Absolute NNN “mail box money” investing with debt. How much risk is associated when balloon payment becomes due? TIA
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[{"id": "g4mb5g2", "text": "You need to find out if the tenant plans on staying  but 15 years is a long time.\n\nYou have to balance two things: reduction of principal to reduce your debt burden, and having enough cash to retenant the property if the tenant moves out in 15 years - or go Bk on you.\n\nThe bank may grant you an extension to the end of the lease term, and buy you time.\n\nThe risk of a balloon is the bank not rewriting the loan and forcing you to refinance or pay the loan off. In year 10, when the lease only has 5 years left that could be a problem.", "replies": [], "depth": 1}, {"id": "g4mb7nz", "text": "Don\u2019t pay down the debt. It\u2019s free money. Just refi and take equity out of the deal. If the property is not crumbeling it will be worth more in 10 yrs.", "replies": [{"id": "g4mbwz1", "text": "Ehh depends primarily on the building's location. If it's a Dollar General currently cash-flowing $70k/m that's great. But if that town goes bust in 10-15 years that could be a big empty box with nothing to fill it.", "replies": [{"id": "g4n3fof", "text": "Pretty sure it\u2019s 70k a year not a month.", "replies": [{"id": "g4nzvgs", "text": "Oops, yeah, good catch.", "replies": [], "depth": 4}], "depth": 3}, {"id": "g4nqsr5", "text": "This is my biggest fear.", "replies": [], "depth": 3}, {"id": "g4pd6gq", "text": "Yes, this is where it matters where the property is located, and who the tenant is.  I've seen NNN properties in rural locations, leased to Dollar General, Dollar Tree, etc. that have gone dark and now have very limited potential to be leased.  I think a NNN property in a larger metro area doesn't have the same level or risk.  One community had the Dollar General lease expire, and they just built a new Dollar General 250 yards done the street.  The old building has been vacant for going on 3 years now.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g4mbf95", "text": "[https://bouldergroup.com/media/pdf/Net-Lease-QSR-Report.pdf](https://bouldergroup.com/media/pdf/Net-Lease-QSR-Report.pdf)\n\nThis report shows the effect of the remaining lease on cap rates. It isn't specific to your property, but if you're worried about financing, you should be able to extrapolate some effect on the value.  That will help with predicting your LTV.\n\nA property worth $2,700,000 now at 5.50% would have an NOI at $148,500.  If the lease has 2% annual increases your NOI in 10 years would be more like $177,500.  If the cap rate is a full 100 basis points higher, as this report suggests, your value would be $2,730,000.  So, no real loss and any debt paydown would be equity.", "replies": [{"id": "g4nqnsx", "text": "Thank you very much. I appreciate the information", "replies": [], "depth": 2}], "depth": 1}, {"id": "g4mbmwu", "text": "NNN with 5 years or less of term is very difficult to sell or refinance. If you don\u2019t pay for the term extension you\u2019ll get nailed with tough loan economics on the refi - sweep to a reserve for TI to some high level or hyper amortization. Good luck!", "replies": [], "depth": 1}, {"id": "g4mbq0e", "text": "Tough to give proper advice without knowing more details. I would say that expectsd residual value of the real estate is very important.", "replies": [], "depth": 1}, {"id": "g4mdzpi", "text": "Have you calculated the annual lease increases?  Seems to me that in ten years time, your dad could have saved enough money to pay the balloon and still have 5 years still left on the lease.  Naturally he wants to be fiscally responsible so that when the balloon comes up he can pay it, although at that time, he will likely negotiate a refinance and an extension on the contract.", "replies": [{"id": "g4o4cxt", "text": "I\u2019m not 100 percent sure but I believe the rent stays the same for 15 years. 6+ cap \n\n4 (5 year options to renew at 10 percent increases each)", "replies": [], "depth": 2}], "depth": 1}, {"id": "g4meu1c", "text": "Most lenders want to make sure the remaining lease term is longer than the loan term. There are a lot of variables, but generally speaking, you're going to want to extend the lease to provide the takeout lender more confidence in the cash flow or have a guarantor with capacity to payoff the loan if the tenant vacates. Perhaps you could negotiate a remargin agreement subject to performance hurdles (e.g., accelerate amortization until it is leased).", "replies": [], "depth": 1}, {"id": "g4mg5gr", "text": "Good question. I\u2019m looking at a similar thing and have the same question. I see some people saying it\u2019s a possibility to refi at the end of the ten years. Based on what I\u2019ve heard from banks today, that would be possible but who knows what things will look like in ten years. Also, in ten years, will rates be this low or lower? Hard to think they will\n\nI think as long as you buy in a relatively stable area that won\u2019t go to shit, you should be safe. Worst case scenario is you get a new tenant in at the same rate they are paying today (unlikely). So if the cash flow makes sense for you now, it would be close to the same in 10 years. And assuming rent increases (fairly safe bet) you would have better cash flow", "replies": [{"id": "g4o4kmv", "text": "Very true. Thank you for reply. My biggest fear is the tenant moves out and we are left with a shell of a building that doesn\u2019t have the value it had with cash flowing tenant", "replies": [], "depth": 2}], "depth": 1}, {"id": "g4mi8ld", "text": "Why not ask him to walk you through his thought process?  It would be a good learning experience.", "replies": [{"id": "g4o4y70", "text": "We have had discussions but I\u2019m all honesty I think my father just got smooth talked into something he doesn\u2019t fully understand", "replies": [], "depth": 2}], "depth": 1}, {"id": "g4mobmw", "text": "Goal is to negotiate an early lease renewal a few years before maturity", "replies": [], "depth": 1}, {"id": "g4piizk", "text": "Dollar General, CVS, Walgreens... these are not unsophisticated tenants.  They know they have all the leverage when the renewals start and as someone else said; will move 100 yards down the street if it makes more sense than renewing with you. Hell, if they could ensure someone would buy the thing they would shorten the initial term too!\n\nDo some due diligence on the location.  Is it on a corner? What is the traffic count? What does ingress &amp; egress look like? If the tenant elects not to renew in 15 years you'll have a $1,000,000 owed on what?  A shell building with vacant lots of both side you can't make a left turn into?  Or is it does it have something that will attract another tenant?\n\nIf he didn't ask you about it on the front I doubt your father wants to hear your opinion now but 15 years is a long time (ok 10 year term on the loan) so if this isn't his only source of income its not the end of the world.  He has plenty of time to use the 70,000 a year plus whatever other cash flow he has to mitigate the risk.", "replies": [], "depth": 1}, {"id": "g4prqnz", "text": "There's not too much to fear except for the company going under during those 15 years. Banks have no problem refinancing with only 5 years left on the lease so that shouldn't be a problem. I've gotten extensions easily when balloon payments are due but haven't been made due to delays in refinancing so it's not a hard hard deadline.", "replies": [], "depth": 1}]