NNN vs. NN vs. Gross Leases: Commercial Real Estate Analysis Guide 2025

The Three Lease Structures Explained

The biggest variable in commercial real estate analysis is understanding exactly what expenses the tenant pays vs. what the landlord pays. This directly determines your true net income and effective yield.

How Lease Structure Affects Your Analysis

A $100,000 annual rent payment means very different things depending on the lease structure. Consider a 5,000 SF property:

• NNN at $20 PSF: You receive $100,000 and pay essentially nothing in operating costs. NOI ≈ $100,000.
• NN at $20 PSF: You receive $100,000 but cover maintenance and capital items. Budget $0.50–$1.00 PSF/yr for reserves. NOI ≈ $97,500–$95,000.
• Gross at $20 PSF: You receive $100,000 but pay taxes (~$1.5 PSF), insurance (~$0.50 PSF), maintenance (~$1.00 PSF). NOI ≈ $85,000 — 15% less than a NNN deal at the same rent.

This is why NNN properties command lower cap rates (higher prices relative to income) than gross lease properties — the income stream is more predictable and requires no management attention.

2025 NNN Cap Rate Benchmarks

Cap rates for NNN retail properties vary significantly based on tenant credit, lease term remaining, location, and property type:

Tenant Credit Quality — The Most Important Factor

In a NNN deal, you're essentially buying a bond backed by the tenant's creditworthiness. Investment-grade tenants (BBB- or better from S&P) represent dramatically lower default risk than non-rated tenants. Key things to evaluate:

• Corporate guarantee vs. franchisee guarantee: A McDonald's with a corporate guarantee (backed by McDonald's Corporation) is fundamentally safer than a franchisee with 5 locations. The cap rate difference can be 100–150 bps.
• Lease term remaining: A 20-year lease with zero near-term rollover risk trades at a much lower cap rate than a 3-year lease.
• Rent escalations: Fixed 10% bumps every 5 years or CPI-based? Flat rent for the entire lease? This dramatically affects IRR over a 10-year hold.
• Replacement cost vs. purchase price: Would it cost more or less to build this building at today's costs? Properties trading below replacement cost have an embedded margin of safety.

The Complete NNN Analysis Framework

Here's the step-by-step process for analyzing a NNN retail investment:

1. Calculate annual base rent: Rent per SF × leaseable square footage × 12. Confirm against the actual lease document.
2. Determine lease structure: What does the tenant pay? What do you pay? Calculate the landlord's true net income after any retained expenses.
3. Calculate going-in cap rate: Net rent ÷ purchase price. Compare to market comps for this tenant type and lease term.
4. Model rent escalations: When do bumps occur? How large are they? Build a 10-year rent schedule.
5. Size the debt: At today's NNN financing rates (5.75–6.5% for 7–10 year fixed), what DSCR does this deal support? Lenders typically require 1.25×.
6. Calculate debt yield: NOI ÷ loan amount. Target 8–10% minimum. Lenders increasingly use this as the primary credit metric.
7. Calculate breakeven occupancy: (Operating expenses + debt service) ÷ gross potential income. Should be well below 100% — ideally below 80%.
8. Model the exit: At year 10, what is the NOI? At what cap rate will this property trade (accounting for shorter remaining lease term)? Calculate IRR.

Key Metrics for NNN / Commercial Analysis

For a realistic Dollar General deal ($1.115M, 7.0% cap, 6.25% loan rate, 10-year term):

• Annual rent: $78,050
• NOI: ~$78,050 (NNN, minimal landlord expenses)
• Going-in cap: 7.0%
• Loan amount (65% LTV): $724,750
• DSCR: 1.31× (passes lender minimums)
• Debt yield: 10.8% (strong)
• Cash-on-cash return: ~4.5%
• 10-year IRR (with 2% rent bumps): ~8.3%

Common Mistakes in NNN Analysis

• Not reading the actual lease. The rent schedule, lease structure, and termination rights are in the lease document — not the broker's marketing flyer. Always read the lease before making an offer.
• Ignoring options to renew at reduced rent. Some leases have renewal options at below-market rent. This matters enormously for your exit cap rate when you sell.
• Underestimating re-leasing costs. When a NNN tenant vacates, you face significant downtime, TI allowances, and leasing commissions. A 12-month NNN deal with a tenant that has low renewal probability is a much riskier investment than it appears.
• Missing rent bumps in the IRR calculation. Flat rent for a 15-year lease has dramatically lower IRR than a lease with 10% bumps every 5 years. Model this explicitly.
• Using going-in cap as exit cap. A property you buy today with 20 years of NNN lease will have only 10 years remaining when you sell. The exit cap rate will be higher (lower price) to compensate for the shorter lease term.