NNN is the default 1031 replacement asset in Florida, and most exchangers underwrite it wrong
Triple-net lease properties are the single most common replacement asset for 1031 exchangers targeting South Florida, and for good reason. You get hands-off income, tenant-quality diversification across credit tiers, and a transaction structure that closes fast enough to meet exchange deadlines. But the cap rate spread from 5% (CVS-anchored, 15-year primary term) to 8%+ (regional QSR tenant, 5 years left, no options) tells you everything: not all NNN deals are created equal. The difference between a bulletproof investment-grade lease and a sub-investment-grade structure that looks solid on the surface is the difference between a deal that cash flows through recessions and one that becomes a re-tenanting project the year your lease expires.
This guide walks through tenant credit-rating tiers, the specific tenant categories that dominate South Florida NNN inventory (QSR, dollar-store, auto-service, medical, banking), ground-lease vs fee-simple ownership structures, and the lease-clause red flags that separate real income from expensive problems. If you're underwriting NNN investments for sale in Palm Beach County or Broward County for a 1031 exchange, this is the checklist.
Tenant credit tiers: investment-grade vs sub-IG vs unrated (and why the spread matters)
Tenant credit quality is the foundation of NNN underwriting. The market prices it ruthlessly, you see it in the cap rate. Investment-grade tenants (S&P rating BBB- or higher) trade at 5-6% caps in South Florida. Sub-investment-grade tenants with recognizable national brands might push 6.5-7%. Regional or unrated tenants, even strong operators, trade at 7.5-8%+ because the buyer pool shrinks and lenders get nervous.
Investment-grade tenants (Walgreens, CVS, Wawa, 7-Eleven corporate, BofA, Wells Fargo) carry corporate guarantees backed by publicly-rated balance sheets. These leases are bondable, institutional buyers will pay a premium because the credit risk is quantifiable. The kicker: investment-grade NNN deals qualify for the lowest-cost debt (sub-5% rates, 75% LTV, non-recourse). If you're doing a 1031 exchange and need to match or exceed your relinquished-property debt to avoid boot, investment-grade credit gets you there.
Sub-investment-grade but nationally recognized tenants sit in the middle. Dollar General, Family Dollar, AutoZone, Advance Auto Parts, O'Reilly's, Tire Kingdom, most QSR franchisees (McDonald's, Chick-fil-A, Wendy's when it's franchisee-guaranteed, not corporate). These are real businesses with strong unit economics, but the parent company doesn't carry an S&P rating or the lease is guaranteed by the franchisee entity, not the franchisor. Cap rates here run 6.5-7.5% depending on lease term and location. Lenders will still finance them at 70% LTV, but the rate ticks up 50-75 bps compared to investment-grade.
Regional and unrated tenants are where you earn the yield, and take the re-tenanting risk. Local medical groups, single-location restaurants, regional auto-service chains, smaller banks. These tenants might be printing money and have been in the same location for 15 years, but if the lease has 5 years left and no corporate parent guarantee, you're underwriting tenant-specific business risk, not balance-sheet credit. The cap rates reflect it: 7.5-8.5%, sometimes higher. The upside is obvious (more yield, less competition). The downside is that when the lease expires, your re-tenanting timeline and cost become your problem, not a national credit desk's problem.
Here's the rule: if you're buying a sub-IG or unrated tenant, the lease term better be LONG (12+ years remaining) or the rent better be 20%+ below market so you have re-tenanting cushion built in. Otherwise you're buying a vacancy countdown, not an income asset.
Tenant categories that dominate South Florida NNN inventory
South Florida's NNN market breaks into five major tenant categories. Each has distinct lease structures, credit profiles, and cap rate bands.
Quick-service restaurants (QSR)
McDonald's, Chick-fil-A, Wendy's, Popeyes, Taco Bell, Dunkin', Starbucks (when ground-leased). QSR is the largest NNN category in South Florida by transaction volume. Corporate-guaranteed McDonald's and Chick-fil-A leases (rare but they exist) trade at 5-5.5% caps. Franchisee-guaranteed deals, which is 90% of what you'll see, trade at 6.5-7.5% depending on the franchisee's unit count and financials.
The kicker in QSR underwriting: drive-thru revenue is 60-70% of sales for most concepts. If the site doesn't have a drive-thru or the drive-thru stacking is compromised (tight ingress/egress, shared access with an adjacent tenant), the unit economics suffer and re-tenanting becomes harder. Always verify the drive-thru exists and functions.
Dollar stores
Dollar General, Family Dollar, Dollar Tree. These tenants blanket Florida, they're recession-resistant, they sign long-term leases (15-20 years), and they'll locate in tertiary markets where other national tenants won't go. Cap rates run 6.5-7.5%. The credit is sub-investment-grade but the parent companies are publicly traded with strong balance sheets.
