Buying Long Term NNN Leases

[Justin S.]

Hey everyone. I currently own a lot of single family homes, a couple apartment buildings, and one commercial strip mall. I really like the commercial side, so I have been trying to find more of these kinds of deals. This is not a flip, fix, or anything that I'm used to. Simply buying a building that's already leased to a tenant.

It's a standalone restaurant building that has been in place for five years. It is in a great location, in a Wal-Mart parking lot in a big town. The building, parking lot, area, is by far one of the best areas in this town.

The restaurant is a large national chain, and the franchisee owns nearly 100 of these restaurants. They are very profitable, and have been in business for 40 years. The purchase price of the building is 1.33 million, and the NNN lease amount is $105,000, making this property approximately a 7.88 CAP. The current lease goes for 10 more years including 1% raises every year, and there are 5 additional lease options on the property all at 1% per year.

This kind of deal is very attractive to me because it seems very consistent. The perks of NNN are nice, as that is what my current commercial property is right now.

Has anyone worked on these kinds of properties? The cash on cash return seems good, and the mortgage pay down is very nice as well. If I did not take income from this property, it could be paid off in 13 - 14 years.

I would love to know everyone's opinions. Thanks!

[Joel Owens]

Hi Justin,

I am commercial principal broker as well as a investor myself and my areas of specialty are NNN and multifamily. So this question is right up my alley.

1% rent bump in the primary term every year is weak and not good. The cap rate is okay given only 10 years left on the primary lease. The lender is going to want the debt service to zero out at the end of the primary term. The reason is restaurants are higher risk in the NNN space and go darker faster and have a shorter life cycle than pharmacies, medical, etc.

Doesn't matter if the franchisee owns 100 restaurants. It matters (how many locations) are guaranteeing this lease and also if the franchisee is giving a personal guarantee that flows through the corp. Many layers have to be considered when evaluating this type of property.

Most lenders want a DSCR of 1.25. With the short term of the lease left you are looking at more than 25% down especially at the 7.88% cap.

The price point you mention sounds like a fast food restaurant as the upscale restaurants usually have price tags in the 1.8 to 3 million range. Those buildings are larger and sit on more land than fast food. The increases should be at least 1.5% a year to 2% in the primary. 1% is rare and usually only when the parent corporate company is backing the property.

Rather than me going into too much detail as I could go on forever just ask your questions.