NNN deal in South Florida

[Angel Pedroza]

I had a very interesting conversation with a potential buyer for one of my listings. This buyer’s rep talked about how most of the deals in his hometown (NY) are at a minimum of 8% cap rate and how the one I have listed which it could be a very nice 7.2-7.5% cap rate in South Florida is a good deal but he always finds better.

Fellow bigger pockets agents in the NY area is this true? Here in south Florida if you find an 7%+ cap rate on anything is pretty much a done deal because of the shortage of deals that pay that much.

What are your thoughts ?

[Joel Owens]

Buyer sounds like they are mostly full of bull.

I review about 1,000 NNN properties a week nationally for clients. I am an expert in the space. Most quality NNN properties on the retail side are 5 to 6 caps with newly minted leases and national credit tenants. Developers build them for about a 9 cap rate to cost and sell usually in the 6's. Dollar stores spreads ar even thinner per property developed and it's a volume game.

Now as you move up the ladder in price to 4,5 million then some cap rates can go to 6's for quality. If you push up into 10 million price for STNL then sometimes you might hit a 7 cap. If you have a 7 cap in the lower ranges it usually is a dollar store in a crappy location, a credit tenant in a good location with a few years left on the lease requiring almost all cash to buy, or it's a regional to mom and pop type tenant where the interest rate instead of the 4's likely mid 5's.

The national STNL lenders like national credit to strong regionals. The local banks typically will look at funding mom and pop or small brands in the local markets with higher rates, lower ltv's with more down payment required, more recourse on the loan, and shorter amortization schedules. All of this can severely affect cash flow. Buyers are often sucked in by a 7 cap STNL only to find out tenant is local and debt rate is higher negating the extra cash flow they thought they would be getting.

Now on certain medical NNN or say industrial occasionally you can hit an 8 cap for really larger properties 10 million and above.

If something is in the lower price range and an 8 cap usually something is going on with it such as business downgrade or fixing to file BK etc.

Developers are not going to build for a 9 cap rate to cost and sell for a 7.5 cap because YOU want a deal. The developer can just convert construction to permanent  debt with national tenant and great cash flow and hold for a better time in the cycle to sell.  I often have to bring buyers down to Earth on what is available and how the market works for returns. of course I want to get them the best deal possible in the market they are buying but also have to be somewhat realistic.