What is a Triple Net (NNN) lease and what does the tenant pay?

In a Triple Net (NNN) lease, the commercial tenant pays the base rent plus all three major property operating expenses: property taxes, building insurance, and common area maintenance (CAM)/repairs. In an Absolute NNN lease, the tenant also pays for roof and structural upkeep, leaving the landlord with zero management responsibilities.

What is the difference between Cap Rate and Cash-on-Cash Return in NNN real estate?

Cap Rate measures the unlevered return of the property (NOI divided by Purchase Price) assuming an all-cash purchase. Cash-on-Cash (CoC) Return measures the actual levered cash yield on your invested equity (Levered Free Cash Flow divided by initial cash invested after debt service).

What is DSCR and what minimum ratio do commercial lenders require?

Debt Service Coverage Ratio (DSCR) is calculated as Net Operating Income (NOI) divided by Annual Debt Service (Principal + Interest). Most commercial lenders mandate a minimum DSCR of 1.20x to 1.30x for credit-tenant NNN properties to ensure cash flow exceeds mortgage obligations by 20% to 30%.

How does 39-year commercial depreciation shelter NNN rental cash flow from taxes?

Under IRS rules, non-residential commercial real estate is depreciated straight-line over 39 years on the building value (excluding land). This non-cash depreciation deduction often offsets 100% of taxable net income, allowing investors to receive tax-sheltered cash distributions.

Commercial Real Estate 1031 Exchange & Institutional Underwriting

Triple Net (NNN) Real Estate Free Cash Flow (FCF) & Yield Calculator

Model Levered Free Cash Flow, Cap Rate, DSCR lender stress-testing, 10-year rent escalations, and 39-year straight-line depreciation tax shields.

1. Property & Lease Economics

Purchase Price ($): $2,500,000

In-Place Cap Rate (%):

Annual Base Rent ($):

Lease Structure:

Annual Escalation (%):

Non-Reimbursable Landlord Reserves ($/yr): $2,500

2. Debt Financing & Capital Structure

Financing Mode:

Down Payment / Equity (%):

Loan Interest Rate (%):

Amortization Period:

Closing & Legal Costs (%):

3. 39-Year Depreciation & Tax Shelter

Building Ratio (Depreciable %):

Investor Marginal Tax (%):

Year 1 Free Cash Flow Underwriting

Institutional NNN Deal Metrics

DSCR: 1.25x (Healthy)

Net Operating Income (NOI)

$166,250

Unlevered Cash

Levered Free Cash Flow (FCF)

$33,654

After Debt Service

Cash-on-Cash Return

3.69%

FCF / Initial Equity

39-Yr Tax Depreciation

$51,282

100% Tax-Sheltered

Total Initial Cash Invested (Down Payment + Closing): $912,500

Loan Amount (Mortgage Debt): $1,625,000 (65.0% LTV)

Annual Debt Service ($P + I$): -$132,596 / year

Year 1 Principal Paydown (Equity Buildup): +$27,842 / year

Total Return (Cash Flow + Principal Paydown): 6.74% Annual Yield

Taxable Rental Income After Depreciation: $0.00 (+$17.6k Excess Tax Loss Shield!)

10-Year Cash Flow & Equity Trajectory

Annual Rent Escalation Modeled

10-Year Multi-Year Underwriting Schedule

Year	Base Rent	NOI	Debt Service	Levered FCF	CoC %	Cumul. Equity

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Click "Run Private AI Analysis" to generate a comprehensive institutional underwriting audit evaluating DSCR safety margins, tenant credit risk, lease rollover cliffs, and 1031 exchange replacement optimization. Your data is 100% private to you—zero server access.

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Commercial Real Estate Underwriting Case Study

Underwriting a $2.5M Dollar General NNN: 1031 Exchange FCF & DSCR Stress Test

A real-world commercial acquisition case study on Cap Rates, debt leverage drag, 39-year depreciation, and lease renewal risks.

