Best way to determine the value on a NNN restaurant?

[Orlando Centeno]

I am looking a restaurant deal that the seller would like to lease option.

He has told me that his NOI is approx 900K and he also says the restaurant grosses approx 1mil. With a sale price of 1.4mil.

What do i do with these numbers to get an estimate of the value of this deal?

We came to some terms, but nothing on paper yet;

Sale price- 1.4mil

Rent/lease- 15k/mo

Option price- 100k

Term- 2yr with a possible 2yr extension.

Would you consider this a good deal?

[Joel Owens]

I know NNN and I know restaurants very well having owned one and been in that business for over a decade before getting into real estate.

What he is saying and what you are saying do not add up at all.

A NNN lease is where the tenant pays property taxes, insurance, and everything else under the sun. The landlord doesn't pay anything.

The value of the restaurant for a NNN lease has to do with if the restaurant is corporate or not??

Investment grade BBB- or better or investment grade only??

For instance let's take Taco Bell. Say there are 4,000 nationwide.

Different levels of a guarantee in the lease from best to worst.

Taco Bell corporate all restaurants (best)

Taco Bell subsidiary (for instance the 200 in Georgia are only guaranteeing the lease)

Taco Bell large franchise owner in the business and has 150 restaurants all guaranteeing the lease.

Taco Bell franchise owner that splits out groups of the restaurants into LLC's and guarantees the lease.

Worst and most risk is a new Taco Bell franchisee that has one location or two or an existing franchisee that is guaranteeing just that one location.

These are the different levels of lease risk for NNN, and you also have NN, and the ground leases.

Now a mom and pop restaurant it's the real estate or the business or both that are for sale. There is no way 900k NOI. I look at restaurants weekly to buy for myself. As a business only with no real estate a seller looks for 3 times net earnings meaning if the place makes 100k profit after expenses the seller asks for 300k purchase price. As a buyer I am trying to buy at 1.5 to 2 times net earnings and put 25% to 50% down and have the seller float the rest as a loan with a 5 year balloon on favorable terms to me. I am not looking for businesses that make 40k or 50k a year profit because I find them to be owner operator working 4 to 5 days a week. If I can't do that I have to put a manager in place and POOF there goes the 40k or so profit they were showing. So I only like businesses where after they have a manager and assistant managers in place and it is pulling in money and I can be hands off.

You might want to take a look at www.bizbuysell.com to see how businesses are valued or sold. A person bringing a million dollars of profit isn't going to sell it to you for nothing down. Not even close to becoming a reality.