Would you do this NNN deal?

Question

Let's test the waters here. I'm looking at a mom and pop cafe that has a cap rate of 8%. It's a first floor retail condo in a downtown D.C., but in the neighborhood section not the business district where offices are only 60% occupied. Above this retail condo are residents who own their own condos (100 units). Other ground floor retail condos are all occupied such as a salon, Fedex store, vape shop and this cafe that I'm talking about. Across the street is a middle school and has lots of car traffic. It also has lots of foot traffic as well with a walk score of 90. Tenant has been there for 2 years and has 3 years left on the lease. This is a true NNN, and the management is easy since the association takes care of the maintenance and roof. The association dues are a part of the the NNN costs. You're essentially owning a 900 square foot box.

Would you do the deal?

Greg Scott · Answer

Probably not at an 8% Cap Rate.

I'm seeing 8 Caps on multi-tenanted buildings with tenant-businesses that are very established.  Meanwhile, food service businesses are notorious for having a high failure rate. You and your tenant are also at the risk of how well the condo is run.  Special Assessments could really hurt.  These two factors add additional risk that needs to be factored into the purchase.

Russell Brazil · Answer

If it is an 8% cap rate, Id question why the unit is so cheap. That would be the highest cap rate in DC, making this property unusually cheap...and theres a reason for that even if its not easily evident.

Russell Brazil · Answer

3.5%-5%. SE and PG you might find some stuff a little over 5%, but unlikely to even hit 6%.

Joel Owens · Answer

Look at the business with personal financials and the IN PLACE rent per ft.

Weak tenant goes dark and were paying inflated rents you do not have an 8 cap you have a 6 cap

John M. · Answer

8% net.  I.E. NNN.

Bob S. · Answer

net 8% or gross? if gross, I would not get out of bed.

Sara Frank · Answer

The 8% was provided by the listing agent? I would dive into those numbers. 8 is very high for DC proper, even for triple net. Check for special assessments. Somethings fishy but maybe I'm just cynical

Jack Seiden · Answer

I would say 8 cap with financing near that and bonds at 5% isn’t necessary that great, however obviously dc proper has some pretty good deals rn, so it would really depend on how much of a discount I was getting off peak price, I do think dc eventually comes back and land near the Capitol isn’t gonna stay down for long, otoh there is a potential it comes in the form of more housing, more retail in the former office spaces and that even if the area Improves they build enough retail that your values don’t. Tldr depends of what I was actually paying for the property vs what I would have paid a few years ago.

Ronald Rohde · Answer

whats the exit?

John M. · Answer

Just a buy and hold.  I do believe rents are undervalued a bit for the location.

Would you do this NNN deal?

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