November Capital / July 28, 2024
NNN Lease McDonalds’ Sells in Fountain Valley, California
A NNN leased McDonald’s property sold on June 20, 2024, according to Costar, for $3,850,000. The lease had about seven years remaining, set to expire in May 2031. The ground lease sold for a 3.55% cap rate.
Property Address: 11321 Talbert Avenue, Fountain Valley, California
Google Maps: 11321 Talbert Avenue
Let’s take a quick look at this trade and evaluate this McDonald’s NNN lease investment property.
McDonald’s NNN Credit is Excellent
Within the NNN world, McDonald’s corporate credit is the gold standard. You pretty much can’t do better than a McDonald’s. S&P rates it BBB+, an investment-grade rating. The combination of credit strength, brand recognition, store performance, and favorable ground lease terms sets the owner up for a secure line of passive income.
Lease Structure
McDonald’s has a ground lease for this site. What is a ground lease? A ground lease means the landlord is renting the rights to the land. They are not renting the building, as the landlord does not technically own the building. Typically, on a ground lease, the tenant builds their own structure and is responsible for all maintenance aspects throughout the lease term. You may ask, what happens to the building at the end of the lease term? If McDonald’s chooses to leave the site, ownership of the building typically reverts to the landlord. Sometimes, NNN ground leases have a demolition clause that requires the tenant to demolish the building and return the property to its original state.
The landlord on a ground lease typically has zero responsibility for repairs, common area maintenance, taxes, insurance, etc. For McDonald’s NNN owners, you really don’t have to worry about anything. Roof repairs? McDonald’s is responsible. Structural repairs? McDonald’s is responsible. Taxes? HVAC? McDonald’s is responsible. This investment represents true NNN passive income. Don’t lift a finger; just collect a check every month. However, this easy lease structure and secure credit come with drawbacks.
Cap Rate
McDonald’s cap rates are low, typically between 3.50% and 4.50%, depending on the lease term and location. The reason cap rates for these assets are so low is the lower risk nature of the investment. Excellent credit, watertight NNN leases, and very solid real estate fundamentals mean cap rates are going to be very low.
Location
This particular McDonald’s is at a signalized corner entrance to a Costco center. It’s a tremendous location with easy access from all turning lanes. It checks a lot of boxes: 28,000 vehicles per day off Talbert Avenue, a huge five-mile population of almost 700,000, and an average household income well over $100,000. It’s less than half a mile from the on/off ramps of Interstate 405. The owner of this parcel is going to fare very well for a long time as long as McDonald’s stays in business.
Is This McDonald’s NNN Lease Property Worth a 3.50% Cap Rate?
This is a tough question to answer. For an owner in an all-cash 1031 exchange looking for a hyper-secure income stream, this is a very solid choice. However, if you are going to buy something with a sub-5.00% cap rate, I would advise purchasing something with a 15+ year lease term. Essentially, if you are buying anything below a 5.00% yield today, the property better be super special. It must have gold-standard credit, intrinsic real estate value, or a compelling deal story.
The yield on McDonald’s investment properties might make any finance expert hesitate at first glance. However, for some buyers in a 1031 exchange, the choice is between huge capital gains taxes or a highly secure investment property. In NNN investments, you get what you pay for. If you want rock-solid secure real estate deals, you should expect a super low yield. If you are willing to take a little risk on credit, lease term, or location, that’s when you can reasonably expect higher yield deals.
November Capital is writing an article about a transaction that occurred in the NNN marketplace. We make no claim to this transaction.
