Net Lease Properties 101

A net lease is a lease structure in which the tenant assumes responsibility for some or all of the operating expenses of the property in addition to paying base rent. The term "net" refers to what's net to the landlord—income after the tenant has paid expenses on their behalf.

The three primary net lease structures are single net (tenant pays property taxes), double net / NN (tenant pays taxes and insurance), and triple net / NNN (tenant pays taxes, insurance, and maintenance). Absolute NNN is the most landlord-favorable variant: the tenant bears all costs including roof and structure repair.

Net lease investments are most commonly associated with single-tenant retail properties—fast food restaurants, dollar stores, pharmacies, auto parts stores, and similar national chain concepts. These tenants often have investment-grade credit ratings (Moody's, S&P), making the cash flow profile similar to a long-term corporate bond with real estate collateral.

NNN lease transactions are valued almost entirely on the income stream. The building itself is often secondary—investors are buying the credit and the term, not the real estate in the traditional sense.

Cap rate is the primary pricing metric in NNN transactions. The cap rate compresses with longer remaining lease term, stronger tenant credit, better location, and more favorable lease terms. It expands with the opposite conditions.

CBRE's H2 2024 Cap Rate Survey showed investment-grade NNN retail trading in the 5.0–6.5% range nationally, with significant dispersion based on brand, location quality, and remaining term. Dollar stores and fast food with 10+ years remaining on absolute NNN leases from corporate obligors typically price toward the lower end of that range.

Location underwriting matters more than many NNN buyers appreciate. When the tenant's lease expires or the location is closed, the building reverts to the real estate market. A freestanding fast food building in a high-traffic suburban corridor has alternative use value and re-leasing optionality. The same building on a secondary road with limited traffic has substantially less.

Buyers sometimes treat a long-term NNN lease as a substitute for real estate underwriting. It is not. The lease is the current income stream; the real estate is the long-term value driver. A 15-year lease eventually becomes a 1-year lease.

Conflating tenant brand with tenant credit is a persistent error. The franchisor's credit rating does not extend to the franchisee operator, who may have a single-location LLC with no meaningful assets behind the guarantee. Always check who the actual lease obligor is.

Buying on a cap rate without adjusting for lease structure details—specifically, absolute NNN versus landlord-responsible structures—produces incorrect yield calculations.

NNN transaction volume declined from 2022 to mid-2024 as rising interest rates compressed the spread between cap rates and financing costs. Many deals that penciled at 5.0% caps with 3.5% debt didn't work at 5.0% caps with 6.5% debt. Sellers in many cases refused to reprice; buyers stepped back.

By late 2024, pricing had adjusted enough in many segments to restore deal flow. Dollar stores (Dollar General, Dollar Tree/Family Dollar) saw elevated transaction activity as their values moderated from 2021 peaks. Fast food and pharmacy NNN remained the deepest markets with the most consistent buyer pools.

In Indiana and Kentucky, NNN buyers are active across all major corridors. Suburban Indianapolis, Louisville, and secondary cities see consistent demand from 1031 exchange buyers and private investors seeking passive income vehicles.

NNN transactions benefit from brokers who understand the nuance of credit analysis, lease structure, and location quality simultaneously. The listing may be national; the due diligence is always local.

Off-market sourcing matters in NNN, particularly for investors seeking specific brands or lease structures. The ability to identify properties before they reach national platforms—either through relationships with operators or corporate sale-leaseback programs—gives buyers access to opportunities at prices that reflect less competition.