Closed the 1031 into a QSR pad at a 6.33 after the guaranty turned out to be a 41-store subsidiary

You said tenant has the parking lot, which is good, but on a drive-thru the lane is the part that fails first. Heavy truck traffic twice a day on the same 60 feet of pavement, plus the trash enclosure approach. If the lease says "parking areas" and the site plan calls the lane a drive aisle, somebody will argue about it in year seven. Also check who owns the grease interceptor and the hood exhaust ductwork, because a rooftop hood penetration is where a roof you're responsible for turns into a roof you're arguing about. Membrane at 8 years with a warranty is fine. Membrane at 8 years with a leaking curb around a grease-laden exhaust fan is not the same asset.

An estoppel is a letter from the tenant confirming the lease terms are what the seller says they are? And separately the guaranty is a different document from a different entity, so you can have a perfectly good lease and a nearly worthless promise behind it. Is that the shape of what happened here or am I mixing two things.

@vellum, that's the shape of it. The lease is the obligation and the guaranty names who answers for it if the operating tenant stops paying. Those can be different entities, and the marketing package is not the document. Read the guaranty itself and trace the entity up.

On the deal as described, the credit question is what the 41-store guarantor looks like standalone. A single-unit coverage of 2.3x tells you about this store. It tells you nothing about whether the guarantor entity's other 40 leases, its debt, and its franchise agreements can absorb a bad year. Ask for entity-level financials annually, and put the reporting requirement in writing where you can, since a lease that doesn't require reporting means you find out from the news.

The REA point is the one people miss. Obligations that run with the fee stay with the owner no matter what the lease says. A reimbursement cap in the lease shifts the excess back to you permanently, and center assessments generally escalate faster than a fixed cap. Model that gap growing, not sitting flat.

One more mechanism worth confirming: in many states a sale triggers reassessment of the property, which raises the tax bill the tenant pays. That raises the tenant's occupancy cost and can affect how they think about the first option. Whether and how reassessment happens on transfer varies by state and sometimes by county, so confirm it with a local tax professional before you underwrite renewal.

The answer to "is this a good buy" depends almost entirely on one assumption: whether you get renewal at the first option or have to re-tenant at market with 4.5 months of pad rent as your cushion.

What did the $700k actually buy you. Cap is 6.33, your note is in the low sixes with a 25-year amortization, so on a cash-in-cash-out basis the debt is roughly a wash and your year one cash yield on $1.70M is about 5.4%. All cash you'd be at 6.33. The amortization is real, it just isn't spendable. If the answer is "the loan let me buy a $2.34M pad instead of a $1.44M one and the $2.34M pad has a better corner and a better store," say that, it's a defensible answer. If the answer is "I wanted leverage," I'd push back at a 6.33.

Genuine question from outside all of this. Between closing and today, what have you actually done? Like tasks. I'm trying to understand what "passive" means when a real person owns the thing.

5.4% cash on cash and no phone calls versus the 8% and 40 tenant texts I'm getting out of my small multifamily. I've been circling this exact trade for a year because I've clearly found the ceiling on doing everything myself. What stops me is the $1.7M sitting on one signature from an entity nobody rates. @arbor, did you look at anything investment grade at this price point or does the math just not exist there?

Was there a broker on your side or did you go direct to the listing side? Trying to understand how the fee works when the buyer is the one doing all the diligence.

@halyard the listing side pays out of the seller's fee in most of these, and plenty of net lease buyers go unrepresented and just eat the diligence themselves. Arbor, my actual question is sourcing. Was this on a public listing platform with the 6.15 printed on it, or did you see it before that? Everything I pull up on the marketplaces looks picked over and every one of them has "corporate guaranty" in the headline, which after reading your post I now assume means nothing until I see the signature page.

Slowing this down for myself. Outparcel means the pad sits on its own legal parcel at the edge of the anchor's parking field, so arbor owns dirt and a building but shares the driveways. And 6.33 cap on $2.34M is just $148,215 divided by the price, which is the yield before any loan. The thing I didn't know existed until this post is that sharing driveways comes with a bill.

Could you have paid for a parent guaranty? Like priced it, offered the seller less and the franchisee something, and gotten the 240-unit entity to sign. Or is that just never on the table because the franchisee has no reason to widen its exposure on a store it already sold the real estate on.

If you're on the hook for roof and structure, put a roof inspection on a calendar twice a year and pay someone $300 to do it. My crews get called to net lease boxes where the owner hasn't looked at the roof in six years and the tenant never reported the stain because it wasn't over the dining room. That's how a $9k repair becomes a $40k deck replacement.

The part I want is your purchase agreement language. Naming the guarantor entity and the specific financials it must deliver as a condition before the deposit goes hard is exactly the clause most people leave out, because the OM already told them what they wanted to hear. Did you write it as a delivery condition with an extension of the diligence period if the delivery is late, or as a representation? Representation gets you a lawsuit. Delivery condition gets you your deposit back. Also curious whether you asked for the franchise agreement itself, since a franchise term that expires before the lease term is its own problem.

