Returns that say they pay out 10% pref tend to be very highly speculative. Not all but most times.
Not this topic but in general I have seen offerings from other syndicators where they put in marketing the pref is a high number like a 7 but then say blended return with the asterisk. You have to ask if they are that sleazy to suck an investor in what that then what else are they doing.
Syndicators just need to be real about an investment and what they are estimating it will do. Sometimes a 6 or 7 pref isn't sexy but if it's a strong investment with limited variables to the cash flow stream then might be better than a pie in the sky investment where the odds of not turning out well are higher than doing good.
So I have 2 syndications for NNN one value add single tenant and one single tenant core plus with tenant already in place.
We buy the properties ALL CASH. I do not like using loans if it can be avoided and being a slave to the debt market and timing of the loan coming due with economic and interest rate environment.
I find often there are 3 types of investors that get taken advantage of with syndications.
1. The very high income investor typically 700k a year and up income with job or business who is busy but gets googly eyes looking at some pro-forma high return and have no clue what they are looking at. They see less risk because they make so much money throwing 50k,100k,200k into something if it doesn't work can be a toe stub for them. Their monthly regeneration of capital can often get them out of bad investments and into the plus over time ( doctors are notorious ) for getting into investments they do not understand.
2. The newly accredited investor. This investor maybe makes 100k a year and has been grinding for years to make accredited investor. They like to get the highest pref possible and equity multiple potential because income is not that high to grow liquid and net worth so they want it working to the max. With that often comes very high risk. Some of those deals might do awesome but others could lose everything. It's more gambling than anything else. You have to understand that as you build your portfolio the risk versus the potential upside.
3. The non-accredited investor. Some syndicators know they can snooker that type of investor out of a quick 50k investment because they are so desperate to get into the game with limited options available to them.
Lots of syndicators sold courses like guru's telling these young bucks they can't lose. Now those syndicators are getting hammered hard. Sure there are still some projects that are doing good or might bounce back but I saw areas that are D areas being sold off as B areas at the height of the multifamily market. Those areas as soon as a downturn economically lots of those tenants start defaulting and crime ramps up higher in those areas. If you have been around for decades and saw the cycles you know what to look for in an investment.
There are also syndicators that their God is money at all costs and they have big teams to feed so when their asset class dries up for deals they go putting together other asset class deals hoping who they partnered with will save the day because they need those going in fees to keep paying staff and living their lifestyle.
My deals the pref is not super high for core plus but these are typically investment grade credit tenants with long term leases. We try to start out at a 6 pref which most REIT's doing what we do might payout 4% so still a better deal. We are smaller with less overhead so can offer a higher pref and still make it work well.
You want syndicators who like to make money but do not NEED IT. Some of my friends haven't bought a property themselves since 2022 to syndicate. They own way over ten million sq ft of retail centers and have been syndicating 40 plus years. The syndicator should only do a deal when they feel strongly about. For me if that is 1 deal a year great if it's 20 then also great. I do it by how I feel about a deal with my 20 years experience in the NNN field. I don't do it to make payroll or because someone wants to hit a certain net worth number goal at all costs. What I learned over decades of time is everything comes full circle.
You make your first 100k a year and feel you can breathe versus living paycheck to paycheck week to week with the bills and ask what do you want to do with life as a career or business. Then you make your first million and think being frugal with investments you could never work another day in your life.
Then the millions tend to turn into tens of millions but you are getting older in age now and see friends with health issues or people from high school that have passed away. I am 49 years old now. Then you come to the conclusion that it's more about the quality of life you live day to day and helping people try to achieve their dreams through investing. What that looks like is different for everyone.
Once you have enough you want to outpace inflation safely. The 50 year average taking out outlier years for negative inflation and super high inflations is about 2.75% annually. Making money drops down a few pegs on the list versus TIME. Time you cannot buy anymore of. You can leverage people to do more in a day but you do not stop that day turning over whether you are worth 1 cent or 10 billion. So chasing money is an endless black hole. There will always be someone with more. Having talked on the phone with thousands of millionaires over the decades from all wealth levels if they do not have their health, their family, and the time to enjoy the money the money is mostly meaningless for them. I found about a handful of people out of many thousands that say they want to count money everyday and are just about another dollar. My legacy I want future generations to see I was much more than someone who made a lot of money. That was part of who I am coming from nothing not 2 cents to rub together but I want them to see all sides of me and what I valued in life. There is an old saying. ( Use money and love people) and not the other way around. The problem with many newer syndicators is often they did not earn the millions the hard way. If they did they would want to treat every investors capital with the upmost respect above all else. That is because there is a story that goes with making that money for that investor investing in your deal. It's not just some money sitting around it was hard earned with their time and energy or it could be family legacy money that was passed down to them which is just as important.
