Investing in single-tenant, triple net (NNN) properties backed by franchisee guarantees presents both opportunity and nuance. While there is abundant data on NNN leases with corporate tenants, the franchisee-guaranteed subset brings additional layers of risk and reward. In this article we’ll explore:

• What a “franchisee-guaranteed NNN lease” means

• How cap rates are behaving generally in the NNN market

• How those cap rates adjust (widen) when you’re dealing with a franchisee vs a corporate tenant

• Key factors driving the premium/risk difference

• Practical takeaways for investors

---

What is a “franchisee-guaranteed NNN lease”?

A pure “NNN lease” means the tenant pays rent and is responsible for property taxes, insurance, and maintenance — shifting most landlord obligations off-the-table. WeDoLoans+2TD Commercial Group+2

When you add a “franchisee-guaranteed” component, it means the lease is with a franchisee (not a corporate-owned location) and that the franchisee (or its principal) personally guarantees the lease obligations (rent, term, etc). Compared to a large public, investment-grade corporate tenant, a franchisee guarantor typically carries more risk (smaller entity, reliant on brand/franchise system, fewer resources) and therefore investors will expect greater return (higher cap rate) or pay less for the same NOI.

According to an article from NNN Investment Group:

“Corporate NNN lease properties … will trade at lower but more stable, less risky cap rates vs. franchisee lease properties.” NNNIG
So the difference is real and measurable.

---

What are current cap-rate ranges in the NNN market?

Before isolating franchisee-guaranteed deals, it’s helpful to see what the general market is doing:

• A mid-2023 review of retail NNN properties reported that convenience stores and pharmacies were trading at ~5.8 % cap rates, while quick-service restaurants (QSRs) edged just over ~5 %. NNN Deals

• A more recent Q3-2024 summary from The Boulder Group shows retail NNN cap rates at about 6.5 %, industrial at ~7.15 %, office ~7.75 %. Hungry Investments

• A commentary on higher interest rates noted that institutional buyers in NNN retail are seeking cap rates of ~6 % to 6.5 % while sellers are anchored around ~5 %. LoopNet

• Additionally, the database provider Net Lease Advisor reports average cap rates across tenants such as Advance Auto Parts at ~6.31 %, CVS Pharmacy ~6.55 %, Verizon ~6.71 %. Net Lease Advisor

Bottom line: For well-leased, strong-credit, long-term NNN properties the “base market” cap rate in 2024 is somewhere in the 5 % – 7 % range, depending on tenant strength, lease term remaining, location, market, etc.

---

How do cap rates shift for franchisee-guaranteed NNN leases?

Because a franchisee guarantor often carries more risk than a large corporate tenant, investors require a risk premium. Here are key observations:

• The NNN Investment Group article (2018) explicitly says that franchisee lease properties “offer higher cap rates” compared to corporate-backed leases. NNNIG

• There is less published data specifically isolating “franchisee-guaranteed” cap rates, but we can infer: if the base market is ~5 %–6 % for very strong credit, then deals with weaker credit (franchisee) might trade in the 6 %–8 %+ category (or higher depending on market, term, location).

• Rising interest rates and cost of debt mean cap rates are trending upward across the board, so that premium may be even more significant today. Hungry Investments+1

• For example, if a corporate-guaranteed Tier-1 tenant property in a premier location is trading at say 5.0 % cap, then the same property leased to a franchisee guarantor (other factors equal) might trade at 6.0 % or higher to compensate for added risk.

• Factors that enlarge the premium (i.e., push cap rate higher) for franchisee deals include: shorter remaining lease term, fewer renewal options, weaker guarantor financials, franchisee only (no corporate backup), secondary location/market, less escalation in rent, or less brand strength.

---

Factors influencing the spread / premium

Here’s a breakdown of the variables that influence how much higher (or lower) cap rates will be for franchisee-guaranteed leases:

---

Sample scenario & estimating cap rate for a franchisee-guaranteed NNN

Let’s walk through a simplified example of how you might estimate a cap rate for a franchisee-guaranteed NNN lease:

Scenario:

• Single-tenant building leased to a franchisee of a major QSR brand

• Lease term remaining: 10 years

• Guarantor: single‐unit operator with moderate financials (not multi‐unit operator)

• Location: secondary market, good traffic but not prime 1A site

• Rent escalations: 2 % annual

• No corporate-backing guarantee

Given the risk profile, you might compare to similar corporate‐tenant deals in that market (say trading at ~5.2 % cap). Then apply a spread/premium for the franchisee risk. For instance maybe +1.0 % to +1.5 % spread → so you’re targeting ~6.2 %–6.7 % cap. If there are additional drawbacks (shorter term, less guarantor strength) you might target ~7.0 % or more.

