Triple Net Lease - Single Investment Grade/Tenants/Properties

OP

Member since 2022 · 7 posts · 3 votes

4y

Thanks James great insight!!

Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes

4y

I have several NNN investments so I can speak to this. I have had a Dunkin Donuts and a Famous Daves go out of business. One finished their lease and one tried to break it. Anything can happen, but the key metric to James point is the location. As long as you buy a class A location the type of tenant won't matter as much. Every major corporation has closed doors for one reason or another so it does happen. In my case I paid for tenant improvements in the dunkin space to attract a new tenant and I was able to increase the rent! In the Famous Daves Case they paid a reduced rent, but I had no out of pocket or TI Costs. I do like the QSR space especially if it has a drive thru. I own a few of these and the tenants are doing well. Its also an easy retrofit for a new tenant without tearing down the building. Feel free to PM me but I could go on and on.

4 Reply

OP

Member since 2022 · 7 posts · 3 votes

4y

Thanks John!

Ronald RohdePro Member

Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes

4y

I'm glad you're comparing these to financial instruments, if you buy the right location (car counts, store volume, recent building layout) you can minimize a lot of the risk from tenant defaulting. That said, you need the platinum brands, not a Famous Daves or Long John Silver, etc.

How are you buying? Cash? A lot of the $2-4 m is paid for all cash and very aggressive. @Joel Owens is the expert and he always says they are like the $200k rental house. Very competitive for people who know how to buy, plenty of duds dressed up as "turn key". You need someone who looks at hundreds of these a week to represent you.

Review your lease to understand what your options are and notice requirements are for default or vacancy. If done right, you'll have very little downtime in between retenanting.

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OP

Member since 2022 · 7 posts · 3 votes

4y

Thanks Ronald, good info & yes its going to be tough for me as my price range is going to be around $1.5M - $1.6M range with about 75% down.....so at this point just trying to get guidance on if there are good absolute triple net leases with good corporate or franchisee tenants with 15 year term & good location out there in this range? If not I may look into financing more (which I really don't want to do as I want to positive cash flow from the get go) or maybe look to bring in a partner. This is my main question as I don't want to have to compromise on my main criteria below to mitigate as much risk as possible:

- Absolute triple net

- Corporate or good franchisee single tenant

- Good location

1 Reply

Joel OwensBusiness Member

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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

4y

Ted those are 4 caps all day long with CA buyers. NNN lenders like loans of at LEAST 1 million.

Even doing finance you estimate about 1.2 million down. Maybe a 3 million property. That is still very tough maybe 5 cap and debt at 5 cap for good location and tenant. Basically anything 3 million and under around 70% all cash buyers. If you are not 1031 exchange you might go after a blend and extend property or a ground lease where you have typically way below market rents compared to absolute NNN.

These days on the broker side I really do not take anyone working below a 3 million price point. The cash buyers are so plentiful sub 2 million that in 24 to 48hrs of hitting market there are 12 offers on them.

Think a lot of people making 100k to 200k a year from job or a business trying to get passive and move to NNN. Also with the current admin in office many see a big recession looming ( not trying to get political but if you look at economic cycle data it is happening ). During a down cycle investors want safety and stability. So getting 10 year fixed debt and having 10 to 15 years on the lease for primary lease term before options they can model out returns for next decade waiting for next upcycle.

Now remember do not focus on cap rate so much because it is THEORETICAL meaning with a weak tenant or paying way overmarket rent the tenant could go dark. None of my clients tenants during Corona had an issue paying on STNL properties as they were credit grade.

The only way I touch mediocre tenants is when locations is great, cap rate is high, rents are well below market. That way if they pay and stay I have high yield and if they go dark after tenant improvements, leasing commissions, and attorneys fees I still have great upside upon re-stabilizing. There is a lot of overpriced trash right now I would not touch that. It gets sold to uneducated buyers.

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3 Reply

Ronald RohdePro Member

Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes

4y

Quote from @Ted Brandt:

Thanks Ronald, good info & yes its going to be tough for me as my price range is going to be around $1.5M - $1.6M range with about 75% down.....so at this point just trying to get guidance on if there are good absolute triple net leases with good corporate or franchisee tenants with 15 year term & good location out there in this range? If not I may look into financing more (which I really don't want to do as I want to positive cash flow from the get go) or maybe look to bring in a partner. This is my main question as I don't want to have to compromise on my main criteria below to mitigate as much risk as possible:

- Absolute triple net

- Corporate or good franchisee single tenant

- Good location

At that price, you're probably just going to do a few syndication chunks of $2-300k each. A LOT more work to vet, but its better than buying a dud NNN unless you have time to be one of the aggressive offers in 12-24hours...

