NNN and STNL Property Sourcing

A net lease replacement is a credit and term problem before it is a real estate problem. The building is simple; the lease terms underneath it carry the actual risk that the exchange budget has to price. Everything else on the offering memorandum is decoration around that lease.

Why Cap Rate Alone Undersells the Risk

Two single-tenant buildings can trade at the same 6.5 percent cap rate while carrying completely different risk profiles: one with nine years of term left on a corporate guarantee, the other with three years left on a franchisee-level lease and no renewal option priced into the rent. The exchange file should list remaining term, guarantor type, and the next rent bump date as separate line items, not fold them into a single headline yield.

A franchisee guarantee also deserves a separate credit check from the parent brand, since a struggling three-unit franchisee operator can default on a single-tenant lease even while the national brand behind the storefront remains financially healthy.

Mile-Road Corridor Pricing

Detroit's mile-road grid gives net lease pricing a clear structure: Woodward and Telegraph carry the deepest traffic counts and command the tightest cap rates, while corridors further out along Gratiot and Grand River trade wider to reflect lower daily traffic and thinner co-tenancy. Hall Road in Macomb County and Big Beaver in Troy price on a different curve again, driven by regional retail draw rather than corridor traffic alone.

A downtown-adjacent pad site benefits from the same recovery activity lifting Midtown apartment rents, but that adjacency premium should be tested against actual foot traffic data rather than assumed from proximity on a map.

Traffic count data should be pulled current, since a corridor that saw a lane reduction or a nearby anchor closure in the past year can show stale figures in an older traffic study a broker is still circulating.

The Lease Line Items Before an Offer Goes Out

A net lease diligence file needs the same line-by-line detail as a bid tab, not a one-page tenant summary. Each line should tie back to the actual lease document, not a broker's paraphrase of it.

• Guarantor type: corporate, franchisee, or unguaranteed
• Remaining primary term and number of renewal options
• Next contractual rent bump date and percentage
• Landlord versus tenant responsibility for roof and structure
• Co-tenancy or exclusive-use clauses affecting future re-leasing
• Parking ratio and access points relative to the mile-road curb cut

Rollover Exposure and Debt Assumptions

A property priced as low-management income can still carry meaningful rollover exposure if the primary term ends inside the intended hold period. Debt assumptions resting on a stabilized ten-year lease should be re-tested against the actual lease expiration date, since a lender's underwriting on a building with three years of term left will differ materially from underwriting on the same building with nine years left.

A re-leasing reserve should be budgeted for any candidate where term expiration falls inside the first half of the intended hold period, sized against realistic downtime and tenant-improvement costs for that specific corridor rather than a generic percentage pulled from an unrelated market.

Sequencing the Identification Around Lease Expiration

When a net lease candidate goes on the identification notice, the file should flag the lease expiration date against the exchanger's own hold-period assumption, and the qualified intermediary should have that date on record before the 45-day window closes so the acquisition timeline is not resting on an asset that is about to reset.

A candidate with a rent bump scheduled within the first year of ownership should also have that adjustment confirmed in writing by the tenant, since a percentage bump tied to a sales threshold can be disputed if the tenant's reporting has lagged.

Common 1031 Exchange Questions

Why can two net lease properties at the same cap rate carry different risk?

Cap rate does not show guarantor strength, remaining lease term, or the next rent bump, and those three factors drive most of the actual risk in a single-tenant asset. A corporate-guaranteed lease with nine years left is not equivalent to a franchisee lease with three years left, even at an identical headline yield.

How does Detroit's mile-road corridor system affect net lease pricing?

Corridors with the highest traffic counts, such as Woodward and Telegraph, generally command tighter cap rates than corridors further from downtown, while regional draw corridors like Hall Road and Big Beaver price on their own curve tied to retail density rather than raw traffic count.

What lease line items matter most for a quick-service restaurant or pad-site replacement?

Guarantor type, remaining primary term, rent bump schedule, and roof and structure responsibility matter most, since these determine both the durability of the income and who pays for a major capital item if one comes due during the hold period.

Does rollover exposure affect whether a net lease property works for a 1031 exchange?

It can, because a lease expiring inside the intended hold period changes both the debt underwriting and the income stability the exchanger is trying to replace. The identification file should carry the lease expiration date alongside the address and purchase price.

Who should review the lease guarantee structure before closing?

The investor's tax advisor and legal counsel should review guarantee and assignment language; this coordination work assembles the lease abstract and rent roll details those advisors need, without providing tax or legal advice itself.

Ready to organize the exchange file?