Triple Net Lease Calculator: Evaluating NNN Returns for DST Investors

Triple Net Lease Calculator Basics: Cap Rate and NOI

Net Operating Income (NOI) Formula

Net operating income represents the cash a property generates from operations. The formula is straightforward: NOI equals gross rental income minus operating expenses. If you are new to NNN investing, our guide to triple net lease fundamentals covers the basics. NNN properties differ from other commercial assets because tenants pay property taxes, building insurance, and maintenance directly. Those tenant-paid expenses never show up in the landlord's expense column. As a result, NNN net operating income runs higher and more predictable than equivalent gross lease properties.

For NNN properties, landlord expenses typically consist only of property management fees, usually 2 to 4 percent of revenue, and reserve contributions.

Items explicitly excluded from NOI include debt service payments, capital expenditures (roof replacements, major renovations), depreciation, amortization, and income taxes. JPMorgan's commercial real estate guidance notes these exclusions exist because they relate to financing and tax decisions rather than property operations.

Capitalization Rate Formula

Capitalization rate measures the unlevered return on a property investment. The formula: cap rate equals NOI divided by property value, expressed as a percentage. This metric enables comparison across properties regardless of financing because it strips out debt entirely.

A lower cap rate generally signals a safer investment with stronger tenant credit. A higher cap rate indicates higher yield with correspondingly higher risk.

The cap rate formula also works in reverse to estimate property value: property value equals NOI divided by cap rate.

How to Calculate NNN Returns (With Examples)

Step-by-Step Calculation

The step-by-step process begins with identifying gross scheduled rent from the lease. Subtract vacancy and credit loss allowance, typically 0 to 2 percent for investment-grade NNN tenants with long-term leases. Add ancillary income such as CAM reimbursements or signage revenue. Subtract landlord operating expenses (management fees and reserves). The result is NOI. Divide NOI by purchase price to arrive at cap rate.

Common Calculation Mistakes to Avoid

Several common calculation errors warrant attention.

Confusing pro forma rent with in-place rent inflates projected returns. Pro forma rent projects future income after improvements. In-place rent reflects what the tenant pays now. Sponsors sometimes advertise pro forma cap rates to appear more attractive. Always verify whether projections use in-place or pro forma numbers.

Overlooking management fees and hidden responsibilities understates costs. NNN leases appear passive, but ongoing oversight, including monitoring tenant maintenance, collecting reimbursements, and handling repair disputes, requires management that costs money.

Confusing cap rate with cash-on-cash return creates unrealistic expectations. Cap rate measures unlevered property-level return. Cash-on-cash reflects what investors receive after debt service.

Whittier Trust advises planning for capital reserves even with credit tenants. Roofs need replacement, HVAC units require upgrades, and parking lots need resurfacing. These costs often hit simultaneously when a tenant vacates.

How DST Sponsors Use These Calculations in Underwriting

Professional sponsors evaluate dozens of potential acquisitions before selecting properties for DST offerings. Their underwriting process separates viable investments from troubled assets.

Acquisition Analysis

Sponsors assess tenant financial strength by tracking credit metrics including debt service coverage and liquidity. This analysis determines the tenant's capacity to cover base rent plus all NNN expenses.

Lease terms receive detailed scrutiny: duration, renewal options, rent escalations, and whether the lease qualifies as absolute NNN, where tenants handle everything including roof repairs, versus modified NNN where landlords retain some responsibilities.

Cap rate verification relies on analyzing comparable sales of similar properties with equivalent tenant credit, locations, and lease structures. This benchmarking ensures acquisition prices align with market reality.

NAIOP research emphasizes data-driven analysis beyond basic financials. Successful underwriting incorporates consumer behavior patterns, demographic forecasts, and market saturation metrics.

Location analysis should include long-term population trends. Properties with strong frontage on well-trafficked streets reduce re-leasing risk when tenants vacate. Built-to-suit properties with high tenant-specific buildouts present problems because conversion costs to re-lease the space can be substantial.

Projected Returns Development

Conservative underwriting applies stringent tenant credit requirements, assumes no rent growth beyond contractual escalators, and stress-tests for expense increases. Aggressive underwriting relies on optimistic re-leasing assumptions and minimal reserves, inflating projected returns while increasing risk.

