Is a 10% Cap Rate High for a Triple Net (NNN) Property with Sale-Leaseback?

[Tzvi Friedman]

Hello Bigger Pockets Community,

I recently came across a triple net (NNN) warehouse/flex property that I'm considering. It is a single-tenant property with 4.8 years remaining on the lease, which includes 3% annual rent increases. The deal also involves a sale-leaseback condition.

I'm trying to understand if a 10% cap rate is considered high for this type of property. What factors should I consider to determine if this is a good investment?

Any insights or advice would be greatly appreciated!

Thank you,
Tzvi

[Jameson Sullivan]

Cap rate is not the only metric you should consider. Generally a higher cap rate indicates a lower credit tenant which indicates a higher risk to the property owner. a 10 cap is a great deal until the tenant goes out of business and leaves you with a Negative 10 cap as you are on the hook for all of the expenses associated with ownership.

You should consider creditworthiness of the tenant first and foremost. 

Few other things to consider: is this a triple net lease or is the 10% cap offered based on the Tenant's last years expenses (at least the ones they are showing). Sale-Leasebacks have inherent challenges because the tenant/seller is incentivized to market the property in such a way they get they price they want, but if the entity who signs the lease is weak and there's no personal guarantor, they could stop paying rent the day after you close leaving you high and dry with very little legal remedy.

I don't know your market, but in my eyes, any 10% cap offering is either an extremely weak tenant OR a tenant that has very little term remaining with no plans to renew.

If I were, you I would very seriously consider how much I like the real estate and what my odds would be of refilling the real estate with the same or better rent and/or a better credit tenant once this tenant goes belly up.