Inherited Commercial Property - NNN or hold and Lease ?

Question

My family currently owns a vacant commercial property ( 2,400 sqft) in Massachusetts we can divide into 2 spaces for lease.  We ran it as a bicycle shop for 45 years.  The location is literally the center of a long-standing plaza (Shaw's grocery, Marshalls clothing, restaurants etc.) owned by a major commercial real estate developer/investor.   I want to keep the property and lease, but one family member wants to NNN 1031 Exchange with a national commercial RE company, assuming a $500K loan, and find a new property . . . "triple guaranteed" with "national franchise".   In the end, our current location has been our guarantee . . paid off . . no debt load, no agent %, no out-of-state ownership or extra costs . . .  just find tenants.   I can't justify selling for a relatively short-term guarantee while assuming major debt.   Am I wrong ?

Joel Owens · Answer

The post is unclear. If you are exchanging 500k for NNN basically with a loan looking at a Dollar Store 2 million and below in price for around a 7 cap because debt is about 5.15 fixed.

The other national tenants sub 2 million price NNN are typically 5 plus cap rate range so with debt of 5 percent have to basically almost be an all cash buyer these days.

If your existing space is in demand you could use what they call a (fee developer). They help land tenants, reconstruct the building, handle contractors,etc. So for a fee might be 100k or more they help you through the process. You need to check in your area what is typical.

You could also tear down the existing building and then do a ground lease where  a national tenants builds on it. I would have to see the size of your parcel and pics to comment further.

Joel Owens · Answer

On single tenant NNN properties a 5,7,10 year fixed loan  with a 15,20,or 25 year amortization loan payment schedule is typical.

The strength of a leases guarantee and length of it depends on what is in the lease. There might not even be a guarantee or the guarantee in 1 0 year primary lease might go away in year 6 or when certain sales numbers are met etc.

For my clients I do not like weak suburban to rural areas to own property unless they are local to the asset. An exception might be if they are doing a 1031 exchange and need to leverage. With leverage for STNL about the only options under 2 million are Dollar stores, Pizza Huts, etc. These are properties with decent length of primary lease term where a 7 cap might be possible with debt around the 5% range. Other STNL types with newly minted leases might command 5 to 6 caps.

Example an Oreilly's auto parts with  along term lease might have a lender agree to a DSCR of 1.15 so if you bought at a 5.8 cap you might still get in with about 450k down on a 1,400,000 property. Problem is cash on cash might be 3 to 4%. The 7 cap helps give close to 7% cash on cash instead.

Anyone trying to buy  under 2 million using leverage is tough. I do come across some good ones but they are 1 out of  hundreds these days.

Jameson Sullivan · Answer

If I understand correctly, they want to lease the property to this national tenant then take a $500,000 loan out against the leased property to go buy a new one, correct? meaning this national tenant is only paying $40,000 annually in base rent give or take? I want to make sure I understand all pieces of the puzzle...

David Johnson · Answer

Thank you so much for replying !

No buy-out option for family member.

The family member wants to leverage the value of the property for loan (500K) and do a 1031 exchange.

The cost to make it lease-worthy (up to code) is 50K, and I have time to chase down tenants.

You are right Joel.  We don't have the buying power to get a property via 1031EX that would be worth it.  We have a national commercial RE company presenting us with poor location/national brand opportunities with "income assessment" lease/land values averaging around 1- 1.3M.

Is there an incredible upside to the 1031EX that I'm missing here ?  NNN guarantees last only as long as the lease, correct ?  So a 30yr mortgage on this EX property would leave us stuck if the lease wasn't renewed.

The agent won't entertain any pro-con discussions.

I can provide more specifics . . don't quite know all the hidden costs either.  Agent wants 6% . . on sale of our property, and purchase too ?  Closing costs for each ?

Brian Schmelzlen · Answer

If there is a significant difference of opinion on how to proceed, is it an option to buy your family member out?

Inherited Commercial Property - NNN or hold and Lease ?

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