Chipotle NNN For Sale
Chipotle Mexican Grill is a fast casual American restaurant chain that serves a menu of customizable Mexican food options like burritos, tacos, bowls, and quesadillas. The chain started in Denver, Colorado, in 1993, and was founded by Steve Ellis, a professionally trained chef. Since then, it’s grown to have over 3,000 locations in the U.S which are mostly built-to-suite stand alone single tenant net lease buildings in busy retail corridors.
The company is known for its recognizable branding and its “food with integrity marketing.” It’s committed to offering nutritious, fresh meal options and sourcing ingredients ethically. Chipotle was a frontrunner in the era of assembly-line, made-to-order fast casual defining experiences. Since going public in 2006 on the New York Stock Exchange, the company has grown rapidly.
Tenant Overview
Quick fast casual restaurants are the fastest growing sector of the restaurant industry, and Chipotle is a hallmark of the fast casual world. For that reason, it’s a highly in-demand brand for NNN leases. Plus, its properties are generally well located, sitting near shopping districts, university and college campuses, and commercial centers.
Chipotle tends to prefer urban and suburban locations along retail corridors. They look for high visibility, parking spaces, and locations with easy ingress and egress to make the store accessible. For new builds, they have a preference for single-tenant properties that stand alone, giving them more space for a parking lot and easy navigation.
| Chipotle NNN Lease at a Glance | |
| Average sale price | $2,670,000 |
| Average NOI (net operating income) | $128,160 monthly |
| Average square feet | 2,000 - 3,500 |
| Average lot size | 0.5 - 1.0 acres |
| Typical lease term | 10 - 15 years |
| Escalators | 7% - 12% every 5 years |
| Typical location | Urban and suburban locations in highly trafficked retail corridors |
| NYSE: CMG | |
Chipotle Lease Structure
Typically, Chipotle prefers NNN ground leases that are 15 years long for the initial term. Their leases normally have renewal options every five years after that, and offer rent increases between 7% and 12% every five years, including during the initial term. Chipotle’s leases also come with a corporate guarantee.
The average cap rate, or capitalization rate, for a Chipotle NNN lease is 4.8%. The cap rate is a figure that analyzes both a real estate investment’s profitability and its return potential. Generally speaking, cap rates that land between 5% and 10% are considered good. A rate just below that range, like Chipotle’s, usually indicates that the company is especially stable and therefore the investment comes with slightly lower risk.
Why Choose a Net Lease Over a Gross Lease When Investing in Commercial Real Estate?
When you’re looking to invest in commercial real estate, there are many benefits to choosing a net lease over a gross lease. These two types of leases are often seen as opposites.
A gross lease involves a predetermined amount that a tenant pays in order to use a space. It doesn’t change due to operating expenses, since landlords generally cover those costs. On the slip side, net leases allow landlords to pass operating expenses on to their tenants.
There are three tiers of net leases: single, double, and triple. They’re also known as N, NN, and NNN leases. Each level allows the landlord to pass more and more expenses over to the tenant, meaning that the landlord is responsible for less and less as the tiers increase.
A single net lease (also called an N lease) passes property taxes over to the tenant in addition to the cost of rent, but the landlord remains responsible for insurance, maintenance, repairs, and utilities. N leases are less common when it comes to commercial real estate. Double net leases (or NN leases) and triple net leases (or NNN leases) are much more commonly used.
What Types of Net Leases Does Chipotle Operate Under?
More often than not, Chipotle prefers to operate under ground leases with initial terms ranging from 10 to 15 years – although for new stores, the 15-year initial term has become dominant. During this period, the lease undergoes a rent bump of 7% to 12% every five years.
Ground leases are similar to NNN leases in the sense that the tenant is responsible for property taxes, insurance, and maintenance expenses. The main difference between the two lies in the fact that ground leases often involve undeveloped commercial land that is leased to tenants.
Those tenants then have the right to develop the property and build a structure tailored to their specific needs. Once they do that, they own the buildings there. They still have to pay rent for the land, however, and if the lease expires, the buildings on the land become the property of the landowner.
When using an NNN ground lease, tenants like Chipotle will typically pay a lower base rent. That’s because they’re responsible for all of the property’s operating costs and the development of the property. Still, NNN leases are attractive because they reduce the burden of property management by passing many responsibilities to the tenant, making a good setup for earning passive income on commercial real estate properties.
How to Evaluate a Chipotle Net Lease
Regardless of what tenant(s) you’re considering, it’s always crucial to analyze both the property value and the tenant strength when you’re looking into an NNN lease. Especially when you’re reviewing single-tenant properties like the ones many new Chipotle stores are using, your tenant concentration can be only 100% or 0%. In other words, you'll generate either 100% of your potential cash flow or none of it.
In order to ensure that your Chipotle NNN lease works out in the long run, you’ll want to make sure that the property you’re investing in meets the qualifications that Chipotle looks for in its locations – high-visibility locations with parking spots and easy access that are positioned in highly trafficked shopping corridors. That will help ensure that your property stays occupied and that you continue getting paid.
Fortunately, NNN lease tenants like Chipotle are most often large companies with strong balance sheets, meaning that you can count on your payments arriving on time each month. You won’t have to chase down your tenants to retrieve your next check.
What Makes Chipotle an Attractive NNN Tenant?
Chipotle is a pioneer in the fast casual space, and its unique branding has a high level of recognition in the U.S. It combines strong financials with top-tier locations in a way that makes it a highly desirable option for an NNN ground lease.
Chipotle’s stock price peaked in September, 2021, at over $1,900 per share. While the stock hasn’t reached that point since, it’s still hovering at a value more than 60X higher than its opening price on its IPO date in January of 2006.
In October, Chipotle announced its third-quarter results for fiscal 2022, which were extremely promising. Its total revenue grew to $2.2 billion, a 13.7% increase year over year. It also opened 43 new restaurants in the third quarter.
Chipotle’s CEO, Brian Niccol, said that the company’s performance confirms its “brand and value proposition remain strong, even during a challenging economic environment.” With its reach expanding and its financials staying strong, it looks like the company has a bright future ahead. Chipotle is a high-quality, investment-grade tenant that’s perfect for an NNN lease.
