Analyzing a NNN lease purchase with 3 years remaining

[Naresh Mistry]

Has anyone had experience of purchasing NNN lease with a few years remaining with multiple renewal options and somehow getting agreement on securing the renewal or redrafting the lease as part of the due diligence period? I am looking at Walgreens with 3 years remaining on base term with a 8+ Cap rate. If this were feasible, it begs the question why a seller would not just do this before putting it on the market? Appreciate feedback from anyone that has had first hand experience with this.

[Joel Owens]

Hi Naresh,

All I do is NNN/ Retail and then apartments.

You say 8+ cap rate. Is it 8.1, 8.2, 8.7 ?? Huge difference on income evaluation and cash flow model.

An 8 cap with 3 years left isn't very good. Usually we try to hit a 9 cap. There is also a difference if you plan to finance part of the transaction, assume the loan in place with a capital contribution ( down payment ) , or pay all cash. If you are doing a 1031 that also needs to factor in.

Also at play is if this is a Ground lease, NN property ( where landlord is responsible for roof, structure, utilities lines or parking lot) have to read the lease to see, or NNN ( no landlord responsibilities at all) .

If this is down payment with new loan most lenders will only double the primary lease term so if 3 years they will go out 6 on amort. Much better loan options for 8 to 10 years left on primary term lease. The down payment would be huge needed on a loan with 3 years only left. The lender wants such a balance that if the place goes dark and doesn't renew the option they can get all their capital back owed on the loan.

Walgreens has a re-up rate in about the 90 percentile for their stores. Loans on a ten year property term left are about 20 year amort. at 4.75% currently.

Walgreens typically WILL NOT re-up in advance. Think about it as the tenant has ZERO motivation to re-negotiate any part of their lease. They do not care that the seller wants to move on to something else. Anymore ? just ask.