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Message
NNN Leased Office advice needed
Posted on 1/31/20 at 11:39 pm
Posted on 1/31/20 at 11:39 pm
I'm considering purchasing a commercial property:
$460k asking price for a 6000 total sq ft office/industrial space zoned M-1. It is separated as two 3000 sq/ft space.
Two separate tenants with current NNN lease in place: Tenant one paying $2200 per month 4.5 yrs left on lease, tenant two $2100/m 4 yrs left on lease. Both have first right to renew options for additional 5 yrs at increase of 10% when current lease expires. Personal guaranteed. NOI approx 50k.
I see mostly residential real estate discussed here but hardly commercial or NNN advice. Honestly, I do not have much experience in this field but trying to diversify. Is this really a great deal or is the broker just yanking me?? This would be an all cash purchase so I would come with a lower offer than asking.
$460k asking price for a 6000 total sq ft office/industrial space zoned M-1. It is separated as two 3000 sq/ft space.
Two separate tenants with current NNN lease in place: Tenant one paying $2200 per month 4.5 yrs left on lease, tenant two $2100/m 4 yrs left on lease. Both have first right to renew options for additional 5 yrs at increase of 10% when current lease expires. Personal guaranteed. NOI approx 50k.
I see mostly residential real estate discussed here but hardly commercial or NNN advice. Honestly, I do not have much experience in this field but trying to diversify. Is this really a great deal or is the broker just yanking me?? This would be an all cash purchase so I would come with a lower offer than asking.
4
Posted on 2/1/20 at 1:10 am to LSUregit
Questions I would ask broker or myself when looking at the numbers.
What are you getting for NNN(CAM, RET, INSUR)? How old is building and property? Is the location going to attract other tenants? What kinds of tenants are they? Will they be there in a 4 years?
The Cap Rate, based on info you gave, is not good.
NOI/Current Market Value
$51,600 / $460,000 = 11.22% (RISK IS HIGH)
How much is similar office space renting for in the area?
$51,000 / 6,000 sf = $8.60 per ft + 5.50 NNN(guestimate) = $14ish all in. These are fairly new leases I would be curious if they just filled the vacancy at low rent to dump the property.
Research cap rates on commercial real estate product types. I know a fraction of what you know, so all of the above information may be worthless...
What are you getting for NNN(CAM, RET, INSUR)? How old is building and property? Is the location going to attract other tenants? What kinds of tenants are they? Will they be there in a 4 years?
The Cap Rate, based on info you gave, is not good.
NOI/Current Market Value
$51,600 / $460,000 = 11.22% (RISK IS HIGH)
How much is similar office space renting for in the area?
$51,000 / 6,000 sf = $8.60 per ft + 5.50 NNN(guestimate) = $14ish all in. These are fairly new leases I would be curious if they just filled the vacancy at low rent to dump the property.
Research cap rates on commercial real estate product types. I know a fraction of what you know, so all of the above information may be worthless...
Posted on 2/1/20 at 4:00 pm to HamCandy
Good info. THx!
All of the above but sounds like I would be responsible for roof and exterior (Is this standard?)
25 yrs old in fair shape, recent HVAC unit.
Broker makes it sounds like he could have another tenant in there within a month but not sure if this is used care salesman talk.
Hopefully good tenants, but by no means I feel %100 confident.
What would you consider low risk? My thoughts was that anything around 10% was pretty good.
quote:
What are you getting for NNN(CAM, RET, INSUR)?
All of the above but sounds like I would be responsible for roof and exterior (Is this standard?)
quote:
How old is building and property?
25 yrs old in fair shape, recent HVAC unit.
quote:
Is the location going to attract other tenants?
Broker makes it sounds like he could have another tenant in there within a month but not sure if this is used care salesman talk.
quote:
What kinds of tenants are they? Will they be there in a 4 years?
Hopefully good tenants, but by no means I feel %100 confident.
quote:
$51,600 / $460,000 = 11.22% (RISK IS HIGH)
What would you consider low risk? My thoughts was that anything around 10% was pretty good.
Posted on 2/1/20 at 4:44 pm to LSUregit
10% and over sounds great initially, but there are probably underlining factors that put you at a high risk. Under 8% is ‘safe’ - and this is heavily dependent on the market you’re buying in.
