What Loan & How Much Down for NNN property thats already leased

15 Replies

Im looking to make my first commercial purchase a fast food restaurant with a new 20 year lease term at $1,575,000 and a 5.75% cap rate so around $90,000 of annual rent. I have a decent income tax wise $180,000 or so, I make more but Im in the gas station business, Im a dealer, I dont own the land I just lease a few stores so I've never made a commercial purchase. I would like if possible to put 20% down, if thats not enough I can put more down. Anyways, what commercial loan would be best for this? Im not looking to take any money home on the property but have the full payment, extra too all go towards repayment of loan? Also would my personal income come into play bc if so I will detail my situation below, I do not believe I have the personal income to carry the loan. Anyways Im looking at 20% or more down non recourse loans, Ive read little but do not know much and have not taken the time to sit with a loan officer and discuss. I currently operate 8 convenience stores but being that I own nothing of them, I assume they're worthless on my balance sheet even though I do make a lot from them?

Anyways my balance sheet is clean Id say net worth of $2m+ not counting businesses, my only debt is $80,000 or so left on car I financed but I have a $1.3M home and owe $280k on, a vacation home worth $600k I owe $240k on, and about $500k in the form of 4 rental properties that are all paid off and producing rental income. I also own 2 pieces of land each worth $150-200k but not sure bc their taxable value is $75k or so and I dont know how that appears for loan purposes

What would be the best options for me to obtain financing for said property.

Or does the bank factor in the lease payments coming in already? I haven't spoken with my banker yet, but want to be informed before I go in looking uninformed.  FWIW I bank with chase, would they be the best option to discuss rates with? Im in the private client group but I am not sure if they do commercial.

Hi Tushar,

I focus on this all day and everyday. Look at 500 to 1,000 NNN properties a week across the country for clients of mine.

At a 5.75 cap rate you are not getting 20% down. The numbers simply do not work for the DSCR a lender requires (debt service coverage ratio). You would be looking around 40% down for an STNL property with that cap rate going in.

Additionally you would need to look at the credit of the restaurant tenants.

Highest as an example for lease guarantee:

Taco Bell 

1. Yum brands corporate guarantee 

2. Yum brands subsidiary (not all stores nationwide but say a few states)

3. Large franchisee with decades in the system and hundreds of stores

4. Small franchisee with 1 or 2 stores starting out

The lender will also look at expansion plans of the restaurant chain and how the average store performs with the rent to sales ratio they are paying.

Many.many other factors to look at. 

There are specific companies I use for STNL lenders.

Thanks this is a pretty big local chain, whataburger, not sure how many they have but they're very popular here in texas. For me my only questions are will my personal situation be brought into play bc I already had a hard time getting the loan for my vacation home last year. I ended up putting over 50% down on it to get it done at 4.5% which I didnt like but I did it. Anyways so you're saying if I can put 40% down on the 1.5M purchase price I should be able to get it done regardless of my personal income? What type of loan would you suggest as best for such a property. I appreciate your insights, I just want to know what I should be looking for when I talk to my banker this week before he puts me in touch with a commercial lender. For what Im looking for which is 0 income from the property and all repayment towards the loan, what would you recommend me seeking? Thank you again

I guess in regards to the loan required Im trying to see what calculators I should be looking at, the payments are a hair of $90,000 annually and like I said I do not even want $1 for myself until its paid off, Im doing fine right now as is but would like to buy this and pay it off as fast as possible. Also I have 2 lots on major roads here 1 is 37,000 sq ft and 1 is 27,000 sq ft. Do you have any tips for going about finding franchises for the properties? I've only been in gas station business in my life and do not know much about others but I would like to buy some major food franchises for those 2 lots if its at all possible.

Hi Tushar,

Your net worth appears to be fine for this size of a purchase. How are you getting cash for the down payment?

All of those things you listed are equity positions in non-liquid assets. So your liquidity to net worth ratio appears off.

Whataburger yes there is a name but WHO is guaranteeing that lease?

For example Taco Bell if it is yum brands corporate nationally then over 10,000 stores are backing that  one location and if that location is losing money corporate still pays the rent like clockwork every month because they can average the loss over many other stores breaking even to making money.

If it's a Taco Bell franchisee and not corporate even with a training manual they can go under so much more risk with a franchisee. The 5.75 is a starting cap rate and you have to know what the blended cap rate is over time with annual rental increases.

I know a lot about this because I was in the food industry for over a decade and I am a commercial principal broker and also a real estate developer.

Your land I would have to see how it is positioned to see what appears for the highest and best use.

I am happy to jump on a call if you like because the scope of the conversation needed cannot be covered in a forum for your individual situation.  

I have cash at the bank I didnt list and I've been looking at putting it into play, residential or commercial, I know I can buy a few residential rental but would prefer the ease of 1 tenant and 1 project. As I mentioned I have a few stores and those occupy most of my time and make me a great living, Im doing this more for the investment aspect of it, not for the monthly income today, so would prefer the ease of an NNN tenant property. I will have to look into who guarantees this lease, I found the property myself on loopnet havent discussed with a realtor yet. As someone who does this on a normal basis, when a property like this generates $90k/year in rent, will my personal income come into play? Also what would be the best loan type for such a purchase? 40% down but what terms do you prefer when doing commercial in terms of length? Thank you again you've been a huge help

Hi Tushar,

I am a commercial broker so I have clients nationally that I work with that buy these properties. I help them through that process as a buyers broker.