Red flag: dollar stores often negotiate zero rent escalations or escalations that only kick in after year 10. If you're underwriting a Dollar General with a flat $100K annual rent for 15 years, inflation is eating your return. Build that into the model.
Auto service (parts, tires, quick-lube)
AutoZone, Advance Auto Parts, O'Reilly's, Tire Kingdom, Jiffy Lube, Valvoline. These tenants need high-visibility corners with easy ingress/egress. Cap rates run 6.5-7.5% for the national players. Lease terms are typically 10-15 years with options.
The underwriting edge: auto-service tenants generate high revenue per square foot relative to rent. An AutoZone paying $250K/year on a 7,500 SF box is doing $8-10M in sales. The rent coverage is strong, and the format (high ceilings, drive-thru bays, parts storage) makes re-tenanting to another auto concept easy if the original tenant walks.
Medical (urgent care, dialysis, outpatient)
Fresenius (dialysis), DaVita (dialysis), plus smaller urgent-care groups and outpatient surgery centers. Medical tenants sign long leases (10-20 years), they invest heavily in build-out (which creates economic re-tenanting friction for them), and the demographic tailwinds in Florida are obvious. Cap rates vary widely: Fresenius and DaVita (corporate guaranteed) might trade at 6.5-7%, while a regional urgent-care group trades at 7.5-8%+.
The risk: medical office is highly specialized build-out. If the tenant leaves, you're not dropping in a Walgreens, you're finding another medical user or you're gut-renovating. Make sure the rent is at or below market for generic retail so you have optionality.
Banking
Bank of America, Wells Fargo, Chase, PNC, regional credit unions. Bank branches are shrinking as a category (everyone knows this), but the remaining locations are high-visibility corners with long-term investment-grade leases. Cap rates run 5.5-6.5% for the big-four banks.
The kicker: banks negotiate early termination clauses into nearly every lease. They'll pay a penalty (typically 6-12 months' rent), but they reserve the right to walk if branch economics deteriorate. Underwrite the termination risk, if the lease has 10 years remaining but an out-clause at year 7, your effective term is 7 years, not 10.
Ground lease vs fee simple: know what you're buying
South Florida NNN deals come in two ownership structures: fee simple (you own the land and building) and ground lease (you own the building, the tenant subleases from you, but a third party owns the land under a long-term ground lease).
Fee simple is the default, and it's what most 1031 exchangers want. You own the dirt, you own the improvements, and when the tenant lease expires you control the re-tenanting or redevelopment. Fee-simple NNN deals qualify for conventional financing at the lowest rates.
Ground-leased NNN (common with some Starbucks, Wawa, 7-Eleven deals) means you're buying the leasehold interest in the building, and the tenant is subleasing from you, but someone else owns the land under a 50-75 year ground lease. Ground-leased deals trade at 50-100 bps higher cap rates than fee-simple equivalents because:
- You're paying annual ground rent (which reduces your net income).
- Financing is harder, many lenders won't touch ground-leased assets.
- When the ground lease expires (even 50 years out), the land reverts to the landowner, and your building goes with it unless you negotiate an extension or purchase option.
Ground-leased deals CAN work if the cap rate premium is real and you're getting 20+ years of tenant lease term, but understand the exit liquidity is narrower. For 1031 exchange purposes, confirm your QI and your lender will accept a ground-leased asset before you commit.
Lease structure red flags: what separates a bulletproof deal from a problem
NNN leases are sold as "mailbox money," but the lease language determines whether that's true. Here's what to scrutinize:
Rent escalations (or the lack of them)
Many NNN leases have zero annual rent increases. You're locking in today's rent for 10-15 years, and inflation is eroding your return every year. A 2% annual escalation is standard. 1.5% is acceptable. Flat rent for a decade is a red flag unless the cap rate is 100+ bps higher to compensate.
Some leases include escalations tied to CPI with a cap (e.g., "CPI increases, max 2% per year"). CPI-linked escalations are better than flat rent, but the cap matters, if inflation runs at 4% and your escalation caps at 2%, you're still losing ground.
Renewal options (and whether they're market-based or fixed)
Most NNN leases include 3-5 five-year renewal options. What matters is whether the renewal rent is fixed (locked in today) or market-based (reset to fair market value at renewal).
Fixed-rent renewals are better for the buyer (you know exactly what the income stream looks like for 30+ years). Market-based renewals protect the tenant (if market rents drop, they reset lower). If the lease includes market-based renewals, underwrite conservatively, assume the tenant exercises the option at a rent 10-15% below your pro forma if the market softens.
Maintenance and roof/structure obligations
A true triple-net lease puts ALL maintenance, taxes, insurance, roof, and structure obligations on the tenant. But some leases are double-net or modified gross, which means the landlord retains responsibility for the roof, structure, or HVAC. If you're underwriting a "NNN" deal and the lease has a roof/structure carve-out, budget $5-10K/year for reserves (or more if the building is 20+ years old).
Always read the actual lease. Don't rely on the broker's description.
