How to analyze NNN properties and determine FMV

Question

Hello,

I have some experience with small multifamily, SFR and condos, especially analyzing those deals, but I am now considering NNN lease for the ability to invest in passive out of state income. I have been receiving listing from brokers offering cap rates of 3-7% in almost all 50 states, for different lease terms and guarantors.
I am trying to analyze those deals in an efficient manner - weeding many deals or brochures early on, and understanding the out of state location well.

Because the cap rates are all over the place (based on tenant, location and lease term), I struggle to understand if a property is fairly priced, as it is not easy to come up with a "general" cap rate to apply to each NOI.

Does anyone have resources (books, podcasts, blogs) that they can share that gives pointers when analyzing NNN properties? I assume it would be easier than analyzing small multifamily, as I don't have to verify expenses or income (instead I would need to pay more attention to lease and tenant), but I found it easier to get a general "cap rate for an area" when it comes to other asset classes.

Your feedback and help is greatly appreciated, thank you!

Michael K Gallagher · Answer

There really isn't a "general caprate" for an entire area.  you'd have to break it down to some like for like comparisons to come up with a more "general caprate for a specific asset class" or something like that.

call me old fashion but if you are sifting through deals, the number 1 thing I look at is market dynamics. I'm not even considering a deal if its not in the specific market that meets my requirements for demographics and psychographic profiling.

- Then the next filter is physical property attributes with regard to its placement in the market, entrances, and exits, visibility etc.

- Then I start looking at prices and returns etc.

This is why I like to go in that order, the least of which is that it helps sift through a lot of crap quickly.

The physical asset you are going after is going to dictate much of what "fair pricing"is going to me.  Same logic applies here as it does to your previous experience, there's just simply an added layer of the income produced by the property.  But ultimately all tenants leave, all debt comes due, and you're going to need to backfill it, so who is that, what pool of tenants could you consider? is significant retrofit needed?

- Generally if you are getting triple net deals from big name brokers the deals are going to be overpriced. The CBRE's of the world are notorious for overpricing their Broker opinions of value in my experience.

- If you are looking for help/input like I said we specialize in market and site selection, so if you haven't don't that yet, we've got some data backed approaches that might be interesting to you.   its mostly focused on retail, but the inputs are infinitely adjustable for whatever asset you are going after.

Chris Mason · Answer

I'd suggest narrowing down a bit. Marketing material from commercial brokers in all 50 states, for all sorts of NNN, isn't useful, and you aren't going to really get insights until you narrow your focus a bit.

Starbuck is a nice easy thing to watch b/c they are all over and, since Americans have largely replaced their trans fat addition (McDonalds, Burger King) with a sugary caffeine addition (Starbucks), it's likely going to do well for a few decades.

A Starbucks building in a suburban nice area in California is going to go for a 5% cap rate, and in Kentucky an otherwise identical building with a NNN Starbucks tenant is at a 6% cap rate. Bam, now I can in fact somewhat speak "in general," and I can say that with a fair degree of confidence BECAUSE I've zoomed into that one thing. Don't ask me about Dutch Brothers or Burger King or Target, as soon as that is in play, my "in general" commentary is right out the window. (If curious, my residential real estate investor clients from 10 years ago [you can find my 10 year old bigger pockets dot com posts :], at the time buying up 2-4 unit properties, a lot of them are now done with the 'human' tenants and want to 1031 into something that is ACTUALLY passive, so yes Starbucks comes up, thus I watch it).

In my case I zoomed all the way into a specific brand (which then allows me to make very sweeping generalizations across an entire state -- but still not the entire country), I'm not suggesting you do that, but SOME of the variables need to be narrowed down, before you can gain any useful insights.

Chris Mason · Answer

Cheers, it's ballpark like algebra.

You can't easily solve this:

a + b + c + d + e = f

But you can easily solve this:

44 + b + 23 + 13 + 48 = 155

And, once you have solved that, you will likely be able to solve one with 2 unknowns, and work from there. But you can't just start with 6 unknowns.

Joel Owens · Answer

My clients are still buying long term stabilized single tenant NNN more 10 to 15 year type stuff.

I am buying with my syndication all cash short term lease blend and extend opportunities.

Accredited investor 200k minimum per property for LP's

Typically pay 8 pref on value add deals and split cash flow thereafter 50/50 between LP and GP.

Closed on Walgreens last month at 11 cap rate absolute NNN with 5 years primary term remaining.

Closing on another Walgreens 11.75 cap rate in December

Another corp day care under agreement almost 11 cap

Another Walgreens currently negotiating in 10's for cap rate with 80k cars per day corner.

Have offers out on others also. I am in big buy mode right now. Goal is to double the equity ( nothing guaranteed ) in 3 years or under time between equity growth and cash flow.

I stick to more strong suburban to urban core markets. I avoid tiny towns unless cap rate is very high like 16 to 18. That way I know with less equity upside upon renewal or backfilling the higher cash flow helps make up for some of that with the overall return.

Rud Sev · Answer

Thank you Michael, I love how you think. I am getting listing from brokers across the US (across states and cities), and I would love to follow your approach. I currently have to do a quick new market study to quickly filter out a market and it is tedious.

I do believe the big names brokers are overpriced. Do you recommend smaller brokers?

I've reached out regarding market and site selection to discuss further. Thank you for offering your help!

John McKee · Answer

It's a little easier to analyze NNN properties, but there are nuances and questions you need to ask.  I have a 72 point checklist  I can share with you if you PM me.  Personally I wouldn't invest in these in today's market as you can get higher rates of return elsewhere like mortgage notes that are even more passive and have no capital calls.  The biggest thing you need to analyze is how easy is it to release this space if the the tenant leaves.  Major corporation's leave all the time so be prepared!

Evan Polaski · Answer

@Rud Sev, while owning a NNN building can be easier, analyzing is certainly not.  They can vary dramatically.

As others noted, you need to narrow SOMETHING down.  Area, tenant use, tenant credit (i.e. only Moody's BBB or better guarantor credit).

There are a lot that can vary in NNN, just like any other real estate.

You have market risks: FL has another hurricane coming, CA has earthquakes and wild fires, the midwest has anemic population growth.

You have some location risk: is building on hard corner with signalized access or buried mid-block with no turn lane?  This will primarily effect tenant's sales and your ability to re-lease when tenant moves out.

You have building risk: primarily, how easy will it be to re-tenant if your tenant goes dark or leaves.  A Walgreens is not going to be as easy to replace as a Dunkin Donuts, at least without major capital spent on your part.

You have tenant quality: Is the Dunkin Donuts a corporate lease or single location, new franchisee guarantor.  Are their sales top quartile for area or bottom quartile?

Lease risk: is it truly full NNN?  Are their carve outs or caps?  Does tenant need to handle the small amount of landscaping outside of parking lot, for instance?  Are their caps on real estate taxes?  Will they reseal and restripe parking lot, but not replace?  And along these lines, if they move out, what condition does building and property need to be in?  Using parking lot again, is their any requirement for them to repave every X yrs?  You could be stuck with a major paving bill to re-lease your property if they leave it full of potholes, etc.

Wale Lawal · Answer

@Rud Sev

Cap rates in NNN deals are influenced by factors like tenant quality, lease terms, location, and lease structure. Location analysis is crucial, considering demographics, retail market performance, and traffic counts. Resources like books, podcasts, and blogs can provide insights. Simplified deal analysis focuses on cap rate vs. tenant risk, lease expiry timeline, rent-to-market comparison, and key metrics like Net Operating Income and DSCR.

Good luck!

How to analyze NNN properties and determine FMV

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