Why no sale?

Question

There is an interesting opportunity available in my market, I'm curious to hear your thoughts.

- new building 2012/2013

- Full service with base year expense stop lease structure. (I understand that means the owner/landlord pays all utilities/maintenance)

- 20 year lease in place, ten firm

- $488K est NOI

- at a 6.5% CAP that puts approx value of $7.5M

Am I missing something? It is a brand spanking new building with a solid AAA credit long term tenant. It has been advertised for awhile now. I am a little surprised no one has scooped it up.

Curious to hear your opinion., thank you!

Chris Snere · Answer

my specific goal is to maximize cash flow with minimal risk in the most tax efficient manner possible.  My goal is to maintain and grow inter-generational wealth outside of simply stocks and insurance policies.

Joel Owens · Answer

Sure. Chris location does play a role in corporate tenants for leases but really the credit of the tenant, their books, and who is backing the lease, and lease terms are where most weight is given.

What are your specific goals??

Chris Snere · Answer

Joel,

My guess you are absolutely correct that it is NOT a deal at 6.5 CAP, hence why it has not sold!

The property speaks to me because I do like the location and I like the idea of one extremely credit-worthy renter for a long period of time. But I can see your point asking "why this property?" when there are triple net properties with better returns out there!

Thanks again for you expertise.

Joel Owens · Answer

I forgot to mention the difference between debt you can obtain and the low cap makes cash flow almost non-existent with this property.

People paying cash such as REIT's can make the cap work in the 7's. When the lender with a 20 year amort. requires a 40% down payment or greater the cash down doesn't make sense. Especially if no rent increases in primary term.

I go through this day in and day out for my clients looking at triple net nationwide. The spread,and how much down, and when the financing comes due, along with the rate is key.

Joel Owens · Answer

Hi Chris,

It depends on the tenants location and how valuable that building is. If the location is great then re-renting to a second generational tenant is easy.

If it's a corporate tenant that wanted to be in a market and went in for an off the path location then the second generation tenant you will likely not command close to the rent of the corp.

Office in many parts of the country is suffering with medical office being a bright spot.

My question to you is why would you want a property and be liable for all costs at a 6.5% cap?? You can land triple net leased properties today from corps at that or better and not have to do anything. The credit grade tenant pays taxes, insurance, etc.

I am trying to figure out why this property speaks out to you.

Chris Snere · Answer

@Joel Owens, thank you for the reply. The property is in an income tax state. Totally makes sense a lender would not count the second 10 year period (nor would I).

The property is considered "office". I do not have the full data yet to answer he rental increase question. I will definitely find that out.

The second ten year of the lease is a risk to be considered for sure, additionally I understand having one tenant is a single point of failure but part of me really likes the idea of dealing with one larger "customer" as opposed to a multitude of smaller.

Joel Owens · Answer

If the owner pays all utility and maintenance on the property then this isn't a deal at all at a 6.5% cap rate.

Is this property in a income tax state or is it tax free??

20 year lease in place with ten firm means the lender ONLY counts the ten years in the primary and DOES NOT count the option. The lender will count the option as the tenant is not going to exercise and the property will go dark. The lender will obtain a "dark value" in the appraisal for the purchaser to asses risk and how much balance on the note would be left at that time. Most lenders will not go more than double the primary term. So on a 10 year primary you are getting a 20 year amortization on the loan even if the property has a AAA rated tenant.

Is this retail, industrial, office?? Are there any rental increases each year in the primary term and by how much??

I can provide more detail if I know more about the asset type.

Thanks