When evaluating a triple net (NNN) lease investment, most investors immediately focus on location, lease length, and cap rate. While those factors are critical, there’s another element that often gets overlooked—and it can make or break the deal: the tenant’s business model.
The long-term value of an NNN property is inseparable from the financial health of the tenant occupying it. Even a prime property in a thriving metro won’t shield you from risk if the tenant’s business isn’t sustainable. That’s why savvy investors go beyond surface-level metrics and dig into how the tenant actually earns money, how resilient their business is, and whether they can adapt to shifting consumer demands.
Why the Business Model Matters
1. Long-Term Stability
A tenant with a proven, profitable model is much more likely to meet their lease obligations. For example, national quick-service restaurants with strong branding and steady sales typically provide stronger security than smaller regional operators with thinner margins.
2. Resilience to Economic Shifts
The U.S. economy moves in cycles—recessions, inflationary periods, and changing consumer habits all test a tenant’s strength. Data shows that during the 2020 recession, essential retailers like discount chains and pharmacies saw year-over-year growth, while many sit-down restaurants experienced double-digit declines in revenue. Tenants with diverse revenue streams and recession-resistant models (such as healthcare or grocery) usually hold up best.
3. Adaptability and Innovation
The retail landscape is evolving rapidly. Businesses that embraced e-commerce or hybrid models (buy online, pick up in store) have consistently outperformed competitors stuck in traditional operations. For example, major pharmacy chains have integrated health services and digital prescriptions, making them more future-proof compared to tenants who resisted innovation.
Examples in Practice
Pharmacy Chains: Driven by recurring prescriptions, they remain one of the most stable tenant classes in the U.S.
Casual Dining Restaurants: Often popular but challenged by high operating costs and razor-thin margins. Not all survive downturns.
Fitness Centers: Recurring memberships can be profitable, but oversaturated markets increase closure risk.
Discount Retailers: According to recent U.S. Census Bureau data, discount chains have grown market share faster than traditional department stores in the last five years, showing resilience even during economic uncertainty.
Where the 1031 Exchange Comes In
For investors using a 1031 exchange, tenant quality becomes even more important. A 1031 allows you to defer capital gains taxes by reinvesting proceeds from one property into another “like-kind” property. But the IRS requires you to identify replacement properties within 45 days and close within 180 days.
That means there’s little room for error—if you exchange into a property with a weak tenant business model, you could end up locked into an underperforming investment for years. On the other hand, choosing tenants with sustainable models and proven track records can help ensure steady cash flow and appreciation potential, making your 1031 exchange strategy more effective.
Questions Investors Should Ask
Before committing to an NNN deal, investors should dig deeper with questions like:
How exactly does this tenant generate revenue?
Are their products or services essential or discretionary?
How did the tenant perform during past downturns or inflationary cycles?
Are they innovating to meet consumer expectations, or relying on outdated methods?
Does the tenant’s growth strategy align with U.S. demographic and economic trends?
State-Level Examples of Tenant Models in NNN Properties
Texas
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Why it matters: Texas consistently ranks as one of the top states for NNN investments due to its business-friendly tax policies (no state income tax) and strong population growth.
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Tenant business models: Discount retailers, quick-service restaurants, and healthcare clinics dominate demand. Tenants in Texas often thrive because of high consumer traffic and a diversified economy.
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1031 angle: Many investors rolling over into Texas assets through a 1031 exchange find stability in tenants like Dollar General and CVS, which are recession-resistant and positioned for long-term success.
Florida
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Why it matters:Florida’s expanding retiree population fuels demand for essential services such as pharmacies, medical offices, and grocery stores.
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Tenant business models: Healthcare tenants with recurring revenue streams (like dialysis centers or senior care clinics) provide some of the most secure income streams.
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1031 angle: Investors who use a 1031 to trade into Florida properties often prioritize essential-service tenants to hedge against seasonal tourism downturns.
California
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Why it matters: Despite higher property costs, California remains a hub for long-term NNN growth because of its massive population and diverse economy.
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Tenant business models: Innovative retail and mixed-use tenants are common, but adaptability is key. Businesses that embraced e-commerce or hybrid sales models tend to perform better.
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1031 angle: California’s appreciation potential attracts exchange investors, but tenant selection is crucial—choosing operators with strong margins helps offset higher acquisition costs.
Midwest Example – Ohio
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Why it matters:Lower acquisition costs and steady economic growth make Midwest states like Ohio attractive for investors seeking higher cap rates.
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Tenant business models: Discount retailers and logistics tenants thrive here, supported by strong regional distribution networks.
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1031 angle: For exchange buyers, Midwest states offer opportunities to diversify portfolios with more affordable, cash-flow-focused properties.
Final Thoughts
A triple net lease isn’t just about owning real estate—it’s about partnering with the tenant’s business model. By analyzing how tenants operate, investors can avoid costly surprises and instead secure properties that deliver consistent, long-term income.
For U.S. investors, especially those leveraging a 1031 exchange, this mindset is crucial. Don’t just buy the building—buy into the sustainability of the tenant’s business model.