Investing in triple net properties

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Hi Chris,

It might be helpful to do a case study here. Without being too specific.

What tenant was it? Primary years left on lease term before options? What was strength of the guarantee? Strong suburban or urban core? Approximate in a  range purchase price? Cap rate? Interest rate? Amortization? 

@Joel Owens - Sure thing, here is a basic overview....

Tenant:  National Retail (not a dollar store) - Corporate Guarantee

Lease: Absolute NNN with 5 years remaining + options

Location:  Secondary city in SC on the main retail strip 

Price:  <$1M

Cap Rate:  ~8%

Loan Terms: 80% LTV @ 4.625% 5yr/25yr (would have been willing to go up to 10yr or length of the lease which ever was shorter).

Lender:  Regional Credit Union  (had similar offers from a 2nd Credit Union and a larger Regional Bank)

I am thinking also since it is at least for Chris under 1 million price and higher cap rate  even at 80% ltv that can be a smaller commercial loan for a lot of banks and local lenders.

The type of properties my clients tend to buy are more larger price say 2.5 to 6 million STNL so 80% leverage on that would give a lender much higher loan centration exposure then they would like.  

NN single tenant national retail. >15 year old bldg

6 years left on lease, Corporate guarantee on lease

3.5%, 7/25, 80% LTV

>$3.5M

Regional bank, prefers to deal with relationships rather than transactions

Regional bank, prefers to deal with relationships rather than transactions

Ah, therein lies the rub, a relationship (ie deposit $10M and we'll loan you back $1M) lender.  Which the OP didn't have.

@Joel Owens - hit the nail on the head. I will give you my experience. I have been a non-residential CRE investor for 10 years and have used the same local bank the entire time. Loans started out at 30% down, 5 year fixed and higher than avg. interest rates but they financed vacant and value add properties that other lenders would not. After a few deals, I was down to 20%. After a few more more I was up to 10 years fixed, 25 yr amt and lower interest rates. My latest value add/vacant building deals in 2021 have been 4.25%. If I purchased a net lease national tenant property I would get better rates with similar terms. Funny Joel mentioned it but my wife is a doctor. I suppose that plays a significant factor. Also inline with Joel's comments, these are full recourse personally guaranteed loans which also by default would be cross collateralized. I would love to hear why @Mark H. Porter  is keeping his lender a secret.  What harm would come out of sharing that?  I too plan on dealing with my bank for all future deals and will freely share.  It is Center Bank in Cincinnati and ask for Ben Johnson.  They will not finance out of state buyers but will finance out of state properties for existing clients.  Hope my post helps.

@Ash Patel if you read my posts above you will see that I did tell everyone about the bank in Pittsburgh offering the same terms as the bank I am dealing with.

In 23 years of playing this game I’ve learned to not to share my bank, broker, and legal team with competitors.  Let’s face it, if you are also in this business you are a competitor.  It has never happened to me but I’ve had friends get the rug pulled out from under them by investors who will shake their hands and meet for drinks.  The next day they have undercut you without blinking an eye.  If you’ve been doing this for decade then you MUST have seen this.

When asked my strategy or goals I always stay at the 10,000 foot level, I won’t even share particular cities I am after?  Why?  Because the first hot shot not fully understanding the art of the deal will come in and make offers using hard money and at 4.5% cap.  There are just too many inexperienced investors muddying the waters.


@Jacob Franz @Ash Patel

Hello - - I've often toyed with a net lease.   Question on financing -  I'd put a minimum of 30% - maybe more down.    For a "credit tenant" ....  do you know if a 30 year amortization is possible?  Right now, my bank is telling me 25 tops.    My hang-ups on Triple Net:

1.)With cap rates low right now - you almost need 30 years to have any cash flow - -things like McDonald or Chick Oil A are doing 4%, even lower Caps.   Chipotle around 4.25 (at least from what I see).   

2.)Have either of you seen Triple Net deals go the distance? I love the idea of a corporate credit tenant. But- - -20 years into the future is a long time. In a changing world I get worried if XYZ fast food or drugstore - will still be there in 20 years. This is why I'm attracted to lower-CAP rates - the locations are better - if I see 4-5 chain QSR's on the street - I feel that if my tenant leaves, I had a good chance of finding a new tenant.

3.)DOLLAR GENERAL: I'm told they're a credit tenant. Of course, higher cap rates. Now, I understand Dollar General won't be located on Times Square :), but most of them are just way out there..... seems like not much action around the location.  Has anyone seen how DG is about abandoning the spot and leaving?

Thanks

@Mel Park - I wish I could give you an intelligent answer.  I have no interest in low cap net leases.  A lot of those assets are used to park money or return safe returns.  My preferred asset should have significant upside.  Ex. a strip center with 15% or more vacancy and some mom and pop tenants.

