What Is an NNN Lease

An NNN lease, short for triple net lease, is a type of commercial lease agreement in which the tenant pays, in addition to base rent, the three primary categories of property operating expense: real estate taxes, building insurance, and maintenance costs. This differs from a single net lease, where the tenant pays only property taxes, and a double net lease, where the tenant pays taxes and insurance but the landlord retains responsibility for structural maintenance, meaning the true NNN structure places the greatest share of ongoing expense responsibility on the tenant among the common commercial lease types.

The opposite of an NNN lease is a gross lease, sometimes called a full-service lease, in which the landlord pays all or most of the operating expenses out of the rent collected, and the tenant pays a flat rent amount regardless of how expenses fluctuate. Between these two extremes sits the modified gross lease, which splits expense responsibility according to specific negotiated terms. Understanding which lease type applies to a given property is essential for accurately projecting an owner's net income, since two properties with identical rent amounts can produce very different cash flow if one is NNN and the other is a gross lease with the landlord absorbing rising insurance and tax costs.

For investors in the Jacksonville market, NNN leases are most common in single-tenant retail buildings, such as pharmacies, fast food restaurants, convenience stores, and auto service centers, as well as some office and industrial buildings leased to a single corporate tenant. Because the tenant bears responsibility for taxes and insurance, which have both trended upward across Florida in recent years, an NNN structure protects the landlord's net income from that expense volatility, a meaningful advantage in a state where property insurance costs have become a significant underwriting consideration for any type of commercial or residential property.

An NNN-leased property qualifies as real property for purposes of a 1031 exchange, so an investor exchanging out of a property with a gross or modified gross lease structure, where expense volatility falls on the owner, can use exchange proceeds to acquire an NNN property and shift that expense risk to the tenant going forward. Investors evaluating a specific NNN lease should read the lease document carefully to confirm exactly which expenses the tenant covers, whether there are any landlord-retained obligations such as roof or parking lot replacement, and how rent escalations are structured over the lease term, since the term NNN is sometimes used loosely in marketing materials without precisely matching the underlying lease terms.