When most investors think about NNN (Triple Net) investments, they envision nationally branded tenants like Starbucks, Walgreens, or 7-Eleven—corporate-backed, credit-rated, and virtually hands-off. But there’s another category of net lease tenants that offers higher yields and more opportunities, if you know how to underwrite the risk correctly:

Franchisee Tenants.

In today’s market, a growing number of net lease deals involve franchise operators — particularly in the QSR (Quick-Service Restaurant), automotive, and fitness sectors. These tenants operate under major brands, but their leases are guaranteed by the franchisee, not the corporate entity.

Done right, franchise-backed NNN deals can offer strong cash flow, structured rent bumps, and excellent geographic diversity. Done wrong, they can expose you to credit risk, lease rollover, and unexpected vacancies.

This guide covers everything investors need to know when evaluating franchisee-backed NNN properties, including red flags to watch for, how to assess franchise credit, and which U.S.-based brands and operators perform best.

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🔹 What Is a Franchisee Tenant?

A franchisee tenant operates a business using the brand, systems, and supply chain of a national franchisor — but they are a separate legal entity.

In a net lease deal, this means:

• The lease is not guaranteed by the parent company

• The credit strength is based on the franchisee, not the brand

• The lease terms may vary widely based on the operator’s experience and negotiating power

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🔹 Pros of Investing in Franchisee NNN Deals

✅ 1. Higher Cap Rates

Franchisee deals typically trade 75–150 bps higher than corporate-leased counterparts. Investors willing to accept some credit risk can enjoy significantly higher cash-on-cash returns.

✅ 2. Rent Growth

Franchisee leases almost always include rent escalations, like:

• 10% every 5 years

• 2% annually

• CPI-based increases

This leads to strong blended cap rates over time.

✅ 3. Attractive Price Points

You can enter the market at lower price points — often in the $1M to $2.5M range — ideal for private investors and 1031 exchange buyers looking for yield.

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🔹 Risks to Consider

❌ 1. No Corporate Guarantee

If the tenant defaults, there’s no recourse to the franchisor. Your lease enforcement is limited to the entity listed on the lease — often an LLC with no assets.

❌ 2. Operator Quality Varies

Some franchisees operate hundreds of stores with professional teams and private equity backing. Others run just 1–3 units with limited infrastructure.

❌ 3. Financing Can Be Tougher

Lenders scrutinize franchisee credit more closely. Deals with short-term leases or unknown operators may require:

• Lower LTV

• Higher interest rates

• Full or partial recourse

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🔹 How to Evaluate Franchisee Tenants

Here’s how savvy investors underwrite franchise-backed NNN deals:

🔍 1. Franchisee Size

Ask: How many units does the operator control?

Larger groups have more resources, internal systems, and scale to weather downturns.

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🔍 2. Store Performance

If possible, request unit-level sales data. For QSR tenants:

• Rent-to-sales ratio should be under 10%

• Annual sales should exceed $1.2M–$1.5M, depending on the concept

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🔍 3. Lease Structure

Look for:

• Absolute NNN lease (tenant pays all expenses)

• Personal or corporate guarantee from the franchisee

• Long lease term (10+ years)

• Rent escalations baked in

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🔍 4. Track Record

Has the franchisee grown in recent years? Were they backed by private equity? Are they expanding or consolidating?

Example:
An 18-unit Taco Bell operator with 15 years of experience is vastly different from a startup franchisee with 2 locations and no financials.

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🔹 Best U.S. Franchisee Tenants for NNN Deals

Here are some of the strongest-performing U.S.-based franchise brands, along with guidance on how their franchisee deals typically perform:

🟢 Taco Bell

• Franchise Structure: Common

• Typical Lease Term: 10–20 years

• Escalations: 10% every 5 years

• Cap Rates: 5.75% – 6.75%

• Why It Works: Fast-growing QSR with high demand. Franchisees often operate 10–100+ units.

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🟢 Dunkin’

• Franchise Structure: Almost entirely franchisee-run

• Lease Term: 10–15 years

• Escalations: 8–10% every 5 years

• Cap Rates: 6.00% – 6.75%

• Why It Works: Essential morning retail, recession-resilient, good operator density in Northeast

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🟢 Jersey Mike’s

• Franchise Structure: Expanding fast

• Typical Term: 10–15 years

• Cap Rates: 6.25% – 7.00%

• Why It Works: Fast-casual trend leader, newer leases often include CPI-based bumps

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🟢 Arby’s

• Franchise Structure: Mixed (corporate + franchise)

• Typical Term: 15 years

• Cap Rates: 6.25% – 7.00%

• Why It Works: Established brand with strong franchise operators, including large multi-unit groups

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🟡 Mid-Tier Franchisees with Watchouts

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🔹 Franchisee vs. Corporate: How to Decide

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FAQ – Franchisee NNN Investments

Q1: Is a franchisee lease still considered “Triple Net”?

Yes — many franchisee leases are fully NNN, with the tenant paying property taxes, insurance, and maintenance. However, make sure to verify the lease to confirm who covers roof, structure, and HVAC.

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Q2: Can I get financing on a franchisee-backed NNN deal?

Yes — especially for multi-unit operators with solid financials. Lenders may require:

• Full personal guarantees

• Recent tax returns

• Minimum store performance
  Franchisee leases with under 7 years remaining may require all-cash or partial leverage.

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Q3: What happens if the franchisee defaults?

If there’s no corporate guarantee, your legal recourse is limited to the franchisee’s assets. That’s why it’s critical to:

• Assess financial strength

• Secure strong lease terms

• Evaluate the real estate fundamentals (so the site can be re-tenanted)

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Conclusion: Franchisee Tenants Offer Opportunity — If You Know What to Look For

Franchisee-backed NNN deals offer one thing corporate leases usually don’t: yield. But that yield comes with added layers of credit analysis, lease review, and operator evaluation.

Done correctly, franchise-backed investments can generate superior returns, consistent rent growth, and scalable portfolios in today’s cap-rate sensitive market. But they’re not for everyone.

If you’re evaluating franchisee deals now — or looking for a NNN asset that balances yield and risk — make sure you’re asking the right questions and working with brokers who know the franchise landscape.

Let’s transact.