Best way to determine the value on a NNN restaurant?

Question

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 · Answer

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.

Orlando Centeno · Answer

The seller owns the business and the building. Its a non-chain restaurant that the seller is hands on only for a day or two a week. I have to put money down on option, 75K, but I would no to pay until i find a suitable sublease tenant/buyer and assign sublease to the seller for a 25K assignment fee. That why the option fee stated above is 100k I have yet to sit down with seller to look at the numbers myself. Going off of what he says; supposedly the restaurant makes 1.7m a year but only he only shows 1m.(guessing he pockets the rest), when I asked what his NOI was he said 900k approx. @Joel Owens what do I need exactly from him to figure out the approx value? He also pays 17k in taxes/yr, 4k in ins. / yr. and 8k/mo on existing loan.

Orlando Centeno · Answer

I thought the NOI of 900k was pretty high myself. He told me he only shows on paper the gross of 1mil. Supposedly it makes 1.7mil per year I am not personly investing anything. I negotiated a master lease option that i will assign for 25k or ill sandwhich it and sublease suboption it to another investor. But Not sure yet, depends on how good this deal is and if theres room to make more.

Account Closed · Answer

Orlando, How much are you investing in this deal upfront? Joe Gore

Wayne Brooks · Answer

Are you talking about the restaurant business, and the real estate, one, or the other? If the restaurant grosses $1M it sure as hell isn't netting $900k. Net is somewhere between $200k, and maybe $200k negative. Restaurants are a very specialized business, you need experience, and outside factors can kill them at any moment.

Jon Klaus · Answer

I'm sure there is, but the question isn't that clear to me. $900k NOI on a triple net? That might be worth $10mm. Somehow I don't think so...

Orlando Centeno · Answer

Theres got to be a better answer than this out there.

Account Closed · Answer

Orlando, Pay a commercial real estate agent to run the numbers to see what it is worth. Joe Gore