It’s not a NNN lease. If a broker told you it was, then they are either lying or not a good broker. I would be skeptical of the broker’s underwriting for the presented cap rate. Expense ratios used likely did not account for building maintenance.
Don’t believe him.
quote:
All of the above but sounds like I would be responsible for roof and exterior (Is this standard?)
It’s not a NNN lease. If a broker told you it was, then they are either lying or not a good broker. I would be skeptical of the broker’s underwriting for the presented cap rate. Expense ratios used likely did not account for building maintenance.
quote:
Broker makes it sounds like he could have another tenant in there within a month but not sure if this is used care salesman talk.
Don’t believe him.
This post was edited on 2/1/20 at 4:57 pm
Posted on 2/1/20 at 6:34 pm to StealthCalais11
quote:
StealthCalais11
Owners are responsible for roof and structure in a NNN lease. You don’t know what you are talking about.
One tenant properties with long term leases are basically the only properties in which the tenant is responsible for roof and structure.
Almost everything else, the owner is responsible for roof, etc.
Think about it, why would a tenant want to be responsible for the roof over a different tenant?
NNN rent means that the tenant pays a base rent and reimburses the owner for property taxes, property insurance, and common area maintenance.
As mentioned above, a high cap rate may mean the rental market in that area isn’t strong.
In the long term, the land is the only thing that is worth anything. The building will deteriorate. If you are buying something in a questionable area, you may be holding an empty building in 10-15 years.
I work in commercial appraising.
This post was edited on 2/1/20 at 6:54 pm
Posted on 2/1/20 at 7:06 pm to StealthCalais11
quote:
It’s not a NNN lease. If a broker told you it was, then they are either lying or not a good broker. I would be skeptical of the broker’s underwriting for the presented cap rate. Expense ratios used likely did not account for building maintenance.
I could show you how the bank looks at these deals and it is very conservative. If you are interested.
Posted on 2/1/20 at 7:34 pm to BornKjun
I do know what I’m talking about, I work with private equity groups & REIT’s that acquire these types of assets on a multi-million dollar scale. However, you are correct, I read NNN & my mind automatically registered it as an Absolute NNN. Slight oversight on my part. OP, ignore my previous post 
This post was edited on 2/2/20 at 11:55 pm
Posted on 2/1/20 at 11:52 pm to soupboy10
quote:
Not sure if you are financing this property
Was planning to do a cash deal to leverage a quick sale/ better price. I would consider refinancing afterwards to free up some funds for a second investment property.
This post was edited on 2/1/20 at 11:53 pm
Posted on 2/2/20 at 7:19 am to LSUregit
quote:
Was planning to do a cash deal to leverage a quick sale/ better price. I would consider refinancing afterwards to free up some funds for a second investment property.
Sounds like a good idea. Let me know
Posted on 2/2/20 at 7:34 pm to BornKjun
quote:
Owners are responsible for roof and structure in a NNN lease. You don’t know what you are talking about.
One tenant properties with long term leases are basically the only properties in which the tenant is responsible for roof and structure.
Almost everything else, the owner is responsible for roof, etc.
Not so fast on the “do not know what you are talking about.” I own NN Dollar Generals. I get reimbursed for insurance, taxes, and CAM. I am responsible for any repair greater than $750. The owners of NNN Dollar Generals have zero responsibilities. That is why the the cap rates for NNN DG’s list for around 6.5% versus a NN store which will list for around 8%. Investors typically buy groups of NNN properties like they are a stock portfolio. NNN buyers don’t want to deal with any expenses.
I run across incorrect listings advertising properties as NNN every now and then. It is frustrating when you read the leases and realize they are not listed correctly. See the definition below -
quote:
Understanding Triple Net Lease (NNN) If a property owner leases out a building to a business using a triple net lease, the tenant is responsible for paying the building's property taxes, building insurance, and the cost of any maintenance or repairs the building may require for the term of the lease. Because the tenant is covering these costs, which would otherwise be the responsibility of the property owner, the rent charged in the triple net lease is generally lower than the rent charged in a standard lease agreement. The capitalization rate, which is used to calculate the lease amount, is determined by the creditworthiness of the tenant.
