What do I need to be aware of? National cable company lease expires in 43 months.

Question

I am looking at a commercial building that is for sale. It has been leased for the last +20 years by the same cable company and they have 43 months remaining on the exiting lease. It is a NNN lease and currently pencils at about a 10% cap rate. The building has a small office, but is used for storing materials and service vehicles within the fenced lot. It seems like this location would continue to serve its current purpose and tenant for the foreseeable future. The seller states that he recently spent almost $50k to upgrade the interior in the last year. I have not received the lease or any other information yet. This would be my first commercial purchase.

Tell me what I don't know, what questions I should be asking, and what to look out for. I appreciate any insight or advice.

Tell me what I don't know, what questions I should be asking, and what to look out for.  I appreciate any insight or advice.

Ashish Acharya · Answer

Adam, the 10% cap rate definitely gets your attention, but with only 43 months left on the lease, I’d treat this as a lease-renewal and real estate-value decision, not just a cap-rate deal.

The first thing I’d want is the full lease and every amendment. Check the renewal options, rent increases, who actually pays for the roof, structure, parking lot, HVAC, insurance, and taxes, and whether there are any termination or relocation rights. I’d also ask for an estoppel directly from the tenant confirming the rent, security deposit, lease dates, and that there are no disputes or side agreements.

The bigger risk is what happens if they leave. Find out what the building would rent for to another user, how long it may sit vacant, and what it would cost to convert it for someone else. A location that works perfectly for a cable company’s vehicles and storage may be harder to lease than a typical warehouse. I’d also verify zoning, environmental history, roof and pavement condition, and whether that recent $50,000 upgrade was paid for by the tenant or landlord.

From the tax side, separate the land, building, and shorter-lived components before assuming what the deductions will look like. Commercial buildings are generally depreciated over a much longer period, although a properly completed cost-segregation study may identify qualifying components with shorter recovery periods.

I wouldn’t walk away automatically, but I’d price it based on the downside if the tenant does not renew, not only the current 10% cap rate.

Happy to connect!

G. Brian Davis · Answer

Hey @Adam Feick a 10% cap with a long term tenant definitely gets my attention, but I'd spend as much time underwriting the lease as the building. I'd want to know whether there are renewal options, who is responsible for roof, structure, and parking under the NNN lease, and what happens if the tenant leaves in 43 months. Also ask whether today's rent is at, above, or below market. A great tenant can make a deal, but you also want to know what your exit strategy looks like if they don't renew.

Jimmy Lieu · Answer

Welcome to BP! A long-term tenant with a NNN lease can make for a great first commercial deal, but I'd spend most of my time understanding the lease rather than the building itself. I'd want to know if there are renewal options, what the rent increases look like, who is responsible for the roof, structure, and parking lot, and whether there are any landlord obligations that survive the NNN language. I'd also ask for the tenant's payment history and confirm whether the lease has ever been amended. Since there are only 43 months left, I'd think about what happens if the tenant leaves. Is the property easy to release, or is it so specialized that finding another tenant would be difficult? I'd also verify that the current rent is at or near market, because a 10% cap rate can look great until you realize the rent is above market and unlikely to continue. I'd also ask why the seller invested $50k into the property right before selling and whether those improvements were requested by the tenant or just general upgrades. Finally, make sure you understand the local market for similar industrial or flex buildings so you have a realistic exit plan if the tenant doesn't renew.

Adam Feick · Answer

@Michael K Gallagher I pursued this a little further, but this was a secondary property that I was pursuing. Meaning I would have been more serious about this one if a multifamily property, that is in the same market, would have fallen into place. This was not in the Marysville or Columbus MSA, but a more rural Ohio town.

Thank you to everyone's advice, it was very insightful and helped me ask good questions to the seller.

Michael K Gallagher · Answer

@Adam Feick any update on this?  you pull the trigger?  was the deal in marysville?  curious what the renewal options where if any for the cable company and when they had to exercise.

Michael Eskenasy · Answer

The 10% cap rate would actually make me slow down here rather than get more excited.

With only 43 months left on the lease, I wouldn’t value this primarily as a leased investment. I’d break it into two pieces:

• What are the remaining 43 months of contractual cash flow actually worth?
• What is the building worth on month 44 if the cable company hands you the keys?

That second number is probably the deal.

I’d want the lease before doing almost anything else. Not a rent summary—the actual executed lease, amendments, extensions, guarantees, assignment language, renewal options, termination rights, maintenance obligations, insurance requirements, casualty language, and exactly what “NNN” means in this particular document.

Then I’d underwrite the building completely vacant.

What would it rent for to another tenant?

How long would that realistically take?

What concessions, commissions and tenant improvements would be required?

Is this configuration useful to a broad pool of industrial/service users, or is it unusually specific to this tenant?

Does zoning allow the obvious replacement uses?

What is the land worth independently of the current improvements?

And I would put very little weight on the seller spending $50k on the interior unless that work increases the value to the next tenant. Money spent is not automatically value created.

The other thing I’d investigate is why the market is giving you a 10% cap on a national-credit NNN tenant.

If comparable properties with similar tenants and lease duration trade substantially tighter, the market is probably pricing a problem you haven’t found yet. The short lease term itself may be the problem.

I’d also want to know the tenant’s history at this exact location. Twenty years is encouraging, but it doesn’t guarantee another five. Cable infrastructure and field-service operations can consolidate, relocate or change even when the parent company is perfectly healthy.

So my downside underwriting would probably look something like:

Current lease income
→ tenant leaves in 43 months
→ 9–18 months vacancy
→ leasing commission
→ tenant improvements / building modifications
→ carrying costs during vacancy
→ replacement rent at actual market rate

If the deal still produces an acceptable return under that scenario, then the existing lease becomes upside instead of something you’re depending on.

That’s where I’d start before worrying too much about the advertised cap rate.

Dominic Mazzarella · Answer

I’d underwrite this as two separate deals.

First, what does it look like if the cable company stays? That means reviewing the lease, renewal options, rent bumps, landlord obligations, roof/structure/parking/HVAC responsibility, payment history, and getting an estoppel so you know the tenant confirms the same facts the seller is telling you.

Second, what does it look like if they leave in 43 months? That is probably the more important question. Is the property still useful to another tenant, or is it very specific to this user? How long would it likely sit vacant? What rent would a replacement tenant actually pay? What TI, leasing commissions, cleanup, fencing, paving, or building work would be needed to re-lease it?

A 10% cap with a long-term tenant sounds attractive, but with only 43 months left, the value is really a mix of the lease income plus the underlying real estate. I’d want to know whether I still like the property if the current tenant is gone. If the answer is no, I’d be very careful about paying a price based mainly on the current cap rate.

Keondre Cohen · Answer

Before treating a 10% cap as durable, I’d review the full NNN lease, renewal and termination language, rent escalations, assignment rights, roof/HVAC responsibilities, environmental history, and what the site would be worth without this tenant. For a first commercial purchase, the tenant-credit and re-leasing downside deserve as much attention as the current income.

Vijay Friedman · Answer

@Adam FeickFor a property like this, I'd spend as much time reviewing the lease as the building itself. I'd want to understand the renewal options, rent escalations, maintenance responsibilities, assignment rights, and what happens if the tenant doesn't renew in 43 months. A strong tenant is a big plus, but the lease details will ultimately drive much of the property's long-term value.

Ronald Rohde · Answer

is this in columbus? Seems like a no brainer, but what is market rent? You need to know in case they vacate.

What do I need to be aware of? National cable company lease expires in 43 months.

What do I need to be aware of? National cable company lease expires in 43 months.

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