In net lease investing, the tenant’s credit quality is arguably the single most important risk factor to evaluate. You’re not just buying the four walls and land — you’re buying a contractual income stream backed by that tenant’s ability and willingness to pay rent.

For investors in NNN (Triple Net) or Absolute NNN assets, tenant creditworthiness determines:

• Lease security

• Financing eligibility

• Resale value

• And ultimately — your peace of mind

In this article, we’ll break down how to evaluate tenant credit quality, highlight common red flags, and offer real-world U.S. tenant examples to illustrate what to look for — and what to avoid.

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Why Tenant Credit Matters in Net Lease Deals

Net lease properties are long-term, low-maintenance investments — but they are only as good as the tenant occupying the space. A 15-year lease means very little if the tenant:

• Defaults

• Goes bankrupt

• Or lacks the financial stability to weather economic downturns

Strong tenants = strong cash flow. Weak tenants = hidden risk, even if the cap rate looks attractive.

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🔹 Step 1: Understand the Type of Tenant Guarantee

Not all leases are backed the same way. Here’s a quick breakdown:

🟢 Corporate-Backed Leases

These are the gold standard. The parent company guarantees the lease, often with national or international financial strength. Lenders prefer these, and buyers pay premiums for the security.

Example:

• Tenant: Walgreens Boots Alliance (WBA)

• Credit Rating: BBB (S&P), investment-grade

• Lease Type: Corporate Guaranteed

• Investor Benefit: Lower risk, higher liquidity, better financing options

🟡 Franchisee Leases

Often branded with national logos, but backed by local operators or franchise groups. Credit depends on the franchisee’s financials, not the brand.

Example:

• Tenant: Taco Bell (operated by a 5-unit franchisee)

• Lease Type: Franchisee Guarantee

• Investor Risk: Depends on the strength of the franchise group — size, performance history, liquidity

🔴 Private Tenants

These are regional or local businesses — they may perform well but typically have no credit rating and are not backed by large corporations.

Example:

• Tenant: Joe’s Tire Shop

• Lease Term: 10 years

• Risk: Higher chance of default, limited resale demand

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🔹 Step 2: Look at Credit Ratings

For publicly traded companies, you can review Standard & Poor’s (S&P), Moody’s, or Fitch credit ratings.

Common Ratings Scale (S&P):

If a company is BBB- or higher, it is generally considered investment-grade — a key threshold for conservative buyers and institutional lenders.

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🔹 Step 3: Review Financials (if available)

For non-rated or private companies, request and review:

• Income statements

• Balance sheets

• Tax returns

• Store-level performance

Look for:

• Consistent EBITDA growth

• Low debt-to-equity ratio

• Positive net income

• Liquidity and reserves

If financials aren’t available — assume risk is higher.

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🔹 Step 4: Evaluate Unit-Level Economics

Even if the tenant is solid, the performance of the specific location matters.

Ask:

• Is this a top-performing store or a marginal one?

• Is the rent-to-sales ratio healthy (typically < 10%)?

• Are there competing locations nearby?

• Is it a high-traffic area?

For example:

• A McDonald’s in a 35,000 VPD hard-corner intersection with $3M+ in annual sales is much more secure than a location doing $900K/year in a sleepy town.

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🔹 Step 5: Understand the Lease Language

The lease should spell out:

• Who guarantees rent

• Whether there are co-tenancy clauses

• Termination options

• Assignment rights

Don’t assume anything. If it’s a franchisee deal, make sure there is a personal or group guarantee, and that it’s enforceable.

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Real-World Tenant Examples

🟢 Low-Risk (Corporate-Backed, Investment Grade):

• Walgreens – BBB (S&P)

• AutoZone – BBB+

• Chick-fil-A – Corporate-backed, no rating, but historically bulletproof

• Starbucks – BBB+

🟡 Mid-Risk (Franchisee or Private Chain):

• Taco Bell – Depends on franchisee

• Dunkin’ – May be corporate or franchise

• Checkers – Often franchise-backed

• Culver’s – Typically franchisee leases

🔴 High-Risk (Non-rated, Private Tenants):

• Local car washes

• Regional vape shops

• Small town urgent care centers

• Independently owned fitness franchises

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Pro Tip: Cap Rate = Credit Barometer

Generally, the stronger the tenant, the lower the cap rate. Why?

Because buyers are paying for predictability, security, and passive income.

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FAQ – Evaluating Tenant Credit

Q1: What if the tenant has no credit rating?

This usually means they’re a private company or franchisee. In that case:

• Ask for financial statements

• Evaluate unit-level sales

• Look at the lease guarantee — personal or corporate
  Treat the deal as higher risk unless proven otherwise.

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Q2: Can a franchisee lease still be a good deal?

Yes — larger, multi-unit franchisees with strong financials can be excellent tenants. Just make sure the lease is personally guaranteed, the stores are profitable, and you price in the risk (via a higher cap rate).

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Q3: Does a strong tenant mean I don’t have to worry about the location?

No. Even great tenants can close poor-performing stores. Always underwrite the real estate fundamentals: visibility, demographics, traffic counts, and long-term value. A Walgreens on a hard-corner in Dallas is a safer bet than one in a declining rural town.

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Conclusion: Underwrite the Income — Then Underwrite the Risk

NNN investing is about buying income, but income is only as good as the entity paying it. Evaluating tenant creditworthiness is essential to safeguarding your return, securing your financing, and ensuring a smooth exit when you eventually sell.

Don’t get distracted by cap rate alone. Understand who’s on the other side of the lease, and structure your investment accordingly.

Need help sourcing high-credit, corporate-backed NNN deals or navigating the gray areas between tenant risk and pricing?

Let’s transact.