The key thing here is to, “Which entity is issuing the Corporate Guarantee for the NNN lease?” Investment grade credit tenants usually have a corporate guarantee. Of course that means as long as the corporate entity is rock-solid, the corporation’s guarantee holds water. However, IF the corporation goes under, a Landlord’s NNN investment lease is a sinking ship. If the corporation files for bankruptcy, then wave bye-bye to your net lease. On the flip side, if the corporate guarantee entity files for some form of a workout bankruptcy a Landlord can expect a lease renegotiation.
NNN Landlords, should ensure that the corporation that guarantees a NNN net lease matches the entity whose credit is being vetted. Credit tenants’ are rated by financial agencies like Moodys, AM Best or Standards and Poor’s, and the higher the rating, the higher the value of the net lease property. For example – a lease guaranteed by AT&T Inc. is a corporate guarantee – since the entity is listed on a stock exchange. In complete contrast, a NNN triple net lease guaranteed by AT&T Mid Atlantic LLC, however, is NOT a corporate guarantee since it is backed by a subsidiary of AT&T, not the actual corporation. A subtle but massive difference.
Triple net lease landlords and investors can find the name of the guarantor corporations using any finance tool, like Google Finance. Some other tips: confirm a corporate guarantee of the NNN property lease – either on a separate guarantee of lease via a lease amendment, or on the lease itself. Evaluate the corporation’s (tenant’s) credit rating by looking up its default rate for its stores. And, Landlord’s should note that a higher rated tenant means a lower rent or rate of return, with accompanying lower tenant failure risk. Also, Landlord NNN investors should look to include NNN lease clauses such as assignment without Landlord consent and early guarantee opt-out!
It is important to reiterate that in a corporate guarantee a corporation agrees to back all NNN lease obligations in the event the tenant/operator defaults. NNN leases are often touted as a safe harbor investment popularly because the lease is backed by a high-credit corporation. In short, income is guaranteed. NNN investors will receive rent checks for the entire long-ish term of the lease unless the corporation behind the guarantee goes bankrupt. That is why the guarantee clause in a NNN lease is solely the most important clause in a NNN lease. Finally, a personal guarantee is mostly always inferior to a corporate guarantee, or a guarantee from a single-member LLC. And, there’s more.
Investment grade (major) and non-investment grade (minor) tenants may fall under the same risk profile. However, minor tenants usually must issue a personal NOT corporate guarantee attached to the triple net lease. This gives a NNN Landlord greater scope and options to recover rent should the tenant fail. The key to optimal security in a minor NNN tenant lease, vs. a major net lease tenant, is to secure a personal guarantee in the lease. Further, also ensure that the personal assets behind the personal guarantee are not directly tied to the the tenant’s business! In other words, use separate assets for a personal guarantee that wouldn’t be affected by the failure of the minor tenant’s operation.
Call your expert navigators and brokers at the Triple Net Investment Group to get advice backed by decades of stellar, solid, experience for rapidly evaluating the economic impact of corporate and personal guarantee lease clauses in the net lease NNN investments under your review.