Right now investors can get about 5% just sitting liquid in the bank but taxed at the highest rate. So getting 6% to start and getting tax depreciation with hopefully some property appreciation value in the future could be a good investment although any investment is not guaranteed. That is why knowing who the sponsor is and what they stand for is super important just as much as the deal itself.
Alot of multifamily guys used short term or floating debt to give rosy pro-forma's to entice investment. They never planned interest rates would double in a few years. Instead they might have planned for 50 basis points to 75 basis points uptick in underwriting. When rent grow of 100 a door happened it still wasn't enough for the high rates to refi the loan and they could not sell off for what they had into it. If you had assumable debt fixed in the 3's for 7 to 10 years you were looking pretty golden to sell in this market if you had to or wanted to. Nobody has the answers but really think the syndicators long time in the multifamily space with pencils down will mop up the lenders messes for them and upcycle net worth again.
Pay cash, cash is king. Then you can place debt when it is advantageous to you and the property versus an asset hitting a certain stabilized point, economic point, or debt point in a cycle to work.
Just another tidbit for you folks. We own NNN properties. In smaller suburban markets what you often get from national brands is ( We like the corner location but do not want to run a parent corporate store from there or we do not have a franchisee in that area yet or we would put a store there.)
Often in smaller suburban markets it is established brands with multiple locations that are regional that covet the corners. Sometimes if a small suburban market is exploding with growth turning into a strong suburban market than lots of brands want the corner. All corners are not created equal either. A corner with the Wal-mart is much more sought after than say a corner across the street that has a furniture store as the main large tenant traffic draw. These minor details make big differences in great success with a property and mediocre. These nuances come with time, knowledge, and experience deal to deal.
Mcdonalds most are franchised owned and not corporate. Mcdonald's hits their franchisees with tons of fees and has garnered it's easier to offer support and collect than to manage tons of employees store to store.
There are a few parent corporate owned stores but not many.
Mcdonald's doesn't pay very much rent most of them sell for 2 million or so. The real money is in Chick Fil A or Raising Cane's where they pay tons of rent and usually do more sales than Starbucks, Mcdonalds, and a Subway store put together.
Now of course the diamond tenants that pay lots of rent want the best locations as it's not really about the rent they pay it's more about how much sales per foot they think they can generate and profit for the site.
Example a restaurant could pay 100k in rent but do 1.5 million in sales for 7.5 percent rent to sales ratio. Conversely a restaurant could pay 200k in rent but do 5 million in sales for 4 percent rent to sales ratio.
Typically lower rent and B to C sites only attract the smaller tenant off name franchisees. The diamond tenants often do not care about low rent their focus is the best site.
Yeah we own many properties and some leasing brokers are good and some are lazy.
I would challenge the (A) location taking 1.5 years to fill. If it's an (A) location you do not need 1.5 years especially to land a franchisee restaurant tenant.
When I look at a property I look at the current value, the dark value, and the re-potential value.
Lot of commercial developers sell off marginal tenants at market rents.
Example me buying a Wal-mart with 10 plus years left at a 7 cap is way different than trampoline or workout place at a 9 cap.
On its face the 9 cap may be appealing but then you find out for that box size the crap tenant is paying 1 dollar below what national tenants pay. That weaker tenant agrees to anything just to get in a space. The property is then sold off to a sucker. The tenant goes dark and now you have to back fill it with 500k to millions in cost. Guess what since previous weak tenant was market rent you are losing your ***.
I look at high cap stuff when it's few years left ( blend and extend ) or it can be weaker tenant at higher cap rate like 10 cap BUT I want them paying about half the going market rent for the building size or less in that market. That way I win both ways. If they stay and pay I get an ultra high return. If they go out I can raise rents to still below market a little for a good deal to a tenant but after my lease up expenses still have additional equity and value to show for it.
