NNN lease, Holy Grail of cash flow?

Question

I have a family member who owns property in a north jersey location,  the property currently has a 99 year NNN lease arrangement to be restructured every 5 years.  The tenant is a prominent bank that very rarely rents property.  There are offers to buy from other investors almost every week.  Should she ever sell or is this the definition of passive cash flow forever?

Tim Ball · Answer

Im guessing cash flow is pretty good?  I say don't sell. Ever.

Account Closed · Answer

does it have cost of living increases or other scaleable increases

Stephen Dominick · Answer

Well the property belongs to my mother in law so I really don't know what the cap rate or lease terms are.  I really don't get involved in the details of the property.  I can appreciate that more information is needed to truly examine the deal. The family diner was on the property for 57 years, the bank bought out the business and tore down the diner.   I do know this property is one of the few that this bank leases, they typically purchase the properties that they build on.  My father in law passed away some years ago and one of his last bits of advice to my mother in law was to make her promise to never sell the property.  I also believe that the bank has a first refusal if she were to sell.  She called my wife the other night and told her that someone had made her another offer on the property for 6 million, that kind of number would get a person thinking, but I still think I would hold the property.  The monthly lease payment is 18,000. It started at 12,000 10 years ago. Thanks to everyone for the input, I really appreciate it.

James G. · Answer

The devil is in the details, some of which were mentioned above.  The key in my mind is what are the terms of the restructuring every five years - binding arbitration or non binding arbitration? CPI increases? Can either party terminate if they do not agree to the rent proposed? Is the rental increase based on the value of the unimproved land or does it include the improvements?  Can the bank scrape its improvements if it does not agree to the rent proposal and the lease is terminated? ...  Your question is tough to answer without seeing the lease. I would consult with a qualified commercial real estate broker (commercial if this is admin or retail if it is a branch).  Your family member may be sitting on a gold mine or they may be able to capture a lot of value by selling to an investor that is infatuated with the bank's credit.  Final comment - banks merge and dispose of surplus real estate all the time.  That trend will continue to accelerate.

Joel Owens · Answer

Another short term some investors who contact me do not know CMBS ( commercial mortgage backed security ) loan.

Jonathan Key · Answer

@Stephen Dominick Ah yes! Triple Net lease I got. I've never seen it as NNN, guess I learned something new today!

Joel Owens · Answer

The VALUE is all about the lease with structure and terms.

People often get confused TOTAL lease term with NNN and PRIMARY term of the lease.

It's common for some leases to tout 99 years,50 years etc. total

I don't care about that. I want to know how many years left on the primary term of the lease??

If it's a 5 year primary term lease renewable for 5 years up to 99 years then that is CHERRY for the tenant. Basically they are only on the hook for five years and that is IF in the lease they didn't put in any early termination clauses within each five year renewal. Lenders look at a lease through the primary term. Under 10 years is hard to finance and under 5 years is very tough left on a lease. Lenders do not count the option periods because it is not a given for the tenant to renew.

If within every 5 year renewal they can terminate each time within after 3 years then the lender counts as a 3 year lease with a 2 year option. Anytime the tenant has an out even in primary term after a certain date the lender does not want to count it. They want to look at worse case scenario and still see if the loan pencils with what the borrower wants to put down for LTV.

Bill Gulley · Answer

Your cap rate figure.....as to value of the property, is the basis plus capitalized amounts, not the market value, it's the value on your books.

NNN, taxes insurance and maintenance,  no maintenance to land as to improvements, it's not depreciated, moving dirt is an improvement. Cutting the grass is a tenant responsibility under upkeep.

If that lease is renegotiated every 5 years, it's not really a 99 year lease, I think the OP means there is a provision for rent adjustments every five years and that won't just be an open ticket to charge at a whim.......otherwise the bank would never have taken it or built on it.

Property is paid for......just the land? I'd probably keep it as a lease with a bank on there, now, if they pull out, the building will be left and you could then sell out, but it's probably a very stable lease income, I'd just keep it the way it is. :)

David Krulac · Answer

@Stephen Dominick

You didn't mention the cap rate.  I've seen banks 4% or less.  NNN is great as far as not having anything to do and no bills to pay, but cap rates can be low.  But since CDs are 1%, what is the alternative?

What would your relative do with the money if they did sell?

@Jonathan Key

on a NNN lease the tenant pays taxes, insurance and all expenses, so the owner gross rent is the same as the net rent.  Cap rate is calculated by dividing the net rent by the value of the property.

NNN lease, Holy Grail of cash flow?

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