NNN Lease with 10 year lease, a good investment? - Posted by Robert

Posted by cam on January 16, 2009 at 10:01:16:

If there any expenses for the owner, then it would not
be an absolute NNN lease. It still may be considered
NNN however. It’s the base rent that will determine

NNN Lease with 10 year lease, a good investment? - Posted by Robert

Posted by Robert on January 14, 2009 at 19:44:33:

My employer is ready to lease a $3.5 million flex building as a single tenant. Rather than us buy, the broker will arrange investors to buy and lease back to us NNN. Our company has an excellent credit rating and very strong financially. With our 10 year lease and probable 10 year option, what do the numbers look like for these investors? Are they putting minimal cash down and getting 20 year financing? Assumming $420k a year in rental income, is this a good investment for me or partners if we have 10% or 20% cash?

some risks to consider - Posted by Tai

Posted by Tai on January 18, 2009 at 08:18:48:

The numbers may look good. But you need to consider some
risks and plan for it, and then the numbers may or may
not work out:

the risk is that the tenant may not stay 10 years. either bankruptcy (ala circuit city) or change of
business condition may cause the tenant to break the
lease. 10 years is a long time to predict what may or
may not happen in the future. just look back the past
2 years. if tenant is bankrupt, you end up with a
empty building and a big mortgage and nobody to sue.
if tenant is not bankrupt but simply decides to break
the lease, you need to sue to collect back rent, and
you have to make the monthly mortgage
payments out of your own pocket in the mean time. plan
on 1 year to get a summary judgement out of the courts
even if you win.

the other risk is one of liability, in case somebody
sues the tenant plus owner of building for liability.

so, in order to protect yourself, you may want to:

  1. get a none-recourse commercial mortgage
  • you are not personally responsible for the
    mortgage in case of tenant default
  • typically the lease is assigned as collateral
    so you cannot change the terms of the lease on
    a whim - even if that would keep a tenant who
    would otherwise walk
  • terms of the mortgage of course will be tougher
  1. hold the property and mortgage in a “bankruptcy remote” corp or LLC,
  • so if worst case happens, you can walk away
    from the property/mortgage/equity without
    anybody coming after your personal asset
  • this means hefty laywer fees unless you do this
    so often that there is a pre-packaged paperwork
    lying around already.

also, remember that commercial properties depreciates
in 39 years instead of 30 years. so you will have to
pay income taxes on the rental income unless you have
other passive losses to offset this income.

now, after all this, see how much is your after tax
cash flow, and how many years before you get back your
25% down payment. then you may decide if this is a
good deal for your or not. it may be. it may not be.
mostly a function of your personal risk tolerance.

one final thought. if you decide to go ahead with it,
you may explore the possibility of the company buying
the propety, getting a non-recourse mortgage,
setting up a LLC as holder of the property/mortgage,
etc, and then you buy the LLC (using another bankruptcy
remote LLC just in case), therefore avoiding the
hassle and expense of closing fees (~75k)

Re: NNN Lease with 10 year lease - Posted by cam

Posted by cam on January 15, 2009 at 12:34:06:

In todays tight credit market, investors generally
have to put 20-25% down unless this is a national
tenant with a Moody’s bond rating of BBB- or better.
The required amount down would be determined by the
strength of the tenant but would be less than 20-25%.

If your company is a manufacturer, they may qualify
for just 10% down if they purchase the property
themselves. Income and business net worth
restrictions may apply though.

20 year financing would be on the low end. Loans of
this size are amortized 20 - 30 years.

Hard to say if it is a good investment or not. Does
the rental income quoted reflect the base rent or
anticipated rent taking into consideration property
taxes, insurance, maintenance contracts etc? What is
the base rent, not including taxes, insurance etc?

For absolute NNN leases:

base rent/(downpayment + closing costs)= cash on cash

Re: NNN Lease with 10 year lease - Posted by Robert

Posted by Robert on January 16, 2009 at 07:43:35:

Thanks for your reply. The tenenat will pay all taxes, maintenance, etc. Very few expenses for the owner so I guess it is considered absolute and the $420k annual rent would be available. This appears to be a good deal for us to own if we have the down pmt. We would build equity and have good cash flow. We would have to build a cash reserve over the 10 years to insure we aren’t in cash trouble if the tenenat moves on in year 11. I will amortize the loan to 30 years or as long as I can get it. Thanks again.