Cap Rate vs Cash-on-Cash Return: What DST Investors Actually Receive

Cap rate measures unlevered return: NOI divided by property value. It ignores financing entirely, allowing property comparison regardless of capital structure.

Cash-on-cash measures levered return: annual pre-tax cash flow divided by total cash invested. It accounts for debt service and reflects what investors actually receive after financing costs.

Wall Street Prep explains: “The cap rate is an unlevered metric independent of financing, whereas the cash on cash return is a levered metric affected by the percent reliance on leverage.”

Why These Numbers Differ

With zero leverage, cap rate and cash-on-cash match exactly. As leverage increases, the two diverge. Cash-on-cash exceeds cap rate when debt costs fall below property yield, producing positive leverage. It falls below cap rate when debt costs exceed property yield, producing negative leverage.

What to Focus on as a DST Investor

When comparing DST offerings, focus on Year 1 projected cash-on-cash returns rather than headline cap rates. Year 1 cash-on-cash is a closer indicator of initial periodic income than cap rate alone, though actual distributions are not guaranteed and may change over the hold period. Cap rate serves as a property valuation benchmark but does not directly translate to investor distributions in levered structures.

Why DST Returns Differ from Raw Cap Rates

Three primary factors create the gap between a property's cap rate and investor returns: leverage structure, sponsor fees, and hold period mechanics.

The Impact of Leverage

Most DST offerings use 40 to 60 percent leverage. Average commercial real estate loan-to-value ratios declined to approximately 61 percent in 2025.

Leverage proves accretive when the cap rate exceeds debt costs. When a property's cap rate exceeds its borrowing cost, the positive spread magnifies returns on invested equity. For example, borrowing at 5 percent to acquire a property yielding 7 percent creates a 200 basis point spread that benefits equity holders, though leverage also amplifies losses if property performance declines.

Leverage also magnifies losses. Higher LTV reduces the equity cushion against value declines. The FDIC's 2025 Risk Review documents commercial real estate loan performance deteriorating amid high rates, with approximately $1 trillion maturing in 2025 and over $1.5 trillion by 2026. This maturity wall creates significant refinancing pressure across the sector.

Sponsor Fee Structure

Acquisition fees typically range from 1 to 3 percent. Asset management fees run 0.5 to 1 percent annually. Disposition fees at sale usually equal 1 to 3 percent.

A 6 percent raw cap rate might deliver 4 to 5 percent net after fees across a five to seven year hold. Cumulative fees often consume 2 to 5 percent or more of returns annually. Fees on smaller deals tend toward 2 percent while larger deals approach 1 percent. Scale matters.

Hold Period Considerations

Typical NNN holds last five to ten years. Rent escalations, usually 1 to 2 percent annually, improve returns as NOI grows while debt service remains fixed. Exit cap rate assumptions materially affect total return projections. Conservative underwriting should assume reversion cap rates at least 0.5 percent higher than entry cap rates.

Longer holds allow more time for fee amortization and rent escalation compounding.

Realistic Return Expectations for NNN DST Investments

Current Market Yield Ranges

NNN REIT reported 2025 investments at a weighted average cap rate of 7.4 percent across approximately $931 million in transactions with 17.6-year average lease terms. The broader NNN market in 2025-2026 shows cap rates stabilizing in the 5.5 to 7 percent range across property types.

Cap rates by property type and tenant credit quality:

• Investment-grade retail NNN (Walgreens, CVS): 5 to 6.5 percent
• Non-investment-grade retail NNN: 6.5 to 7.5 percent
• Industrial/warehouse NNN: 5.5 to 7 percent
• Medical NNN: 6 to 7 percent
• Net lease office: 6.5 to 8 percent

Factors Affecting Your Individual Returns

Offerings projecting returns significantly above current market cap rate ranges warrant additional scrutiny. Higher projected returns usually signal higher risk or aggressive assumptions. Understanding risk-adjusted returns helps investors distinguish genuinely attractive yields from those that simply compensate for elevated risk.

CBRE's research on commercial property cap rates over two decades found cap rates for all property types averaged 6.29 percent with a standard deviation of only 1.12 percent, reflecting low volatility and narrow historical ranges. This stability reinforces the view that NNN investments function as income-oriented holdings rather than appreciation plays.

Red Flags: When Cap Rates Seem Too Good

Cap rates deviating significantly from market comparables signal problems. Properties priced well below market cap rates may be overvalued. Properties priced well above market carry hidden risks.

