NNN and NN Cap Rate Spread

Anyone know what the spread should be for cap rates on NNN and NN leases? Think a food place with an excellent credit rating. This is for a brand new building.

Landlord Responsibilities: Landlord shall maintain, repair and make replacements to the Premises, the Building and the Property, including the Common Areas, the roof and the foundation.

Expense Reimbursements: Tenant reimburses Landlord for all operating expenses, including Common Area maintenance.

 

I personally feel that the cap rate will be driven much more by the tenant than by slight differences in lease structure. In my mind, it's not truly NNN unless it's Absolute NNN. Yet I see NNN deals marketed with roof repair as tenant responsibility and roof replacement as landlord. Same with parking lot and sometimes foundation.

The NN structure you propose does not appear desirable to either party. I can't see why a tenant would want to wait for their landlord to make common area repairs. Additionally, I don't see why a landlord would want that responsibility (even if reimbursed) if the tenant/user has high traffic and repairs.

 

I agree with this. Triple net leases for Starbucks/Chipotle/etc. sell for a lot more than the cost of construction and land acquisition. Since you are paying 3-4 times build out cost for a quality tenant, the cost of fixing the roof every decade or so isn't really going to have a huge impact on your return.

For properties with investment grade tenants with long-term leases, it looks like ~25 bps seems to be the spread. This is based on a small sample size of listings I've looked through.

 

I'm working on putting together my first NNN deal. From my discussions with lenders and other investors, it seems like 50-65% LTV is the norm. Most of the people buying NNN with a quality tenant aren't looking for private equity returns and can live a safe mid to high single digit return. I've heard CMBS (specifically CTL) financing is a big player in this space but the best quote I've gotten was from a no name credit union in the heart of suburbia. Also, CTL is probably where you will get the most leverage if you are looking for something with a little more octane.

 

Interesting, thanks guys. Pokemon Master, I am not familiar with GTL(gym, tan, laundry??), what does it stand for?

PacNumber, 15/15 as in 15 years IO/15 year term? Sound like pretty sweet debt terms if they can get to 65% LTV.

 
Best Response

CTL financing is the best you can get on a good CREDIT NNN deal. This type of financing is made strictly for these types of deals and you can get leverage up to 100%, so long as the cash flows allow for it. They underwrite it to DSCR of a fully amortizing loan with the same term as the term of the underlying lease. It's also possible to have a small balloon at the end if you get residual value insurance. These guys are smart though and read through the leases very thoroughly, so if there is anything funny in there, the CTL guys won't do it (i.e. an appropriation clause on a government lease). Beware of ambiguous lease clauses, these will kill CTL deals. I've seen a shocking amount of poorly written leases, who is hiring these awful lawyers? I digress.

 

Sounds like a popular exchange product called "Zero Cash Flow NNN"

You can meet all your debt and exchange requirements on the 100% NNN deal. You still have all your equity, now you go buy another building. Let the NNN deal marinate for the next 20yrs and it will be paid off. Meanwhile you took your money elsewhere and expanded your portfolio.

 

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