OP

Member since 2022 · 7 posts · 3 votes

4y

Thanks Joel & Ronald for the feedback - very good to know & definitely sets my expectations on whats available in the NNN space

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Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes

4y

Ted,

You most certainly can find NNN deals in the 1-1.5 million range. It's kind of a perfect sweet spot. Too small for the rich/institutional guy and too big for the little guy just starting out. One thing to look out for is that investors get caught up with the Brand, but some of these brands are tired and poorly run by the franchisee. Fall in love with the location first! When doing your due diligence, look at the sales figures of the tenant, and ask if they are an experienced operator and how many stores do they run under their corp vail.

3 Reply

Brock Mogensen

Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes

4y

Vacancy calculations in NNN deals is tough. It is hard to accurately predict. I always lean on the side of caution. I usually factor in a year worth of vacancy to fill the space.

2 Reply

Michael K GallagherBusiness Member

Real Estate Agent · Columbus OH · Member since 2018 · 1k+ posts · 1k+ votes

4y

Quote from @Ted Brandt:

Hi Folks,

I'm just recently getting educated on commercial real estate & am really interested in absolute triple net lease, single investment grade or franchisee tenant/properties, however I'm concerned about the worst case scenario of having the single investment grade or franchisee tenant not wanting to release after the initial 15/20 year term is up (& do not want to initiate 5 yr term options). I know to keep risk as low as possible of this property going vacant after the initial lease term (or franchisee BK) would be to make sure I have invested in a property with a good location, growth market, population growth, good visability & all that stuff but my real question is what are the property types that have the lowest risk of having issues with vacancies or if it does go vacant it's not vacant for long after the initial term is up? Is it QSR's (quick service restaurants)? Seems if this type of property is in a good location there would be plenty of other franchisee's of the same brand or a different brands standing in line to take that location because there are so many different types a fast food chains/operators that could use the same or close to the same layout. Would that be close to accurate? Also typically would I be able to initiate another absolute triple net lease for another 15/20 years with a new franchisee tenant? Would this new tenant typically pay for any updates/upgrades/repurposing that is needed to the property or would that be on me as the landlord? I ask this question as I really like the passive income/NOI that comes with this kind of investment for the 1st 15/20 yrs but just concerned about post that. Does it get messy after that and become a less passive investment with shorter lease terms, more landlord responsibilities...etc?

Hey @Ted Brandt your hesitancy is very well thought out. From my experience and what has been echoed here in these responses is that if the fundamentals of the location, the traffic counts, the visibility, etc. Then re-tenanting is possible. I won't say it will be easy but obviously the better the location and market fundamentals the better the pitch to future tenants. One of our favorite conversions is a stand alone single tenant building, maybe 4K sf, on a pad at a retail like a Kroger etc, and to get our clients in that. The location and the fundamentals are always great, and even if you don't change the physical structure of the building, you'd be surprised how much a burger king or chase bank thats just been painted different colors looks nothing like the original.

As far as who has to pay for the refurbishment of the space, like all things in real estate that is negotiable. Normally as a tenant rep I'm going to ask for a tenant improvement allowance, but that number varies by the buildout requirements and the market. You could also accept an "under market" base rent in exchange for an as is space and not offering a TIA. There are benefits and cons to both and it really depends on who the tenant is that is asking and what their use case for the building is.

Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes

4y

You could also invest in NNN Retail Condo's. These are street level spaces that are roughly 1,500 square feet. These investments are great because there is not a lot of TI that has to go into these spaces and are quicker to rent out than a traditional pad site with a building on it. Your basically investing in a box and the association of the building takes care of the roof and common grounds. Easy to insure and not a lot of headache/retrofitting.

OP

Member since 2022 · 7 posts · 3 votes

4y

John - are there some advantages to NNN retail condo investing versus residential condo investing?

Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes

4y

NNN is passive and residential is not.

In Residential you have to pay for taxes, insurance, and maintenance, whereas in NNN the tenant pays all of that

The leases are 5-10 years vs. 1 year in residential

Residential association rules can be a pain sometimes. Sometimes they limit the # of Rentals you can have within the building.

Generally speaking Class A retail holds it's value well in a down economy. Residential prices tend to decrease.