How buyers price a drive thru lease marketed as absolute NNN when the landlord keeps roof and structure and the guaranty is a franchisee

Question

Consider a 2,400 sf drive thru restaurant box with 12 years remaining and 10 percent bumps every five years, at an asking price that puts it around a 6.4 percent cap. The offering memo says "absolute NNN, corporate guarantee." The lease says the landlord maintains roof and structural elements and is responsible for parking lot resurfacing. The guaranty rider is signed by a franchisee LLC operating 14 units, and the brand entity appears nowhere in it. That is two deviations from what is being marketed, and the question is how experienced buyers actually price them. Is there a rule of thumb for widening the cap rate on a franchisee guaranty versus corporate, or is the better practice to underwrite the roof and paving as an expense line and leave the cap alone? And can an estoppel certificate clean up the guaranty question at all, or is the guaranty document the only thing that matters?

Rena Expert · Accepted Answer

Triple net and absolute net are different documents. In strict usage, triple net means the tenant carries taxes and insurance along with maintenance obligations, and the landlord may still hold roof and structure. Absolute net (sometimes called bondable) means the tenant holds everything, including roof, structure, and casualty restoration, with no landlord obligation left. Brokers use NNN loosely for anything where the tenant pays the operating expenses, so read the maintenance and repair article rather than the cover page. What you're describing is a double net lease with a paving obligation on top.

Price the carve-out as an expense, not a cap rate adjustment. A low-slope membrane on 2,400 sf runs roughly $9 to $14 per square foot installed depending on market and deck condition, so call it $22k to $34k. Divide by remaining useful life and you have a real annual reserve, maybe $2k to $3k. Mill and overlay on the lot runs about $2.50 to $4.00 per paved square foot every 15 to 20 years. Take those out of NOI before you cap it, and you'll see the actual yield.

The guaranty is the bigger item. A 14-unit operator isn't rated credit, and buyers generally demand a meaningfully higher yield for franchisee paper than for a brand-guaranteed unit, with the gap depending on the brand and the location. An estoppel confirms facts about an existing lease. It can't create a guaranty that wasn't signed, and whether an existing guaranty survives assignment turns on its own wording and on state law, so have a real estate attorney read it before you're hard.

The number I'd chase hardest is unit-level sales. Ask for trailing 24 months and compute rent as a percentage of sales. Above roughly 9 or 10 percent on a restaurant, renewal gets fragile, and brands frequently require a costly image remodel at option exercise, which is exactly when a thin operator walks.

ehernandez74 · Answer

The roof piece needs a date on it. Ask for the roof age and any remaining manufacturer warranty before you argue about pricing, because a 3-year-old TPO membrane and a 19-year-old one are completely different deals on the same lease language. The other thing to look for in the lease: does it give you the right to request the guarantor's financial statements annually? A 14-unit franchisee guaranty is worth something only if you can see whether the 14 units are still there in year six. Plenty of leases are silent on that and then you're flying blind for a decade.

How buyers price a drive thru lease marketed as absolute NNN when the landlord keeps roof and structure and the guaranty is a franchisee

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