Commercial property with NNN lease

[Bo Wang]

I am newbie to commercial real estate and study this recently. I plan to purchase out of state commercial property with NNN lease. Per my understanding, for NNN lease, it is leasee's responsibility to handle all maintenance cost and pay insurance and property tax. So from landlord point of view, I should be hassle free ideally and net rent should be my net income.

Anyone has out of state commercial property experience with NNN lease here? Is that easy to handle for the out of state investor who could not visit property easily?

Also since landlord has no maintenance responsibility for the property, do I still need management company to manage the property?

How can I guarantee the leasee will pay the property tax and buy the property insurance for the property? Will I get tax payment receipt and detail insurance policy copy which I can make sure they have the correct policy and enough coverage?

Thanks a lot for any suggestion and advise.

[Joel Owens]

This thread is going all over the place.

Mortgage brokers will spend many hours with buyer. Commercial NNN brokers will not. Time is money.

You have not said Bo what price range you are buying in. For instance sub 1.5 million price mainly looking at Dollar stores at 6.25. to 7.0 cap rates with no rental increases in primary lease period.

2 million and up you get into more tenant types. I am not worried about specific tenant use Mcdonald's and Walgreens is a simple box that can easily be re-tenanted as location is generally great.  When you buy you figure out what second generation tenant would pay for the space if it ever went dark.

Mcdonald's and Chic-fil-a you are talking 4 to 5 caps with long term leases in place. Walgreens, CVS 5 to 6 plus cap rates with newer leases. Values are tied cap rate wise to length of primary term left with guarantee. You have to look at blended cap rate over time as the primary lease term winds down. Disclosure of sales in the lease is a plus as you can monitor trends over time and likelihood to renew the options and plan accordingly.

There are some value plays with a Walgreens where 5 years left on primary term for say a 7 to 8 cap. The investor is rolling the dice that they will renew the option and with rent increase have a high cap rate. 15 to 20 year leases it's 5 to 6 caps all day long. The 5 years is generally an all cash play or half down at least. Lender wants to know when option comes up and tenant does not renew that land and building dark value is not lower than remaining loan balance. This way if owner cannot renew then lender can foreclose and be close to made whole on the loan.

Dollar stores and Pharmacy are generally flat rent in primary lease term with no increases. Restaurants, Auto stores, banks, medical office,etc. generally have rental increases.

Buyers have to get real about returns.

General cap rate to cost for a developer is 9 to 9.5 cap rate so they ARE NOT,ARE NOT selling a newly minted lease for a 7 to 8 cap folks. If that is what you are looking or thinking quit now and go back to residential investing. I know because besides a commercial broker I am also a retail developer. The developer with a long term lease will just convert construction to permanent debt fixed for 10 years and wait until a better time in the cycle to sell or refi. They are not developing a property for 100 basis point spread on resale and handing you all the equity. It doesn't work that way. 

Now when you get into retail centers etc.  you can get into 7 plus cap rates in certain deal sizes. Sometimes even 8 caps. These are not 1 or 2 million dollar properties but 7,10,12 million dollar centers etc.

I look at thousands of properties a month every month nationally. Theory is great but real world  makes the difference. 

Sometimes a developer WILL want to redeploy capital to build more projects. In certain cases instead of 6.25 cap they might g 6.75 for a quick sale. They are NOT usually dealing with individual buyers. They are dealing with REIT's and funds that can close for the right deal in all cash within 30 days and then place debt on it after words.

The scope of an individual buyers expectations or circumstances cannot be fully covered on a forum. That is why people call me and talk on the phone because every investor just like taxes is different. I give them the realities of the market on a national scale and then they decide if NNN whether single or multi tenant is right for them.

I just think it is a wasted exercise to go into tons of what if's when someone does not have the deep level experience of the reality in the sector.

Hope it helps.