Absolute NNN lease

Member since 2021 · 3 posts · 1 vote

Newbie to Commercial RE Investing...

What are the reasons, if any, that someone would purchase a commercial property that has national-brand client with a 15 year Absolute NNN lease IF your monthly debt service is slightly less than the monthly rent (for the first 5 years)?

Is it merely for the tax benefits?

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Ronald RohdePro Member

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

Quote from @John M.:

On an absolute you won't get any depreciation because you don't own the building. The only thing you can write off is the Interest on the loan. A lot of investors will 1031 into an absolute because they would like to trade up their existing equity. Even if it doesn't cash flow as much initially they will own an asset that is worth more. Other investors just need a place to park their cash and like the passive nature of it. I own one of these but it did it with all cash. The rent bumps are small so these assets tend to be traded once every 10 years to capitalize on the equity of it.

I'm no CPA, but i don't think thats right. absolute net lease does have depreciation, maybe you mean ground lease has no depreciation. Land doesn't depreciate.
There are plenty of reasons to buy these assets, but the number of buyers has gone down, thats why you see the WAG and Sherwin Williams sitting for months now.

If you're 1031 trading in, your basis may only be $500k, so deal cap rate is a 5, but your internal cap is 15...

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Nathan Grabau
Realtor · Longmont, CO · Member since 2021 · 577 posts · 631 votes
3y
You could assume you are able to refi at a lower rate. Maybe you put more money down so it will cashflow. You are paying down the loan. And you benefit from a very safe long term investment that is not going to take much effort. When people put management costs into their single family or small multifamily underwriting, and then put a number in for their time, very few strong markets, like Austin, cash flow anymore.
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Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
3y
whats the dirt worth? Market dynamics? What does the return look like from year 6-15? Whats the paydown look like? Likelihood of renewal? What are the other opportunities for your cash?
When you are talking larger properties even small margins make a difference. And if your debt service is 7% and you are essentially breaking even on that, you may be doing very well on paydown. And ou will still have a real viable property to sell with 10 years on the lease.
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John M.
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
3y
On an absolute you won't get any depreciation because you don't own the building. The only thing you can write off is the Interest on the loan. A lot of investors will 1031 into an absolute because they would like to trade up their existing equity. Even if it doesn't cash flow as much initially they will own an asset that is worth more. Other investors just need a place to park their cash and like the passive nature of it. I own one of these but it did it with all cash. The rent bumps are small so these assets tend to be traded once every 10 years to capitalize on the equity of it.
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Ronald RohdePro Member
Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
3y
Quote from @John M.:

On an absolute you won't get any depreciation because you don't own the building. The only thing you can write off is the Interest on the loan. A lot of investors will 1031 into an absolute because they would like to trade up their existing equity. Even if it doesn't cash flow as much initially they will own an asset that is worth more. Other investors just need a place to park their cash and like the passive nature of it. I own one of these but it did it with all cash. The rent bumps are small so these assets tend to be traded once every 10 years to capitalize on the equity of it.
I'm no CPA, but i don't think thats right. absolute net lease does have depreciation, maybe you mean ground lease has no depreciation. Land doesn't depreciate.
There are plenty of reasons to buy these assets, but the number of buyers has gone down, thats why you see the WAG and Sherwin Williams sitting for months now.

If you're 1031 trading in, your basis may only be $500k, so deal cap rate is a 5, but your internal cap is 15...
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John M.
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
3y
@Ronald Rohde Yes you are a correct that an absolute NNN ground lease has no depreciation and that's what I was referring to. Sorry for the confusion. Just make sure that when analyzing leases that if it's advertised as an absolute NNN that it covers structural repair and the roof otherwise it's really not an absolute. Sometimes what is advertised and what is in the lease are two different things.
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Ronald RohdePro Member
Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
3y
Quote from @John M.:

@Ronald Rohde Yes you are a correct that an absolute NNN ground lease has no depreciation and that's what I was referring to. Sorry for the confusion. Just make sure that when analyzing leases that if it's advertised as an absolute NNN that it covers structural repair and the roof otherwise it's really not an absolute. Sometimes what is advertised and what is in the lease are two different things.

I'd say everytime. Brokers aren't known for truthful advertising.
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
3y
Listing brokers have va's and junior agents putting these OM's together. Most times it is not intentional they are just pumping out so many listings and hoping some will sell that the finer details fall through the cracks.

As to why a buyer would do something I have talked to thousands of millionaires over the phone through the decades interested in this space. The reasons for them wanting to do something are as vast as the tax code.

I have some clients still pushing hard at 100 million net worth and others taking the foot off the gas and coasting at 10 million. It has more to do with their age in life, family and time commitments, health, what ideal life they want, etc.

The investment itself is just once point of the overall plan of the WHY they are doing something. That's why people talk to me on the phone because I hear their way and theoretical reasons for doing something and then I give them the realities of the markets and what to expect. From there it might be the right time for them to buy, not right for them ever, or they need to save some more to get a property in the area and tenant quality they really want.

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Account Closed
Lender · Atlanta, GA · Member since 2018 · 108 posts · 28 votes
3y
Quote from @Daniel Stack:

Newbie to Commercial RE Investing...
What are the reasons, if any, that someone would purchase a commercial property that has national-brand client with a 15 year Absolute NNN lease IF your monthly debt service is slightly less than the monthly rent (for the first 5 years)?
Is it merely for the tax benefits?
Easy management and low risk due to corporate guaranteed leases are benefits. Another benefit is targeting a lower LTV to optimize cash flow. If higher LTV is preferred, considering other tenants/industries with 10 year leases and 8-10% year 1 cap rates helps cash flow.
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