All Forum Posts by: Joel Owens

I didn't read all of the replies.

7.5% interest rate is insane.

For credit grade tenant DG the going rate is about 5.75%. NOW you mentioned buying a 1 million property so after down payment your loan is teeny tiny in likely a small town where national NNN lenders PASS on a property. So the local lenders drill the buyers as they know nobody wants the loan.

Some 1031 buyers will eat the 5.75 to 6% rate and then refi when rates hopefully fall in a few years to avoid millions in tax penalties.

A common mistake I see is buyers looking at cheap price as less risky to them. Most DG's are NNN. I would not touch NN property unless upgraded construction, strong location for dirt value, and within 5 years of being constructed and has transferable roof warranty to buyer. Those DG's tend to be 2 million or so in price and sometimes 3 million.

If you have limited funds I will say what I told a doctor recently who had 300k to put down and not 1031 but made great money. I told them WAIT and build up more money so we can buy in a strong suburban area. The low price point DG's are often middle of nowhere on septic systems with sheet metal sides and back construction that almost no tenant wants if DG vacates in the future.

The only time I look at DG with that construction is if really old building in strong suburban core area I get with few years left on lease for 10 cap all cash and then can tear it down if they leave and have upside in redeveloping the dirt.

Hope it helps I have been in NNN about 20 years as a specialist.

Good luck

It depends on INLINE retail center space versus FREE STANDING and if property is in urban core, strong suburban, small suburban, or rural area. 

Reverse engineer it. The property looking to lease up is it a planned long term hold or a short exit and 1031 to something else timeline?

Also I have found from personal experience owning vacant NNN properties to turn around that most attorneys do not know what the buyer demands in the market on an exit. There are many provisions negotiating the lease that might seem tiny or trivial at the time so to get a lease done the owner caves to the tenant but pays dearly later on when they eventually sell it. You have to wait for the right tenant and the right lease. The wrong tenant with the right lease can go dark and you are out the leasing commissions to just have to lease up again.

I have found good retail leasing brokers in major metros. If property is more small suburban fringes I have my in house director reach out to potential tenants.

Friend of mine that has his securities 7 license but it's been awhile so you would need to check if he still does that or not.

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The lenders want to see investment grade credit. Some tend to be large hospital off shoots or get bought out by Walgreens. Those can be a win when you get a high cap rate and later get Walgreens credit backing the lease for some cap rate compression on the exit.

Some lenders will consider large private groups that have strong financials. If it's a single doc office or a local brand with maybe 8 to 10 locations most national NNN lenders pass. Those tend to sell all cash or a local lender to do the deal but at not so great terms.

Hardest thing with medical buildings is to get the HELP. Not enough doctors to go around as many are retiring. The new docs out of school want to party some and work minimal hours and enjoy life after many years of schooling. They do not want really long hours with serious long term commitments out of the gate ( at least most do not ). So finding workers is the key to a locations success often. I have lots of doctors that are clients and buy NNN to own directly with me and we talk shop about the medical industry often.

It's WHATEVER is in the lease. Don't assume a standard for anything. What should be in there and what is are two separate realities. As I say ALWAYS read the lease and any amendments while hopefully in LOI stage before you start spending money negotiating the PSA.

There aren't.

Depends on credit of tenant, strength of borrower, primary years guaranteed left on the lease, strength of location for median income, number of houses, population levels in 5 mile radius, area political philosophies, level of crime.

About 20 years in the NNN space as a principal broker and investor.

Right now about the best rate is mid 5's with 25 year amortization for investment grade credit tenant and strong location with about 40% down.

Lots of my clients are waiting for 1031 money volume to reduce over next few months and interest rates to stabilize. That can make sub 4 million price range go from current 50 basis point spread between debt and cap rate average to 100 to 150 spread which is what buyers like to do deals.

Sure there are higher cap rates for junk tenants that are 6.5 cap but interest rate not 5.5 it's 6.3. The name of the game is the spread. 1031 buyers looking at millions in tax penalties for failed exchanges can put 50% down for 3 to 4% cash on cash return before mortgage paydown and then get little to no-prepay penalty on the loan and refi in a few years when rates drop some. By then likely rental increases and lower interest rate increase the 50 basis point spread to 100 to 150 and they defer the taxes.

Cash buyer or buyer some down cash using debt non-1031 doesn't like 3% cash on cash return when bank paying 4.5 to 5% to stay liquid month to month for return. They would rather wait for higher cap rate to deploy the cash. I think around August it will get crazy busy as fed will be scared to raise rates anymore and seller will have ( marked to market ) selling for higher cap rates and the sellers testing the waters hoping for a 1031 buyer to overpay will be long gone.

Step 1. Make sure you have an absolute NNN lease. Do not assume it is so. Often what is put in for sale flyers is not correct or the owner doesn't even know what is in the lease.

Step 2. See if you qualify for real estate professional status as a broker/agent or putting in and logging hours per year in real estate activity (since NNN single tenant is mostly passive not going to qualify generally that way). Some people own other real estate that is active hours for investment to try and qualify.

Step 3. Analyze current income from job or business and see what deductions you might need in what years of today and in the future ( optimizing the tax planning and harvesting ). 

Step 4 . See what advanced cost segregation might yield in additional deductions against the properties NNN income. If not real estate professional typically you get capped on other income above about 125k annually that is not related for the NNN property.

This is a generalization and how you approach strategies varies by the individual. I have clients from 7 to 10 figure wealth that are individuals and families and what and how they make decisions varies each time. Might be some commonalities but still has many variations of difference.

Good luck. No legal advice given. 

Can't give legal advice. If it's absolute NNN leave them paying the rent. A buyout in that case usually does nothing for you unless more tenants banging down the door to lease it up right away with similar rents or higher with the same credit.

If you feel the tenant is fixing to go bankrupt as a brand then might be good to negotiate and take what you can get. You need to pay attention to sublease language and also default provisions with bankruptcy to see how the lease and tenant could be handled.

Certain items I tend to let my acquisitions director handle and other legal items my commercial real estate attorney.

Would have to see your location to see possible desirability. Remember it's not just current in place income and your cap rate on the dark space. It's what is the demand and the market doing NOW for your location. Sometimes developers get leases minted in the moment with above market rents for that building size. So that dark 7 cap could be a tenant occupied only 5% return with a new tenant if replacement rents are lower. You need to know the sales that brand was doing at that location when it shut down compared to their brand average nationally and then what the health ratio score was.

Example 100k NOI in rent for QSR you typically want to see 1 million in sales or higher (10%) at a minimum. If they are paying 100k rent and 2 million in sales would imply a 5% rent ratio to sales which is crushing it usually. Anything above 10% when you add in food and labor starts getting into the danger zone where they shut down or start asking for rent reduction help to stay afloat. Brand tenant saturation levels in the area make a difference as well. If you have an emerging market where income, population, and traffic counts growing but not as many brands their yet that can be appealing to tenants to get in and establish themselves. That way first 3 to 5 years they crush it with sales and profit before saturation kicks in from competition. Competition tends to bring reduction in average sales ticket because of coupons to maintain market share presence. I was in food for decades before getting into commercial real estate so know it well. Everyone has to eat but NOT at your restaurant! This is often lost on people with less experience in the business.

Lots of auctions right now for that product and some listing brokers in commercial specialize on those.

I buy them for cash to reposition but less about the building itself which can be sometimes converted and more about the DIRT. How big is the parcel and how much of it is usable so often times I am looking at buying the real estate a former bank was on a lot value only.