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Pad Sites & Outparcels: Ground Lease Economics, QSR Credit, and the 2026 Cap Rate Stack
Key Takeaways
- The Q1 2026 outparcel cap-rate stack runs 4.40% (McDonald's corporate ground lease) to 6.80% (franchisee-guaranteed QSR) per Boulder Group's Q1 2026 Net Lease Research Report — a 240 bps brand-credit wedge that defines the bid for every pad transaction.
- "Outparcel" and "pad site" describe the same physical asset through different lenses — outparcel is the legal/zoning term (a separately platted parcel carved out of a larger center), pad site is the transaction term. Institutional documents use both; never treat them as different products.
- The corporate-guaranteed vs. franchisee-guaranteed QSR ground-lease spread is 72–90 bps as of Q1 2026 per Boulder Group (corporate 5.82% vs. franchisee 6.80%). The franchisee paper is not a "cheap McDonald's" — it's a different security with different default behavior.
- Subordinated ground leases let the fee owner pledge the land to the operator's leasehold lender; unsubordinated leases do not. The institutional norm post-GFC is unsubordinated — expect a 25–50 bps cap-rate premium for unsubordinated structures.
- The buyer wedge in a shopping center acquisition with outparcel optionality is the seller's failure to pull forward the carve-out value. A pad transacting at 5.00% inside an aggregate-cap-rate sale of 7.25% is 225 bps of accretion on every dollar of pad NOI — the underwriting must isolate the pad cash flow before pricing the rump center.
The 2026 Outparcel Cap Rate Stack
The 2026 net-lease retail market opened with a cap-rate stack that institutional buyers had not seen since 2022. Boulder Group's Q1 2026 Net Lease Research Report, the canonical quarterly print for single-tenant net lease pricing, shows McDonald's corporate ground leases trading at 4.40%, Chick-fil-A ground leases at 4.50%, Chipotle at 5.45%, and Starbucks at 6.45% — against a 10-Year Treasury benchmark of 4.38% on the print date. The McDonald's print is inside the risk-free rate. That is the headline of the cycle.
The bifurcation that matters more than the headline is between corporate-guaranteed and franchisee-guaranteed QSR. The same Boulder Group report bins corporate-guaranteed QSR ground leases at 5.82% and franchisee- guaranteed at 6.80% — a 98 bps headline spread that compresses to roughly 72–90 bps when controlled for term remaining and location quality. The franchisee paper is not "the same building with a cheaper guarantor." It is a structurally different security: the rent cash flow runs through an operating LLC with operator-level financials, no parent guarantee, and a default profile that historically clusters around regional recessions and brand-level operating margin compression. The cap-rate spread compensates for that — it is not a market mispricing.
The 10-Year Treasury context matters. With UST at 4.38% on the print date, the McDonald's GL is trading inside the risk-free rate — a 2 bps negative spread to the 10-year. This is not a bond-pricing anomaly; it reflects three things institutional buyers are paying for that the Treasury doesn't offer: the fee-simple reversion at end of term (the 50–99 year option to recover the land), the embedded rent growth (fixed bumps or CPI escalations), and the 1031-exchange demand from private-capital buyers competing with the institutional bid for the same paper. The negative nominal spread is the market's signal that the reversion option plus the inflation hedge plus the tax-deferral demand together exceed the absolute level of the risk-free curve.
Outparcel vs Pad Site: Vocabulary Matters
The two terms describe the same physical asset through different professional lenses. An outparcel is the legal and zoning vocabulary: a separately platted parcel carved out of a larger shopping center, with its own legal description, tax ID, and reciprocal easement agreement (REA) governing parking and access. A pad site is the transaction and brokerage vocabulary: the developable lot in front of a center, typically 0.75–1.5 acres, fronting the highest-traffic road frontage, suited to a single-tenant build with a drive-thru.
