Guides

What Is an NNN Lease

Commercial leases generally exist on a spectrum based on how much of a property's operating costs the landlord absorbs versus how much the tenant covers, and understanding where a given lease sits on that spectrum generally matters for evaluating any commercial property as a potential purchase or 1031 replacement. At one end, a full service gross lease generally has the landlord paying essentially all operating expenses, including real estate taxes, insurance, utilities, and maintenance, out of the base rent collected, which is common in traditional multi-tenant office buildings where tenants generally want one predictable monthly payment. A modified gross lease generally sits closer to the middle, where the landlord and tenant generally split responsibility for operating costs in whatever way the lease specifies, often with the tenant covering utilities and janitorial for their own space while the landlord covers taxes, insurance, and common area maintenance. Moving further toward tenant responsibility, a single net lease, sometimes written as an N lease, generally has the tenant paying base rent plus real estate taxes, while the landlord generally continues to cover insurance and maintenance. A double net lease, generally written as NN, generally adds insurance to the tenant's obligations, so the tenant pays base rent, real estate taxes, and building insurance, while the landlord generally retains responsibility for structural maintenance and repairs. A triple net lease, generally written as NNN, generally shifts the third major cost category, maintenance, to the tenant as well, meaning the tenant generally covers real estate taxes, insurance, and common area or property maintenance in addition to base rent, leaving the landlord with the most limited ongoing cost exposure of any structure on this spectrum. Some NNN leases go a step further and are marketed as absolute NNN, generally meaning the tenant also assumes responsibility for structural repairs and even roof and foundation obligations that a standard NNN lease might still leave with the landlord, which is common in build-to-suit single tenant properties constructed specifically for a long term corporate tenant. San Diego, CA investors evaluating a specific lease should generally read the actual lease document rather than relying on the NNN label alone, since the degree of net responsibility described in marketing materials does not always match every clause in the underlying lease, and the specific carve outs for roof, structure, and capital repairs generally vary property by property even among leases described the same way. Understanding exactly which costs a landlord retains under a given lease structure is generally essential before underwriting a commercial property as a 1031 replacement candidate. Educational content only. This is not tax, legal, or investment advice.