NNN Leases Question

[Joe Richardson]

Hello, guys, I had a question in reference to NNN leases:

If a 7-Eleven is $3,000,000 and you put down 30% ($900,000), what would be the true yearly net NOI after paying the mortgage? I tend to see on websites that, for example, on loopnet: "7-Eleven will pay $145,000 a year in NOI", but what about after paying off the mortgage each month, it never states your NOI after paying the mortgage, so, if on the website it states that the 7-Eleven is $3,000,000 and it produces $145,000 a year in NOI, what about after the mortage is paid off, how much would be the true yearly net NOI after paying the mortgage each month? I just don't get why on websites it states "$145,000 a year in NOI" acting like we're buying it fully all cash (because not everyone has $3,000,000 to put down to buy it all cash" when it doesn't state numbers in regards to what down payment that would produce "$145,000 a year in NOI".

I know that I am not providing you guys' much numbers, but any thoughts on some figures in-regards to my question as for the NOI after paying off the mortgage?

[Joel Owens]

Hi Joe,

I don't think we have talked before on the phone.

There are a few points I want to bring up. I don't know a lot of details about the specific property you are referencing so comments will be general in nature.

1. 7- Eleven with any good amount of primary lease term left go for 4 caps and at best around a 5 cap.

2. At a 4 plus to 5 cap you will not be putting down only 30% because the lenders have DSCR ( debt service coverage ratios ) they follow. With current interest rates at about 3.5% to about 4.0 depending on tenant and other metrics you need about a 5.4 to 5.5 cap minimum to have a chance at getting in with 30% to 32% down.

3. If years under 8 remaining it is a cut off point for most lenders lending. There are some below 8 years down to maybe 6 remaining but they want 35 to 40% down even if there is a good spread of basis points between cap rate and interest rate.

4. 3 million and under there are about 60 to 70% purchases all cash and 30 to 40% using finance. When prices go to 4,5,6 million even if a buyer has all cash they like to get a loan as they do not want all that cash in one property. So at higher prices a smaller amount pay all cash and more use finance.

5. NOI is net operating income if you paid cash ( based on absolute NNN lease). I believe what you are asking is what is the IRR ( Internal Rate of Return ) for the year with mortgage paydown? Generally for my clients when we buy NNN if the spread is about 175 basis points between cap rate and interest rate with a 25 to 30 year amortization and rate in the 3's then year 1 cash on cash off of the down payment is about 6% and with mortgage paydown with principal total IRR is about 10%. Buyers want to try to outpace inflation by a factor of 2 to 3 times and grow money safely with investment grade tenant and long term lease. The financing we get is typically 10 year fixed with 30 year amortization with interest rate in the 3's. So my goal for a lot of my clients is to find a cap rate close to 5.5 or better with investment grade tenant and long term lease in a strong suburban area.

6. Listing brokers that have properties on websites often have junior agents with 1 to 2 years in the business, virtual assistants, or in house marketing graphics people pushing out the flyers. It's a volume business because listing brokers with their splits need volume to survive. They typically have to do 6 to 10 transactions to my 1 because I am a buyer specialist and own my company so I get it all whereas they have to split fees they earn with their company and people on their team.

7. I could keep going on and on but without knowing your liquidity, net worth, age, business or job annual income, 1031 exchange or not, etc. I could not comment much further. I can tell you the good properties go quick within 24 hrs to 48hrs. Properties on Loopnet and other sites have often been sold already the listing companies are using them as BAIT to fish for buyer and build buyers lists to sell more of their inventory too. Whether property is good, mediocre, bad the listing companies push what is in their inventory whereas a buyers broker is doing a complete research from various sources to find properties for their buyer.

I know all this and more because NNN is all I do. Been at it 17 years.

Hope it helps.