Single Tenant NNN Deal

[Kyle Ransom]

Hi everyone, I am in negotiations with a private seller on a 2,800 Sq ft commercial property that is currently leased for 2 years at 11.57/sq.ft He wants to sell a 10% cap. at $275,000 I crunched the numbers and I am looking a 10% Coc return 17% IRR what should I be looking out for when conducting due diligence?

[Joel Owens]

Hi Kyle,

I do not work on stuff typically under 1 million for NNN with clients.

With 2 years left see if you can get to review the lease in LOI stage with a confidentiality component. You want to know if current rents are at, below, above the market for that box size? You want to know for that business model is there oversaturation in the marketplace? Is there new development ongoing being offered at the same rate or close to it for your property? Does the tenant have a personal guarantee on the lease? Does they lease require ongoing personal and business financials? Are there any environmental problems with the site? Does the site have some kind of grandfathered use that goes away once you own it? Are there any deed use restrictions?

Even if NNN if tenant vacates in 2 years to land new tenant they might want repaved parking lot, new roof, a/c units, etc. That could run tens of thousands of dollars or more sometimes six figures in cost. So you have to do a cost reserve stable with your inspection and if items are in bad shape try to get a seller credit for closing that you can hold for those line items without coming out of pocket big in the future.