Offering Memorandum Guide for Single-Tenant Net Lease Properties
Single-tenant net lease deals live or die on the lease terms and tenant credit. Your OM needs to prove the income stream is bulletproof and the tenant won't disappear in three years. Most brokers screw this up by burying the lease details or glossing over the tenant's financials. Here's what actually matters to NNN buyers.
Tenant Credit Analysis
NNN investors are buying a bond with a building attached. The tenant's financial health determines everything else.
Three Years of Audited Financials
Include full P&L statements, balance sheets, and cash flow statements for the past three years. Public companies make this easy, but private tenants often resist.
Best Practice
For private tenants, get signed financial statements from their CPA. Tax returns work as backup but audited statements carry more weight with lenders and buyers.
Credit Rating Documentation
S&P, Moody's, or Fitch ratings drive cap rates more than any other single factor. Investment grade tenants trade at 5.5-7% caps while unrated tenants hit 8-10%.
Best Practice
If tenant is unrated, include D&B report and credit analysis from a third party. Don't make buyers guess about creditworthiness.
Store Performance Data
Sales per square foot, customer traffic trends, and store ranking within tenant's portfolio show location strength beyond corporate credit.
Best Practice
Get trailing 12-month sales figures and compare to tenant's system average. Strong performing locations have more protection against dark store risk.
Parent Company Guarantees
Many franchise locations have weak local operators but strong parent guarantees. The guarantee structure determines actual credit risk.
Best Practice
Include full guarantee language and parent company financials. Specify whether guarantee is full or limited and if it survives assignment.
Lease Structure Details
The lease terms determine cash flow predictability and exit value. Buyers need every provision that affects NOI.
Full Rent Escalation Schedule
Show exact dollar amounts for every year, not just percentage increases. Many leases have compounding escalations or reset provisions buyers miss.
Best Practice
Create year-by-year rent schedule through lease expiration. Include any percentage rent kickers or CPI adjustments with caps and floors.
Renewal Option Terms
Option rents, notification periods, and number of options directly impact terminal value assumptions. Market rent resets can kill returns.
Best Practice
Highlight if renewal rents are fixed, CPI-adjusted, or market-based. Market rent options are red flags for many NNN buyers.
Dark Store Provisions
Go-dark clauses let tenants keep paying rent while closing operations. Co-tenancy requirements can trigger rent reductions or termination rights.
Best Practice
Extract exact language around dark store rights and co-tenancy triggers. Many retail leases have complex provisions that aren't obvious from rent rolls.
Assignment and Subletting Rights
Tenant's ability to assign lease or sublet affects future credit risk and buyer's control over property use.
Best Practice
Include full assignment clause language. Note if landlord consent is required and what approval standards apply.
Maintenance and Repair Obligations
True NNN leases push all expenses to tenant, but many have carve-outs for structural repairs, roof replacement, or parking lot maintenance.
Best Practice
List any landlord obligations that could create unexpected capex. HVAC replacement responsibilities are often unclear in lease language.
Financial Performance
Clean NOI calculations with proper expense reconciliation. NNN buyers hate surprises in year two.
Base Rent vs Total Rent
Many NNN properties have additional income from parking, signage, or percentage rent. Break out each component so buyers can model probability.
Best Practice
Show base rent, percentage rent history, and any other income separately. Don't blend everything into one rent number.
Expense Reconciliation History
Even in NNN leases, landlords often pay expenses and get reimbursed. Show actual collections vs expenses for past two years.
Best Practice
Include copies of actual expense reconciliations sent to tenant. Highlight any disputes or uncollected amounts.
Property Tax History and Assessment
Property taxes often increase after sale due to reassessment. Show 5-year tax history and recent comparable sales that might indicate new assessed value.
Best Practice
Get recent tax assessor records and note any pending appeals. Calculate likely post-sale taxes based on purchase price.
Insurance Requirements
Lease insurance requirements affect tenant's occupancy costs. Inadequate coverage requirements can create landlord liability.
Best Practice
Include current insurance certificate and lease insurance requirements. Note any gaps that might need addressing.
Market Position and Location
Location drives re-leasing risk and terminal value. Show why this site works long-term.
Demographics and Trade Area
Population, income, and traffic counts within 1, 3, and 5-mile rings. Include growth projections and any major development planned.
Best Practice
Use current year demographics, not 2020 census data. Include drive-time analysis if relevant for tenant's customer base.
