Corporate NNN and franchise leases are two of the most debated types of leases in the commercial real estate world. An NNN (or triple net) lease benefits landlords since it absolves them from most risks. On the other hand, a franchisee lease is a beneficial agreement for the franchisor, but it comes with more potential risks for the landlord.
In this blog, we’ll discuss the differences between the two types of leases and what to look for when considering an investment.
Corporate NNN Lease Properties
Landlords of Corporate NNN properties often experience more security and less risk. These properties are low-maintenance for the owner since the tenant pays for any property-related expenses, like structural maintenance, repairs, insurance premiums, and real estate taxes.
Corporate NNN property owners can easily predict their cash flow from the property, proven to be more stable over a more extended period.
In many cases, the tenant expects the landlord to charge a lower base rent and have low-risk cap rates since they cover all additional expenses. Tenants also expect favorable termination clauses.
Franchisee-Owned NNN Lease Properties
For franchisee-owned properties, investors should always up their risk expectations when considering their return. There is a lot of online competition in the franchise market, so it’s wise to practice more caution.
Franchisees are becoming more particular about their operators and locations — their main priority is now a specific property’s performance and sales due to high competition levels in the market. Agreeable cap rates have also encouraged them to invest in real estate expansion after selling their other locations during the market’s peak.
Measures of Protection
Real estate is not a risk-free business, so you should always prepare for unexpected situations.
1. Do Your Research
It’s important to note that lenders are usually cautious regarding franchisee-leased properties. Investors who plan to use debt to acquire franchise net-lease properties should prepare to contribute between 50% and 60% equity.
Study the brand or franchise’s market position and value before signing anything — if you see any red flags, it’s probably best to avoid the situation altogether.
2. Experience and Finances Matter
Other things to examine closely are a franchise’s finances and length of experience. A well-established franchise or brand should have a solid financial record and investments in diverse assets.
Entering an NNN lease agreement with no collateral means taking a risk you might not want to take.
To avoid future issues, landlords and investors should request insight into a franchise’s financials. Their financial statements will show whether or not there is a need to ask for a guarantor; it’s a small step that provides great comfort.
Consult your Corporate NNN & Franchisee Lease Expert
When deciding between a corporate NNN lease or a franchisee lease, Brisky Net Lease can advise you on what is best for your situation and finances. We remain at your side throughout the process and ensure you get the most out of your money.
As experts on the NNN commercial real estate market, we help our clients achieve their financial goals — no matter what type of investment they’re considering.
Get in touch with our brokers today to learn about our various market opportunities or to learn more about our process.