NNN Lease - Security Deposit Listed as None

[Micah Freeman]

Went into escrow on our very first NNN property this week. Documentation is starting to roll in as part of our Due Diligence period and Received the lease documentation today and it says "Security Deposit: None". Is it standard practice for a NNN property to not have a security deposit? Should I be weary? Can I have the lease amended to provide for one? My partner is like they have 30+ locations and their financials look good, "don't worry about it." Needless to say, I'm worried about it! Any advice for this noob would be greatly appreciated.

Micah Freeman

[Joel Owens]

For STNL (single tenant) it is not typical to have a security deposit. NOW if there are TI credits then you would want to make sure in the lease that if there is an early termination clause there is a penalty for getting out of the lease early. You want to cover expenses to get a new tenant in not come out of pocket. Additionally you do not want any outstanding leases commissions owed.

Now if this is MTNL ( a retail center) then it can be typical to have security deposits in the lease. The security deposit really is only a small part of the due diligence process.

Micah said:

"My partner is like they have 30+ locations and their financials look good, "don't worry about it."   

Doesn't matter if they have 100 locations if those 100 are not backing the lease then you have next to nothing. Tenants can easily set up a lease backed by a few locations or a single location they can easily remote bankrupt and walk away from leaving there other business locations in tact.

I would want to know more about their expansion plans, how many years it takes each store to get profitable, are they giving a corporate guarantee on the lease and is it single stores or multiple stores? If it's multiple stores is it the dogs barely breaking even or backed by the most profitable ones? Does the guarantee burn off at some point in the primary term of the lease? How many years left on the primary lease term? How long has this location been open? Do they disclose ongoing sales per the lease? How much is the annual rental increase or is it blocked and only goes up once every 5 years?

Waiting 5 years can be typical with national credit tenants but mid level franchisees is not optimal as they could go out before the increase occurs and you essentially had flat rent all those years.

See if they give a personal guarantee as well. If multiple partners make sure to attach the one with the higher net worth as well.