Learn

The Net Lease Investing Library

Plain-English definitions, formulas and worked examples for single-tenant net lease and passive commercial real estate. Every entry answers one question, cites its sources, and is kept current.

Join Our Free Education Network

Core guides

NNN and Lease Structures

Who pays what, and the clauses that decide it.

Absolute NNN lease
A net lease in which the tenant is responsible for essentially every property cost, including roof, structure and parking lot, leaving the landlord with no routine operating obligations. Full guide →
Blend-and-extend
A lease amendment in which the tenant commits to a longer term in exchange for a rent that blends the current rate with a lower or restructured rate. Full guide →
Go-dark clause
A lease provision that lets the tenant stop operating in the building while continuing to pay rent. The income continues, but the property loses the traffic and relevance that support its long-term value.
Gross lease
A lease in which the landlord pays most or all operating expenses out of a single, higher rent payment. Common in office and multi-tenant buildings, rare in single-tenant retail. Full guide →
Ground lease
A lease of land only. The tenant builds and owns the improvements during the term, and the landlord's income is secured by the land and, at expiration, often the building.
Lease guarantee
A promise by a parent company, franchisee entity or individual to pay rent if the tenant entity does not. Who signs the guarantee often matters more to value than the brand on the sign. Full guide →
Renewal option
The tenant's right, not obligation, to extend the lease for additional periods at pre-set rent. Options favor the tenant: they are exercised when the location works and declined when it does not.
Rent escalation
A scheduled rent increase written into the lease, either a fixed percentage (for example 1.5% a year), a fixed step every five years, or an index such as CPI.
Sale-leaseback
A transaction in which an owner-occupier sells its property to an investor and simultaneously signs a long-term lease to stay in it, converting real estate equity into operating cash.
Triple-net (NNN) lease
A commercial lease in which the tenant generally pays property taxes, insurance and maintenance in addition to base rent. The exact split depends on the lease itself, so the label alone does not settle who pays for the roof or structure. Full guide →

Cap Rates and Valuation

How net lease properties are priced.

Cap rate compression and expansion
Compression is a falling cap rate, which raises the value of the same income; expansion is a rising cap rate, which lowers it. Interest rates, tenant credit and lease term drive both. Full guide →
Capitalization rate (cap rate)
A property's net operating income divided by its price or value. A $100,000 NOI property priced at $1,600,000 trades at a 6.25% cap rate. Full guide →
Exit cap rate
The cap rate an underwriter assumes a buyer will pay when the property is sold in the future. Small changes in this assumption move projected returns more than almost any other input.
Market rent vs contract rent
Contract rent is what the lease says; market rent is what a new tenant would pay today. Contract rent far above market is a risk at renewal.
Net operating income (NOI)
A property's annual income after operating expenses but before debt payments, income taxes, depreciation and capital reserves. NOI is the numerator of the cap rate. Full guide →
Remaining lease term
The number of years left on a lease's primary term, excluding unexercised options. In single-tenant net lease it is one of the largest drivers of cap rate, because value declines as term burns off. Full guide →
Replacement cost
What it would cost today to buy comparable land and construct the same building. Buying well below replacement cost gives a margin of safety if the tenant leaves.

Return Metrics

The numbers used to compare investments, and what each one leaves out.

Cash flow vs appreciation
Cash flow is income received while holding a property; appreciation is the gain realized at sale. Net lease investing is usually weighted toward cash flow.
Cash-on-cash return
Annual pre-tax cash flow after debt service divided by the cash equity invested. It measures current yield in a single year and ignores appreciation, loan paydown and taxes. Full guide →
Equity multiple
Total cash returned to investors divided by total cash invested. A 1.8x multiple returns $1.80 for every $1.00, but says nothing about how long that took. Full guide →
Internal rate of return (IRR)
The annualized rate at which the present value of all cash flows from an investment, including the sale, equals the money put in. IRR rewards timing, so early distributions raise it. Full guide →
Preferred return
A threshold return that investors must receive, typically as a percentage of contributed capital, before the sponsor shares in profits. It is a priority of payment, not a promise of payment. Full guide →

Debt and Financing

How loans change the risk and return of a property.

Capital stack
The layers of financing in a property, from senior debt through mezzanine and preferred equity to common equity. Lower layers are paid first and carry less risk.
Debt service coverage ratio (DSCR)
Net operating income divided by annual debt service. A 1.30x DSCR means the property earns $1.30 for every $1.00 of loan payments.
Debt yield
Net operating income divided by the loan amount. Lenders use it as a rate-independent test of how much income supports each dollar of debt. Full guide →
Loan-to-value (LTV)
The loan amount as a percentage of the property's value. Higher LTV magnifies both returns and losses.
Positive leverage
When a property's cap rate exceeds the loan constant (annual debt service divided by the loan amount), borrowing increases the cash yield on equity. When it does not, debt reduces it. Full guide →
Recourse vs non-recourse loan
A recourse loan lets the lender pursue the borrower's other assets after a default; a non-recourse loan limits the lender to the property, subject to carve-outs for misconduct.

