I am selling a few SFR properties, first one has an offer, and will net approximately $700K. I intend to 1031 to a NNN to a fast food or other retail property. I will need to secure a commercial loan of roughly $400k to $700K. Property does not need to be local to me.
I have no experience with commercial loans. Where do I go to secure one? What are the general criteria to securing a loan?
Does anyone have a recommendation on how to find a NNN fast food or retail property?
What should I be looking for in a property?
What should I beware of when looking for a property?
What should I beware of when looking for a tenant franchise?
What is the standard compensation for a commercial broker?
What is the standard compensation for a property manager?
What should I establish as a team?
- Property Manager
- Any other experts?
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There are a number of variables to consider when acquiring and financing a single tenant NNN retail or restaurant property. These include:
* Quality/financial strength of the tenant
* Length of remaining lease term
* Demographics of the location
* Other terms of the lease including rent increases, if any
* Current rent compared to market rents
Lenders in particular with focus on the first three of these variables (tenant, lease term, demographics). Each lender has its own underwriting criteria. Some will consider only properties occupied by investment grade tenants. Others are good with private company/franchisee tenants as long as the tenant provides financial statements and operates a minimum # of units (25+ is good). Some lenders won't lend on a property if the population within the 5-mile radius is below a certain threshold. Some lenders have a minimum loan amount of $1,000,000 but others will go as low as $500,000. Hope this helps. Thank you!
To answer your questions in order:
- I would recommend talking to a qualified mortgage broker and have them shop around. There are many lenders to specialize in this niche of the market and do a great job. With the 10-year currently so low you can probably find some favorable terms. Although, you also might be able to find some gems with $700k in cash
- Like residential, there are a number of websites that have inventory of commercial real estate properties available for sale. The traditional commercial search website has been Loopnet.com but Crexi.com is also a great resource and has a focus on retail NNN properties.
- When evaluating net lease properties there are a number of factors to consider: cap rate, lease term remaining, rent increases, creditworthiness of the tenant, tenant expense responsibilities (NNN vs. gross lease), rent to sales ratio, who is guaranteeing the lease, demographics, site ingress/egress, and rental rate as compared to the market.
- What to beware of.. A tenant paying too far above market rental rates. Even if you have an operator that just signed a fresh 15-year lease, if they do not renew the lease down the road (or go insolvent), you are left trying to backfill that space at an above market rent.
- Franchise vs. franchisee - it all comes down to the business model/operator. You can sometimes get higher cap rates with franchisee rather than corporate. I wouldn't necessarily gamble with a 3-unit operator, but most QSR's have great franchisees who operate hundreds of locations.
- Varies by price point, but buyer reps are typically paid by the seller for NNN deals.
- If it is a true NNN then tenant would be responsible for paying all expenses. No property manager necessary.. Collect that rent! Sometimes property managers will be hired for NN leases if LL is responsible for roof/structure.
- You have the foundation for a team there. On the front end you will also need a 1031 intermediary set up prior to closing on your relinquished properties
Good luck in your search!
For 1,200,000 to 1,400,000 you will be looking at JUNK STNL not worth much. How do I know? I look at about 1,000 a week nationally for my clients. I am a principal commercial broker, syndicator, investor myself.
When developers build in strong suburban core to urban core areas the land can range from 400,000 up to 1 million an acre or so before building costs. So after building costs and developer paying short term capital gains on resale, commission costs from real estate brokers, and legal fees most resale prices are in the 2 million plus range and up for quality.
Cap rates on food with newly minted leases range from 4 cap for a Chick Fil A all the way up to a 6 or so for a Bojangles etc.
Down payment is usually 35% or greater. It's often a common buyer mistake to think ( I have 700k proceeds, let me get a small loan that I can pay off soon so less risky.) Actually the property is in a weak area, tenant is weak, and lease is weak. Loans also the larger lenders that compete with great rates stay away from the weak suburban to rural micro markets. That leaves you with the good ole boy network banks that are local and give crap 15 to 20 year amortizations and 5 years fixed full recourse with a low LTV. That higher cap rate that drew the buyer in is now offset by horrible debt terms.
I believe in quality of dirt first with location over price concerns.
As far as where to get lenders, property managers, access to properties you should find a commercial broker that specializes and represents your interests. They tend to already have all of those pieces in place so you do not reinvent the wheel. The listing brokerages generally only sell what is in their inventory whether a bad,marginal, or good property. A buyers broker with an extensive network of on and off market properties can look to find the diamonds to purchase from ALL of their sources.
If you could add some more money to your exchange that likely could get much better quality. Just moving from 1,400,000 to 2,500,000 makes a huge difference for location and tenant.
Hope it helps.
To piggyback on this topic, are there any books/resources you experienced investors recommend when it comes to learning more about NNN ground leases?
Good evening every one I was looking to get some information on Buying NNN properties in the form of wholesaling or getting investors for the deal un till I build some cash has any one done this before and what type of return do investors look for when buying NNN property. what is the occupancy rate they look for . what numbers do they look for when purchasing NNN from 2 million up to 10 million
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