Triple Net Deal - worth pursuing ?

[Frank Paul]

Hi- I have come across a deal and wanted to get feedback on if I should pursue it. I have had interest in NN and NNN deals given the predictable cash flow and the passive nature of the investment. The deal had some risk to it however. It's a national tenant in a small but solid market, located as an Outparcel to a Walmart Supercenter. This tenant has been there since since 2003, and the lease only has 4 years left on it. The broker tells me the location is doing well. The current owner did have to Lower the rent by 25% on the last option. It's on the market for a 8% cap but I believe a deal at 8.5-9% is possible. My strategy would be to buy expecting that the tenant will renew (given the tenant's low closure rates, and the fact that is has already received a 25% rent discount, making it likely a profitable store), collect the rent for 3-5 year, sign a new lease in year 4, and then either sell (at what should be a higher cap rate given a new lease), or hold for cash flow. If the tenant does not sign a new lease, I believe the location is strong enough to attract new tenants. The location is small however in a town of 6k people, but having Walmart as an anchor would seem to be a nice advantage.

Has anyone been involved in a NN or NNN deal with a short lease life left? What's the likelihood that this tenant will sign a new lease and how can I get comfort here? What the right cap rate for such a deal? If the tenant does renew what would this lease look like (a 5 year deal, 10 year?), and what would an appropriate cap rate be then? Also, very importantly, how is financing for this type of deal? I would be looking to finance this purchase, 30% LTV or lower.

Any insight greatly appreciated !