Triple net leases (NNN) shift property management duties to the tenant, who pays insurance, taxes, maintenance, rent and utilities. The landlord handles minimal day-to-day work. This structure appeals to real estate investors seeking a more passive investment compared to managing multifamily or residential assets, though some attention remains necessary.
Before purchasing an NNN asset, investors should evaluate three factors.
First, assess tenant creditworthiness. If the tenant goes bankrupt or stops making money, they may default on the lease. Look for national corporate tenants with an investment grade of BBB- or higher, understanding that higher-quality tenants carry lower risk but offer lower returns. A McDonald's corporate-guaranteed lease carries minimal risk and minimal reward. A regional quick service coffee operator offers higher returns but more risk.
Second, verify the corporate guarantee. A corporate guarantee is a legal promise by a parent company or affiliate to cover financial obligations if the tenant defaults. If a location underperforms, a national operator with 500+ locations might absorb losses. However, check that the guarantee comes from the parent company, not an individual franchise LLC. If a Wendy's location is "guaranteed" by "Wendy's 456 Lakewood Dr LLC," that LLC could be dissolved if the location struggles. This distinction matters because you may not recover losses from a franchise entity.
Third, secure long-term leases. Purpose-built properties like dialysis clinics face difficulty attracting new tenants if the current one leaves. Leases ranging from eight to 20 years or longer provide planning room for re-tenanting challenges.
A private family office specializing in NNN and double net (NN) leases has facilitated over $470 million in transactions. NNN terminology varies across offering memorandums. Absolute NNN means the tenant handles all maintenance, insurance and taxes. NN means the tenant handles insurance and taxes plus some maintenance, while the landlord covers roof and structure costs.