What to do after a NNN Lease ends?

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Joel Owens · Answer

This is my wheelhouse. I look at about a thousand of these a week nationally for clients. There are so many variables to your question it is almost like taxes. Usually I get on the phone and talk to potential clients about there specific situation.

Most NNN deals are standard boxes with just what we call (gingerbread) on them which is the coating for a particular brand. Those are easily re-rented with some TI ( tenant improvements) if location is good. If the site layout was very unique with parking, size of box non-standard, weird entry and exit access points, visibility levels,etc. then much harder to redo an existing space.

The credit of the existing tenant comes into play, who is guaranteeing the lease, what starting rent they are paying,etc. In cold belt states cap rates for STNL tend to be a little higher but only isolated areas of growth and many outlining suburbs to rural are contracting and dying off. Those buildings if they go empty where little to no growth or expansion is happening can sit for years. With just one tenant going dark and no income you are now (feeding the beast) until you can get it performing again.

In warm belt states that is where most growth is happening. People are moving there for retirement. Some of the faster growing areas are GA,TX, AZ,FL,etc. In high growth states if a tenant concept goes out there is general demand from other tenants to go in.

Multi-tenant MTNL is a different animal and underwritten differently. I would have to know your investment plans and expected returns to comment further. STNL cap rates can vary based in price range. Sub 2 million lots of properties go for cash so cap rates are more compressed. As the price goes up the rate on the loan usually gets better and cap rate can get higher maybe giving a 50 basis or more point spread.

Ronald Rohde · Answer

Budget for a complete gut job once you have a new tenant. Or tear it down as mentioned

Brian Ploszay · Answer

Good question.  Many of the structures are not usable again.  So the most sought after NNN leases are stable, high credit tenants, with longevity - Walgreens, for example.   So, buy one in an established retail corridor, where the land will have future value, even if the tenant goes dark.   You seem to live in the Columbus Ohio region, which is good in my opinion.  Many other parts of Ohio are economically less healthy.   I've seen reuse of closed NNN deals before, so it does happen.  I've seen a long term KFC that renewed, but built a brand new structure on the same land.   If the business is established and viable, they will renew.  Usually, the leases tie the property up for many years to come..

Amos Ajo · Answer

Kevin, I am also considering to buy a single tenant triple net lease within is the price range of $1 - 3Million. I can not afford to lose a million dollar at this stage of my life. But I also realize that there is no such a thing like "Risk-Free". With this in mind, my number one consideration to buying is location, location, location. In a great location, the cost of land and site plan alone is almost $1Million. If I get a good a single tenant triple net lease within my reach in a great location and high land value, then I will buy. If everything goes dark I will recuperate a significant part of my investment from the value of land, location and the site plan.

Jeff Kehl · Answer

@Don Konipol thanks for sharing that info about dollar stores. I think people buy those dollar stores sometimes assuming the store will be in that location forever and I've seen them several times move a few lots over and just rebuild. Especially because they'll put them all over in some fairly rural locations. Caveat Emptor.

Joel Owens · Answer

I do have some clients that buy Dollar Generals. In certain price points if someone has say 500k down and they want to use a loan then they have to find a NNN lease close to a 7 cap. That is either a Dollar General or usually a mom and pop type tenant. Interest rates on STNL for national credit are about 5% plus right now.

About 15% of Dollar Generals are in what I consider strong suburban locations. Those are 2 plus million most time in price and cap rate in the mid to high 6's. They are all brick with upgraded construction. If a client can go higher in price then definitely in the 2.5 to 3 million range the type of tenant and quality can go up substantially.

What we have been doing lately with some of my buyers is going after auto stores such as Auto Zone, Advance Auto etc. The quality of construction tends to be better and the location generally is stronger. Developers of Dollar Generals build to sell as the profit margin is very small usually 150k if they run into construction problems to 250k or so if everything goes right. It's a volume game for them and the developers have told me at least with Dollar Generals they constantly want to add stores because they almost want to go anywhere. Other tenant types they said can make better profit per deal but are more sporadic with expansion plans and a lot more pickier on sites and locations.

Leon D. · Answer

The easy answer, is to not still own the building/site when the lease ends. Make lease renewal, site redevelopment, or re-tenanting someone else's problem.

What to do after a NNN Lease ends?

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