Help on looking at a commercial deal - NNN ground lease

Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes

Hey guys I have some SFH rentals, looking to add a more passive investment and came across this commercial deal and hoping you guys can give me some tips before I dig further into it.

Price $412.5k
Cap: 8%
Recently signed 10 year NNN ground lease with options & escalators.

I'm new to the commercial arena. This is 14 acres in heavy industrial area with some larger buildings on it. It's my understanding that this would be purchasing the land only, and leasing to the company that has the building. The improvements are technically theirs but they obviously can't a building when lease is up.

What am I missing? 8% cap rate on this investment seems too easy.

0 Reply

30 views

Most Popular Reply

Joel OwensBusiness Member

Moderator

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

10y

What Daniel I think is talking about is a leasehold. You are buying the revenue stream for a set period of time.

Those trade at high cap rates because of the risk and difficulty financing.

A typical ground lease where you own the land itself generally if the tenant doesn't renew after the primary term you get the land by default.

Sounds like they just renewed a 10 year option. Industrial on 14 acres the cost of environmental remediation alone could exceed your purchase price. Also the older industrial buildings tend to not have the desired ceiling heights most new tenants want today.

If it's a corporate tenant that is nationally guaranteeing the lease for 10 years it isn't that bad. I would want them to have a remediation clause where they are on the hook for environmental cleanup costs if the site is found to be contaminated. Hopefully the owner had a phase one completed last time to show a clean site and if they have been the only tenant since then and it gets contaminated that is pretty self explanatory unless it leeched over from another property owners site.

Podcast Guest on Show #47

NNN Invest53 Reviews

Website View Page

1 Reply

See this reply in the discussion

12 Replies

Jump to latestLatest

Sort by

Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Chase Gochnauer:

Hey guys I have some SFH rentals, looking to add a more passive investment and came across this commercial deal and hoping you guys can give me some tips before I dig further into it.
Price $412.5k
Cap: 8%
Recently signed 10 year NNN ground lease with options & escalators.

I'm new to the commercial arena. This is 14 acres in heavy industrial area with some larger buildings on it. It's my understanding that this would be purchasing the land only, and leasing to the company that has the building. The improvements are technically theirs but they obviously can't a building when lease is up.
What am I missing? 8% cap rate on this investment seems too easy.
1. Who would you rent to in 10 years or one year if they go out of business?
2. What are the costs to clean the land after tenant leaves?
0 Reply
Chase Gochnauer
OP
Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
10y
Honestly, I think the value of the property is at least that $412.5k mark if the tenant were to leave. I believe this tenant has been here since 1997 so they have already been in the building 20 years, they are just renewing the lease for another 10. The existing buildings have value.
49k SF warehouse/3200 SF office
0 Reply
Daniel Chang
Professional · Riverside, CA · Member since 2009 · 254 posts · 273 votes
10y
Be very careful here. If you were truly buying the land with 8% cap ground lease, that seems like a really good deal. However this doesn't seem like the case, because typical ground leases are 20+ year, so it doesn't matter to you that the tenant just renewed a 10 year lease.
What it sounds like however is that you are buying the ground lease instead, where you pay the rent to the landowner, and the tenant pays the rent to you. And the difference between the 2 is your net profit, resulting in an approximate 8% cap.
Make sure you know what is actually on sale.
0 Reply
Nick L.
Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
10y
@Chase Gochnauer
You'd likely have to subordinate your priority to the tenant's lender. You would also want to make sure that all improvements revert to you at the end of the lease.
http://www.propertymetrics.com/blog/2014/08/04/gro...
http://www.lorman.com/resources/adding-value-befor...
I would be concerned about environmental contamination. Also zoning or other local govenrment concerns that might restrict future tenants.
0 Reply
Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
What Daniel I think is talking about is a leasehold. You are buying the revenue stream for a set period of time.
Those trade at high cap rates because of the risk and difficulty financing.
A typical ground lease where you own the land itself generally if the tenant doesn't renew after the primary term you get the land by default.
Sounds like they just renewed a 10 year option. Industrial on 14 acres the cost of environmental remediation alone could exceed your purchase price. Also the older industrial buildings tend to not have the desired ceiling heights most new tenants want today.
If it's a corporate tenant that is nationally guaranteeing the lease for 10 years it isn't that bad. I would want them to have a remediation clause where they are on the hook for environmental cleanup costs if the site is found to be contaminated. Hopefully the owner had a phase one completed last time to show a clean site and if they have been the only tenant since then and it gets contaminated that is pretty self explanatory unless it leeched over from another property owners site.
Podcast Guest on Show #47
NNN Invest53 Reviews
Website View Page
1 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Chase Gochnauer:

