Evaluating Deal-Class A tenant (NNN lease with percentage sales)

[Joseph Dzwiniarski]

Brief background - My family will need to 1031 a property in the near future and will need the income to live off of. I'm already managing 2 of their rental properties and will not have the capacity to do a third. As such, I was looking into commercial properties that have Class A tenants on long term triple net leases. It seems like this may be a better passive investment while getting a slightly higher cap rate in my market today.

There is one property that peaked my interest that was given to me as an off market deal. The deal is a percentage of sales lease with a widely known class A franchise in the restaurant/food industry (sale lease back). The area isn't the most prized, but there is a lot of traffic which is good for the business. Essentially this lease is like buying a minority interest in the franchise owners business. The franchise owner has a strong credit history has over 20+ stores and the sales of this location appear to be strong. I'm requesting sales and net income for the past 10 years to confirm this assumption. My strategy would be to hold onto this property for 20 years while my parents receive the income and then cash out when the market is right.

Rent: 8% gross sales

Cap Rate: 6%

Base Term on rents: 11 years with 3 10 year options.

In my projections I'm assuming sales increase 1% a year below 3.5% inflation.Using this conservative assumption IRR is close to 9.5% over 20 years (assuming an exit value with 7% cap).

Does this sound like a good investment strategy? Obviously there are a ton of pitfalls if sales fell, which is why I want to do my due diligence on the company, but it seems like a pretty decent passive investment strategy? I would love to hear other people's thoughts?