All Forum Posts by: Steve Scharlau

All good info already provided. I am analyzing next purchase and going thru this exact same thought process. 

NNN lease has you covered for increased expenses because it all passes through to tenant but that rising interest rate IS the primary concern along with tenant default or vacancy. Large corporate guarantees mitigate the tenant default and a longer fixed rate might be wise at this juncture. The 5 yr. term worked great over the past 10 to 15 yrs when interest rates stayed very low and extremely low but rates are more likely to rise making that 10 yr. rate lock more appealing now than any time in the past 10 yrs.

In my analysis, I would be skeptical without 10% increases to NOI every 5 yrs. The increase in NOI more or less guarantees an increase in (Direct Cap) value so that works in your favor for the finance renewal or sale. I played around with various scenarios in interest rates and generally, I don't see negative cash flow until interest rates increase 3.5% in 5 yrs which is double today's offerings. I will be asking about rate increase limits.

Worst case scenario for me is that I don't get to pull cash out with the refinance if interest rates go crazy. This means that I carry a greater equity position (lower LTV) and the overall return is not as good as a fully leveraged investment but that NNN lease (with 2% annual increase) still beats the unknowns of all the other inflationary expenses that could affect gross leases (like multi-family).

Investment Info:

Retail commercial investment investment in Winona.

Purchase price: $1,375,000
Cash invested: $275,000

4 tenant Retail property in the Super Walmart shadow

What made you interested in investing in this type of deal?

Triple Net lease(s)

How did you find this deal and how did you negotiate it?

Appraisal business contact. I had appraised similar properties.

How did you finance this deal?

Cash out refinance equity pulled from several residential investments.

How did you add value to the deal?

Improved the parking lot access by opening another driveway.
Created a second drive-thru window that became invaluable to the tenant during the 2020 pandemic.

What was the outcome?

Far better in/out traffic flow.

Lessons learned? Challenges?

Filling vacancy creates cash flow challenge. Gamestop tenant pulled out in 2016. Time frame to get a new tenant was almost a year. Sally Beauty (supply) occupied for 3 yrs. Now a Mega Laundry tenant is moving in. The time frame between tenants seems to be no less than 8 months even with best made plans.