Institutional underwriters see both terms in the same deal document. The zoning attorney writes "the Outparcel A described in Exhibit 2"; the broker's offering memorandum lists "Pad 1, drive-thru pad with QSR LOI." Treat them as synonyms in conversation, but never lose the distinction when reading the documents — the outparcel's legal severability (the REA terms, the parking ratio carve-out, the signage easement) is what makes the pad site a discrete asset that can be sold, financed, and developed without the consent of the inline center's lender. If the REA is sloppy, the pad's marketability is impaired.
| Dimension | Outparcel (legal/zoning) | Pad Site (transaction) |
|---|---|---|
| Document context | Plat map, REA, zoning approvals, title work | OM, LOI, purchase agreement, ground lease |
| What it identifies | A separately platted, taxed, deeded parcel | A single-tenant developable lot, usually with drive-thru |
| Typical size | 0.5–2.0 acres, varies by jurisdiction | 0.75–1.5 acres, sized to QSR prototype |
| Critical sub-document | REA (reciprocal easement agreement) | Ground lease or fee purchase agreement |
| Who uses the term | Counsel, planners, title officers | Brokers, sponsors, developers, lenders |
The same physical lot, two professional vocabularies. Read both terms in the same deal documents and never assume they describe different products.
Ground Lease Mechanics: Term, Escalations, Reversion
A ground lease conveys the right to occupy and improve a parcel of land for a long fixed term — typically 20 to 99 years — while the underlying fee title remains with the lessor. The tenant constructs and owns the building; the landlord owns the dirt and recovers it (and the building, depending on the lease form) at expiry. For institutional QSR outparcels, the structural variables that drive value are four: term length, escalation mechanic, subordination, and reversion.
Term length drives the buyer's underwriting horizon and the lender's amortization assumption. McDonald's, Wendy's, and other corporate QSR ground leases typically run 20-year primary terms with four to six 5-year tenant extension options — nominally 40–50 years if all options exercise. Chick-fil-A historically runs 15–20 year primary with similar extensions. Starbucks leans shorter: a 10-year primary term with two or three 5-year extensions. The "all options exercised" duration matters less than the primary term remaining — lenders typically size leasehold debt to amortize within primary term plus one option, and institutional buyers haircut value when primary term remaining drops below 10 years.
Escalations come in three institutional forms: fixed bumps (most common, typically 7.5–10% every 5 years), CPI-linked (with floor and ceiling), and fair-market-value resets at option-period transitions (rare; usually only on long-dated unsubordinated structures). The fixed-bump structure is the institutional norm for QSR because it produces predictable cash flow that fits net-lease REIT modeling. CPI-linked escalations have come back into structuring conversations post-2022 inflation but remain a minority of the QSR ground-lease universe; the 1031 buyer pool prefers fixed bumps because they're easier to underwrite.
Subordination is the structural feature that most directly drives the cap rate. In an unsubordinated ground lease — the institutional norm post-GFC — the fee owner does not pledge the land to the tenant's leasehold lender. If the operator defaults, the fee owner recovers the land free and clear, leaving the leasehold lender to chase the building (often with limited recovery). In a subordinated ground lease — common in the 1980s-2000s development era, rare today — the fee owner does pledge the land, allowing the operator to finance the building with a first-lien mortgage that encumbers both leasehold and fee. Subordinated ground leases trade at 25–50 bps lower cap rates than unsubordinated structures because the fee owner is taking incremental risk that compresses the residual value.
Reversion is the asset's terminal value — the fee owner recovers the land (and, depending on the lease form, the building improvements) at end of term. For a 50-year ground lease, the reversion is heavily discounted in PV terms (at 6% discount rate, a dollar in year 50 is worth roughly $0.054 today), which is why most institutional pricing focuses on the in-place cash flow rather than the terminal value. But two reversion features warrant attention: whether improvements revert to the fee owner at term (most leases say yes — the operator effectively donates the building) and whether the lease contains a tenant purchase option (which can collapse the reversion value if exercised). Standard institutional QSR ground leases have no tenant purchase option; the fee owner retains the optionality.
QSR Brand Credit: The Corporate-vs-Franchisee Spread
The 72–90 bps wedge between corporate-guaranteed and franchisee-guaranteed QSR ground leases is the single most important number in pad-site underwriting. Per Boulder Group's Q1 2026 NNN report, the corporate-guaranteed QSR median trades at 5.82% and the franchisee-guaranteed median at 6.80%. Adjust for term remaining and location quality and the controlled spread settles in the 72–90 bps range.
