Fri, Jul 03, 2009
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NNN Sale-leaseback Opp. - Need Help! |
smalhotra
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Posted: 19:45 on 05-30-2008
Hi, very new to CRE investment, but I have been getting up to speed quickly. Anyhow, ran into a potential opportunity for a NNN investment, but feeling very unsure about my analysis and what to make out of it. Therefore, I am posting it here for some advice.
A financial institution with ‘Aaa’ rating is looking to sell / leaseback their existing locations in my area. They are asking for offers based upon MAX 6.5% cap rate. In seller own words: Buyers are encouraged to submit offers based on cap rates that are significantly lower than 6.5% to ensure the competitiveness of their overall bid. Additional consideration will be given to those bids that allow for additional lease flexibility within the portfolio (lease termination rights, expansion rights, etc.)
One Sample property:
Building: 3420 sq. ft.
Lot: 32670 sq.ft.
Rent:
Year 1-10: $55,000 / Yr
Renewal terms: 4, 5 year options @ 15% Increase.
If you go with the seller directions, they are asking for $846,153 (6.5% cap) or $916,667 (6% cap)
My Concerns:
- Locked into long term lease (30 yr) with no rent increases for first 10 years, therefore no real appreciation potential for a long time.
- Most of the locations can be defined as second- or third-tier location (i.e., a block or so off the main retail drag). Most would be considered "location-challenged", in the sense that it can only accommodate a similar business and cannot be converted to a general retail-commercial space.
- Given my AGI (150k+), I believe I can’t take advantage of tax benefits, making it harder to justify the deal. Is this correct?
My questions:
- With NNN leases, is it as simple as it sounds, i.e. landlord does not have any expenses, so your Gross = NOI? In other words, the only exp is debt service?
- Based upon my understanding and a say 6% Cap, even with no expenses and 20% down ($183,333) the yearly payments alone one a $733,334 loan (6.5 %, 20Y) will be $65,610 making it $10,610 neg. cash flow. What do you think will be a fair price?
- I can dig more deeper and look for potential tax benefit, appreciation and equity buildup benefits, but at the end of the day it is –ve cashflow. Ho will you factor in those issues?
- Most importantly, how much will you pay for this?
Sorry for the long post and lot of q’s. Thanks in advance for your help!
Sam
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ypochris
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Posted: 23:29 on 05-30-2008
To me it appears they are looking for someone who wants something really safe but a better return than T-bills to put their money into. I don't really see this as a great opportunity using borrowed money.
Chris
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smalhotra
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Posted: 10:23 on 05-31-2008
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On 2008-05-30 23:29, ypochris wrote:
To me it appears they are looking for someone who wants something really safe but a better return than T-bills to put their money into. I don't really see this as a great opportunity using borrowed money.
Chris
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Chris, so the question is, at what price, cap rate, or rent increase this can be a good deal? In other words, what can someone offer to the seller to make it worthwhile.
thanks,
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larock
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Posted: 13:53 on 05-31-2008
Yochris is right, these types of deals are better left to people buying properties for cash. You just can't borrow money and make a property cash flow on a 6 to 6.5 cap rate.
In response to your original question, all true NNN net leases have the tenant responsible for all expense items other than debt service. Most commerical leases are a modified NNN lease, meaning the tenant is responsible for most expense items, ie taxes, insurance and operating expenses, but not structural items, like the roof. If your really set of offering in on this property, be sure to get a copy of the lease they wish to use, or even better write your own lease. Also, I don't like the ten years no rent increase, most of our commercial leases have a 3-4% percent annual increase, but some of the larger tenants have no increases for five years, then there is a 8-10% percent increase for the next five years. Concerning the location issue, even though the location might not be A+, there are always tenants looking for a decent location at a fair price. If you have to replace this tenant at some point, you might not get $12 per square foot, you may have to settle for $9 per square foot. Back to the cap rate issue, if you're looking for single tenant, NNN opportunties, there are several on the market now. I have been getting calls for Dollar General Stores in PA. I have two deals on my desk right now, one is a 8.5 cap rate, and the other is 9.66 cap rate. If you interested let me know and I can get your the brokers contact number.
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cjmazur
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Posted: 23:02 on 05-31-2008
not all NNN lease are the same. you need to look at the lease and see what the terms are.
If you want rent increases you can counter w/ different lease terms that would give you rent bumps.
These used you be much more attractive as there was CMBS financing that would all for 100% financing.
While 100% isn't available, see if there is a lender that will allow you to leverage the credit rating of the tenant.
6.5 cap isn't great, compare it to t-bills.
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smalhotra
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Posted: 00:06 on 06-01-2008
just curious,
how are you comaring this to t-bill? Just looked-up:
DURATION YIELD
3 mo t-bill 1.89
6 mo t- bill 2.01
Should not the comparison be to the longer term securities?
