What kind of financing are you seeing for a NNN mom and pop

[John McKee]

Just spoke with two banks about a NNN mom and pop deli. It's in a class A urban location with 5 years left on lease. One bank said 65% Ltv and the other 55%. Too much to put down! What are you guys seeing?

[Joel Owens]

The LTV for first position can go up as high as 70% for credit grade investment tenants with 10 plus years primary lease term.

Mom and pop tenant is the HIGHEST risk in a lender eyes.

Best credit:

1. Investment grade credit with parent company guarantee on the lease.
2. Large subsidiary guarantee of investment grade company
3. Large national private company with strong financials but not credit rated
4. Large franchisee 50 plus units in the system for over a decade
5. Small franchisee with 2 to 20 stores plus
6. Independent mom and pop single business operator 

The lower you go in credit the more down typically and shorter the amortization period along with borrower having to strongly qualify to carry the property in case it goes dark. Most lenders will not touch anything below 7 years remaining on primary lease term. I know some for national tenant that might consider 6 left with 35 to 40% down.

Lenders want accelerated loan paydown so if tenant goes dark not renewing the option period the mortgage remaining is at or below the dark value of land and building with no tenant in it. Most 5 year remaining terms are all cash purchases because not enough time left for the pay down for lender to get comfortable hence your large amount required down. This is for single tenant. Multi-tenant the properties are underwritten differently because common to see 5 to 10 years leases for primary term and not all cash flow depending on one tenant to service the debt.

Buyers often get sucked in with higher caps in good locations with weaker tenant credit and then are shocked and amazed...lol. when they can't get investment grade tenant financing (want the cake and eat it too). It doesn't work that way folks. Banks do hundreds of loans a year sometimes and are going to protect their position.

I have seen in RARE instances where a buyer gets in with 20% down with a lender but high net worth doctor worth tens of millions buying 4 million property and cross collateralizing everything with the bank. Lenders in that case sometimes make exceptions as they have personal relationship with the doctor and willing to do a loan at higher LTV. Even then it's not usually 30 year amortization but 20 to 25 year as bank wants faster paydown. This can make a 5% cash on cash with a 30 amort down to 2% on a 20 year amort. Now you can have faster equity build up with loan paydown but cannot access it like the free cash flow buyer is getting each month.

When you find something 5 years left and can't pay cash might want to approach seller for owner financing with better terms than bank might give and then once you negotiate extension with the tenant to 10 or 15 years primary then refinance out with regular lender in future years.

A mom and pop tenant like that I would want in place rent 40 to 60% below market for that space and be getting a higher cap rate. This way you likely win if they stay and pay getting higher returns but if they go out and you release it to better quality tenant at higher rents you still should (nothing guaranteed) have some profit upside after paying for more (tenant improvements, agent leasing commissions, rent credits, attorneys fees).