To make the spread concrete, hold the physical asset constant and vary the rent obligor. A McDonald's pad at a 1.0-acre site in a Sun Belt MSA generating $125,000 annual ground rent:
| Structure | Cap Rate (Boulder Q1 2026) | Implied Value | Δ vs Corporate |
|---|---|---|---|
| Corporate ground lease (McDonald's Corp guarantor) | 4.40% | $2,840,909 | — |
| Corporate QSR (blended, IG-rated parent) | 5.82% | $2,148,180 | ($692,729) / −24.4% |
| Franchisee-guaranteed QSR (operator LLC, no parent) | 6.80% | $1,838,235 | ($1,002,674) / −35.3% |
Same physical asset, same ground rent — three different securities. The McDonald's corporate guarantee represents nearly $1.0M of incremental value vs. franchisee paper at the same rent. The wedge is not arbitrage; it's the brand-credit risk premium priced into the cap rate.
The institutional reading: the franchisee paper is not a "value play" or a "mispriced McDonald's." It is a distinct security with three structural differences from the corporate ground lease. First, the rent obligation runs through an operating LLC whose creditworthiness depends on store-level cash flow, not parent balance sheet. Second, McDonald's Corporation as franchisor typically does not guarantee the franchisee's rent obligation under the lease — the franchise agreement and the ground lease are separate contracts. Third, franchisee default tends to cluster geographically: when a regional franchisee operator runs into margin compression (commodity costs, labor inflation, local recession), the same operator's other stores follow, producing correlated defaults that the institutional buyer pool prices via a portfolio premium.
Practitioner check: when reading a QSR ground-lease OM, read the rent obligor on page one of the lease abstract. "McDonald's USA, LLC" or "McDonald's Corporation" is corporate paper. "Hampton McDonald's Holdings, LLC" or any single-state-suffix operator name is franchisee paper. Two-thirds of the QSR ground-lease universe by count is franchisee-guaranteed; the institutional bid concentrates on the corporate-guaranteed third.
Outparcel Value Inside a Shopping Center Acquisition
The underwriting opportunity that the SimonCRE and Matthews developer literature gestures at — without quantifying — is the latent outparcel monetization inside a shopping-center acquisition. The institutional shopping-center seller often hasn't pulled the outparcel value forward into the aggregate sale price. The buyer who isolates the pad cash flow, prices it at the QSR-specific cap rate, and reverse-solves the rump-center value captures the spread.
Concrete arithmetic. A 120,000 SF grocery-anchored center with two outparcel pads (one McDonald's corporate GL, one Starbucks GL) is offered at a 7.25% blended cap rate on $4.5M of in-place NOI — implied value $62.1M. The pad NOIs are $125K (McDonald's GL) and $145K (Starbucks GL). Priced at brand-specific Q1 2026 cap rates — McDonald's at 4.40% and Starbucks at 6.45% — the two pads carry a combined value of roughly $2.84M + $2.25M = $5.09M. At the blended 7.25% cap, those same NOIs implied just $3.72M of value.
The buyer's wedge: the two pads are mispriced inside the blended cap by approximately $1.37M. The institutional acquirer carves them post-close, sells to a 1031 or net-lease REIT buyer, and recovers the spread — without the seller having had the opportunity to capture it. The rump-center cap rate on the inline grocery-anchored box (which is what's actually been transacted) is the residual: ($62.1M − $5.09M) / ($4.5M − $0.27M) = $57.0M / $4.23M = 7.42%, not 7.25%. That 17 bps of repricing on the rump is the math the seller didn't surface.
Two operational caveats. First, the carve-out math only works if the REA permits separable conveyance — some center REAs require seller / co-anchor consent to spin a pad. Read the REA before pricing the wedge. Second, the rump cap-rate repricing assumes the inline center can stand alone economically after the pads are carved — if pad rent is cross-collateralized with anchor reciprocal commitments, the carve may damage the rump's marketability. The institutional underwriter prices the pad separately and the rump separately and keeps the cross-checks visible.
How to Model It
The pad-site / outparcel underwriting workflow has four computational pieces that belong in distinct tabs of any institutional pro forma. They are not difficult individually; they're easy to get wrong when combined.
