Commercial Real Estate Valuation

[Tariq Sabbah]

Looking at NNN commercial properties. In researching I've found content regarding the valuation of the property based on its lease/size etc. However, how do you value the property if the tenants leave (empty commercial building)? What factors?

Thanks in advance!

[Joel Owens]

If you get a loan the appraiser does a current value with tenant in place and a dark value at end of primary lease term if they do not renew the option period. Lender wants dark value higher than remaining mortgage balance so if you cannot release the property they can take property back and be made whole on the mortgage selling it off or breakeven to losing a little. They want to minimize losses and risks with loans as much as possible. Nothing is foolproof but they want to put the odds in their favor.

In regards to NNN you have tenant, location, and a ton of other factors. If I buy as an example a mom and pop tenant at an 8 cap but location is good and rent is below market then I know likely if they go out I have some upside. If however it's mom and pop tenant with a cherry national tenant lease structure and rents at or above market then that's high risk for me. Minimal upside if any and huge downside.

Just remember right now lenders are very tough on mom and pop tenants and small franchisees because they do not know if they will be around post covid. Those tenants tend to not have the staying power of investment grade credit rates tenants backed by thousands of locations with the lease.

You really need a very experienced commercial retail broker/retail attorney/ or both helping with the process.

An investment grade tenant might be 30 to 35% down, interest rate fixed for 10 years in the high 3's, with a 30 year amortization. Mom and pop tenant might be 45 to 50% down right now, with a 20 year amortization, 5 year fixed, and rate in mid 4's to 5's. Of course there can be exceptions based on strength of borrower and existing relationship with a lender but I am talking more general terms what NNN lenders are looking for right now.

People think NNN is easy but there is a big process to buying RIGHT then it can be more passive.