Single tenant, NNN lease - Real estate Valuation
I have been asked to do a pricing/ valuation of an industrial asset with a single tenant with a triple net lease for 20 years. The gross annual rent income is $2m. Given its NNN lease, should I then find some cap rates and calculate the Value of the asset based on a NOI equal to the rent ?
Any help would be very much appreciate
In the context of valuing an industrial asset with a single tenant under a triple net (NNN) lease, where the tenant is responsible for all expenses including taxes, insurance, and maintenance, the net operating income (NOI) indeed equals the gross annual rent income, assuming there are no other income or expenses directly paid by the owner. Here’s how you can approach the valuation:
Confirm NOI: For a NNN lease, the NOI is typically equal to the total rent collected, which in your case is $2 million annually.
Research Appropriate Cap Rates: Look for cap rates applicable to similar industrial properties in the same region or market. Cap rates can vary based on location, property condition, lease terms, and market conditions. Since it's a stable, long-term NNN lease, the cap rate might be lower compared to properties with higher management or turnover risks.
Calculate Property Value: Once you have an appropriate cap rate, calculate the value of the property using the formula: [ \text{Value} = \frac{\text{NOI}}{\text{Cap Rate}} ] For example, if you determine a cap rate of 6%, the valuation would be: [ \text{Value} = \frac{\$2,000,000}{0.06} = \$33,333,333 ]
Consider Market Trends: Be aware of current market trends, especially in the industrial sector and how they might affect future cap rates and property values. Economic factors, supply chain issues, and changes in commercial real estate demand can all influence your valuation.
Professional Appraisal: While these calculations can provide a ballpark figure, consider consulting with a professional appraiser or a commercial real estate broker for a more precise valuation, especially for high-stakes transactions.
This approach should give you a solid foundation for your valuation task. Remember, the accuracy of your valuation depends significantly on the cap rate you choose, so ensure your research is thorough.
Sources: CAP RATE Interview, Modeling ground lease payments into a pro forma, Real Estate Private Equity Technical Qs, Will office be the buy of the century this correction or is it dead?, Real estate returns
It depends on the lease, if all expenses truly fall to the tenant, then yes you can cap income. you could maybe deduct a small expense for non recoverable landlord fees at like $.25 cents psf or something.
I assumed a 10% non recoverable expenses. So the NOI was essentially 90% of the GRI.
But it sounds a bit excessive perhaps
That should be fine, cause theoretically I think you should be deducting vacancy and credit loss so that should cover it all then
I would detail justification of your cap rate due to tenant financials/strength/rating, lease term(longer=better), market rents (below could be better for lower cap easy replacement/more upside, above market not so good, aligning with market is fine), also can demand lower cap depending on rent bumps/options/likely of lease renewal ie there is no where else this tenant would lease/been their forever/best building for them in area and why, and location/market demographics. If you want more brownie points do some try hard shit like find the thoroughfare plan from the city and see if there is any major road improvements or zoning going on around it.
Other than that you could just slap a cap rate on it comparable to other buildings’ tenant/age/size/lease term in the area. STNL is pretty easy. But that’s how to get gritty w it.
I assumed the market cap rate for the specific asset in the region. Added a 40bps premium based on specific adjustments similar to the one you mentioned above (tenant credit profile, lease length, location, asset quality). Another method I used was a DCF where I assumed the same cap rate but with 50bps premium at terminal year. For the discount rate I used the public available WACC of the fund. Hope it was a good approach
Yes, NNN lease NOI/cap rate and should be some spread to treasuries. Even if it's a AAA credit tenant, there is a spread and risk it is not a bond.
Maybe do 1-2% to treasuries, around 7% due to where financing could be today. I'm assuming you do not want negative leverage and since there's no room to add value that's something to think about.
Anyone that underwrite these deals often agree?
Comp to equivalent corporate bond yields for the given tenant's credit. Check Bloomberg for where the tenant's debt actually trades. If they don't have any public debt, comp to BofA benchmarks. If the tenant is BBB, then: https://fred.stlouisfed.org/series/BAMLC0A4CBBBEY. A 20-year NNN lease is closer to a credit investment in the tenant than an investment in the real estate. Mission criticality and ability to be replaced are things you should think about. The strength of the local submarket comes into play after these things (depending on the deal).
Basically:
1. Who is here?
2. Why are they here?
3. Can they move?
4. What do we do with this thing if they move?
We've received reports from some of the national appraisal shops indicating in this case that the PGI = the EGI = the NOI. So, they apply the cap rate directly to that. The thinking is that it reflects how national NNN investors model these properties, but I can say from my seat on the Bank side and as others have mentioned here, there are some nonrecoverable expenses that should be included in a prudent model. I would always include a V&C of 1 or 2%, because I work for a Bank - a 3% management fee and then a reserves expense of some kind.
Also, for these assets, the cap rates vary based on the usual factors and the years remaining on the lease/option periods. Check out Boulder Group's NNN Reports for some more data here.
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