The NNN Investment Playbook

A Triple Net (NNN) lease offers completely hands-off passive income because the tenant covers taxes, insurance, and maintenance. However, under current interest rate environments (6.0%–7.0% mortgage debt), purchasing at a 6.75% Cap Rate with 65% debt produces a Positive Leverage Spread of only ~0.25%, making Debt Service Coverage Ratio (DSCR) and 39-year commercial depreciation the most critical factors in determining true after-tax investor yield.

The Scenario: David's 1031 Exchange Acquisition

David recently sold an active 16-unit apartment complex in Denver for $3.0M and rolled $1,000,000 of equity into a 1031 Exchange to eliminate landlord responsibilities. He identifies a newly constructed Dollar General (Absolute NNN with 15 Years Remaining on Primary Lease Term) located in Texas:

Deal Terms

Purchase Price: $2,500,000

Cap Rate: 6.75%

NOI: $168,750 / year

Financing Structure

Equity Down: $875,000 (35%)

Mortgage: $1,625,000 @ 6.50%

25-Yr Amortization: $132,596/yr

Tax & Yield Results

Levered FCF: $33,654 / yr

DSCR: 1.25x (Bank Compliant)

Taxable Income: $0.00 (Sheltered)

The Institutional Underwriting Waterfall

Underwriting Line Item	Formula / Basis	Annual Dollar Value
Gross Contractual Base Rent	$2.5M × 6.75% Cap Rate	$168,750
Non-Reimbursable Landlord Reserves	Admin, Legal & Tax Filing Reserve	-$2,500
Net Operating Income (NOI)	Base Rent - Reserves	$166,250
Annual Debt Service ($P + I$)	$1,625,000 Loan @ 6.50% (25-Yr Amort)	-$132,596
Net Levered Free Cash Flow (FCF)	NOI - Debt Service	$33,654 / year
Principal Amortization Paydown	Year 1 Loan Balance Reduction	+$27,842 / year
39-Year Straight-Line Depreciation	($2.5M × 80% Building) / 39 Years	-$51,282 (Non-Cash Deduction)
Net Taxable Income to Investor	NOI ($166.2k) - Interest ($104.7k) - Deprec ($51.3k)	$0.00 (100% Tax Free Cash!)

The Bottom Line for David

David successfully deferred $280,000 in capital gains taxes through his 1031 exchange, eliminated 3am tenant phone calls, and now collects $33,654/year in 100% tax-sheltered free cash flow plus $27,842/year in automatic loan principal paydown, delivering a total annualized return of 6.74% on his invested equity backed by an investment-grade corporate guarantee.

Frequently Asked Questions (Triple Net NNN Investments)

What is the difference between an Absolute NNN and a Double Net (NN) lease?

In an Absolute NNN lease, the tenant is contractually responsible for 100% of property costs, including roof, foundation, parking lot, structural replacement, taxes, and insurance (true zero landlord obligation). In a Double Net (NN) lease, the tenant pays taxes and insurance, but the landlord remains responsible for structural repairs (roof, HVAC, foundation reserves).

What is Negative Leverage and how does it happen in NNN investing?

Negative Leverage occurs when the interest rate on your mortgage is higher than the property's Cap Rate (e.g. buying at a 5.5% Cap Rate with a 6.75% mortgage loan). In this scenario, borrowing money actually decreases your Cash-on-Cash return below the unlevered cap rate. In high-rate environments, investors must seek higher Cap Rates (6.75%–7.50%+) or purchase with lower LTVs.

What happens when a NNN lease term expires?

Most long-term NNN leases include multiple 5-year renewal options at predetermined rent bumps (e.g., four 5-year options with 10% increases). If a tenant elects not to renew (vacates), the landlord is responsible for finding a new commercial tenant, paying leasing commissions, and funding tenant improvements (TI). This is why properties with 10–20 years of remaining lease term trade at the lowest risk premiums.