NNN long term risk evaluation, Initial lease w/renewals

[DJ Roshan]

I'm looking at a NNN retail lease Investment in which it appears the initial term will be up in three years with two additional five-year options to renew, each with a 10% rent increase. My first concern is that although they are advertising it as a NNN, in the offering it says roof and building are the landlord's responsibility. The NOI and cap rate they are advertising do not reflect any expenses! I'll have to dig into That! But how does one evaluate or make sure the current tenants have intentions to renew. Also if the area is good for retail, do these properties typically appreciate because of a good location or depreciate the closer you get to the end of the lease term? I'm familiar with the area and think this is could be a good deal. With such fierce competition out there for passive investments with a good cap rate, do people make offers below asking price on these or do they typically sell for asking price?

[Joel Owens]

I have been doing this about 16 years. Review over a thousand retail properties per week.

I am a specialist in this field.

Cap RATE value for a single tenant lease is TIED to the length of the primary lease term remaining, credit rating of the tenant if any, and the dirt value. Typically as the primary lease term winds down the cap rate RISES to sell the property. 

Roof and structure is a NN lease and not an absolute NNN lease. You have to remember these listing brokers most get a virtual assistant or grunt at the office to make the flyers and OM's so they typically are missing information or have errors on them.

The most long term leases are for are typically 20 years primary term. There used to be 25 with options. With FASB( financial accounting standards bureau) changing how tenants have to show lease value as an obligation it has made many tenants want to shorten primary lease terms. This has caused new leases to be in some cases down to 10 years with option periods. There are some cases where that works but in many cases I like there to be a new 15 year minimum primary lease term in place. When a property gets to 10 years left buyers can usually still get good new loans on it.

What you are talking about with 3 years left is a value add STNL that is typically purchased all cash or a very tiny loan. The lender looks at current value with income and dark value ( no tenant just dark building and the land). The lender wants that dark value to be HIGHER at end of primary lease term than the mortgage balance so if you cannot release the space and lender takes back the property they can be mad whole on the loan.

Many buyers often do not understand how finance works in the STNL space. They just see HIGH CAP deal. There is a reason it is a high cap. Being NN if roof is old and parking lot you can be spending hundreds of thousands to update the outside. 10% every 5 years is normal for an STNL national tenant. If it is mom and pop and or regional I do not like that as much because the tenant might not be able to absorb the shock of a 10% increase all at once so it's better to have it slowly go up the 2% per year. The goal with STNL is too keep up with inflation closely while being passive and having national credit. There is not a big equity jump unless you go after value add type properties.

I could write many, many pages on this subject. Let me know what specific questions you have.