Competition Analysis
Direct competitors within trade area and any planned competitive development. Oversupply kills re-leasing prospects.
Best Practice
Map all direct competitors and note any recent closures or new construction. Include municipal planning data for future retail development.
Access and Visibility
Traffic counts, intersection configuration, and sight lines affect long-term viability for retail tenants.
Best Practice
Include recent traffic counts from DOT and photos showing visibility from all approaches. Note any planned road improvements that could affect access.
Zoning and Use Restrictions
Permitted uses determine re-leasing options if current tenant leaves. Restrictive zoning limits buyer flexibility.
Best Practice
Get zoning letter from municipality listing all permitted uses. Note any special use permits or variances that might not transfer.
Physical Property Details
Building condition affects tenant retention and future capex needs. NNN buyers want minimal landlord obligations.
Property Condition Assessment
Recent engineering report or property condition assessment showing major system conditions and remaining useful life.
Best Practice
Get PCA within 12 months of sale. Include executive summary highlighting any items over $10,000 in next 5 years.
Environmental Due Diligence
Phase I environmental report and any required Phase II testing. Environmental issues can kill deals or create huge buyer discounts.
Best Practice
Include recent Phase I within 180 days. If any recognized environmental conditions exist, get Phase II completed before marketing.
Survey and Title Information
ALTA survey showing any encroachments or easements. Title commitment with full exception list.
Best Practice
Get ALTA survey updated within 2 years. Include utility easements and any shared access agreements with neighboring properties.
Building Specifications
Construction details, major system ages, and any recent improvements. Include any tenant-specific improvements that might not transfer.
Best Practice
Note HVAC system type and age, roof material and warranty status, and parking ratio. Include any ADA compliance issues.
Common OM Mistakes
Including only lease abstract instead of full lease document
Impact: Buyers can't evaluate go-dark provisions, assignment rights, or renewal terms that determine risk and value
Fix: Provide complete lease with all amendments. Create detailed abstract as summary but include full document for buyer due diligence
Not disclosing below-market rent escalations or renewal terms
Impact: Buyers discover weak rent growth during due diligence and reduce offers or walk away entirely
Fix: Calculate effective annual rent increases including any step-downs or market rent resets. Show this affects long-term returns
Failing to address dark store risk for retail tenants
Impact: Sophisticated buyers assume worst-case lease terms and price accordingly, reducing offers by 50-100 basis points
Fix: Extract and explain go-dark provisions clearly. If tenant can go dark while paying rent, explain why this protects investors
Omitting tenant's store performance metrics
Impact: Buyers can't assess location strength within tenant's portfolio, creating uncertainty about renewal probability
Fix: Get sales per square foot data and store ranking within tenant's system. Strong performance reduces dark store risk
Not explaining corporate guarantee structure for franchise locations
Impact: Buyers confused about actual credit risk when local franchisee is weak but parent company provides guarantee
Fix: Include parent company financials and full guarantee language. Specify guarantee limits and survival terms
Key Metrics for Single-Tenant Net Lease OMs
| Metric | What It Tells Investors | Typical Range | Data Source |
|---|---|---|---|
| Current Cap Rate | Return on investment based on current NOI. Investment grade tenants typically trade at 5.5-7.0% caps | 5.5% - 10.0% | Divide current NOI by asking price. Compare to recent sales of similar tenant credit and lease terms |
| Lease Term Remaining | Cash flow duration and re-leasing risk timeline. Longer terms command lower cap rates | 2 - 20 years | Calculate from lease commencement date and initial term plus any exercised options |
| Annual Rent Escalations | NOI growth rate and inflation protection. Fixed escalations preferred over market rent resets | 1.5% - 3.0% annually | Review lease escalation clauses and calculate effective annual increase over lease term |
| Tenant Credit Rating | Default probability and financing availability. Investment grade ratings dramatically improve pricing | BBB- to AAA for rated tenants | S&P, Moody's, or Fitch ratings. For unrated tenants, provide D&B score and financial analysis |
| Rent Coverage Ratio | Tenant's ability to pay rent from location cash flow. Higher coverage reduces dark store risk | 1.2x - 4.0x coverage | Divide tenant's location sales by annual rent. May require tenant cooperation to obtain sales data |
| Renewal Probability | Likelihood of lease extension based on tenant performance and option terms | 60% - 95% for strong locations | Analyze store performance vs tenant average, renewal option terms, and tenant's expansion/contraction strategy |
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