Curious how triple-net leases create predictable income in Phoenix? If you are a high-net-worth or 1031 buyer, you want reliable cash flow with minimal headaches. You also need clarity on what the tenant pays, what you keep, and how lease terms drive value. In this guide, you will learn the core pieces of NNN investing, how to underwrite a deal, Phoenix-specific items to check, and how these assets fit your portfolio. Let’s dive in.
What a triple-net lease is
A triple-net (NNN) lease is a structure where the tenant pays base rent plus most property operating expenses. These typically include property taxes, property insurance, and common area maintenance. Utilities for the tenant’s space are often paid directly by the tenant.
In many NNN deals, you receive a steady rent check while expenses flow through to the tenant. Capital expenditures and major structural items can be exceptions, depending on the exact lease language.
NNN variations and responsibilities
There are several forms of NNN that affect your risk and cash flow.
- Absolute NNN: The tenant is responsible for taxes, insurance, maintenance, repairs, and often structural components like roof and foundation. These are very landlord-friendly and common with strong credit tenants on long terms.
- Standard NNN: The tenant covers taxes, insurance, and CAM. The landlord may retain some structural responsibilities or limits on certain systems.
- Modified net: Caps or carve-outs can limit what tenants pay. Examples include CAM caps, expense stops, or landlord responsibility for structural repairs.
Lease terms in single-tenant NNNs often run 10 to 25 years with multiple renewal options. Longer terms and stronger credit usually translate to lower cap rates.
How NNN cash flow works
In a typical single-tenant NNN, your income is primarily base rent. The tenant pays or reimburses taxes, insurance, and CAM per the lease. Some leases require the tenant to pay these bills directly; others reimburse the landlord after payment.
Watch for exclusions. Roof replacement, major structural work, and capital expenditures may not be passed through. The lease defines exactly what is included in CAM and how annual reconciliation works.
Why Phoenix NNN now
Phoenix benefits from strong population growth, in-migration into Sun Belt markets, and a diverse employment base in tech, healthcare, and logistics. These drivers support single-tenant retail pads and storefronts along high-traffic corridors and near grocery-anchored centers. Freeway-visible pads often command premium pricing and stronger tenant rosters.
Common NNN tenant types here include convenience stores, drugstores, quick-service and fast-casual restaurants, national and regional bank branches, discount retailers, automotive service, and select medical or durable service users. New development along growth corridors can affect rents and vacancy, so confirm the pipeline when underwriting site-level risk. Phoenix’s small-format industrial and last-mile sites also perform well, while some retail segments face consolidation risk from weaker credits.
The lease clauses you must review
Careful lease review is where risk management starts. Focus on these items:
- Base rent and escalations: Fixed steps, CPI-based increases, or a blend. Escalations are your inflation hedge.
- Term and options: Initial term, renewal options, and option notice windows. Exact timing matters.
- Tenant credit and guaranty: Corporate or personal guaranty. Investment-grade credit typically commands lower cap rates.
- Assignment and subletting: Permissive or restrictive language affects re-tenanting flexibility.
- SNDA: Subordination and non-disturbance protects tenant occupancy if the property’s loan is foreclosed.
- Estoppels: Ensure the tenant must deliver estoppel certificates to confirm terms during due diligence.
- Defaults and remedies: Cure periods, monetary remedies, acceleration, and repossession timelines.
- CAM definition and reconciliation: What is included, how reconciliations occur, caps, and exclusions.
- Maintenance and repair: Roof, structure, HVAC, pavement, parking lot, and ADA items. Clarify who does what.
- Insurance and indemnity: Policy types, limits, and proof-of-coverage mechanics.
- Casualty and condemnation: Rent abatement, repair timelines, and termination rights.
- Force majeure and pandemic clauses: Clear rules for interruptions and rent obligations.
- Access and inspection: Your rights to enter and perform repairs.
Underwriting steps
Underwriting NNN is about rent durability and re-lease risk at expiration. Start with the fundamentals:
- Value drivers: Tenant credit, remaining term, rent per square foot versus market, location visibility and traffic, size, condition, and lease structure. Absolute NNN with long term and strong credit is typically priced at tighter cap rates.
- Rent growth: Evaluate contractual escalations and where in-place rent sits relative to the market. At or below market can create renewal and rollover upside.
- Location check: Submarket dynamics, arterial traffic, grocery-anchored proximity, and freeway visibility. Assess the competitive set and new supply.
- Exit thinking: A single tenant is a single point of failure. Model renewal probability, re-tenanting downtime, TI and LC assumptions, and potential use conversions if needed.
Due diligence checklist
A disciplined checklist protects your downside. Prioritize these items during pre-contract and post-contract periods:
- Title and survey: ALTA title report, easements, and encroachments. Confirm if the lease is recorded and verify the legal description.
