Corporate vs Franchise Guarantee

Corporate vs Franchise-Backed Leases in Triple Net Investing

One of the most critical factors in Triple Net (NNN) investing is understanding who is guaranteeing the lease. When purchasing a NNN property, investors often encounter either corporate-backed leases or franchise-backed leases. While “corporate” may sound like the safer, more stable option, the truth is far more nuanced. In some cases, large franchise operators may offer comparable — or even superior — risk-adjusted returns.

This article will explain the differences between corporate and franchise-backed leases, how to assess the strength of each tenant type, and why creditworthiness should be evaluated on a case-by-case basis.

What Is a Corporate-Backed Lease?

A corporate-backed lease means the lease is signed and guaranteed by the parent company — the corporate entity behind the brand. For example, if you purchase a Taco Bell leased property with a corporate guarantee from Yum! Brands, you have the backing of a publicly traded, credit-rated company.

Key Features of Corporate Leases:

  • Lease is guaranteed by the parent company, not the individual store.
  • Often includes investment-grade credit ratings (BBB+, A, etc.).
  • Seen as lower-risk by lenders and investors.
  • Typically commands lower cap rates (i.e., higher purchase prices).
  • Common with brands like Walgreens, Starbucks, AutoZone, CVS, and McDonald’s (Corp locations only).

Why Investors Like Corporate Leases:

  • If the store underperforms or closes, the corporation is still obligated to pay rent.
  • Greater ease in securing financing, especially for 1031 exchanges.
  • Less operational risk — the tenant is likely to continue performing under a strong balance sheet.

What Is a Franchise-Backed Lease?

A franchise-backed lease is signed by an individual or entity licensed to operate the brand under a franchise agreement. These are typically local or regional operators or multi-unit franchisees.

Key Features of Franchise Leases:

  • Lease is guaranteed by the franchisee, not the brand’s parent company.
  • May or may not have corporate support or backing.
  • Financials depend on the specific franchisee’s strength.
  • Cap rates tend to be higher, which means lower purchase prices and potentially higher cash-on-cash returns.
  • Common in industries like QSR (Quick Service Restaurants), Automotive, Fitness, and Childcare.

Why Franchise-Backed Doesn’t Always Mean Risky:

  • Some franchisees are larger than you think, with hundreds or even thousands of locations.
  • Well-capitalized operators with solid performance history can be just as reliable.
  • Deals with personal guarantees, multiple entity backstops, or real estate collateral can mitigate perceived risk.
  • Many of the most successful brands in America (e.g., Chick-fil-A, Domino’s, Planet Fitness) primarily operate under franchise models.

Corporate Doesn’t Always Mean Better

It’s important to understand that corporate backing is not a guarantee of success or performance. While corporate leases often offer greater legal and financial protections, that doesn’t make them immune to economic downturns, brand erosion, or closures. In fact:

  • Brands like Subway, Kmart, and Sears once had strong corporate presence — but many locations closed or went dark.
  • Walgreens and CVS have both closed underperforming locations, even with long-term leases in place.
  • Some public companies carry significant long-term debt, and investors should still scrutinize financial statements.

On the other hand, franchise-backed locations — when properly underwritten — can offer equal or better performance. Some franchisees operate more stores than their corporate counterparts:

  • Carrols Restaurant Group, a major Burger King and Popeyes franchisee, operates over 1,000 units.
  • Some Planet Fitness franchise groups operate 150+ gyms.
  • The Flynn Group operates more than 2,000 restaurants under brands like Taco Bell, Arby’s, and Applebee’s.

In these cases, a franchisee-backed lease may offer the scale, operating expertise, and financial strength equal to or better than a smaller corporate chain.

Evaluating Credit Strength

When evaluating a corporate lease, investors often rely on public credit ratings from agencies like S&P, Moody’s, or Fitch. These ratings reflect the company’s ability to meet its financial obligations. Common ratings include:

  • A or higher: Strong investment-grade (e.g., McDonald’s, AutoZone)
  • BBB / BBB+: Lower-tier investment-grade (e.g., Walgreens, Dollar General)
  • BB or below: Speculative grade (junk) — higher risk, higher potential returns

However, many franchisees do not have public credit ratings. In these cases, your due diligence becomes even more important:

What to Ask for:

  • Audited or reviewed financial statements
  • Rent coverage ratios (EBITDAR to rent)
  • Number of locations and their geographic diversity
  • Lease guarantees (individual, entity, or both)
  • Real estate ownership or collateral
  • History of lease performance or defaults

A strong franchisee may offer 2.5x to 3.5x rent coverage with a long operating history, making them an attractive risk-adjusted play even without a credit rating.

Lease Structure Matters Too

Whether corporate or franchise-backed, the lease structure has a major impact on investment quality:

  • Absolute NNN: Tenant is responsible for all expenses, including roof, structure, and taxes.
  • Double Net (NN): Landlord may retain some responsibilities (e.g., roof or structure).
  • Modified Gross: Landlord covers some operating expenses.

A well-structured absolute NNN lease with a high-performing franchisee may be less risky than a double net corporate lease with a lower-rated company.

Cap Rates: Corporate vs Franchise

Cap rates vary widely based on tenant strength, lease length, and location. In general, but not always:

  • Corporate-backed leases trade at lower cap rates: 4.50% – 6%
  • Franchise-backed leases trade at higher cap rates: 6% – 8.50%

This means you may achieve better cash-on-cash returns with a franchise tenant, especially if the risk is appropriately managed and mitigated.

Which One Is Better?

There is no one-size-fits-all answer. Both corporate and franchise-backed leases can be strong investments — it all depends on the specifics of the deal.

Corporate may be better if:

  • You want maximum ease and minimal management.
  • You’re looking for a truly passive, long-term hold.
  • You’re buying in a 1031 exchange and need lender-friendly tenants.

Franchise may be better if:

  • You want higher returns and are willing to do more due diligence.
  • The franchisee is well-established and well-capitalized.
  • You’re comfortable with a personal or entity guarantee.
  • You’re looking to buy at a discount compared to similar corporate deals.

Final Thoughts

When investing in triple net lease properties, don’t let the terms “corporate” or “franchise” be your only guide. A large franchisee with hundreds of locations and strong financials may be a better long-term tenant than a struggling corporate brand. On the flip side, investment-grade corporate leases offer legal and financial protections that may be hard to replicate elsewhere.

Evaluate the lease, the guarantor, the rent coverage, the operating history, and the property fundamentals. Ultimately, the strength of the investment is in the details, not just the name on the lease.

Disclaimer: This content is for informational purposes only and does not constitute legal, tax, or investment advice. Always consult with a qualified advisor, attorney, or financial professional before making any real estate investment decisions.