I shake my head at buyers buying Popeyes with some small franchisee that is 6.2 cap rate versus national grade credit at 5.9 cap and that Popeyes paying market rent. Those developers pray long enough while building out the building that the tenant will open and they can sell it off before taking a bath on it.
The small to medium franchisees eventually if the have trouble get bought out by a Private Equity group that runs them like sh*t and makes their money back and sucks any remaining profit dry before they close or ask landlord for rent reduction.
That's what 20 years experience teaches you versus buyers just looking at a cap rate thinking something is a good deal. You could look at a 20 cap (being funny) but if the 10 year lease they go out in year 2 it didn't mean squat.
We are taking down investment grade tenants all cash with my core plus syndication 200k minimum per investor. Works out to be about a 6% cash on cash return to LP's which they love. Multifamily syndicators many pausing distributions so investors getting hosed on those for years and now they seek safety.
What's awesome about investment credit grade tenant is what you model out is typically what you get. Multifamily you can win big or lose your *** it's all about if you already made your money with your career, business, investments already and want to be safer.
Right now owning NNN yourself without a syndicate is tougher especially in the smaller 4 million and below price ranges. The reason is a 5 cap might have risen to a 6 cap but the debt still at 7 s underwater on spread. That makes down payment of 30% when cap rates 5 and interest rates 3.5 now 45% down with huge interest payment to make DSCR work with lender and only get cash on cash of about 3.5% and buyers say that suck I get 5 in the bank no thanks.
Now in bank they get highly taxed on the 5 and some banks unstable right now depending on who they hold funds with. You could say they are FDIC insured to an extent but claims to be made whole on a failed bank to get reimbursed by the FEDS can take a very long time in some cases.
The NNN even if return was 5% you have hopefully property appreciation value long term, tax depreciation against the asset, rental increases, etc. you do not get with the bank.
So my clients unless they are buying say a 6 million and up single tenant where I can land 7 plus cap rate above the debt a little those smaller deals sub 4 million do not work unless they are paying all cash or have a tiny loan like 25% LTV so the high interest rate does not affect cash flow that much.
So what if someone HAS TO buy with 1031 for large taxes. Usually we get loan with little to no pre-pay penalty and maybe they hit 4.5% cash on cash return going in and then when hopefully rates drop in a year or two they can refi and push cash on cash to 6 to 8% while being passive.
Leasing brokers don't get out of bed for 4% total.
Break it down.
If you have 100k rent say for 10 years primary lease term that is 1 million to keep simple at 4% that is 40,000 but if other leasing broker that is 20,000 and BEFORE that leasing broker splits with their brokerage. They are hardly making anything for such work on a deal. That is why leasing brokers like new develop deals where national tenant paying 40 to 60 bucks a foot in rent value for 200k plus a year in rent.
A bigger question is WHEN the leasing fee is DUE. If you are not dealing with a national tenant the tenant could never open, go dark in 1 year, etc. Then you would have that leasing expense all over again.
We actually sometimes like to pay the leasing brokers more so they push our site harder than others.
If you have an A location and A parcel shape then typically lots of tenants fight for the site to lease it or buy it and leasing broker has to do less work for fee involved and rent per foot higher most times. If you have a B to C site with irregular or small parcel shape then tenants tend to pick 2 to 3 sites in an area and pit landlords against each other to see who will give the tenant the best terms they desire on a lease. The leasing broker has to work a crap ton for their fee to get them to your site over others.
If you decide all you can get is a higher risk small to no credit tenant then you may want to only start paying the fee once open and first months rent received on time and have a clause if the tenant goes bankrupt or closes the fee is no longer owed to leasing broker. The first fee paid is an installment to leasing broker with more over time. Leasing broker will fight that and say they want fee today but bad deal for you if crap tenant. Broker will say you get to decide if you want high risk tenant that is on you to which I typically say bring me another better tenant then if you want your full fee upfront when they open and start paying.
You do not want to keep having to pay attorney fees, tenant improvements costs, and leasing fees every time a tenant last a few years and goes dark. If it's Starbucks though I know I am getting paid for full primary lease term and even if they close the place they will pay rent to me so I am okay giving the full fee to leasing broker once they are open and operating.
No legal advice given.
I was in food business for decades before getting into commercial real estate the last 20 years so know it well.
FIRST you have to separate out does your current business itself without the building have any value?
