Single Tenant Net Lease deal

[Mark Devereaux]

My wheelhouse is single family and multifamily properties.  I am looking to get into smaller commercial net lease properties.  The theory is to trade some of our built up equity for less intensive management.  This deal came across my desk a couple days ago.  I'm looking for good feedback and questions/concerns I should be raising.  The biggest concern I have is spelled out at the end of this post regarding the Lessee right to purchase during the term of the lease.  What do you guys think?  Are there better deals in commercial?  Thoughts, opinions welcome.  Here to learn.  Thanks 

List Price: $350,000

Advertised cap: 8.2%

Monthly rent: $2440.00

NOI: $28,740

Lease expiration:  June 20, 2020

Renewal options:  One, 5 year option remaining with rent escalation to $2600.00 per month

Tenant:  Single building; single tenant; Large Michigan based pizza, orange color; franchisee with 10 locations; not corporate

Sq feet:  3960       Year built:  1979

Lease type: NNN

Highlights:  National brand, retail corridor, 4 lane highway main road frontage, adequate visibility, signage and parking.  Surrounding retailers include Meijer, Home Depot, Family Farm & Home, McDonalds

** Haven't got a full copy of the lease yet; looking at the 7th amendment of the lease; current lease option is up June, 2020, option remaining is until June 30, 2025.

** Lessor agrees to reimburse Lessee $4664.00 for 1/2 the cost of HVAC unit

**  Lessee shall have the right and option to purchase the premises at any time during the lease; current price through 2020 is $419,000.00

I like the property for the location, the size of the building isn't overwhelming.  Not sure this is the highest and best use of the property, and I think I could lose out on possible re-development or re-sale opportunity with the Lessee right and option to purchase clause.

What say you?

[Joel Owens]

When you have a right to purchase by a tenant it also hurts resale ability down the road by your future buyer.

Look at liquidity and net worth of the personal guarantor.

Have your seller give you a credit at closing for the 4,664 HVAC obligation. If landlord has already paid this you need a signed affidavit notarized by the authorized party on the lease. Name needs to be printed and signed.

See if tenant discloses sales per the lease?

Rent is about 30,000 a year so generally want sales at 10% ratio or under so 300,000. If the number is 6 or 7% rent to sales then restaurant is usually doing well. If at 12% they are close to losing money after adding in food and labor. 

[Karen Schimpf]

@Mark Devereaux since the renter is not a big box (new restaurant franchise with only 10 stores on the ground), the tenant has an option to purchase, and the purchase price is small for commercial; it could be very hard to get financing. If you live in the same area as the property, I recommend calling your credit union or local bank.  Talk to the credit union over the phone to find out if they lend on single tenant, if property is in their wheelhouse, if they lend below $350K, if they allow tenant purchase and if they would be interested. You are going to have to overcome the weakness of a new restaurant franchise being the tenant with several strengths. Strength being for example: you have a lot of liquid assets that can be deposited at the credit union. Provide the local credit union/local bank with a recent credit report with credit scores in you loan package. Only allow the credit union/local bank to pull credit after you have received an LOI, Letter of Intent.

[Mark Devereaux]

Joel, Karen.  Thank you for the feedback.  I have my homework for the coming week.

I'm going to see about getting the info Joel mentioned.

Also, we own a 24 unit apartment complex in the same town, so it is where I live and work my full time job.  I will approach our local bank to see if they are interested in lending on such a deal and how that may fit in to our existing loan portfolio.  I have to make an appointment regarding other business anyway.

@Karen Schimpf, is it a financing hurdle with a clause in the lease allowing the tenant to purchase?  For me as the potential investor, it also seems to be somewhat of a hindrance. 

Thanks again, a few great tips that will help in the process of making a decision.

Mark

[Joel Owens]

Usually the tenant has a (ROFR) right of first refusal in the lease meaning any other offers coming in the tenant has the option BUT NOT the obligation to match the offer to purchase the property.

What it sounds like you have is different in a pre-set price the buyer can pay at anytime. You need to research if that set price is AT,BELOW, or ABOVE market conditions for current value.

If it is above what you would could sell it for on the open market it could be a bonus instead of a negative. All depends on the particulars.