If with a stronger guarantor or better location the spread might shrink (e.g., only +0.5 %) leading to maybe ~5.7 %.

---

Key takeaways for investors

• Don’t assume all NNN leases trade at “low 5 %” cap rates — many of those numbers assume top-tier credit tenants (corporate) and prime locations. Franchisee-guaranteed deals carry more risk and must be priced accordingly.

• Evaluate the guarantor strength: ask for personal financials, business track record, franchisee performance, and understanding of the brand’s economics.

• Focus on lease structure: remaining term, renewal options, rent escalations, site location quality and building suitability for other tenants if needed.

• Consider market dynamics: rising interest rates mean cap rates may continue to widen; sellers may be reluctant to accept this, creating spread opportunities for buyers.

• Use comps wisely: Distinguish between corporate‐tenant NNN deals vs franchisee‐tenant deals in your comparable set.

• Risk premium is real: Expect cap rates for franchisee‐guaranteed NNN leases to typically be higher (i.e., worse for the buyer) than for similarly located corporate-tenant deals. Your underwriting should reflect that.

---

Final word

If you’re evaluating a single‐tenant NNN investment backed by a franchisee guarantee, the premium (higher cap rate) you require will depend heavily on guarantor credit, lease term, location and brand strength. While “top-tier” NNN leases may trade in the ~5 % range today, many franchisee deals realistically belong in the ~6 %-7 % (or higher) band unless they match nearly corporate credit profiles and premier site attributes.

As with all real estate investing, the magic is in the details. Understanding the nuances of the tenant and lease is as important as knowing the headline cap rate. If you’d like, I can pull together recent closed transaction examples of franchisee‐guaranteed NNN deals (with cap rates, locations, brands) to further illustrate the current market.

Frequently Asked Questions

1. How much higher are cap rates for franchisee-guaranteed leases compared to corporate-guaranteed ones?

The short answer: typically 75 to 150 basis points higher, depending on the risk profile.

• Corporate-guaranteed NNN leases — backed by investment-grade or national tenants — often trade between 5.0% and 6.0% (as of late 2024), depending on sector and lease term.

• Franchisee-guaranteed NNN leases, on the other hand, generally trade in the 6.25% – 7.5% range, sometimes higher for weaker credit or secondary markets.

That spread represents the “risk premium” investors require for smaller guarantors with limited financial depth or shorter lease terms. For example:

• A Chick-fil-A or Dunkin’ lease guaranteed by a large 40-unit franchisee might trade at a 6.0% cap, nearly corporate-like.

• A single-unit operator of the same brand, in a tertiary market, might require 7.25% – 8.0% to attract buyers.

This differential compensates for the increased probability of default and the potential re-tenanting costs if the franchisee fails — though the premium can also create attractive entry yields for investors comfortable underwriting operator risk.

---

2. What makes one franchisee guarantee stronger than another?

Not all franchisee guarantees are equal. Investors (and lenders) look at three main pillars when assessing guarantee strength:

1. Financial capacity – The guarantor’s liquidity, net worth, and debt-to-income ratio. A multi-unit operator with audited statements and strong cash flow will trade tighter than a first-time franchisee.

2. Operational track record – Years in business, number of successful units, and performance within the brand. A franchisee who owns 10 profitable units across multiple states is viewed as quasi-corporate.

3. Guarantee structure – Whether the lease is personally guaranteed by the owner(s), backed by a holding company, or has cross-collateralization with other units. Full personal guarantees reduce perceived risk.

Bonus indicators of strength:

• Consistent royalty payment history with the franchisor.

• Ongoing development rights or area developer status.

• Presence of professional management teams rather than owner-operators.

In short, the more institutionalized and financially transparent the franchisee, the closer their lease pricing gets to corporate levels.

---

3. Are franchisee-guaranteed NNN leases still a good investment in a rising-rate environment?

Yes — if priced and structured correctly. Rising interest rates have lifted cap rates across all asset classes, so franchisee-guaranteed deals now offer yields often 100–200 bps above comparable corporate assets. For many investors, that extra yield more than offsets the additional credit risk.