Example you are owner operator and it clears 200k a year profit so at a 3 multiple worth 600k about as a business. If someone wants to buy the business they may want to own the building also or they may want to buy the business but lease the building. Additionally they might want owner finance with some down for the business, building, or BOTH.
The reason you are seeing a wide range per foot of sale price is because there are hundreds of variables in NNN properties. There is age of building, design of building, parcel size, usable land, shape of the parcel, sightlines from the road, access from the road, any junior anchors beside it and large anchors behind it to drive interconnectivity on a daily basis.
If the building is typically more than 15 to 20 years old you are not landing a national tenant for it. They will often want a new building constructed and building today with labor and materials is very expensive versus retrofitting existing building.
When I buy value add vacant buildings the goal is to double the return on investment within a 3 year period.
So if I can use the existing building and retrofit to same concept ( example previous burger inc. but now Whataburger wants to come in ) then not as much tenant improvements to convert.
So if rent 20 a foot for 5,000 ft that is 100k NOI NNN a year. 7 cap value is about a 1,400,000 stabilized value
So if I buy it for 400k and have 300k in it more 700k to get new tenant in the value is then around 1,400,000 based on NNN 20 a foot and a 7 cap rate exit value.
If you want a premium price then you would need to sell to an end user tenant ( regional or national in nature) that wants to buy the building and put their concept in there. They are very picky on sites and slow to respond and can take 6 months to 1 year or more. When they go under agreement they have to get site approval from corporate and have to get permits from the city and county and do not want to close on a property until then. All of that takes many months of time.
If your land is 1/2 acre or less with bigger building 5k sq ft and limited parking will be a tough sell most likely. Most QSR restaurant concepts and others tenants desire 3/4 to 1 acre plus usable parcels these days. it gives them lots of options with designs and layouts to maximize sales per foot. Many want double drive thru's as since Covid places have gone 80% drive thru and 20% eat in when it used to be reverse unless it's a specific sit down restaurant without a drive thru.
You could have 40,000 cars per day go by your property but if there is a median with turn around or they can't see it easily and have to work to get to your building that is a negative. You could also have 40k cars a day on the road but on your side of traffic have only 10k and 30k is on other side.
You could also have a big breakfast, lunch, or dinner model and have your property on the wrong side of the road for that ( going home side versus going to work ).
I can go on and on have specialized in this for decades. We buy nationally sites for all cash but of course do not pay a premium. It's just another property to us that either pencils for our goals or does not. Tomorrow there will always be other properties hit the market nationally for consideration.
So you have to work through what is properties and business highest and best use and how long will it take to achieve that possible outcome? Then you have to decide based on your life circumstances what makes the most sense for you. You could have something make more money in a 3 year horizon but you need your return in 6 or 12 months etc.
Do you have an address of the property for a Google street view to see how it is positioned on the road and in the market?
I think it depends if they need to live on the fees or not. I make millions per year as a commercial broker. So I can go into a syndication deal as a GP with wanting to find the best deals.
So skin in the game is not always a predictor of success. Someone could be venturing into something with some money to put into a deal as a GP and lose all their money too because they have little to no experience.
You pay for experience. Experience tends to come with less risk unless the syndicator is not above board and just wants to scale at all costs.
Syndicators all have different models. You have to look at their track record and level of experience and then decide if you want to invest and how much.
I have potential clients on the broker side I say NO to all the time that we are not a fit. The minute you start trying to be everything to everyone in the name of scale you lose your vision quest and what you want out of life. That is with anything in life not just investing.
There are no absolutes to investing. No investment comes without risk. Nothing is guaranteed.
My current syndications have not lost money. On our value add side the goal is to try and double the initial investment within a 3 year hold period. Sometimes with single tenant on lease up we decide to sell the property to an end user or a developer rather than hold long term if we do not land the tenant strength and terms we want for the lease.
I call it my (90 day initial review period). We usually talk to about 2 to 3 leasing brokers before we purchase a property. After that we monitor interest over a 90 day period and decide what we want to do. If you take doubling money and divide it by 36 months then if we exited in 3 or 6 months time on our value add we try to hit what that would have been had we held for 3 years. Example 100/36 months or 3 years roughly equals about a 2.78% average return per month.
Now our core plus syndication for NNN is tenants already in with place with leases so that is a different model more long term holds. Our accredited investors could invest in both value add and core plus and blend their portfolio returns. I am more selective on deals I syndicate and more about quality than doing volume.