NNN Property 4.10% Cap Rate- Killer Location WOULD YOU BUY IT?

Question

NNN Property in a killer location. Near Walmart, Starbucks, and chick fil a, location is buzzing with growth.....

Prime Rate at the moment is 6.25%

Cap Rate is 4.10%

Numbers are obviously in the negative... We could pay cash for it, but don't want to give up all of our funds incase another deal rises. We could pay cash, then refinance later when rates decrease

Every time we look at these NNN properties, somebody is willing to outbid us an overpay for the property...

Numbers are as follows

• 11+ years remaining on this corporate guaranteed ground lease with 4 (5-year) options to extend, demonstrating their long-term commitment to the site
• The lease features a 10% rental increases at the beginning of each option period, growing NOI and hedging against inflation

75,036 NOI

4.10 CAP

1,830,000 purchase price

any thoughts or feedback would be so much appreciated.

James Storey · Answer

In order to compete on this one, it would need to be all cash in my opinion. I work in this space and can say that most buyers under $2M are paying all cash and most of the time it is either 1031 exchange funds or someone who is restructuring their large portfolios into an alternative investment like real estate.

The only way I would buy this one is if the location was absolutely non replaceable to the point that re-tenanting the building if needed would be a guarantee. Also, the other risk as John had mentioned above is that CAP rates are more than likely on the rise at a macro level however, that doesn't mean all property will see a huge expansion in CAP rates as some spaces just have so much demand that the space market outweighs the capital markets.

Other than a 10% increase at options, are there anymore rental increases during the remainder of the term? If not, I would say waiting for a 10% increase in 11 years and 5 years after would make it were realizing a 6% proforma CAP would take 31 years without any other increases. To me that is a long time to realize a cash flow that is equivalent to some longer-term bonds that you will be able to buy at the beginning of 2023.

The type of building has a lot to do with the analysis also as well as the underlying local economy. The STNL properties are driven mostly by the underlying market, location, visibility, and building use. I never advise to buy a property because of a specific tenant but rather the underlying asset and the economy in which it resides. After all, it is a real estate investment not a tenant investment. If we were investing in tenants, we would just buy their corporate bonds.

Anyways, these are just my thoughts. Feel free to reach out if you have any other questions or ideas.

James Storey, CCIM

Joel Owens · Answer

If cap rate was 4 and ground lease where it's really 8 cap NNN on current market rents for upside and had some additional land to develop than maybe.

It's really all about life cycle.

Someone worth 50 or 100 million just wants safety. If they are in their 60's or 70's in age they want to enjoy the golden years and do estate planning for the next generations. Most do not want to still push the needle for max yield. They want safety and peace of mind with investment grade tenants and longer term lease.

I run into people willing to sell dark building to me for a great price. Could they make money stabilizing themselves? Sure they could but they want time more than anything. You get older the extra million doesn't carry the same weight as an extra year of quality life left to live. I talk to the people first on the phone and then solve for what they are trying to achieve with their life. The money is just the mechanism to get there. Now if you are a syndicator or group where a certain return is desired to invest that is a different conversation then an individuals life goals.

John McKee · Answer

Dont buy it.  The reason why is that you are still in growth mode, so burying all your cash in one property doesnt make sense. Also there are plenty of Good locations selling at a 4% cap. And last but not least cap rates are on the move upward as we speak.  Be patient or maybe look for a value add deal instead.

Mark H. Porter · Answer

I wouldn’t.  if you already have a great relationship with your bank you’ll be paying at least 7% interest, 25 year amortized, 75% LTV.  They’ll also be pushing HARD for the 1.25 DSCR which will be impossible with your numbers without a very low LTV.

Alicia W. · Answer

You need to compare levered versus non-levered DCF and determine whether the IRR is 1.) greater than 0, and 2.) greater than your RRR for the investment.

Peter Xiao · Answer

Yeah this is a rough deal. It honestly sounds like it is for that wealthy lawyer or doctor who might be buying their first piece of retail property.

Ronald Rohde · Answer

Did this sell?

Neil Cronkrite · Answer

Our syndication group uses debt, and it's likely a 4% entry cap can't add enough value in 5 years to provide decent risk-adjusted returns. As prior posters mentioned, this might work for an all-cash buyer. We like retail and office with a bit of hair on it (low WALT, vacancy, escrow holdback, seller carry) that a 1031 or cash buyer wouldn't want to pursue, which gives us great returns to passive investors.

Ronald Rohde · Answer

Its better than a 10 year (3.75%), thats your benchmark. More risk vs. guaranteed income.

NNN Property 4.10% Cap Rate- Killer Location WOULD YOU BUY IT?

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