Analyze the deal - Posted by john

Posted by ray@lcorn on August 11, 2006 at 24:19:05:

john,

There are three major rating firms:

Standard & Poor’s: www2.standardandpoors.com

Moody’s: www.moodys.com

Fitch Ratings: www.fitchratings.com

Each have different levels of access, from free to paid subscriptions. S&P allows free access with registration on their website.

ray

Analyze the deal - Posted by john

Posted by john on August 08, 2006 at 13:04:29:

Im looking at a deal that is a 20 year NNN lease, franchise restaurant (not well known). I would own the land and the restaurant. The cap rate is 6%. The franchisee personally guarantees the lease. My only concern is the cap rate might be too low and that the property is a single use type of property, meaning that if the owner goes out of business it might be difficult to get a new restaurant owner in there because the building is designed for restaurant use.

Re: Analyze the deal - Posted by ray@lcorn

Posted by ray@lcorn on August 08, 2006 at 14:57:44:

john,

Your concerns are valid, and should be weighed into the determination of what the maximum price is that allows you to meet your minimum return requirements.

For more detail on how to do that, see this article: http://www.real-estate-online.com/articles/art-216.html

ray

Re: Analyze the deal - Posted by john

Posted by john on August 08, 2006 at 15:55:14:

In my scenario is the cap rate of 6% low, because the risk is low on the deal…I.E.long term lease with franchisee and personal gaurantee or is the rate more of a reflection of the seller’s price and the going market for cap rates.

Re: Analyze the deal - Posted by ray@lcorn

Posted by ray@lcorn on August 08, 2006 at 16:59:01:

john,

In my opinion a 6% cap for a regional restaurant operator with no credit rating on a specialty building is too low. A 6% rate is for A rated credit tenants with a bond lease. This is not the same animal.

For a tenant as you describe, assuming they have strong financials, at least 10 stores, at least ten years in business, and a pure NNN lease, current asking caps are around 7.5%-8%.

My value would be around 8.5% because I can’t get the lowest finance rates on that type of tenant. I wouldn’t sacrifice my return just to buy it because there is typically very little upside income potential. With these deals, its WYSIWYG (What you see is what you get).

ray

Re: Analyze the deal - Posted by john

Posted by john on August 08, 2006 at 19:02:56:

What is a bond lease?

Re: Analyze the deal - Posted by ray@lcorn

Posted by ray@lcorn on August 09, 2006 at 10:13:01:

john,

A bond lease is one that has; no exit clauses during the primary term other than condemnation, destruction, or environmental contamination; terms of a true triple-net lease with no landlord responsibilities; and tenant credit quality rated above BBB- by S&P, Baa3 by Moodys.

This gives the lease bond-like characteristics of a guaranteed income stream.

For leases that have some but not all of the above traits, there are insurance products that convert leases to a bond-lease payment status and insure the income stream to the owner, but this does not change the underlying credit rating of the tenant and typically won’t qualify for the preferred loan terms available to a true bond lease. Also, such enhancements are typically paid for by the owner unless provided for in the original lease negotiations.

ray

Re: Analyze the deal - Posted by john

Posted by john on August 09, 2006 at 15:27:11:

How do you find out the credit rating of the business?