It's my understanding that this would be purchasing the land only, and leasing to the company that has the building. The improvements are technically theirs but they obviously can't a building when lease is up.
Sounds like he is purchasing the land that has a NNN lease.
0 Reply
Chase Gochnauer
OP
Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
10y
Originally posted by @Account Closed:

Originally posted by @Chase Gochnauer:
It's my understanding that this would be purchasing the land only, and leasing to the company that has the building. The improvements are technically theirs but they obviously can't a building when lease is up.
Sounds like he is purchasing the land that has a NNN lease.
That's the way I read it but I'll clarify tomorrow.
0 Reply
Robert T.
Investor · Houston, TX · Member since 2015 · 76 posts · 12 votes
10y
The land appears really cheap at about 30K an acre or 70 cents/sf; although I am not familiar with this area! You are probably right that if they leave, you can get at least that amount for the dirt, PLUS the building. Have you research any comparables? As alluded to, the main thing is to make sure it has no contamination, and you may even need a phase 2 environmental. if I read you right, it is a 49,000 sf steel building, and @$50/sf replacement cost maybe 2.45M? The math seems wrong here, and too good to be true. Why are they selling it so cheap? You cannot skim on the due diligence process if you are really keen on this property.
1 Reply
Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
The 14 acres also some of the land might not be usable so then you are paying taxes on land you can't use. The unusable land could have issues to it as well.
I looked at a retail STNL property the other day was 58,000 sq ft building on prime 6 acres and had a detention pond inlcuded. So 14 acres sounds like a lot of dead space for that size building.
Podcast Guest on Show #47
NNN Invest53 Reviews
Website View Page
0 Reply
Chase Gochnauer
OP
Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
10y
"Property offers a recently signed 10 year NNN ground lease with options and escalators. No ownership responsibilities." is quote from flyer. The area I would say isn't a hugely desirable area, more of an older industrial area. Building is approx. 60 years old but appears nice. No obvious environmental concerns. It is a larger corporate tenant(over $1bil gross rev).
I'll clarify with agent tomorrow. If it's truly ground purchase then it sounds like it could be a good deal, if it's not I'll pass. I'm looking to finance part of it.
0 Reply
Chase Gochnauer
OP
Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
10y
So, good news and bad news.
Good news. It is the purchase of the land, 8 years left on ground lease by a billion dollar company so that side of things is solid. 8% cap.
Bad news. Ground is contaminated by previous owners/tenants. The only thing needing done is monitoring of 6 wells by a company. I guess they come nearly everyday, check levels, and leave. Aside from that there is nothing else that needs done at this time. But, because of this, it's likely not able to be financed.
0 Reply
Robert T.
Investor · Houston, TX · Member since 2015 · 76 posts · 12 votes
10y
Originally posted by @Chase Gochnauer:

So, good news and bad news.
Good news. It is the purchase of the land, 8 years left on ground lease by a billion dollar company so that side of things is solid. 8% cap.
Bad news. Ground is contaminated by previous owners/tenants. The only thing needing done is monitoring of 6 wells by a company. I guess they come nearly everyday, check levels, and leave. Aside from that there is nothing else that needs done at this time. But, because of this, it's likely not able to be financed.
@ChaseGochnauer: Thanks for the update! Most of us here thought there was contamination. It is priced very low for a reason. As investors; we have been in the same situation several years ago. We were looking at a very busy strip mall and was offered at 12% cap, which is high in our area. Looked ok on the outside; but we spent thousands on environmentals (including phase 2), and found PERC as there was a dry cleaner there before. Had to drop the deal and lost money there. The brokers kept pestering us to close the deal, saying that it can be remediated through our state TCEQ program. and the seller even dropped the closing price. Yes, TCEQ has a program but there is a long waiting list. We said goodbye to the deal. Contamination clean ups can cost millions. Having said that, I know some investors still proceed to buy contaminated land, especially if they know what they want to do with it, have a long term plan and need little financing. There is never one way to do real estate deals, and there are many ways to this food chain, but stay away from danger. Risk can reward but ca also destroy. Good luck!
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.