Loopnet is limited in the properties it has. We check that but also have a database of the best properties we source from other developers, property management companies, other brokerages that are not on Loopnet.

When buying at a low cap rate you want to make sure the dirt value over time is good. That way if the tenant ever goes out the location and market should dictate ease of releasing the property and increased rents per sq ft in the market. Also if the dirt is valuable then 10 to 15 years down the line the property might be prime for redevelopment.

You need to get with a broker like myself or another one in the field that specializes in NNN. Regular REALTORS tend to not specialize in these properties. This is all I do day in and day out.

A pharmacy might be a better buy for you if you just want to accumulate equity and principal pay down over time. Restaurants tend to be mid line spaces and not corner. Corners are generally worth the most money dirt wise. A pharmacy you can get in sometimes with less down as lenders will use a lower DSCR ratio to qualify with the loan. In addition since the pharmacy is A credit the lender relies less on the borrower like they would with a restaurant franchisee.

Hey Joel, thanks for all your help. I have about $900k in cash to work with, I'd ideally like to put down $400-500 cash tops, with that said, what do you think my limits are price and cap rate wise? Im trying to understand more about the debt service coverage banks are looking for. There's a jack in the box thats $1.25M and a 5.6% cap rate, would that be a better option for me? Im meeting my banker tomorrow morning to discuss what Im looking for.

If I choose to skip the NNN property and build, I have a couple major lots on major streets, what type of construction costs would I be looking at with land already paid for to build a basic 10,000 sq ft strip center to lease out? Would that be a better option for me considering I already own the land? I imagine there is more money to be made on my end leasing it out fully but obviously more risk.

Some food concepts are overbuilt right now and you have to be very careful.  I have seen some dark Jack in the box's lately.

For 5.6 cap rate I would go with a Starbucks. 10% rental increases every 5 years with a 10 year primary term lease backed by corporate.

The problem with a strip center is without a track record banks will not generally give funding or require most of the center be pre-leased up before you break ground. With a STNL property you get the lease executed ahead of time so when you close on the land you know the funding is there and the tenant has committed with hard earnest money and a penalty fee if they back out while under construction or it gets finished and they do not take occupancy etc.

What area you live in will dictate the exterior finishes for the center. Exterior could be 90 a foot or 130 a foot with finishing required. If the land needs more engineering work that can drive costs up even further. Interior TI is about 20 to 50 a foot depending on the tenant.

Typical cap rate to cost is about a 9 plus cap rate and then you sell it for a 5 to 6 cap rate. If you have a Mcdonald's or a Chich Fil A those can go for 3.75 to 5 cap rate if area is good.

The other factor is time. If you are busy with your gas stations you will likely not have the time to do development.

The banker will have no clue about NNN. They do regular loans unless you are talking to the VP in the commercial department.

I know all the good areas in Texas. Woodlands, Sugarland, Austin, Mckinney, Spring, Katy, etc.

Meet with your banker and then give me a call. 

Thanks Joel, its actually in spring on aldine westfield which is a major road, I have a big lot there almost 30,000 sq ft right down the street they just built a dollar general right now and leased it out and a huge gas station is going in down the street the numbers are off the dollar general listing but 16,670 VPD and 5 mile population of 178,895. Are those good numbers for seeking a tenant to come build on my land? There's alot of businesses around me with huge workforce like baker hughes 2 minutes away, the police training academy, and many more oil companies, I would love to know how to get one of these big guys to come and want a store on my land I have no issue building them whatever, I just dont know the process of doing something like that. 

If you are going the land development route you might want to joint venture with a local commercial developer. You learn as you go along and split 50/50 the profit proceeds upon sale and XX percent of the ongoing cash flow until the sale.

Also you could just hold the land and ground lease it to the tenant directly and collect rent every month and they build the building.

Another option is to ground lease to a developer who will then construct the building and locate the tenant. They collect XX from the tenant,pay you the ground lease rent, and then the difference (leasehold) is for themselves.

The leaseholds are more rare just a few percent out there but are used for situations where a developer wants to develop on land where the seller does not want to sell. Could be a seller who does not know how to develop or to locate the optimal tenant but wants to hold the land long term. Government and Indian land like to do ground leases. Also an owner who might have mineral rights underneath the land they want to tap later on for additional revenue. 

Hello Tushar,

I am a commercial agent in Spring. I didn't read all of the exchange between you and Joel, but from what I did read he is dead on. What the bank will look at first is the DCR which is the income the property generates compared to the debt service. An average DCR is about 1.25 on the low side. As long as the Whataburger is a corporate store or guaranteed by corporate you should be fine. Regional banks recognize the strength of Whataburger and unless the store is in a very rural market and doesn't have a history of strong performance you shouldn't have an issue financing the deal. The down payment and rate will be determined by the actual deal and possibly to a small extent your personal financials. From what I read you shouldn't have an issue. I have some thoughts that might be more beneficial depending on what your desired outcome with the Whataburger purchase is. I am happy to meet you in person or discuss on the phone if you'd like. Feel free to reach out directly. My firm is Oldham Goodwin Group out of the Houston office.

Thanks Joel and Aaron. Aaron, how do I get in contact with you? And do you think you could help me with what joel mentioned and maybe finding a tenant to lease the the properties to? I am interested in doing something with the 2 big lots and they are on major roads so looking for help on possible options with them. Thanks

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