Questions to ask when buying Commercial RE

[Sam Chaptini]

When the numbers work, what are the questions agents ask about the potential property?

FYI: NNN fast food restaurant.

[Michael Hall]

All good comments on this so far particularly about reviewing the lease. Another important point to consider in due diligence is what deferred maintenance is present in the building, at lease renewal or when the current tenant vacates you will need to make the space ready and do you have adequate cash reserves to do so. 

Since it appears this is your first purchase of this type of asset I want to encourage you to dig deep into the creditworthiness of the tenant and their commitment to this property. NNN leased assets are in very high demand (due to 1031 exchanges and a large amount of PE and REIT funds committed to these type of assets) and have experienced significant cap rate compression over the last several years. (end of 2018 average cap rates for McDonald's is 4.22%, KFC is 5.5%, Taco Bell is 5.37% etc.) If the property has been on the market awhile or is at a cap rate significantly over these cap rates then I would be suspect that people know something that you do not. KFC and a number of other users are actively closing and subleasing corporately owned stores throughout the United States. All that to say when evaluating NNN leased assets make sure you are comfortable on the ability of the property to be leased if the current users is to leave at lease expiration, we have all seen the poorly located former Hardee's or Wendys that is now a vapor store etc.