See link Investopedia NNN Definition
Posted on 2/2/20 at 10:38 pm to LSUregit
Broker should be able to provide some market data from the listing with the sub market lease rates, occupancy data, comps etc etc for the area. That should help
Posted on 2/5/20 at 2:37 pm to Ramblin Wreck
quote:
StealthCalais11
quote:
I do know what I’m talking about
quote:
I read NNN & my mind automatically registered it as an Absolute NNN. Slight oversight on my part. OP, ignore my previous post
Bingo!
quote:
Ramblin Wreck
You don't fully understand the terms.
An "absolute NNN" lease means the tenant is responsible for basically everything. As I said, these are basically only seen in single tenant (one occupier) leases. Dollar General is an example of this (leases can have slight variations).
A NNN (triple net) lease is what I said above. It DOES NOT mean that the tenant is responsible for the roof unless it's an "absolute NNN" lease.
quote:
That is why the the cap rates for NNN DG’s list for around 6.5% versus a NN store which will list for around 8%.
This shows your lack of knowledge.
The same definition you shared says:
quote:
The capitalization rate, which is used to calculate the lease amount, is determined by the creditworthiness of the tenant.
^ While this is true, it doesn't mean the CAP RATE is totally dependent on the tenant's creditworthiness. Dollar General has one credit rating but there are differences in the CAP RATES on different stores DG leases.
The terms of the lease have more to do with the Net Income of the property and less to do with the multiple.
BTW!
Some times CAP RATES include reserves and some times they don't. This is overlooked at times and it makes a difference.
You need to understand all the moving parts. CAP RATES with or without reserves can definitely create confusion.
This post was edited on 2/5/20 at 2:54 pm
Posted on 2/5/20 at 8:58 pm to BornKjun
quote:
This shows your lack of knowledge.
I said nothing about how the cap rate is calculated, only that cap rates were lower for DG NNN properties than DG NN properties.
Posted on 2/6/20 at 7:10 pm to LSUregit
You need to look at the leases to determine your repair and maintenance exposure. Look for "maintain and repair" vs "replace" as these are very different obligations.
Another thing to consider is the parking area. It is common for a commercial lessor in a NNN to be responsible for repaving the parking areas, which can be very expensive.
Another thing to consider is the parking area. It is common for a commercial lessor in a NNN to be responsible for repaving the parking areas, which can be very expensive.
This post was edited on 2/6/20 at 7:13 pm
Posted on 2/7/20 at 7:03 am to LSUregit
What kind of tenants OP? Are they professionals like CPA or doctors? Or more like small businesses like a crappy local computer repair guy or something like that? I’d consider that strongly. A professional is not likely to want to move and be a more conservative investment.
As said also, what’s the 5-10 year outlook like for that area? Is it improving? Is there a lot of available land and office space?
Have you looked at comparable rents on the market now?
First look, those prices are pretty low even considering NNN. You are looking at $230,000 and getting under 1% rent a month. But if the tenants are great and outlook is good it could be a great deal.
Broker sounds full of shite though.
As said also, what’s the 5-10 year outlook like for that area? Is it improving? Is there a lot of available land and office space?
Have you looked at comparable rents on the market now?
First look, those prices are pretty low even considering NNN. You are looking at $230,000 and getting under 1% rent a month. But if the tenants are great and outlook is good it could be a great deal.
Broker sounds full of shite though.
This post was edited on 2/7/20 at 7:04 am
Posted on 2/7/20 at 10:24 pm to CrawKing
quote:
Another thing to consider is the parking area
Good looking out. I'll have to ask.
Posted on 2/7/20 at 10:51 pm to baldona
quote:
Or more like small businesses like a crappy local computer repair guy or something like that?
This unfortunately... which has been giving me pause. A one man band type tenant.
quote:
what’s the 5-10 year outlook like for that area? Is it improving? Is there a lot of available land and office space?
Stable, more of an industrial area. Not many new construction or available land.
Posted on 2/8/20 at 7:47 am to LSUregit
Without knowing more, that appears to be a very average purchase imo. Unless you are in a rush, I’d see what else is out there for a bit personally.
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