1031 exChange now for a NNN property. What should I be looking 4?

[Justin Lau]

Hello, I am in the middle of a sale and anticipating a 1031 exchange for a NNN. I'm looking at my options. I'm looking primarily in the northeast (MA). I'm seeing 4.5 to 6% caps for 1.5 to 2.3 million dollar properties. Interested in getting one of these but seeing only 5 years left on leases with options but hard to anticipate tenant will resign. Looking at banks, fast food. Not so sure about dollar general but they seem to have longer leases. looking to put down more equity and new mortage for a longer lease NNN but lower cap (10-15 years) to have stable income. Franchise vs Corporate? How's to plan for stagflation looking economy. I plan to also diversify my portfolio with residential condos outside the greater boston area. Thank You!

[Joel Owens]

I can't give absolutes on loans. Generally there are still 70% LTV loans for properties with investment grade credit tenants and 10 years or more remaining on primary term lease with population of at least 50k in a 5 mile radius and average income of 50k to 60k plus. The loans typically are mid 3% type range with 30 year amortization fixed for 10 years.

These loans the NNN lenders want U.S. citizens. Sometimes they will do green cards etc. but want more down than the 30%. Additionally say someone is retired with little ongoing income except for properties but great net worth. In those cases with my clients I have seen lenders require 35% down even with investment grade credit tenant.

They still qualify borrowers with investment grade tenants it's just maybe 80% on tenant and 20% on borrower. That is because tenant credit is so strong the chance of going dark in primary lease term is very small. When you start moving down lease guarantee strength and size of company the risk profile changes from the lender. They put maybe 50% on tenant and 50% on borrower for medium size companies and 80% on borrower and 20% on tenant for the smaller companies or one off mom and pop types. With tenant strength being less odds are tenant goes dark in primary lease term and they want borrower to have high ongoing income to (float the note) while property gets repositioned for lease up (strong warm belt state markets can be under 6 months for 10k sq ft and below type properties and up to 1 year. Cold belt states and small markets could be years just depends on the new lease up rate and would that work for smaller tenants and their business model. This is exactly why I like stronger markets. If it's okay tenant with higher rents close to market in a small area you are just asking for a bad outcome when they go dark.

If you are Canadian then there are some banks here from Canada with location in U.S. that might give foreigner loans. Might be more than 30% down whereas other NNN lenders would just pass. The other part is the DSCR ( debt service coverage ratio ). You could have strong location, tenant, lease term but cap rate it is selling at and interest rate available dictate 35% down to 40% down needed to meet lender coverage requirements.

That 3 million and below price point is so tough because a huge buyer pool looking to sell of multifamily or other assets and go passive. If someone's net worth is say 1 million and then jumps to 5 million a lot of them take the foot off the gas and just coast with investments to outpace inflation. They would rather have that time to do as they wish then obligations in exchange for active yield versus passive yield. I am talking about regular individual investors and not the syndicators and fund typed burning the midnight oil constantly hunting for the next deal.

In that range you are mentioning expect to get about a 5% cash on cash year 1 off the down payment and with mortgage paydown about 9 to 10% overall return. We are in hyperinflationary times. Right now it is because of logistics and corona affect. In a few years that likely settles down and prices drop from the peaking now for costs of good but not back down to what it was pre-corona as regular economic cycle inflation sets in for a longer term. So if people want to place money trying to match hyper inflation year for year right now then stabilized single tenant NNN is not the investment for them. If they want 5 to 6% rent growth for a blip in time they will need more multifamily, residential rentals, storage, hotels etc. If they want that yield they will have to work for it unless they invest into a syndicate type deal.

1031 investors like the poster would have to looking more into DST's if they qualify to invest and yield again not going to be super high. There are some owners of dark buildings for retail trying to position new lease with tenant for a minimum rent amount or CPI rate whichever is higher to benefit from inflation. When inflation is low you do not want CPI as that tends to be less than getting 2% annual rental increases. Tenants are smart cookies and know inflation like this is for a few years most likely and not the full primary lease term so will not want to sign that whole time to pay high rates. So it's a dance and a negotiation getting something landlord is happy about and tenant while not happy will accept and still sign the lease. There is part art and strategic science to it. I would rather let a property sit vacant for months and months to get the right lease for me that gives me the lease value and cash flow while I own it and when I exit.

I have seen some doctors with a local bank get 75% to 80% LTV for STNL but they are super strong like tens of millions net worth and make millions per year and personally guarantee everything and have to keep all accounts at that bank for business. Even then rate might be slightly higher for loan and amortization 20 to 25 instead of 30 year.

To get high return in NNN usually people invest with me on my turn arounds. Another option is they become a developer themselves but that takes a ton of work and again working for active yield versus passive.

No legal advice of course. Hope it helps.