Absolute net, or modified net.

Four letters, four different deals

NNN, NN, MG, gross. The shorthand on a listing is not decoration. Each label moves real costs from one side of the table to the other, and two deals at the same cap rate can leave you with very different bills. Read the letters before you read the yield.

At the passive end is the triple net lease, NNN, where the tenant pays the three big carrying costs: property taxes, insurance, and maintenance. At the other end is a gross lease, where the landlord pays most of it out of the rent. In between sits modified gross, MG, which splits the costs in ways that change deal by deal.

The forms you will actually see

• Absolute NNN: the tenant pays everything, including the roof and the structure. The closest thing to mailbox money in net lease.
• Bondable NNN: absolute net taken further, usually with no right for the tenant to stop paying or to offset for any reason. The lease behaves almost like a bond.
• NNN with carveouts: triple net, but the landlord keeps responsibility for the roof and structure. Common, and fine, as long as you reserve for those two items.
• NN, double net: the tenant pays taxes and insurance; the landlord carries maintenance, often roof, structure, and parking lot.
• Modified gross: a negotiated split. The lease is the only place that tells you who pays what.

Why the cap rate misleads if you skip this

A 7 percent cap on an absolute net deal and a 7 percent cap on a modified gross deal are not the same offer. In the absolute net deal, the 7 percent is close to what you keep. In the modified gross deal, you carry costs that come off the top before you see a dollar, so the real yield is lower than the headline. Net the operating costs out and the two numbers move toward each other. Until you do that, you are comparing a price to a different price and calling them equal.

Two deals at the same cap rate can leave you with very different bills. Read the letters before you read the yield.

The bar, by how passive you want to be

For genuinely hands-off ownership, absolute or near-absolute net lease is the standard to hold. Triple net with roof and structure carveouts is workable, as long as you set money aside for the two things you now own. Modified gross is an operating asset wearing a net-lease label, and it belongs to a buyer who wants to operate. Pick the lease that matches the amount of work you actually intend to do.

If you take a deal with roof and structure carveouts, price them. A roof has a service life and a number, and the structure is the one repair you cannot defer forever. Set a reserve against both from day one, so the year the roof comes due is a line item you planned for and not a surprise that eats a year of income. A carveout is fine. An unfunded carveout is a hidden cost wearing a triple-net label.