Tab 1 — Lease abstract and obligor identification. Capture the rent obligor name (exact legal entity), the parent guarantor (if any), the primary term remaining, the extension option count and length, the escalation schedule (fixed bumps with frequency and percentage, or CPI with floor / ceiling), and the subordination status. Every downstream calculation depends on these inputs. The most common underwriting error is using a corporate cap rate against a franchisee-guarantor lease — build a hard- coded validation that flags any sheet where the obligor entity doesn't match the brand's corporate naming convention.
Tab 2 — Cap rate selection from the brand-credit stack. Build a lookup table indexed by (brand, guarantor type, primary term remaining bucket) that returns the Q1 2026 Boulder Group cap rate. The McDonald's row reads 4.40% for corporate guarantor with 20+ years remaining; the same row reads roughly 5.50–5.80% if primary term remaining drops below 10 years (the short-paper haircut). The Starbucks row at 6.45% is already a short-paper price because Starbucks' standard term structure tops out around 10 years primary — don't double-haircut.
Tab 3 — Cash flow schedule. Project annual ground rent with the contractual escalations through the primary term plus expected option periods, then discount at the selected cap rate to get the in-place value. For institutional outparcel pricing, the cap-rate-on-current-rent shortcut is the standard market convention; the full DCF is only worth running when escalation timing differs materially from the standard 5-year fixed-bump pattern, or when CPI-linked escalations require an inflation forecast.
Tab 4 — Carve-out sensitivity (for shopping-center deals). When the pad sits inside a larger acquisition, build a two-step sensitivity: (a) pad value at brand-specific cap rate vs. pad value at blended cap rate — the gross wedge; (b) rump-center cap rate at the residual NOI — the repricing. The wedge minus any carve-out friction (broker fees on the pad sale, legal cost to amend the REA, tax implications) is the buyer's net accretion.
Build It in Apers
BUILD IT IN APERS
The AQ-331 Retail Value-Add Pro Forma Model handles the outparcel underwriting workflow inside a shopping-center acquisition: lease-abstract intake by tenant, brand-credit cap-rate lookup against the Q1 2026 Boulder Group stack, pad carve-out value vs. blended pricing, and the rump-center repricing on residual NOI. Drop the rent roll, identify the pad obligors, and the model returns the carve-out wedge with a one-click sensitivity on cap-rate compression scenarios. Part of a growing library of institutional retail models.
Common Mistakes in Outparcel Underwriting
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Conflating outparcel and inline retail. The pad is a different product from the inline retail behind it — different tenant credit, different lease form, different cap rate, often different REA-defined boundary. Pricing the pad at the inline center's blended cap rate undervalues it by 150–250 bps in most shopping-center deals. Always isolate the pad rent roll.
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Treating franchisee paper as corporate paper. "McDonald's pad" means nothing until you identify the rent obligor. "McDonald's Corporation" is corporate paper at 4.40% Q1 2026; "Mid-Atlantic McDonald's Holdings, LLC" is franchisee paper at 6.80%. The 240 bps difference on a $125K rent stream is $1.0M of value. Read the lease abstract.
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Ignoring subordination status. Subordinated ground leases trade 25–50 bps tighter than unsubordinated because the operator's lender accepts a thinner risk premium — but the fee owner takes incremental residual risk. The institutional norm post-GFC is unsubordinated; subordinated legacy structures should price with the residual-risk haircut and a hard look at the term-remaining and operator credit.
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Pricing on remaining options without primary-term discipline. A QSR ground lease with 8 years of primary term and four 5-year options has a contractual maximum duration of 28 years, but the institutional pricing convention is to price the primary term and treat options as upside. Net-lease REIT buyers and 1031 buyers haircut value when primary term remaining drops below 10 years; that haircut is in the cap rate.
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Mistaking "no rent bumps for 10 years" as a feature. Long-dated flat rent in a 4%+ Fed funds environment is value erosion. Institutional buyers price flat-rent QSR ground leases at 20–30 bps wider than comparable-term leases with 7.5%-per-5-year bumps. The "set it and forget it" flat-rent structure is a 1980s-vintage feature that compresses returns under inflation.
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Skipping the REA before pricing the carve-out wedge. The shopping-center monetization thesis assumes the pad can be separately conveyed. Some REAs require co-anchor or grocer consent for any pad sale — built into the document to prevent the pad's drive-thru traffic from being weaponized against the inline tenants. Read the REA's separable-conveyance provisions before underwriting the carve-out spread.
