Does anyone specialize in NNN retail sites?
Have a client looking for 8% yields; they're packaging these and selling as products to investors overseas. We specialize in most MF classes and have a stable of sponsors we use. I want to help the client move into other areas that could offer more yield but I have no experience in this space.
Does anyone have a good source that has a primer on how they work, risks, operating nuances, lender appetite, etc?
I have the email blasts from brokers, and some look pretty good... 7 year NNN leases on dollar stores and banks at 7 caps. My immediate thought is that with leverage you can get these to 8 or 9% yields, but I'm concerned there is much i dont know (lenders leverage and interest rates, although leases are 7 years are there ways they can get out even if they're corps with strong balance sheets, do you typically UW the balance sheet, how do you underwrite BS/tenant, etc).
Any color would be great. Thanks!
You'll have to get familiar with the way these products are financed. A lot of people assume that since they get 72% LTV 10 year fixed rate paper at 3.5% for a stabilized multifamily that they'll get similar terms on NNN assets, and frankly, thats not going to happen.
The reason you see high yields on these 7 year leases you're talking about is because they're not easily financable. You'll see all kinds of structure, lower leverage, higher rates and fees, and more importantly, ALL KINDS OF STRUCTURE. The IO periods will be minimal to non-existant and you'll likely be in for several years of cash sweeping or other non desirable things.
These are really a specialty asset class and properly evaluating an asset is a combo of the asset as it stands, a "dark value" test of the bricks and mortar, and credit assessment of the lease guarantor. Find someone who works at Stan Johnson or one of those NNN firms and chat them up to get a decent intro level primer on these things.
Are you an operator? We have capital looking for these yields but need a partner with a track record to walk us through how to make it happen
I'm in debt and equity brokerage, so there probably wouldn't be a fit if you're not the sponsor/co-sponsor. We're also expensive, so smaller sponsors don't really like using us. That said, always happy to connect offline if you'd like to discuss further.
Agree with everything emceedrive said. And you're very unlikely to find a NNN single-tenant with a credit tenant at a 7 cap. There are a lot of nuances that aren't apparent, so talk to some people with experience. Financing NNN single-tenant on a short 7-year lease isn't appealing to a lender without a lot of mitigations.
In my CMBS financing world, we see tons of single tenant NNN properties in retail and industrial. Its all about the tenant. How much money have they invested in their space? are they sticky, is surrounding real estate cheap that they can move at LED, is the location mission critical, do they have strong sales PSF at the location and how does it compare to the national average, what are the TI/LC costs and downtime in the market, tenant financials are important , this is essentially corporate banking more than res estate lending, so we look at metrics like debt to EBITDA, fixed charge coverage ratio, we would like 12-18 months sweeps with ongoing TI/LC reserves. If tenant is IG rated, we can average rents through the earlier of LED or loan maturity so that we can underwrite a higher NCF, if the IG rated tenant has a LED extending 3 years more than loan maturity, Fitch will give excellent treatment so we can waive ongoing TI/LC's reserves and increase proceeds and leverage. We dont typically lend at 75% LTV like we used to in the 1.0 days even if the tenant is IG rated. We are at 70% LTV with no I/O usually or 65% LTV with some I/O and 60% LTV with full I/O for high quality tenants.
Interesting post Brody - appreciate the data points. On my end, I'm seeing that once we get down to 65% LTV, the market is providing 10 year paper with full IO as long as there isn't something crazy (lease term, totally BS tenant, etc). There is usually some structure unless there are at least 5 years of remaining term on lease, but sponsor dependent to a degree.
Yeah we can be at 65% full term I/O if we like the tenant. Recently, we financed a $16.5MM loan for a single tenant USPS building in New Hampshire and terms were 65% LTV, full term I/O. USPS will be rolling prior to loan maturity but the IG rating of the tenant helped. Plus we had a 20 month sweep priority to lease maturity and ongoing TI/LC reserves.
Thanks, makes sense.
Who are some active operators in the space you see doing deals regularly?
Is CMBS the typical option, or do banks do this on balance sheet?
Is 65% LTV normal? What would rates look like, and what i/o is achievable?
What is the dynamic tenanting the space; knowing nothing, i assume sponsors usually have relationships with corps looking for space?
1) This is a national industry. The whole point of NNN is that literally anyone can buy and get into the game because of minimal landlord responsibilities
2)Deal Dependant, but generally not balance sheet territory
3) Deal Dependent
4) Generally, no. The point is to buy space that won't need to be re-tenanted. Everything else trades at a heavy discount.
Can I ask what you do Reissl?
CMBS is a popular option because of I/O, leverage,fixed rate. But banks particularly local banks are also a option. I sometimes see local banks offering 75% LTV deals because its a real estate thats in their backyard and they want to build a relationship with a sponsor. But not sure if they are always fixed rate and non recourse like our loans. My sponsors are smaller players, they are not institutional, but there are national operators who specialize in this space. One group I always see using CMBS loans every quarter is Exchange Right Real Estate, they create 1031-exchangeable, DST portfolios of long term, net-leased properties. They regularly get $50MM+ loans to finance 20+ property portfolios and the properties are typically Dollar Generals, Walgreens, Fresenius, Tractor Supply. They are a big group with over 2B AUM. Brokers who specialize, live and breathe this space are experts when it comes to leasing and selling these properties. On Bigger Pockets, I often read posts by Joel Owens who has a database of NNN properties and reviews over 1000 properties a week. Speaking to a broker like that will help you get a better understanding of the space. 65% ltv is reasonable and knowing nothing about the tenant and lease terms, I would say 225 bps over UST is a reasonable coupon. Its very deal dependant. You can definitely expect some I/O as well if you have a 6 handle. Full term I/O is an option if you have a 6 handle and if the tenant is IG rated or has a long term lease, ideally beyond loan maturity.
One important factor to consider for a lot of these single tenant NNN retail deals is the sales (or store & company financials) and if they report the figures. This along with extension options is absolutely crucial. If sales/SF is high relative to estimated gross rent, then there is a greater likelihood that the tenant will renew their extension options. Typically, traditional (perm) lenders won't lend past the expiration of the lease however there can be scenarios and structures in place that can be put in place. For example, if you have a tenant that is paying significantly below market rent and vacancy is low, you can structure in a sweep which will handle re-tenanting if the tenant leaves.
I recently did a single tenant retail deal in NYC with 6 years left on the lease. There was a contractual rent bump to occur within 16 months of closing. CMBS was unable to much beyond providing an earnout after the rent bumps occurs. Regardless if the rent bump occurred, the rent was still below market so we were able to underwrite the cap rate to 4.5%. We ended up doing the deal at 64% LTV with a life company (7% DY) with no structure and almost 70 bps cheaper than the CMBS options.
"you can structure in a sweep which will handle re-tenanting if the tenant leaves."
can you please further explain how this works and what it means. thanks
It depends on whether the sweep is a paydown or just a reserve, but essentially it means that for the last 'X' number of months, your cashflow has to either go towards paying down the loan balance or sitting in a cash account where it can't be released until it refinances. This means you can't take any of your post debt service cashflow - it has to sit in an account (or get applied to your balance) until the lender releases it (when you either get a new lease or new financing).
i think its also fair to mention that NYC single tenant retail is a bit of a different animal just due to the value of the bricks. Good execution at that DY, but thats really the main problem with CMBS - never going to get any credit for any upside, its all sized on in-place.
big difference between STNL and MF is if your 1 tenant leaves 100% of your income disappears. Dollar General has great yield but a lot of their locations would be nearly impossible to backfill should DG vacate or go belly up
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