Early termination and co-tenancy clauses
As noted in the banking section, many tenants (especially banks and some national retail) negotiate early termination rights with a penalty. These clauses are usually buried in the lease. If the tenant can walk at year 7 of a 15-year lease by paying 6 months' rent, your effective term is 7 years for underwriting purposes, not 15.
Co-tenancy clauses (common in shopping-center pad sites) allow the tenant to reduce rent or terminate if an anchor tenant vacates. If you're buying a Starbucks pad in front of a Publix-anchored center and the lease includes a Publix co-tenancy clause, you need to know Publix's lease term and financial health. Co-tenancy risk is real.
Assignment and subletting restrictions
Some leases restrict the tenant's ability to assign the lease or sublet without landlord consent. This sounds like a landlord protection, but it's actually a re-tenanting risk for you as the buyer. If the tenant wants out and can't assign or sublet, they're more likely to stop paying and force you into an eviction and re-tenanting process.
Prefer leases that allow assignment with reasonable landlord approval (financials review, use restrictions). Full prohibition on assignment creates friction.
How to underwrite NNN for 1031 exchange compatibility
NNN properties are the most common 1031 replacement asset because they close fast, require minimal due diligence compared to multifamily or office, and the income stream is predictable. But not every NNN deal works for every exchanger. Here's the 1031-specific underwriting checklist:
Debt replacement requirement
If you sold a property with $2M of debt, you need to take on AT LEAST $2M of debt on the replacement property (or add cash to make up the difference) to avoid taxable boot. Investment-grade NNN deals qualify for 75% LTV financing. Sub-IG deals qualify for 65-70% LTV. If you're buying a $3M NNN property, you can get $2M-$2.25M in debt. Run the math early, if your relinquished debt was $4M and you're buying a $3M replacement, you have a problem.
Cash flow vs equity requirement
Many exchangers prioritize cash flow (they want income now) over appreciation. NNN delivers that, but at lower cap rates (5-6%), the cash-on-cash return after debt service might only be 4-5%. If you need higher cash flow, you need to move up the cap rate spectrum into sub-IG or regional tenants, which means accepting re-tenanting risk.
Alternatively, consider a NNN portfolio of 2-3 properties instead of a single asset. You get geographic and tenant diversification, and the blended cap rate often lands 50-75 bps higher than a single investment-grade deal.
Exchange timeline (45-day ID, 180-day close)
NNN deals close faster than multifamily or office, 30-45 days from contract to closing is typical. The lease is in place, there's no tenant estoppel drama, and financing moves quickly. This makes NNN ideal for exchangers who identified late in their 45-day window.
But here's the kicker: finding the right NNN deal in 30 days is hard if you're shopping the MLS or waiting for Crexi posts. The best deals are off-market, owners who'll sell but aren't actively listed. If you're in an exchange, tell your broker you're an exchanger UP FRONT and ask for off-market NNN inventory in your target price range and geography. Waiting until day 40 of your 45-day ID period to start looking is a recipe for overpaying.
Geographic and tenant diversification
If you're exchanging out of a single asset (e.g., a $4M multifamily), consider replacing it with 2-3 NNN properties in different cities and different tenant categories. A $1.5M AutoZone in Delray Beach, a $1.2M Dollar General in Boynton Beach, and a $1.3M Dunkin' in Deerfield Beach gives you tenant diversification, geographic diversification, and blended risk. If one lease goes dark, you still have two others paying.
The downside: managing three closings instead of one inside a 180-day exchange timeline is harder. Work with a 1031 QI who's done multi-property exchanges before.
Final take: NNN underwriting is about reading the lease, not the brochure
The cap rate tells you what the market thinks of the deal. The lease tells you what the deal actually IS. A 7% cap on a Walgreens with 12 years remaining, 2% annual escalations, and fee-simple ownership is a different investment than a 7% cap on a regional urgent-care group with 5 years remaining, no escalations, and a ground lease. Both might pencil to the same cash flow year one, but the risk profiles are completely different.
Read the lease. Verify the tenant's credit. Understand the ownership structure. Model the debt. Know your re-tenanting optionality. If you're underwriting NNN investments in South Florida for a 1031 exchange or a cash acquisition, those are the variables that separate a bulletproof mailbox-money deal from a problem that surfaces the day the tenant's lease expires.
If you're looking for off-market NNN inventory in Palm Beach, Broward, or Miami-Dade, or you need help structuring a 1031 exchange around a NNN replacement, reach out. We track the unlisted inventory, we know the lease structures, and we underwrite for the variables that matter.
Anthony Conners is a Florida licensed real estate sales associate (license SL3334618) with Atlantic Commercial Advisors, affiliated with KW Commercial and based in Boca Raton. He represents buyers and sellers of multifamily, retail, industrial, hospitality and net lease property across Palm Beach, Broward and Miami-Dade counties. About Anthony · Track record