@Mark H. Porter - I will share everything I do.  I am fully transparent and literally give away all of my secrets. A lot of this inspiration comes from following @Joe Fairless who wrote a step by step book on Multi-Family syndication that many have credited to their success.  Joe gives away all of his knowledge without hesitation.  I have also invested hundreds of thousands of dollars on a handshake.  I can't think of a time where I have been burned by sharing my "secrets", in fact it is the opposite.  Over the years, I have given a lot of time mentoring others on finding commercial deals.  The unintended byproduct of that is they ask me to partner with them on these incredible deals.  I then advise them on how to manage these properties and again receive a free property manager.  This came after years of sharing knowledge and helping others.  

@Mel Park Mel, my last deal was a Walgreens that I got financed at 3.25, 20% down, 25 year amortized through coastal Carolina national bank.  That was in February. I’ve never seen a 30-year  amortization on a commercial property.

Be cautious with dollar stores in general.  There is risk to the demographic areas they primarily go into so the banks won’t give you the same terms as a pharmacy or restaurant with a drive up.

Cap rates are inversely related to lease term and quality of the tenant. The longer the remaining term in the lease, the less risk, hence a lower cap rate. The higher cap rates can be found, you just have to be willing to look outside your geography and comfort zone. for instance, I did a 6.25% cap rate on the remaining money left over from the Walgreens deal with a DST.

Best of luck - 


@Mark H. Porter thanks for sharing. Yes, that is my aversion to the Dollar Stores. Sure the cap rates look nice but the substandard locations make me feel I'm 100% totally dependent on the Dollar Store. Sure that's the case with any NNN tenant - but at least something in a good location - I have a good chance of landing another tenant. Question - when you did the Walgreen's deal - and even now, today - what did your research tell you vis a vis future of pharmacy retail stores? I ask because I lean towards QSRs -- I like that Amazon and drones - just can't produce cheeseburgers. I look at Walgreens, Rite Aids, CVS - etc - -many are in fine locations. Decent cap rates....but the Amazon/future online businesses worry me. Did you have those concerns? Thanks

@Mel Park Mel, the current numbers were looked at as well as the land/location.  I’m at a signalized intersection, 2 acres, with 50,000+ cars per day going through.  The McDonald’s next door is considered second stage since I have the corner and their customers either pass behind my building or use my right of way between the lots.

In other words, I researched the worst-case scenario and still decided to go with it due to change of use possibilities.

@Ash Patel I hear you.  Many of these triple-net leases have returns comparable to stock market dividends. And I can't help but wonder that the people who bought the land originally, and landed the tenant - are the ones who made the real money.     I've owned commercial properties in the past - - but it was MY business occupying it.   With your strip malls- do you screen the mom and pop tenants and have you had good experiences?  

Today - in Suburban Philly - (I'll save you all the history) --  I am able to buy a 2 acre piece of land for $1 million. Originally I got into this with hopes of building myself a new company there but for a variety of reasons I'm not sure it's feasible.  I only have another 30 days of due dilligence.    Anyway - the location iMO is awesome.  Very growing area. Right next to it - a big Toyota dealership, and CarSense - a Penske owned used-car superstore. Directly across - a new Wawa.  Half mile down the road, a 5 year old WalMart and large retail strips.     It's on the "main drag' in town - with 46,000 vehicle count.   I've spent time in the area - and I just can't shake the thought that SOME retailer or QSR would want that property one day.  Trouble is - I'd have to buy it without having enough time to find such tenants.  My purchase price is $1mm - I have it from a reliable source that already there's another local medical practice that would pay $1.1mm.  Point being - I think its desirable.     I've NEVER EVER done a rash investment.....but a small tiny part of me wants to buy it for the $1 miillion- - and then proceed to hope that one day I find someone to sell it or lease it to.  It would be QSR, it could be a small strip mall.     My novice thought process is this:  $1 million land.   3000 square foot building - let's say $650,000 =. $1,650,000 cost.     BUT -I look at net leased Chipotle, Taco Bell, Wendy, etc-  those are selling for $2.5mm + ....so I figure if I tie up $1million dollars for 2 years. I lose that cash flow, I pay some property taxes and insurance....but I should be able to do something good with this property   Trouble is, at this moment I have *no* idea what the endgame is.        So the cautious in me wants to invest in homes, or triple-net, make a SAFE 5%.......but I also keep wanting to gamble on this one.     Any thoughts? 

 @Mel Park - Most developers would tie up the property for several months. I would try to do the same and see if you can attract a national tenant. If you put a ridiculous amount of earnest money ($100k) down you may be able to get it done. Obviously the earnest money doesn't go hard until the very end. If that doesn't pan out, I would advise against buying it and sitting on it. John Mcnellis wrote a great CRE book and this he has been a developer his entire career. He strongly advises against buying land and sitting on it. You also have to wonder, if this is a great piece of land, why is it still on the market? Price?

