NNN in QSR - Percentage Rent Lease vs 5 yearly increases

[Kiran R.]

Hello I am just getting started in NNN investment, and mainly looking at national brand tenants in Quick Service Restaurants(QSR). Comparing two deals - with almost same price point
#1. no rent increases but Percentage rent lease - There is a base rent ( ~65% of NOI) and the rest is percentage of their gross sales in last 12 months
#2. 10% rent increase every 5 years

As a newbie option #2 seems preferable /safer to me, and #1 may be slightly riskier. Would love to hear the opinion of experts.

And also if you have any recommendations for brokers and lenders specializing in NNN please let me know.  

Thank you 🙏

[John McKee]

I never heard of option 1 and I have been doing this for 20 years.  I would choose option 2, because when the economy goes south, gross sales take a dive.  Make sure you buy the lot and not the brand!  In other words when dunkin donuts decides to close a location, you are able to release it quickly.  Trust me I know!!!  Nothing lasts forever.  Factors such as competition, food trends, lack of management, ingress etc, can close these stores.  Ingress and Egress and drive thru capability are a must have.  Even the side of the street that the QSR is on matters.  One side of the highway can be more profitable than the other.  Make sure you get the sales data and ask where this store stands financially in the region.  If the broker doesn't know then you walk in and ask the manager...You would be surprised once you start getting people to talk. The other reason why you would choose option 2 is that no investor would ever buy #1 and the bank might have trouble financing a deal where the revenue can be iffy.