- Environmental: Phase I ESA, and Phase II if needed. Sites with fuel tanks or chemical use require extra scrutiny.
- Property condition: Roof age and warranties, HVAC condition, parking lot, signage, landscaping, and ADA items. Consider a third-party property condition assessment for larger or older assets.
- Financial and tax records: Property tax history and any pending appeals, insurance claims, prior CAM reconciliations, and utility bills.
- Lease file and estoppels: Executed lease and amendments, guaranties, SNDAs, service agreements, and signed estoppels.
- Tenant credit and business health: Financials for non-investment-grade tenants, watch lists for closures, and bankruptcy checks.
- Zoning and permitted uses: Confirm compliance today and future use potential within Phoenix or nearby municipalities.
- Contracts: Broker commission agreements, management or service contracts, and any auto-renewal provisions.
- Insurance: Current policies, claim history, and compliance with lease requirements.
- Litigation and code: Any pending litigation or municipal code violations.
Phoenix and Arizona specifics to confirm
Local details can affect your net cash flow and risk profile.
- Property taxes: In Maricopa County, the Assessor publishes assessed values, and appeals are common. Many NNN leases pass taxes through to the tenant, but confirm the payment mechanics and whether you ever pay upfront and get reimbursed.
- Transaction Privilege Tax: Arizona’s TPT is a state-level tax on business activity that affects tenants’ operations rather than typical landlord expenses. Be aware of business tax context, especially for retail tenants.
- Zoning and design review: Phoenix, Tempe, Scottsdale, Mesa, Chandler, and Gilbert have different zoning and design rules. Confirm signage, curb cuts, and any recent ordinance changes that could affect operations.
- Utilities and water: In a desert climate, water rates and landscaping standards matter. Verify utility metering and who pays under the lease.
Financing for NNN buyers
Lenders focus on the durability of the rent stream. Expect questions about tenant credit, remaining lease term, location quality, and debt-service coverage.
- Lender types: Life companies, regional banks, credit unions, CMBS, and portfolio lenders offer different terms. Life companies often favor long-term, lower-LTV loans for investment-grade tenants.
- Loan structure: Fixed versus floating, prepayment penalties or yield maintenance, and treatment of assignments and SNDAs.
- Rate impact: Rising interest rates can pressure leverage and cap rates. High-credit, long-term leases tend to remain more resilient.
1031 exchange and DST pointers
Single-tenant NNN is a common 1031 replacement because of predictable, tenant-backed cash flow. Keep timelines and rules front and center.
- 45/180 rules: You must identify replacement property within 45 days and close within 180 days. Use a qualified intermediary.
- Like-kind real property: Ensure your replacement qualifies for tax deferral.
- DSTs and TICs: Delaware Statutory Trusts and tenant-in-common structures are popular for passive replacement and scale. Review sponsor track record, fees, and liquidity limits with tax counsel.
Portfolio role and risk management
NNN assets can act like a lower-touch income anchor in your portfolio. They often balance higher-management holdings such as multifamily or value-add projects. Contractual rent escalations provide some inflation protection.
Diversify across tenant credit, geography, lease expirations, and property types such as banks, QSR, convenience, and medical service. The main risks are vacancy at lease expiration and tenant credit events. Absolute NNN leases shift more maintenance risk to the tenant, but re-tenanting can still be challenging if a tenant fails.
Your next steps
If you are evaluating a Phoenix-area NNN, start with lease review and tenant credit, verify property taxes and zoning, order a Phase I, and benchmark rents against submarket comps. Confirm escalation mechanics, maintenance responsibilities, and SNDA status. For 1031 timelines, line up a qualified intermediary early and keep financing terms in sync with your closing window.
If you want a disciplined, boutique advisor to source, underwrite, and execute your next net-lease acquisition, connect with Anchor Net Lease. Our team focuses on single-tenant NNN brokerage, financing, valuation, and 1031 replacement to help you place capital with confidence.
FAQs
What is a triple-net lease vs a gross lease?
- In a triple-net lease, the tenant pays taxes, insurance, and most operating costs in addition to base rent, while in a gross lease the landlord typically pays those expenses.
How do lease term and credit affect cap rate in Phoenix?
- Longer remaining terms and stronger, investment-grade tenant credit usually command lower cap rates, while shorter terms or weaker credit push yields higher.
Are property taxes my cost or the tenant’s in Arizona?
- It depends on the lease; many NNN leases pass property taxes through to the tenant, but you should confirm payment mechanics and any temporary owner obligations.
Can I use a single-tenant NNN for a 1031 exchange?
- Yes, NNN properties are commonly used for 1031 replacement as like-kind real property, subject to the 45-day identification and 180-day closing rules with a qualified intermediary.
What is the biggest risk with single-tenant NNN investments?
- Vacancy at lease expiration and tenant credit events, since one tenant represents a single point of failure for cash flow.