Financing NNN building with national / NASDAQ tenant w/o A rating

Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes

So I've bought lots of commercial property. Financing hasn't been a problem. Janky apartments? No prob, my local banks will finance me all day long Clean apartments? No prob, Freddie small balance will finance all day long. NNN deals with local tenants? No prob, local bank. NNN deals with national A+ rated tenants: no problem for several lenders. Here is one I'm having problems with: it's a new building with a NNN renter (and Guarenteed lease) but since they're not A rated, normal lenders I've used seem to be passing. Anyone have experience buying/financing these types of deals? What type of lender would find this to be in their wheelhouse? Life co? CMBS?

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Joel OwensBusiness Member

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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

Typically

Absolute NNN - Landlord does nothing but collect a check. Tenants responsible for everything.

NN - Landlord usually responsible for roof,structure,parking lot, utility lines,etc. depending what is written into the lease.

Ground lease - You won the land but not the building and collect ground rent. If tenant does not renew after primary lease term for option then landlord usually gets building for free by default.

ZCF - Zero Cash Flow property. These properties the payment and debt service cancels each other out. Usually you want at the end term of the primary lease term to be zero balance. These are done typically for special tax purposes.

You can also own the building but not the land. Have to pay 2 payments for example with the lender mortgage and the ground lease fee. Have to be careful on these as you do not own the land but can typically depreciate 100% of the building versus a 75% building and 25% land ratio that most use as an average for a depreciation schedule. Commercial is 39 years typically for depreciation but there are some cost segregation techniques that can be used to advance write offs in certain years ahead of time.

Build to suit - You build a building for a tenant and they pay you rent.

Sale Leaseback - A owner user that owns the building and land etc. for example will agree to sign a lease at closing with certain conditions and terms. The company then takes the lease payment as an expense on their accounting books and then uses the money they had trapped int he building and land to re-image their current location or also put into new development or redevelopment of other stores in the brands. Could also recapitalize to start up a new additional brand under their company.

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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
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@Cody L., come on Cody, did you forget about me or just not thrilled with paying my rates? LOL
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Cody L.
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Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
Originally posted by @Don Konipol:

@Cody L., come on Cody, did you forget about me or just not thrilled with paying my rates? LOL
lol, this deal wouldn't work with rates above, say, even 5%. It's a ultra conservative NNN deal. Just over 6 CAP. Just looking to park some of my cash into more of a mailbox money option. At, say, 6.5% you need a rate around 4.5% -- MAYBE 5%, for it to DCR 1.25x with any leverage due to principle payback.
Where I would use hard money is if I needed help with a second. Say it's a $10m deal and I was hoping for 75% LTV but could only find 60%. I wouldn't have $4m to put down but I might have $3m. So I'd need a $1m loan. But again, even for that if the rate was more than 8-9% it simply woulnd't be worth it to me.
I've been spoiled by cheap money. Even my 5% stuff seems high now. I just modified one of my 5% loans (5 year local bank with 2 years left) to have another 5 years and changed the rate to 4.5%. They did that because they knew I'd refi and close the loan if they didn't mod
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
There are lots of NNN tenants that are not A rated. Some are not credit rated at all.
CBRE capital markets usually has a lot of NNN sources for single tenant. Of course you will pay usually as point at closing to source the debt. Rates typically in the 4's currently. Amortization schedule depends on the length of the primary term the NNN lease is for.
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Jeff Moore
Real Estate Investor · Clarksville, TN · Member since 2017 · 46 posts · 8 votes
9y
Just for those of us who might not know, can we define NNN?
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
Typically
Absolute NNN - Landlord does nothing but collect a check. Tenants responsible for everything.
NN - Landlord usually responsible for roof,structure,parking lot, utility lines,etc. depending what is written into the lease.
Ground lease - You won the land but not the building and collect ground rent. If tenant does not renew after primary lease term for option then landlord usually gets building for free by default.
ZCF - Zero Cash Flow property. These properties the payment and debt service cancels each other out. Usually you want at the end term of the primary lease term to be zero balance. These are done typically for special tax purposes.
You can also own the building but not the land. Have to pay 2 payments for example with the lender mortgage and the ground lease fee. Have to be careful on these as you do not own the land but can typically depreciate 100% of the building versus a 75% building and 25% land ratio that most use as an average for a depreciation schedule. Commercial is 39 years typically for depreciation but there are some cost segregation techniques that can be used to advance write offs in certain years ahead of time.
Build to suit - You build a building for a tenant and they pay you rent.
Sale Leaseback - A owner user that owns the building and land etc. for example will agree to sign a lease at closing with certain conditions and terms. The company then takes the lease payment as an expense on their accounting books and then uses the money they had trapped int he building and land to re-image their current location or also put into new development or redevelopment of other stores in the brands. Could also recapitalize to start up a new additional brand under their company.
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Chase Gambill
Lender · Dallas, TX · Member since 2017 · 8 posts · 1 vote
9y
@Cody L. I'd be happy to help source some debt for your investment.
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Cody L.
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Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
Originally posted by @Chase Gambill:

@Cody L. I'd be happy to help source some debt for your investment.
I have a few brokers I work with for deals outside of what my few local banks lend on (thoguh 80% of my financing comes from two houston area local banks)
Each time I'm approached by a new lending broker I've been unimpressed. They all seem to call on the same groups and none can really get a deal done that the others can't. So I've been working with the same guy that just has a lot of hustle
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Chase Gambill
Lender · Dallas, TX · Member since 2017 · 8 posts · 1 vote
9y
@Cody L. I can understand where you are coming from. When you say A+ rating, are you specifically talking about an A S&P Rating? I can tell you CMBS, bank, and life co's all play in the NNN space and will look at tenants without the A rating. Their willingness to lend will really depend on financials for the tenant if you have them, lease term left, location, loan size, leverage etc. There are so many more factors to consider than just the credit rating of the tenant.
If you ever need another set of eyes, I'd be happy to take a look. The way I see it is, you aren't paying any upfront fees for our services so what does it really hurt for you to test our capabilities? If we can't produce then move on, just make sure you don't sign any exclusive agreements!
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Conor Freeman
Lender · San Diego, CA · Member since 2015 · 88 posts · 57 votes
9y
@Cody L.
I work with over 50 life co's that, depending on size and leverage, would be interested in taking a look. I also have access to portfolio lenders and funds a lot of smaller brokers do not have access to. (RE :Each time I'm approached by a new lending broker I've been unimpressed. They all seem to call on the same groups and none can really get a deal done that the others can't.) Flexible on origination and local to San Diego also. Shoot me an email.
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
Lenders are notorious for re-trades. If they will not give a rate lock up front and do it a few days before closing you have nothing.
I ask lenders if they are currently under audit, in process being bought out by another bank, loan has to be through a committee etc. There are some banks that act more like a CMBS lender so decision making can be easier.
Life co's can be good but they tend to do low LTV's. CMBS really can't compete much with some good credit unions these days. CMBS is more expensive with loan costs, lock box controls for hold backs, and onerous loan covenants with carve out using broad language and difficult loan assumptions when you want to sell to a buyer later on.
CMBS has really fell out of favor in recent years as a loan option. I like capital markets lenders because they might have done 50 loans with one lender and the lender will think twice about burning that relationship mid deal and quoting incorrect terms and rates. If your a one off buyer starting a new relationship with a lender for a single loan you tend to go at the end of the pile and they rarely make exceptions when you need a request mid deal.
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