For Triple-Net Investment Owners, Is the Unthinkable Risk Possible?

Triple-net real estate investment owners often take a lower rate of return, sometimes in the 5-7% annual range, with increases every five years, long 20-30 year leases, credit tenants or strong franchises just to protect their investment. Many of these investments are absolute triple-net, which covers the owner.  If a hurricane tears down the building or some other catastrophic event occurs, it is up to the tenant and their insurance to rebuild the property. The Covid-19 has thrown a new wrinkle into this equation, as strong franchisees with great brands like Pizza Hut, Wendy’s and others are now filing for Chapter 11 bankruptcy due to the pandemic and the recession. “NPC International Inc., a Kansas-based franchisee that operates 1,225 Pizza Hut restaurants and 385 Wendy’s restaurants, is seeking to restructure as it struggles with at least $1 billion in debt”, as reported by CoStar.  This is usually very bad news for the landlord, as it may involve rent reductions or the closure of under-performing locations, regardless of the underlying lease.