Here’s why they can still make sense:

• Higher initial yield – While a corporate Walgreens may trade at 5.25%, a comparable franchisee-backed QSR could yield 6.75%+, improving cash-on-cash returns.

• Lease stability – Long-term NNN structures (10-20 years) with solid personal guarantees can still provide predictable income even amid rate volatility.

• Diversification – Franchisee-backed deals expand an investor’s exposure beyond a handful of national credits and can tap into growth-oriented local operators.

However, investors should underwrite conservatively:

• Verify guarantor financials and liquidity.

• Stress-test interest rates and exit cap rates.

• Focus on strong brands, prime sites, and multi-unit operators where possible.

When properly selected, franchisee-guaranteed NNN assets can deliver above-market yields and solid downside protection — especially for investors who know how to assess operator strength rather than just corporate logos.

Frequently Asked Questions

1. How closely do cap rates follow interest rates, and what happens if the Fed cuts or delays cuts?

Cap rates and interest rates are related, but they don’t move in lockstep. While lower borrowing costs can lead to lower cap rates (and thus higher property values), several factors influence the timing and magnitude of the adjustment:

• Spreads and risk premiums: Cap rates reflect investor yield requirements above the risk-free rate. If investors still perceive high risk or low liquidity, spreads remain wide — even if the Fed cuts rates.

• Debt markets: Lenders may not immediately pass rate cuts to borrowers, especially if credit standards remain tight.

• Market sentiment: After two years of rate volatility, many investors want confirmation that inflation and monetary policy are stable before repricing risk downward.

• Historical lag: Studies (CBRE, Nareit) show cap rates often lag interest rate movements by 6–12 months.

Bottom line: Even if the Fed begins cutting in late 2025, expect cap-rate compression to occur gradually, not immediately. The first signs typically emerge in prime sectors (industrial, core retail, multifamily) before filtering to others.

---

2. Which property sectors are most likely to see cap-rate compression in 2025—and which could still widen?

Cap-rate direction will diverge sharply by sector and asset quality:

• Likely to Compress:

  • Industrial: Demand remains robust due to reshoring, logistics, and limited supply; forecasted compression of 10–30 bps for institutional-quality assets.

  • Multifamily: Stabilizing rents and improving debt markets should lead to slight compression (10–20 bps) in supply-constrained metros.

  • Grocery-anchored & QSR retail: Steady consumer demand and long-term leases with strong tenants make these assets attractive, leading to mild compression (10–25 bps).

• Stable or Expanding:

  • Office: Persistent vacancy and refinancing pressure will likely keep cap rates flat to higher (+10–50 bps) through 2025.

  • Secondary/tertiary retail & hotels: Still sensitive to economic swings and financing costs; yields may stay elevated or rise slightly.

In short, capital will chase stability — meaning sectors with reliable income streams and lower re-leasing risk will see tightening spreads, while transitional or operationally complex assets stay wide.

---

3. How can investors position themselves to benefit if cap rates start to compress again?

Cap-rate compression can create outsized returns for investors who act early and strategically. Here’s how to prepare:

1. Acquire quality assets while yields are still elevated.
   If cap rates decline by even 25 bps, that could translate into a 3–5 % value gain on exit — purely from market repricing.

2. Lock in fixed-rate financing.
   Securing debt before rates fall further allows investors to benefit from both lower borrowing costs later and potential appreciation.

3. Focus on core-plus and stabilized assets.
   These are first to benefit from renewed buyer demand when capital flows return to the market.

4. Underwrite conservatively.
   Build models assuming flat or only moderate cap-rate compression — any additional compression becomes upside, not necessity.

5. Watch liquidity cycles.
   As institutional capital and REITs re-enter, competition for prime assets will increase, driving yields lower. Positioning ahead of that wave is key.

Example: An investor acquiring a Class-A industrial building at a 6.3 % cap today that compresses to 6.0 % by mid-2026 could see roughly 5 % value appreciation with no change in NOI.

---

Summary Insight

• Cap rates will gradually compress in 2025, especially in industrial, multifamily, and core retail.

• The Fed’s rate policy will influence direction, but market confidence and risk appetite determine speed.

• Smart investors will act early, target high-quality assets, and lock in stable financing to capture the upside as spreads tighten.