Best Cities For NNN Lease Properties?
What are the top 5 best cities for triple net leasing? I've been looking at various demongraphic profiles for hottest growth areas in California (Sacramento), and Alabama (Shelby County) but wonder if anyone has info about other cities/counties in the US. I'm interested in a buying a small strip mall, based on answers I've received to questions in other areas of this forum.
Gratefully,
Marlene
Hi again,
I think you'll have a somewhat hard time finding a true "NNN" lease on a strip mall. Most of those tend to me a straight investment - yes you might have some 'anchor" tenants on something close to a NNN; but expect the strip mall to need a local management office (parking lot cleaner), and have mostly 5 year leases.
I think you should try to locate some of the major strip mall 'builders' in the areas you want to specialize, offer to finance a project if they'll build it and help you lease-up - then you'll end up with their expertise and get to pay for it by the hour, not as a % of profit.
Yeah, an NNN strip mall would be a rarity, for sure. Heck, the way I see if, after doing some looking, strip malls at any reasonable price are a rarity these days!
I agree with the idea of working with builders... but most of them aren't having trouble finding investor $$ these days.
CT
I think I understand - a NNN lease would include maintenance, and by definition, leasing retail space in a strip mall involves hiring someone to do maintenance for the whole mall. So strip malls would typically involve double net leases - right?
Actually strip malls generally have an anchor tenant who si NN or NNN but the bulk of the stores are gross rental or single- net tenants.
Most strips are as commericalking describes. You may find some strips, with all NNN, we have a local on the market with a Golds Gym, Books-a-Million, and Office Depot all NNN. Not typical though, you usually have a anchor on NNN. You may want to question if many of these are worth it at current caps, which are far lower than historical averages, and increase in caps later on would of course devalue these properties, and its diffucult to find anything that will cash flow without a large amount down.
I can see how locking in a NNN lease at a 4-6% cap rate could be a disaster in 5 years or so, if interest rates keep rising and caps rise as well.
How are people protecting themselves from this glaring problem if they have money to invest now?
Marlene, I have been looking for strip centers with tenants predominantly on (at least) double-net (NN) leases, with caps approaching 10%. Not a lot of those available, and they typically have a few warts, but they can be found if you are patient. Am nearing finalization of a purchase contract on one right now.
I figure the property will cash flow between 12 and 15% depending upon loan terms, and I should not take it in the shorts too badly if I need to sell in 2 to 3 years.
I think the answer to your question about how to protect yourself is simple, but unpleasant: hold the lease to maturity, or at least until cap rates are such that you can sell at a profit.
That's what long term investors do with bonds: they buy and hold them, so they could care less what rates do in the interim. And at the end, they get their principal back, and in they meantime they clipped coupons and collected their interest every month.
Similar thing here: hold on to the lease, deposit a check in your account every month, enjoy some cash flow, and at the end, you get a paid up building and a nice piece of land. Now, granted, your building may not have anyone in it if the tenant doesn't renew, but that MAY not be bad. Sometimes you can re-let the space for much more than the original tenant was paying. (That's specially true if you had a high-credit tenant, as they often negotiate only microscopic rent increases over a 20 year period!)
Or, here's another high-class outcome: the lease and all its renewal periods end, and the tenant comes to you and says he wants to stay. Now who's in the catbird seat?
CT
I forgot one other scenario: about 5 years into the process, the high-credit tenant decides that they don't want to keep that particular location open any more. But guess what? They signed a 20-year lease, and you can hold them to it. Usually you can get a nice lump settlement out of that, and turn around and (with luck) release the building to another tenant. That's a nice outcome -- you get paid twice for the same property!
CT
Quote:
On 2004-07-26 20:39, CharlieTango wrote:
I forgot one other scenario: about 5 years into the process, the high-credit tenant decides that they don't want to keep that particular location open any more. But guess what? They signed a 20-year lease, and you can hold them to it. Usually you can get a nice lump settlement out of that, and turn around and (with luck) release the building to another tenant. That's a nice outcome -- you get paid twice for the same property!
CT
CT,
Doesn't always work out that good, dark properties are usually worth less. Also, for example, a relative had a Food Lion Center that went dark, but 11yrs left on lease. Problem is the rest of the strip often depends on the primary tenant. Caused a lot of other losses on the strip, so they spoke with FL about FL buying out the reminder... only thing was FL did not want another grocery store in the area so they refused (they had built a new store nearby), and asked for $150k for them to release, (eventualy paid FL $100k to break lease). New tenant in and center started to fill up again, got ended up with a very small profit after a flip.
c5,
I hear you, and I agree. That's why I said "with luck" you can release. Without luck, you could be in trouble.
The FL situation you mentioned is very interesting. So the owner actually had to pay THEM to break the lease? In other words, they were willing to keep the store dark and keep paying the lease, just to avoid having a competitor come in? That's interesting. Of course, if the owner of the store hadn't owned the rest of the center, then he wouldn't care. He'd say, "sure, keep the building dark and keep paying me rent. Whatever, I just want my check."
In many (most??) of these cases the NNN building is a separate stand-alone building, so that scenario wouldn't apply, but it may for some. So your point is a good one -- watch out!
CT
Charlie,
Yep... owner stalled for months and almost just let it stay dark, but FL hung on tight.
Another thing that concerns me about some of the deals, especially some of the lease-back arrangments, where tenant owns the property or some other arrangement is present that supplies the property with a fresh lease in place on closing, is that the properties seem to be selling at well above maket of the property, based on fhe value of the lease and the cap rate that tenant would demand credit wise. For example, a top credit worth tenant may have typical deals of 20yr fresh leases at 6.75% cap. In this case a property may sell at $2m based on lease value, although to me it looks like the underlying property is worth much less.. maybe a $1m property. In this case the tenant with lease back is not only moving debt of books, but raising capital from the sale. Some of the Kindercare's that are on market are like this... you can look up tax records to see what the property was changing hands at before hand.
I'm glad to see you guys addressing this issue - overvaluation! I recently looked at a NNN muffler shop site with a 9% cap rate (that would yield 9% to the investor/owner). At that rate the 3600 sqft building was being sold for $260/sqft! I'm no appraiser - but that seemed awfully high.
In the event of default by the tenant, what can you turn a muffler shop into to maintain the value of the property?
atlanta is often looked at as the hub of the US for investing..next to NY of course..i'd look to the south
I saw a CNBC spot this morning with a builder's association president describing Seattle and jacksonvill, Fl as the two best areas for new homes right now. Last week, I went to a seminar in San Diego where the speaker was describing Houston, Dallas, Austin and San Antonio as the four best investment locations for real estate.
The dollar is devaluing as we speak, and the stock market is getting awfully bumpy. RE prices in San Diego are softening, but they still aren't reasonable.
So I appreciated the discussion about valuation of NNN properties earlier in this thread, but am still wondering where you folks are investing your $$.
Anyone want to add to the list? So far I see we have a someone suggesting Atlanta. Anyone, anywhere else?
Thanks for your help.
Marlene
I am also an interested NNN investor. I have not dealt with this side of the business before so I have a general question to ask. What happens when the single tenant NNN property declares bankruptcy or does not pay rent? What recourses do I have at that point?
I am looking at properties in major cities in CA, NV, AZ, TX, and FL.
Also, what cap rates is everyone targeting?