Pro Forma vs In-Place Cap Rate Manipulation

In-place cap rate uses current actual NOI, a snapshot of real performance. Pro forma cap rate projects future NOI after improvements that have not yet occurred.

Some sponsors advertise pro forma cap rates to make properties appear more attractive. Pro forma projections mislead when sponsors assume unrealistic rent growth, low vacancies, or understated expenses. Always request in-place cap rate alongside pro forma projections.

Plante Moran Realpoint emphasizes that “value and price paid are not necessarily the same thing.” Cap rate calculations must distinguish between fair market value and the investor's actual basis including transaction costs.

Hidden Risk Indicators

Cap rates 2 percent or more above market signal undisclosed risk, whether pending lease expiration, tenant weakness, or environmental issues. A higher than expected cap rate could indicate high vacancy rates.

Non-investment-grade tenants priced at investment-grade cap rates mean missing risk premium. When the cap rate reflects investment-grade pricing but the tenant lacks credit strength, someone absorbs uncompensated risk.

Short remaining lease terms inflate current yield when above-market rent resets at expiration.

Reversion cap rates equal to or lower than going-in cap rates indicate overly optimistic exit assumptions. Conservative underwriting should assume exit conditions worse than entry, with reversion cap rates at least 0.5 percent higher.

Aggressive rent escalation assumptions exceeding contractual terms create phantom growth. Projections assuming 3 to 4 percent annual rent growth when the lease specifies 1.5 percent bumps rely on optimism rather than contractual reality.

Below-market leverage terms that reset mid-hold can dramatically reduce cash flow when rates adjust.

Lack of transparency compounds other red flags: no comparable sales data, ignored leverage effects, or failure to stress-test assumptions.

How Anchor1031 Evaluates Sponsor Projections

Anchor1031's designated broker-dealer, Great Point Capital, conducts due diligence on DST offerings before they are made available to investors. This process reviews sponsor assumptions, fee structures, property fundamentals, and risk factors to assess whether an offering's financials are reasonable relative to current market conditions.

Areas of review generally include cap rate benchmarking against comparable transactions, rent escalation assumptions, exit cap rate modeling, total fee impact, sponsor track record, and leverage sensitivity. The goal is to identify offerings built on conservative, supportable assumptions rather than optimistic projections.

This due diligence does not guarantee investment outcomes, and all DST investments carry risk including potential loss of principal. However, a disciplined review process helps filter the available offerings and gives investors additional context when evaluating which opportunities align with their goals.

Direct NNN Ownership vs DST: Making the Right Choice

Direct NNN ownership suits investors who want independent due diligence, have $1 million or more to deploy, possess the time and expertise for thorough property evaluation, and are comfortable negotiating financing directly. Direct owners control hold period timing and exit strategy.

DST investment suits investors who prefer professional underwriting where sponsor teams have already analyzed tenant credit, verified cap rates, and modeled returns. DST provides access to institutional-quality NNN properties with lower investment minimums of $50,000 to $100,000.

DST offers particular advantages for 1031 exchange investors facing deadline pressure. Rather than sourcing properties within 45 days and completing due diligence within 180 days, DST investors review pre-packaged offerings with completed analysis and arranged financing.

For investors who value professional oversight over direct control, DST provides institutional-quality execution at accessible minimums.

Next Steps for DST Investors

The gap between a property's cap rate and investor returns reflects the real economics of passive NNN investing directly and through DST structures. Leverage, fees, and hold period assumptions all create separation between property-level metrics and actual distribution checks. DSTs generally quote actual distribution percentages which is a figure that is net of all expenses.

The math itself requires no advanced financial expertise. The skill lies in knowing which numbers to focus on, what assumptions to question, and which red flags demand investigation before committing capital.

When looking at DST offerings and NNN properties, make sure you compare cash-on-cash returns rather than the headline cap rate. Cap rate data and market figures referenced in this article reflect recent conditions and are not indicative of future property values or investment returns. Every investor's situation is different, and the right structure depends on your goals, tax position, and risk tolerance. Consulting with a CPA or tax advisor familiar with your circumstances is an important step before making any investment or exchange decision. The Anchor1031 team can help you evaluate specific options with that context in mind. Reach us at (502) 556-1031 or schedule a call at anchor1031.com.