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TRIPLE NET REAL ESTATE
Let's talk about it. Lots of investors seeking income think it is the Holy Grail, but let's talk about some risks. (I'm specifically talking about single tenant NNN).
Thread....
Let's talk about it. Lots of investors seeking income think it is the Holy Grail, but let's talk about some risks. (I'm specifically talking about single tenant NNN).
Thread....
When I was a banker (about 7 years ago), there was a large convenience store chain based in our town that developed their own locations, then sold them off as NNN investments when the locations were complete and opened up. There was huge demand...
Because of the demand, we saw cap rates go from 8.75% to the mid 5's in just a few year period as people were thirsty for income generating assets.
The issue was, they started developing HUGE stores that required large sites (3-5 acres was common)....
The issue was, they started developing HUGE stores that required large sites (3-5 acres was common)....
People loved the income, but I thought overall, they did a poor job or underwriting the risk in the investment.
Think about it this way. Let say you paid $5.5 million for the deal. You own RE for a gas station (single purpose asset)...
Think about it this way. Let say you paid $5.5 million for the deal. You own RE for a gas station (single purpose asset)...
If the deal goes south, it is likely because for whatever reason, the location was not good for a gas station (what your asset is designed for). Now your entire investment is entirely in the value of the land - probably not worth the $5.5mm you paid.
Plus, you as the owner probably need to demolish the building, the gas canopies, etc. to make it marketable to another future user (if your lease makes you responsible for the underground storage tanks, you got taken).
Absolutely, you should look at the tenant, the ROI, the viability of their business through the lease term.
But that is where most people stop their underwriting on these type of deals....
But that is where most people stop their underwriting on these type of deals....
You also need to be considering:
1. What are other potential uses for the property if the tenant dies/goes away? These NNN deals are often gas stations, restaurants, etc (customized). Hard to re-lease.
2. What will your basis in the land be at various points in the deal?....
1. What are other potential uses for the property if the tenant dies/goes away? These NNN deals are often gas stations, restaurants, etc (customized). Hard to re-lease.
2. What will your basis in the land be at various points in the deal?....
...assuming that you really just end up with land value (need to tear down structure for potential new development options).
There is a lot more to it than just the "coupon" rate of the NNN lease.
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There is a lot more to it than just the "coupon" rate of the NNN lease.
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