Corporate NNN Lease vs. Franchisee Lease

NNN Buyers can invest in Corporate backed Triple Net NNN properties or, in Franchisee leases. National corporate retailers and restaurants, are revamping their expansion models to prevent large capital outlays by franchising more locations. Hence, a more nuanced look at the benefits of NNN leases with either corporate backing or franchisee backing, is desirable.

CORPORATE OWNED NNN LEASE PROPERTIES

• Corporates offer better credit – than franchisees, giving greater ability to investors to conserve capital and have greater predictability of income cash flows.
• Corporates will back their leases and not use Assignment clauses, typically.
• Corporates have better termination and destruction clauses in their NNN lease contracts.
• Corporate NNN lease properties will trade at lower but more stable, less risky cap rates vs. franchisee lease properties

FRANCHISEE OWNED NNN LEASE PROPERTIES

• With higher cap rates on offer by franchisee NNN lease properties, investors need to consider the return, adjusting for risk.   Franchisees, after having sold off their real estate at the height of the market in the decade prior, have been investing in real estate based expansion due to favorable cap rates for land deals. This said, franchisees have been facing strong online competition and this is causing them to be more selective with sites and operators, and are now more sales/performance focused. 

• Since a majority of franchise net-lease properties are priced below $2.5 million, they’re quite ideal for all-cash buyers using 1031 tax-deferred, “Starker” exchanges.

Financing issues

• NNN investors should note that lenders are cautious when it comes to properties that are leased to franchisees. Triple Net lease investors who plan to use debt to acquire franchise net-lease properties should be prepared to contribute between 50% and 60% equity.    In addition to a franchisee’s experience and financials, investors need to pay particular attention to the value and momentum of the franchise and brand in the marketplace.  
• Assuming a franchisee is a newly formed entity having no value or assets other than its franchise rights, a landlord or investor should request and review the financial statements of the principals of the franchisee and obtain a personal guaranty, which provides the Triple Net NNN landlord or investor with a reasonable level of comfort.

For better insight into the pros and cons of any type of NNN lease investment, discussion with your expert Triple Net NNN lease broker at the Triple Net Investment Group is always advisable.