NNN Lease Vs. Gross Lease - Which one is beneficial for 1031 Exchange investors

It's a simple calculation. Let's say you own an investment property worth $3 million, which you've leased out to someone under a gross lease for a monthly rent of $2K or $24K annually. Now, let's calculate the necessary property expenses that you'll be paying. Say at the end of a year you spent $1200 on the maintenance of your property, $400 on property taxes, and another $400 for the insurance. Therefore, your profit at the end of the year will be -
Rent = $24,000
Property expenses = (Maintenance + Property taxes + Insurance fee)
= $(1200+400+400) = $2000 or $2k
Profit = $(24k-2k)
= $22k

As you can see here, you're investing $2k from your income on the property expenses. In other words, you're paying these expenses from your pocket.

Now, consider a situation where you've leased out the same property under a NNN lease. As you know, the tenant is responsible for paying the property expenses in a NNN lease, you won't have to spend anything from your pocket, and the entire amount received as rent will be saved. So, your profit at the end of the year will be $24k instead of $22k.

However, not every lease that requires the tenant to pay property expenses is a NNN lease. In order to understand this, you'll have to know about the other types of leases.

•Absolute NNN lease - An absolute NNN lease requires the tenant to pay all three major property expenses - property taxes, insurance fee, and maintenance expenses. These property expenses together are known as the 'three nets.' Therefore, each 'N' of an absolute NNN lease represents one 'Net' or expense. As the tenant is responsible for paying the property expenses, the base rent of the property leased under an absolute NNN lease is less than that of the property leased under a standard lease.
•Double-net lease - A double-net or NN lease is an agreement that requires the tenant to pay two operating expenses in addition to the base rent. Though the two operating expenses could be any, it generally includes property taxes and insurance fee, whereas, the investor or property owner looks after the maintenance expenses associated with the property.
•Single-net lease - As the name suggests, a single-net lease is an agreement that requires the tenant to pay one property expense along with the base rent. The property expense included in a single-net lease could be either the property taxes or the insurance fee. Whereas, the investor is required to pay the other two expenses. A single-net lease can also be represented as 'Net' or N lease.

As you can see, the liability on the tenant and investor changes along with the lease type. In other words, your profit will depend upon the type of lease under which you've leased your property. However, no matter whether it's a single, double, or a triple-net lease, it certainly reduces the burden of property management from an investor's shoulders to some extent. In addition, the investor can also exchange an old investment property for a NNN property and defer up to 100% capital gains tax through a 1031 exchange.