Evaluating a Triple Net lease

[Evan P Stegman]

Hello,

I have a client interested in a triple net lease for sale. I'm curious were I can find tools based on the monthly cashflow to determine the price of a specific property. The cashflow is 120k/ year and the listing Price is $2.395 million. How did the Listing agent come up with this number, my client thinks it is way too high and in order to reach that price point it would have to cashflow 180k/year. I would love a formula I could just plug and chugg the numbers, so I can offer him better properties in the future. Also is it based on cap rate in the area as well?

Thanks have a great day!

[Joel Owens]

I do STNL and MTNL but spend more time on single tenant. Single tenant 1 lease and 40 to 50 pages to read. Retail center thousands of pages. So for me to work on those I have to get paid very well for my time.

The original poster sounds like both the buyer and the agent are newer to the space. 2 million STNL is like 200k house in residential. Lots of crap tenants and area with poor financing options and occasionally a few gems show up with good tenants in good areas. Lots of those go to all cash buyers.

It's all relative to the buyers net worth.

The buyers before that make 100k a year and made some real estate house and apartment investments that made them worth a few million now want to go passive. They view putting 1 million down as a major deal on a property so they want max yield which doesn't compute with passive investments and demand in NNN. Before when interest rates were lower we could stretch LTV to 30% down instead of 35% and get close to what a buyer wanted for more yield. Those days are pretty much all but gone.

A good 2 million property is 1 in 10,000 these days and has about 12 offers in 48hrs of hitting the market. Even pre-market has multiple offers. 

There are lots of doctors, high tech executives, business owners that just want to park money and break even to outpace inflation a little. They take 5% all day long with strong tenant and long term lease. If you are worth 5 to 10 million already and make about 1 million a year income you do not need max yield with investments.

The ones that want the world at a low price I do not work with them as you waste lots of time and if one comes up the buyer better be able to pay all cash and close quick in the 2 million range even if they want to put a loan on it afterwards. Unskilled buyers often look for high cap rates and just spin wheels learning with limited years left on lease, weak tenant, poor location, price point too small they won't be able to get the debt they are seeking.

Some people get upset when I tell them the reality. They have this theory thought up in their mind of what they want and when reality shatters that into a thousand pieces they are not happy.

You can't coddle people in business. You have to give the real market expectations and returns for the product they want and see if they would like to proceed. I know within 1 minute talking to a buyer if a waste of time. This buyer mentioned above wanting max yield if you have nothing else better to do then guess could keep going to the ends of the earth for them. For me I have 3 docs wanting 5 million property each at 5 cap or 1 buyer wanting 2 million property and complaining about max yields to proceed it's easy to know which one I want to work with. As you do this over decades you get smart to what is worth your time and what are long shots or big time sucks for a small return on investment.

Good luck