Tenant Credit

Judging whether the rent will keep arriving.

Credit tenant
A tenant whose rent obligation is backed by a financially strong company, often one with a public credit rating. Lenders and buyers price credit tenant leases partly like corporate bonds.
Investment-grade tenant
A tenant whose parent company carries a credit rating of BBB- or higher from S&P or Fitch, or Baa3 or higher from Moody's.
Rent coverage ratio
A store's earnings, or its sales, relative to its rent. It shows whether a specific location can afford its lease, which a corporate credit rating cannot. Full guide →
Tenant concentration
The share of a portfolio's rent that comes from one tenant or one industry. High concentration ties the portfolio's income to a single credit.
Weighted average lease term (WALT)
The average remaining lease term across a portfolio, weighted by each lease's rent or square footage. It summarizes how long contracted income is expected to last.

Underwriting and Due Diligence

The documents and checks behind an acquisition decision.

Estoppel certificate
A signed statement from the tenant confirming the lease terms, rent and absence of defaults, which a buyer or lender relies on at closing.
Offering memorandum (broker OM)
The marketing package a broker prepares for a property for sale, with rent, lease terms, tenant and market data. It is a starting point for diligence, not a verified source.
Right of first refusal (ROFR)
A tenant's right to match a third party's offer to buy the property. It can slow or chill a sale and must be checked before marketing.
SNDA
A subordination, non-disturbance and attornment agreement, in which the tenant subordinates its lease to the lender's mortgage and the lender agrees not to disturb the tenant after a foreclosure.
Trailing twelve months (T12)
A property's actual income and expenses over the most recent twelve months, used to verify the figures in a pro forma.

Real Estate Funds and Syndications

How private real estate vehicles are structured and paid.

Distribution waterfall
The order in which a fund pays out cash: typically return of capital, then the preferred return, then a split of remaining profits between investors and the sponsor.
Private placement memorandum (PPM)
The legal disclosure document for a private securities offering, describing the business plan, fees, conflicts and risks.
Private real estate fund
A pooled vehicle that owns several properties under one set of documents, spreading risk across assets and tenants at the cost of less say over individual acquisitions. Full guide →
Real estate syndication
A pooled investment in a single, identified property. Investors can review the specific asset before committing. Full guide →
REIT vs private real estate
A listed REIT trades daily on an exchange and moves with the stock market; a private fund or syndication is illiquid but valued on property income and appraisals.

Depreciation and Tax

The tax mechanics investors ask about most. Always confirm with your own tax advisor.

1031 exchange
A tax-deferral provision that lets an owner sell investment real estate and reinvest in like-kind real estate without recognizing the gain, if strict timelines are met.
Bonus depreciation
A provision that allows an immediate deduction of a large share of the cost of qualifying shorter-life property in the year it is placed in service. Full guide →
Cost segregation
An engineering-based study that reclassifies parts of a building into shorter depreciation lives, accelerating deductions into earlier years. Full guide →
Depreciation (commercial property)
An annual tax deduction for the wear of a building. US nonresidential real property is generally depreciated straight-line over 39 years; land is not depreciable.
Passive activity loss rules
IRS rules under Section 469 that generally allow losses from passive investments to offset only passive income, not wages, unless an exception applies. Full guide →
Schedule K-1
The tax form a partnership issues to each investor reporting that investor's share of income, deductions and credits. Full guide →

Accredited Investors and Regulation

The securities rules that govern private real estate offerings.

Accredited investor
Under SEC Rule 501, generally an individual with income over $200,000 ($300,000 with a spouse or partner) in each of the last two years, or net worth over $1 million excluding a primary residence, among other tests. Full guide →
Accredited investor verification
The reasonable steps a 506(c) issuer takes to confirm accredited status, such as reviewing tax returns or bank statements or obtaining a letter from a CPA, attorney or registered adviser. Full guide →
Rule 506(b) offering
A private offering under Regulation D that may not use general solicitation, and may include up to 35 non-accredited but sophisticated investors. Full guide →
Rule 506(c) offering
A private offering under Regulation D that may be publicly advertised, but only to accredited investors whose status the issuer takes reasonable steps to verify. Full guide →

Guides by Profession

Passive real estate, explained for your career

Each guide starts from the constraints of one profession: its income pattern, schedule, tax picture and career risk.

Attorneys

Passive Real Estate Investing for Attorneys

Billable hours, associate versus partner pay, capital contributions and K-1s, and the conflicts questions a lawyer should clear before investing in private real estate.

Watch and Listen

Prefer to listen?

Podcast and video conversations on net lease investing, passive income and stewardship.

All podcasts and videos Subscribe on YouTube