is this a good investment?

Question

I saw a commercial RE for sale listed at $1,600,000.  The building was built in 2001. Cap rate is 7.85%.  NOI is $125,400.  It is an NNN lease starting at Mar 2010 and ending at Mar 2030 with two options.  Rent increase no more than 10% per five yrs.  It is leased to an auto service chain.  I did some calculation,

If 30% down, 30 yrs loan @ 5.5, the mortgage is $6359 per month.  The cap rate is (125400-6359*12)/1120000=10.23%

So does this sound like a worthy deal?  I am no professional investor at all.  Just looking for some passive income.  What are the potential deal breakers or concerns?

Thank you!

Joel Owens · Answer

Read some of this.

Jane if you are not experienced in buying NNN you need a high level commercial retail broker and a commercial retail attorney. At the LEAST a commercial retail attorney. Someone mentioned 8k to 12k closing costs.

The cost to buy a triple net property ARE WAY MORE than that.

30 year amortizations are generally reserved for MTNL (retails strip centers) with multiple tenants for the income stream as they are underwritten by lenders differently than STNL.

I have seen a few times when lenders would do a 30 year amortization for STNL schedule but LTV was really low like 30 or 40% so putting 60 to 70% down. Lenders have an appraisal completed and they look at current value ( existing tenant in building paying rent and length of guarantee for primary lease term before options) and dark value (value the building has and land if it sits vacant with no income). Lender is looking at if option comes up and tenant does not renew what would the remaining loan balance be at the end of the loan term? Many have loan term end with primary lease term because options are not guaranteed. Lender wants loan balance typically LESS than dark value of the property when renewal comes up so if landlord owner cannot get the tenant to renew or  a new tenant in then they can foreclose and be made close to whole on the loan. Bank wants to get out without taking a big loss.

Some lenders will do non-recourse on the loan if national credit at 40% or more down, some partial non-recourse at 35%, 30% down typically full recourse against the borrower. STNL most amortization is 20 to 25 years schedule with properties 10 year or more remaining on primary. You might could beat the 5.5 interest rate. One of my clients we are closing in about 3 weeks on an Advance Auto getting a little under a 5% rate with a 25 year amortization. If tenant is not credit rated than 5.5 to 5.7% can be more typical as lenders price in risk with their spreads.

On a deal size such a 1,600,000 the costs can vary by state.

Commercial attorney cost for STNL I have seen anywhere from 8,000 to 15,000

Title Policy can be 10,000 or more but generally seller covers basic title policy and buyer pays for special endorsements.

Capital Markets Mortgage broker for the loan. Most charge a 10,000 minimum or 10% of the loan balance whichever is greater paid at closing.

Lender site inspection, buyer building inspection, environmental phase one, ALTA level one survey, appraisal, etc. all in can be about another 10,000

Lender legal fees for banks attorney to draft and negotiate the loan docs with the buyers attorney ( generally about 3,000 to 5,000).

Transfer taxes and recording fees. These can be as small as a few hundred to up to many thousands or more it can vary by state. There are a bunch of smaller costs as well.

You have to make sure you are looking at a true NNN property. I look at the lease with my clients in the non-binding letter of intent stage before the client spends money on the attorney. Often times the flyer or offering memorandum's are incorrect. They push the listings out so fast and often have grunts putting them together so often have errors in them.

I basically specialize in NNN properties and have clients all over the country. I have a system and network for retail attorneys, lenders, properties, etc.

Be careful with auto places as it is key in the lease if written that they are responsible for any environmental issues and if they vacate the property they would have to return it to a pre-existing state before the contamination happened.

There is a ton of other analysis that goes into NNN. Once you own it can be great and passive but people just think it is like buying  a car. There is upfront work and due diligence needed. I look at tons of properties a week nationally.

Good Luck

Mark Bookhagen · Answer

A couple notes:

- Commercial loans usually have a 20 year max amortization period.

- Need to know the credit rating of the tenant.

- Cap rates never include debt service in the calc. You want to calculate your cash on cash return which is (Net Cash at the end of 1 year / (all cash you bring to closing + cash you spend during the year including mortgage)

Jane Lewis · Answer

Thanks all for your inputs!  Will do some research based on your advices! Thanks again!

Ken Jernigan · Answer

@Jane Lewis Any lender will want a Phase 1, and maybe Phase 2 environmental report on an auto repair shop before closing. If any contamination is found, most likely will require clean up and sign off from state environmental authority. Best to get out in front of this with a good environmental consultant. The reports can be expensive, and the clean-up more. You might ask if there is an old report on the property. That could tell you a lot.

Ronald Rohde · Answer

This makes little sense to me, why are you considering putting down $480,000 cash but can't cover $20-30k for vacancy? If you're investing half a million dollars, you need to put down $250k and not worry about 6 mos of vacancy or repairs or legal bills.

Jane Lewis · Answer

So a few more questions if any of you can help answer,

1, when it comes to CRE, do I have to set up a LLC etc or can I buy just like SFH?

2, how the commercial loan payment works?  I know it’s an scheduled payment and then a lum sum? If it’s 20 yr loan,  how do you pay it?

3, what do you think if I use LOC from the home I live for a higher percentage of down payment?

4, I read somewhere that for automobiles shops,one consisting environmental pollution.  Anything I should know regarding to this? How should I ask?

Appreciate your inputs!

Joe Villeneuve · Answer

AS mentioned above:

1 - Is this a true NNN?  In a true NNN, there  are no expenses to you (i.e. roof repairs, parking ots, etc...)

2 - Who is the Parent Company, and do they guarantee the lease?  This is your protection in case the franchise goes "dark".

3 - The mortgage isn't included in a CAP rate calculation.  This makes using a CAP rate to analyze a NNN property very difficult if not impossible, since you won't have any expenses.  To use the CAP rate in this case, you are just dividing the Lease Income by the Purchase Price of the property and comes to 7.85%.  That's actually pretty good for a NNN.

Mark Bookhagen · Answer

@Jane Lewis - Yes, it is basically correct. You're closing costs will probably be somewhere in the 8-15k range. Investors tent to overestimate expenses and mortgage interest rate to be safe (instead of underestimating).

One thing I would caution you about... you are putting ALL your eggs in the single tenant. That's very risky. If they go bankrupt or decide to move, you're scrambling to say the least.

You'll also want to make sure it is a true NNN lease, and if there are ANY expenses the landlord is responsible for.

is this a good investment?

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