A net lease — specifically a triple-net (NNN) lease — requires the tenant to pay base rent plus property taxes, building insurance, and maintenance costs. It is the dominant structure in single-tenant commercial real estate (retail, restaurants, medical, industrial). NNN leases shift operating expense risk and variability to the tenant.
Commercial real estate leases exist on a spectrum from gross (landlord pays all operating expenses) to triple-net (tenant pays all operating expenses). In between are single net (tenant pays property taxes), double net (tenant pays taxes + insurance), and modified gross/hybrid structures. Triple-net (NNN) leases are the standard for single-tenant commercial properties — particularly retail pads, fast food restaurants, pharmacies, medical offices, and industrial buildings. In a true NNN lease: Base rent = the landlord's return on investment (typically expressed as a cap rate on acquisition price). Property taxes = tenant pays directly to taxing authority or reimburses landlord. Insurance = tenant maintains and pays property insurance. Maintenance/repairs = tenant maintains the building, often including the roof and structure (though landlord warranties may cover structural items for a period). From the landlord's perspective, NNN creates a bond-like income stream with minimal management involvement. REITs (Real Estate Investment Trusts) built on NNN-leased single-tenant properties (National Retail Properties, Realty Income) use this predictability to finance acquisitions and pay consistent dividends. For business tenants, NNN leases provide full cost transparency — no landlord pass-throughs or CAM reconciliation surprises. The tenant controls maintenance quality directly. However, NNN tenants bear all operating cost risk — if property taxes increase or the roof needs replacing, those costs fall entirely on the tenant. NNN leases are typically long-term (10–20+ years with options), which provides stability for both landlord and tenant. From a financing perspective, a tenant with a long-term NNN lease at a creditworthy business is an attractive lending prospect — the lease provides stable cash flow documentation.
NNN leases give tenants control over their occupancy costs and eliminate landlord pass-through disputes. For long-established businesses with good facilities management, NNN leases often have lower base rents than gross leases (the landlord isn't pricing in operating cost risk). The downside: tenants bear full operating cost risk and variability — unexpected roof replacements, tax assessment increases, or rising insurance premiums are entirely the tenant's problem. Creditworthy businesses with strong occupancy cost discipline often prefer NNN; smaller businesses without facilities management capacity may prefer gross leases.
A full-service gross (FSG) lease is the opposite end of the spectrum from NNN: the landlord pays all operating expenses (taxes, insurance, utilities, maintenance, janitorial). Base rent is higher to compensate. Common in multi-tenant office buildings. A modified gross lease falls between NNN and FSG: the parties negotiate which expenses are net to the tenant. CAM (Common Area Maintenance) charges in multi-tenant retail are a form of modified gross — tenant pays base rent plus their pro-rata share of common area expenses.
Yes, for most businesses under ASC 842 (FASB's lease accounting standard effective for private companies from 2021). Operating leases with terms exceeding 12 months must be recognized as a right-of-use (ROU) asset and lease liability on the balance sheet — even if they are NNN operating leases. The NNN variable costs (taxes, insurance, maintenance) are not included in the lease liability calculation — only the fixed or minimum base rent payments are capitalized. This is a critical detail for businesses applying for loans, as their balance sheet now reflects lease liabilities that lenders must include in leverage calculations.