@warrant that clause plus estoppel chasing plus REA abstracting is basically a service nobody I know sells cleanly to small net lease buyers. Filing that away.

Transferable roof warranty is doing a lot of work in this post. Most of the ones I've read transfer once, require notice within 30 days of the sale, and are void if anyone who isn't a certified applicator touches a penetration. On a restaurant with a hood and a walk-in condenser on the roof, somebody has touched a penetration. Did you get the warranty confirmed in writing by the manufacturer or just the seller telling you it moves?

What did the closing table cost all in? I'm building a first deal budget and everyone quotes purchase price and then nothing else.

Who fights the center manager when the CAM bill jumps? Is that you personally reading the assessment backup every year, or does someone do that for a fee?

@girder is right about the hood. I've pulled grease-soaked duct out of QSR roofs where the tenant swore it was fine, and the membrane under the fan curb was cooked. If the lease puts the equipment on the tenant and the roof on arbor, the seam between those two words is the whole argument.

45 days of diligence and you found the guaranty problem on day 31. I would have found it on day 44 and then asked for two more weeks and then talked myself out of the deal entirely. What made you order title and the REA early instead of starting with the lease, since starting with the lease is what every checklist I've read says to do?

Does this shape exist at $600k or is that entirely franchisee-guaranteed small box stuff with 4 years of term left? Six months of reading and I still can't tell whether the small end of net lease is a real market or a graveyard.

@plumb, I manage a handful of these for owners and "hands off" is close to true but not literally true. Every year somebody has to confirm the tenant actually paid the taxes before delinquency, confirm the insurance certificate came in with the right named insured and the right limits, read the CAM reconciliation, and look at the roof. That's maybe eight hours a year if nothing happens. The failure mode isn't work, it's assuming zero work and then discovering in year four that the certificate lapsed.

Two things I'd have pushed harder on. First, one year of same store sales at plus 3% after a plus 1% year in a category where traffic counts have been flat is not a trend, it's price. Ask for transaction counts, not sales dollars, if the lease lets you. Second, the 41-store entity's own capital structure. If that sub is a borrower under the parent's credit facility, or its stores are cross-collateralized, your guarantor's balance sheet is only as good as the covenant it lives under. @arbor did the financials you got show debt at the guarantor level or just an income statement?

45 days of diligence would kill every deal I do, but the reassessment point in the expert reply is the one I'd lose sleep over. If the sale resets the assessed value and the tenant's tax line jumps, their occupancy cost goes from 7.2% to whatever, and they're the ones deciding on the option 9 years out. You bought at a premium to the last basis and handed the tenant the bill for it. Not saying it's wrong, just that it's a real cost you don't see on the rent roll.

The REA is where I'd spend the next week if I were you. Things I'd want confirmed in the recorded document, not from the center's manager: whether the assessment methodology is fixed pro rata by land area or discretionary by the declarant, whether there's any cap or escalation limit on assessments, and whether the declarant has self-help and lien rights against your parcel if you dispute a bill. A lien right against a fee parcel with a $700k loan on it is a default trigger under most loan documents. Also check whether the REA restricts use, because a restriction on food service or on the drive-thru configuration matters enormously for your re-tenanting story if the option isn't exercised. Recording practice and what shows up in the title commitment varies by state, so read the recorded instrument itself rather than relying on the exception summary. And the $4,100 gap I'd model at whatever the four-year assessment history compounds to, not flat.

The seller had a broken deal and a timeline. That's what got you the $70k. The guaranty file was the reason you could ask, but a seller with three backup offers says no to all of it and you buy at 6.15 or walk. Worth naming so nobody reads this and expects a credit.

Residual is the number I'd want and nobody has said it. 0.86 acres on a signalized hard corner attached to a grocery anchor has a land value that exists whether or not the restaurant is open. If the pad dirt is worth, say, $850k to $1.1M in that submarket, your downside on a dark building isn't zero, it's land minus demolition minus the carry while you re-tenant. That's the real floor under a non-rated guarantor, and it's why I'd rather own a small box on great dirt than a big box on a highway frontage road with an investment grade logo. @ledger, that's also the answer to your leverage question if arbor wants it. Debt at a wash on year one cash yield can still be right if the corner is what you were actually buying and the bumps compound against a fixed coupon for ten years.

@sextant agreed on the dirt, with a caveat. Land value as a floor assumes you can get a use approved that pays for it, and outparcels bound by an REA often carry use restrictions the anchor negotiated decades ago. @fathom's point about restricted uses and the drive-thru configuration is the same point as your residual point. If the REA says food service only, or says no drive-thru without declarant consent, the floor under the deal is lower than raw comps suggest. I'd get that answered before I'd carry $900k of land value in the downside case.

@trellis eight hours a year is the number I've been trying to find for months, thank you. That's the version of this I want. Reading arbor's post I'd have gotten the guaranty wrong, so I'm clearly a while off doing it alone.

The thing I'm taking from this is order of operations. Title and the recorded documents first, lease second, marketing package never. I had it in the reverse order in my notes and would have spent $3,500 on an abstract for a deal the REA might have decided for me.