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Forgetting the 1031 demand pool sets the floor. In Q1 2026, the McDonald's GL at 4.40% is partly the 1031 exchange buyer pool's price — private capital deferring gains from apartment or office sales into the lowest-friction net-lease product available. When deal flow slows in the institutional channel, the 1031 bid keeps the floor under the prints. Underwriters who price assuming institutional-only demand miss the floor support.
FAQ
Frequently Asked Questions
What is the difference between an outparcel and a pad site?
They describe the same physical asset through different professional vocabularies. 'Outparcel' is the legal and zoning term — a separately platted parcel with its own legal description, tax ID, and reciprocal easement agreement. 'Pad site' is the transaction and brokerage term — a developable lot in front of a shopping center, typically 0.75 to 1.5 acres, suited to single-tenant retail with a drive-thru. Institutional deal documents use both terms interchangeably. The distinction matters only when reading the REA and title work, where 'outparcel' carries the specific separability and easement language that makes the pad a discrete conveyable asset.
How does a ground lease work on an outparcel?
The fee owner conveys to the tenant the right to occupy and improve the outparcel for a long fixed term (typically 20 to 50 years primary plus extension options on QSR), in exchange for periodic ground rent. The tenant constructs and operates the building; the landlord owns the land. Standard institutional ground leases are unsubordinated — the fee owner does not pledge the land to the tenant's leasehold lender, preserving residual recovery in default. Rent typically escalates on a fixed-bump schedule (7.5 to 10% every 5 years is the institutional norm); some structures use CPI-linked escalations with floor and ceiling. At expiry, improvements typically revert to the fee owner.
What is a typical pad site cap rate in 2026?
The Q1 2026 outparcel cap-rate stack per Boulder Group's Net Lease Research Report runs from 4.40% (McDonald's corporate ground lease) to 6.80% (franchisee-guaranteed QSR median). Specific brand prints: Chick-fil-A 4.50%, Chipotle 5.45%, Starbucks 6.45%, blended corporate-guaranteed QSR 5.82%. The 10-Year Treasury benchmark on the print date was 4.38% — the McDonald's GL is trading two basis points inside the risk-free rate, reflecting the fee-reversion option, embedded rent growth, and 1031 demand together exceeding the absolute curve level.
Are outparcels good investments for institutional buyers?
For institutional buyers — net-lease REITs (Realty Income, Agree Realty, NETSTREIT), REPE shops with retail mandates, and 1031 exchange capital — outparcels with corporate-guaranteed QSR ground leases are among the lowest-friction core net-lease products available: long-dated cash flow, investment-grade or near-IG credit on the rent obligation, simple operating profile (no landlord opex on a pure ground lease), and 1031 eligibility. The institutional bid drives the cap rates to their tight 2026 levels. Franchisee-guaranteed paper is a different security with a 72-90 bps premium reflecting operator-LLC credit risk and correlated regional default exposure.
How long do outparcel ground leases typically run?
QSR ground leases typically run a 15 to 20-year primary term plus four to six 5-year tenant extension options — a nominal contractual maximum of 35 to 50 years if all options exercise. McDonald's and Wendy's lean toward the longer end (20-year primary, 5-6 option periods). Chick-fil-A historically runs 15 to 20-year primary. Starbucks is shorter: 10-year primary plus 2 to 3 option periods. Institutional pricing convention focuses on primary term remaining, not the all-options-exercised duration; net-lease REIT buyers haircut value when primary term remaining drops below 10 years.
What is the corporate-vs-franchisee QSR ground lease spread?
Per Boulder Group's Q1 2026 Net Lease Research Report, the median corporate-guaranteed QSR ground lease trades at 5.82% and the median franchisee-guaranteed QSR trades at 6.80% — a 98 bps headline spread that compresses to roughly 72 to 90 bps controlled for term remaining and location quality. The spread reflects three structural differences: the franchisee rent obligation runs through an operating LLC rather than a parent guarantor; the franchisor typically does not guarantee the franchisee's lease obligation; and franchisee defaults tend to cluster regionally, producing correlated portfolio exposure that institutional buyers price via a portfolio premium.
What is a subordinated ground lease?
