NNN investment properties are in high demand and short supply. Quick Serve Restaurants (QSR) are one of the most sought after NNN investment categories. A guarantee by a publicly traded corporate operator is by far the entity that investors prefer to see on the lease. Corporate guarantees, especially credit rated guarantees, by QSR operators like McDonalds, YUM! Brands, Chic-fil-a and Jack in the Box often trade at cap rates that rival those of banks and pharmacies. While investors may prefer a guarantee on the lease by a national operator, a restaurant review published by GE in 2011 indicates that 74% of QSR locations are operated by a franchisee. The challenge then lies in evaluating a franchise QSR.

When considering franchise owned and operated QSRs there are four key factors to consider:

1. Unit sales at the site in question.

• The lease should include a requirement to report sales. Review sales for the past 3 years and compare to national averages.

2. Financial strength of the lease guarantor.

• Guarantee should be for the term of the lease.

• Net worth at minimum equal to tenant NNN cost to cover rent, taxes and utilities for the term of the lease.

3. Real estate fundamentals.

• Size of parcel and the reusability of the building are important.

• Are QSR competitors already in the market?

• Are there closed QSRs that have been rebranded and now occupied by a “mom&pop” restaurant?

4. Rent to sale ratio.

• Generally not to exceed 9% but there is more leeway depending on unit volume ($2.5MM+) and size of the market.

• Consider rent increases and their impact on long term ability to replace the rent.

A strong showing in each of these categories can go a long way towards narrowing the gap between a franchise and corporate guarantee.