictability. When you have a high-quality, long-term tenant, you essentially lock in a return with very few variables.

• Predictable Income: With the tenant covering all variable expenses, the landlord receives a consistent rent payment, making it easy to calculate the investment's Yield and long-term returns. Unexpected roof repairs or a spike in property taxes won't eat into your profits.
• Low Management Burden: This is as “hands-off” as real estate gets. There are no late-night calls about leaky faucets. The landlord's primary role is asset management, not property management.
• Built-in Margin of Safety: As Benjamin Graham taught, a margin of safety is crucial. In a NNN lease, the safety comes from the tenant's Creditworthiness. A lease with a financially sound, blue-chip company (e.g., Walgreens, McDonald's, FedEx) is far more secure than one with a small, unproven business. The strength of the tenant is your margin of safety.

Why would a business agree to this? Control and cost. Tenants in a NNN lease have greater control over the property's maintenance and appearance, which is vital for brand consistency. In exchange for taking on the property's expenses, they typically negotiate a lower base rent than they would pay under a Gross Lease, where the landlord covers all costs.

While NNN leases can seem like a perfect investment, they are not without significant risks that every investor must weigh.

• Vacancy Risk: This is the number one threat. If your single tenant vacates or goes bankrupt, your income stream instantly drops to zero, but you suddenly become responsible for 100% of the property taxes, insurance, and maintenance on an empty building. This can turn a cash-flowing asset into a money pit overnight.
• Tenant Default: Even if the tenant doesn't leave, they might stop paying rent. Evicting a large commercial tenant can be a long, expensive, and complicated legal process.
• Interest Rate Risk: Because a long-term NNN lease provides a fixed income stream, it behaves much like a bond. If prevailing Interest Rates in the market rise significantly, the value of your property could fall because its fixed rent payments become less attractive compared to newer, higher-yielding investments.
• Re-leasing Risk: A property built for a specific tenant (like a uniquely designed restaurant) can be difficult and expensive to re-lease to a different type of business once the original lease term expires.