A subordinated ground lease is a structure where the fee owner pledges the land as collateral to the tenant's leasehold lender. If the operator defaults, the lender can foreclose on both the leasehold and the fee title — the fee owner can lose the land entirely. This was the development-era norm of the 1980s through early 2000s. The institutional norm post-GFC is unsubordinated: the fee owner does not pledge the land, leaving the leasehold lender to chase only the building in default. Subordinated structures trade 25 to 50 bps tighter than unsubordinated because the operator's lender accepts a thinner risk premium, but the fee owner takes incremental residual-value risk.
How do you underwrite outparcels inside a shopping center acquisition?
The institutional move is to isolate the pad NOIs from the rent roll and price each pad at its brand-specific Q1 2026 cap rate, then reverse-solve the implied rump-center cap rate on the residual NOI. The seller's blended cap-rate ask usually undervalues the pads — a McDonald's pad at 4.40% and a Starbucks pad at 6.45% combined are worth materially more than the same NOI priced at a 7.00 to 7.50% center-wide blended cap. The buyer's wedge is the carve-out spread, recoverable post-close by selling the pads to 1031 exchange buyers or net-lease REITs. The carve depends on the REA permitting separable conveyance — read the REA before pricing the wedge.
Related Articles
- Net Lease Single-Tenant Underwriting: Credit Spreads and Cap Rate Decomposition — the deeper net-lease companion on STNL credit underwriting, lease-form differences (NN vs absolute net), and tenant credit waterfall.
- Retail Underwriting: Anchor Economics and Co-Tenancy Provisions — the inline center context for the outparcel monetization wedge: anchor rent structure, co-tenancy clauses, and the REA mechanics that govern carve-outs.
- Grocery-Anchored Retail: Below-Market Anchor Rent and Inline Economics — the grocery-anchored center underwriting that frames the rump-center math after pads are carved.
- Dark Stores and Big-Box Vacancy: Retenanting Economics — the value-add scenario adjacent to outparcel monetization in distressed shopping-center acquisitions.
- CMBS Prepayment: Conduit vs SASB, Yield Maintenance, and Defeasance — the debt-side mechanics for shopping-center acquisitions and the 2026 maturity wave context.
- Cap Rate Calculator and Formula — the underlying valuation primitive driving every outparcel pricing decision.
Sources
- Boulder Group, Q1 2026 Net Lease Research Report — the canonical quarterly net-lease cap-rate print; McDonald's GL 4.40%, Chick-fil-A 4.50%, Chipotle 5.45%, Starbucks 6.45%, corporate-guaranteed QSR 5.82%, franchisee-guaranteed QSR 6.80%.
- InvestmentGrade.com — tenant-credit ratings database for NNN underwriting; corroborates the Q1 2026 6.80% franchisee print and the 1031-demand floor under corporate paper.
- Matthews, "What Is a Pad Site?" — brokerage-authority overview of pad-site characteristics, tenant mix, and post-2022 transaction trends.
- Matthews, "What the QSR Cap Rate Plateau Is Really Signaling" — the institutional-vs-secondary bifurcation thesis in QSR pricing as of early 2026.
- First National Realty Partners, "What are Commercial Real Estate Pad Sites?" — sponsor-side definitional overview of pad sites and ground-lease monetization for shopping center owners.
- SimonCRE, "How Retail Outparcels are Driving the Current Retail Center Market" — developer-side perspective on outparcel demand and the QSR-and-drive-thru tenant skew.
- Kaplin Stewart, "Outparcel Leasing & Development — Avoiding Surprises" — legal-pitfalls framing on premises definition, CAM, and the REA-driven separable-conveyance question.
- The Fractional Analyst, "How to Value Ground Leases Using Capitalization Rates" — the modeling-tutorial reference on direct-cap valuation of ground leases.
- ICSC Educational Seminar Materials, "Digging Deep into the Ground Lease" — industry-association reference on ground-lease mechanics; static PDF, cite by name.
- TradeNetLease, "QSR Net Lease Investment 2025" — net-lease brokerage commentary on the year-end 2025 / 2026 transition in QSR pricing; cite by name.
- U.S. Treasury yield curve via the Federal Reserve H.15 release — 10-Year Treasury at 4.38% on the Q1 2026 print date.