5 yr note 3.42
10 yr note 4.06
30 yr bond 4.72
thanks!
Sam
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cjmazur
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Posted: 23:52 on 06-01-2008
compare it to the duration of the leaseback period.
if it's a 10 year leaseback look at the 10 yr bond. So seeing that there seems to be a ten yer base period, I would compare the cap rate with 4.06%.
[ Edited by cjmazur on Date 06/01/2008 ]
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johnmckee
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Posted: 21:50 on 07-18-2008
I"ve done a few of these deals so here are my answers to your questions:
- Locked into long term lease (30 yr) with no rent increases for first 10 years, therefore no real appreciation potential for a long time.
***This is a bad deal, most rent increases are at a minumum 10% every 5 years for a AAA tenant. For independent business it can be 3% a year.
- Most of the locations can be defined as second- or third-tier location (i.e., a block or so off the main retail drag). Most would be considered "location-challenged", in the sense that it can only accommodate a similar business and cannot be converted to a general retail-commercial space.
***Second or 3rd tier locations at 6.5% is a bad deal. Cap rates are increasing around the country. A true prime location would be around 6-6.5%. If you think it will be tough to rent when the tenant goes dark.....then it's definitely a bad deal. The more risk in the deal, the higher the cap rate should be.
- Given my AGI (150k+), I believe I can’t take advantage of tax benefits, making it harder to justify the deal. Is this correct?
***You will be able to write off the interest on the loan up to a certain point, check with your CPA. But your decision shouldn't be based on the tax deduction when shopping for commercial real estate. Factors you need to consider are strength of tenant, length of lease, reusable space, surrounding tenant mix, growth of area, and a competitive cap rate with rental increases. Always think about your exit strategy.
My questions:
- With NNN leases, is it as simple as it sounds, i.e. landlord does not have any expenses, so your Gross = NOI? In other words, the only exp is debt service?
***Yes that is correct. The tenant pays for taxes, insurance, and maintenance. If you own the building you will have to get some general liability as a backup....oh and don't forget to put the property under an LLC to protect your personal wealth.
- Based upon my understanding and a say 6% Cap, even with no expenses and 20% down ($183,333) the yearly payments alone one a $733,334 loan (6.5 %, 20Y) will be $65,610 making it $10,610 neg. cash flow. What do you think will be a fair price?
*** You shouldn't do the deal if it doesn't cash flow. There are plenty of deals that will cash flow with 20% down, that have better locations, better ROI, and less risk. You might want to start a little smaller.
- I can dig more deeper and look for potential tax benefit, appreciation and equity buildup benefits, but at the end of the day it is –ve cashflow. Ho will you factor in those issues?
***No bank will give you this deal if it doesn't cashflow. You need to have a debt service ratio of 1.15-1.25 and be prepared to put 25-30 percent down.
- Most importantly, how much will you pay for this?
***I wouldn't pay a cent for this deal. Run as fast as you can. Feel free to E-mail me if you want some more info on these types of properties.
Sorry for the long post and lot of q’s. Thanks in advance for your help!
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cjmazur
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Posted: 14:07 on 07-19-2008
smalhotra:
did you end up doing this?
The other point is since the bank is selling the can modify the lease.
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smalhotra
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Posted: 07:39 on 07-20-2008
Nope, I talked to the bank and they sounded pretty firm on what they were looking for in potential offers, so I gave up!
Sam
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cjmazur
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Posted: 02:14 on 07-21-2008
That's fine. If your "hurdle rate" is 12%, don't waste you time looking at 6% properties.
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Birddog1
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Posted: 08:38 on 07-24-2008
Ok, Here's the Skinny.
your Best credit Tenants, (CVS, Walgreens, Home Depot, Lowes, ETC) always trade for a cap rate South of 7%. In Massachusetts, I just sold a CVS and a Jo-Ann Fabric, for $14,000,000. CVS appraised at 6.74 cap, and Jo-Ann 7.28.
The beauty of an ABSOLUTE NNN lease, is the fact, that you have nothing to do but pay the mortgage (if you have one) The tenant pays for taxes, insurance, all maintance, plowing (if applicable) so its a good thing to buy, if you're exchanging into it and putting big money down, and don't want any headaches, just a return
Some very wealthy companies, or investors, like these deals, because its a tenant, for 25-60 years, and they don't have to do anything but collect the rent. These kind of deals I wouldn't recommend to someone who is just starting out because unless you have 40-50% to put down, its a bad bad ugly terribly cash-flow.
The one thing to keep is mind, is that depending on the company, its very well worth a 6-6.5 cap (I have a home depot available now at a 5.8 cap) depending on their credit, lease terms, etc etc. I'd ignore this one and go find an add value project, where you can cash flow, build equity, and sell/leverage.
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