Deal analysis - Thoughts on two NNN single tenant properties

[John Chen]

Hi Everyone. I'm trying to learn more about analyzing commercial properties so wanted to get the community's thoughts on the following 2 NNN single tenant properties:

I understand both properties have low cap rates but I'm hoping to get pass that point and actually analyze the other components of the deals

Deal 1:

• Location: Vacaville, CA.  Pop 100k, anchored by Outlets, several big box stores, off exit ramp for interstate 80 (186k traffic daily)
• Lease terms 20 years (new)
• Rent increase: 10% every 5 years
• Price: $2.35M
• Cap: 5.62% (may be possible to go to 5.8%)
• Tenant: Popeyes
  
• Operator: 17-Unit Franchisee founded in 1972, 14 years of operating in this property location
• Year Built: 2004
• Gross Leaseable Area: 3754 SF
• Lot Size: 0.64 Acres
  

Deal 2:

• Location: Santa Cruz, CA. Pop 100k, near University (UCSC), anchored by safeway and a few retails, on major road for the city (27k traffic daily)
• Lease terms: 19 years left
• Rent increase: 1.75% after year 7
• Price: $2.47M
• Cap: 4.5% (may be possible to go to 4.75-5%)
• Tenant: Burger King
• Operator: 65-Unit Franchisee 
• Year Built: 1978
• Gross Leaseable Area: 1971 SF
• Lot Size: 0.51 Acres

Any thoughts on anything interesting? Any red flags or points of interest? What other key info is missing (ie Store sales), and once obtained them, how would you analyze the data?

Thanks again!

[Joel Owens]

Hi John,

I look at about 1,000 properties a week for clients nationally.

Right now STNL these would be about all cash deals. The lenders go by DSCR ratios for spreads between debt and cap rates.

Even on national tenants most STNL rate for national credit tenants on the lease are 5% plus right now. So to get in with 30 to 35% down you really need something in the high 6's to 7 or so to make the spread work. If you are paying all cash or maybe 75% down then a property can usually work at the lower cap rate levels. If you are willing to pay those cap rates then I would look more for parent corporate guarantee stores.

Some of my clients that live in CA buy there but others buy in other states where they can get a little better on the cap rates. 

The 2 you mention here I would want to know on older buildings WHEN they plan to re-image the inside and outside of the store? Also is there a personal guarantee on the lease? If it is just corporate is it all locations or did they set up just one store or a few backing it? Is the rent for that box size space above, at, or below market rents for the area? Do they disclose ongoing sales per the lease and business financials? What about if personal guarantee ongoing financials for liquidity and net worth? Does the lease have a termination clause built in if certain sales are not met? If there is an early  termination clause is there a fee paid to landlord to terminate? If a personal guarantee does it get removed after so many years in the lease? 

You have to look at the location but the lease is just as important. I have seen some great locations but horrible lease structures that would affect your long term cash flow and exit resale value when you sell.