Triple net lease

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I was woundering if triple net lease prices vary. Are they ever cheaper is there a cycle? And also is it cheaper to buy them when there's less than 5 years on the lease? Is there such thing as distressed nnn? I'm trying to find a way to purchase them cheaper as there all in the 2 million range with a noi of 80k to 120k 

[Joel Owens]

Hi John,

All I do is retail and triple net. There is a cycle to EVERY asset class and within that what the local micro market is doing for that area. 

Additionally there is STNL properties that are free standing single tenant buildings such as a pharmacy, bank, dollar store, auto store, restaurant, etc.

The value of those properties tends to be based on location, quality of the tenant, length of the primary lease left, and any termination clauses or where it's a NN and not absolute NNN.

You won't find a brand new regional or national tenant property at a high cap rate. As a commercial developer my land and building cost all in should be about a 9 cap or so. When I sell my margin is a few hundred basis points after resale cost. So if I sell at a 6 cap with resale cost I am making about 240 basis points. If I do not get the cap rate I want I can simply hold the property for a long time and cash flow very well until then.

Generally the target buyer is out of country investor looking for low yield and to place money here, a retiree looking for a coupon type return to live off of, or a 1031 buyer will larger tax implications if they do not complete an exchange. There are many other situations but these are common.

If you are a yield buyer for a value play then typically leases under 10 years is where cap rates start rising. If you want to finance the cash on cash gets sucked down by the bank wanting a shorter 15 year amortization loan term and about 40% down. That takes your high cap rate cash flow down close to the same as if you bought a 6 cap instead of a 9. The difference being if the tenant renews after primary you will have an even higher cap rate with the rent bump in the option.

The bank doesn't care about your cash flow but does care about the risk with the loan. They want accelerated pay down. The key is what is market rent and what is the tenant paying. Example is a Walgreens with 5 years left at a 9 cap. Market rent is 22 a sq ft but they are paying 30 on a vintage lease and rents have fallen since then. In that instance if they do not renew the option then you would re-tenant at market rates or less. Now 5 years from now rent rates could rise to what they are paying.

Nobody has a crystal ball.

The value plays it's usually best to take down all cash.

I am not even getting into MTNL properties and where the cycles are at. This is a longer discussion for a phone call.

Hope it helps.