Mom and pop tenants are awesome.  You rarely have to give them a TI allowance and they will improve your space on their dime.  I would prefer established businesses vs. startups.  Even though I have a personal guarantee in my leases, I have an unwritten rule:  If you need to vacate your space, we will both try to find a replacement tenant and you will have to pay rent until we do so.  I'm note going to sue someone who just went out of business.  Much different than a corporate guarantee.  If you treat them well, they will be great long term tenants.  

@Ash Patel . Situation on this piece:

*I got on it, about 34 days on market. I offered $975k and thought it was a done deal....then a local medical practice offered $950k - seller picked THEM - because they knew that medial practice for 30 years, it was a local fixture, etc. 60 days later - that buyer terminated because they were counting on the neighbor (hospice) to share the traffic-light --- and they didn't do it. So it came back to me, I said 'yes' but give me the same $950k - - I signed the LOI but before the other side signed - a golf cart company offered $1 million - with only 60 days due-diligence. At that point - I just wanted my shot at the property and I figured, enough trying to be straight up - tie up the seller for due diligence and terminate - just like previous people did. So I signed LOI at $1mm and have 45 days left on diligence. Bank/SBA loan is TOUGH to get for the business I'd have wanted to start there so I'd have to pay cash for the building and land and then put working capital into my company and frankly, I don't want all that money vested in one place. SO---I don't think 45 days is enough to find a national tenant, let them say yes or no, etc. I am willing to spend. few bucks on an attorney and civil engineer to give me their "best guess" to tell me that a strip mall, a Taco Bell, etc - would eventually be given permits there. So, the property hasn't been on market that long -the first buyer tied it up for awhile - now I;m doing the same. I agree it's a dumb idea to sit on property, especially one of this magnitude ($1 million in non-productive cash is HUGE for me). Between demolishing current buildings, and holding costs.....I figure, after 18 months, I'd be into this land for $1.2 million.

If its not wise to land-bank - (which I agree its not), then I should get out of this and move on. BUT....I can't help but think that between all the established, and upcoming QSRs, and/or MOM and POPs....... given time, this could be a nice profitable venture but I don't know where to begin

There is wealth creation, wealth stabilization, wealth preservation phases.

Some buyers are focused on cash flow others more for SAFETY.

I can have conversations with 2 different investors worth 4 million. One makes 200k a year and saved and saved and owned house or apartments and had big gains create their net worth. They want to go from active to passive investing. They are sensitive to putting down 1 million on something and are hyper focused on cash flow maximization.

Conversely I can have a doctor worth 4 million in prime earning years making 1.2 to 1.5 million a year or more. They want more safety, more depreciation, and yield tends to be further down on the list. It's a consideration but not typically number one.

I have closed 5 Walgreens deals this year and 30 year amortization on all of them. Now that is NOT 20% down that is more 30 to 35% down. You move up into that kind of LTV lenders usually like 15 to 20 year amortizations if you can find one to do it because their first position to value of the property is really high so they want accelerated paydown schedule on the mortgage.

As far as cap rate lots of Chick Fil A are 4 caps but usually ground lease where absolute is 40 a foot in the market and they are paying 20. So if you hold for 10 to 20 year eventually close to a 6 cap or if they leave then release the building (typically get building for free if tenant does not renew the option) and convert to absolute NNN at much higher rates.

There is long term value add and short term value add NNN. I am buying lots of properties right now either with my own cash or syndicate the rest as a sponsor. I do not find value add properties for investors to buy NNN. It's not worth my time. I might would make 20k on commission whereas if I syndicate and my investors and I split upside 50/50 I can make 500k or more. I do broker deals where my clients are buying stabilized NNN to hold with credit tenants and long term leases as I can make 60k to 200k a pop at a time. I get to keep it all as I own the company whereas other broker with split have to do 6 to 10 deals to my 1 deal to make the same money.

I already got some amazing deals this year like grand slam type deals and more in the works. I am going to accelerate buying a ton over the next 24 months. I have an in with servicer at a very large bank getting properties that have went through the workout process. By the time it gets to them they just want it gone and off the books and I have the cash ready to go.     

@Mel Park - For me, its hard to park money in land unless there is a solid plan.  I would ask the seller if you can market the land for 3-4 months with a preset purchase price.  Essentially an option on the land, at the end of that period, you either purchase the property or walk away.  Let them know what your plan is and how you will bring a lot of attention to their parcel.  Its a long shot but worth the ask.  

I started out 10 years ago purchasing $200k commercial buildings and have moved up to $5m strips.  I have learned a few things the hard way:

Go bigger faster
Managing a $5m property often takes the same effort as managing a $500k property
Build a team to exponentiate growth

Best of luck brother!