I am looking at a single tenant net leased property for purchase
What should I focus on when looking at the lease?
[{"id": "hixndbn", "text": "Maintenance, insurance, taxes. The lease should establish that all of these are covered by tenant on Triple Net basis.", "replies": [], "depth": 1}, {"id": "hixrh2g", "text": "Loopnet, MLS or talk to a realtor.", "replies": [{"id": "hixtifr", "text": "Single tenant. \n\nIE: a freestanding Chipotle. (Or McDonald\u2019s, Dollar General, etc)\n\nMake sure there is term left and make sure you reach out to the Tenant for DD. Ask about their sales volume. (Say \u201cyou don\u2019t need to give me sales figure, is it below average, average or above average). And make sure they plan to renew, obviously. \n\nHappy to discuss in DM if you need more help. \n\nAnd under no circumstance, should you take the persons advice above this post. DON\u2019T EVER USE A RESIDENTIAL REALTOR in our business (commercial). (They don\u2019t know what they are doing)", "replies": [{"id": "hixv4pp", "text": "A residential realtor aka MLS is not commercial and 99/100 will not have the experience necessary to provide you with actionable advice. \n\nTwo things not mentioned yet:\n\n1) Who is the guarantor on the lease if any\n\n2) What are the lease rates for the area for the property. You have a higher probability of releasing a space in a metro area verses a Sonic in rural midwest.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hiy01rv", "text": "Remaining term on lease, and tenants credit worthiness", "replies": [], "depth": 1}, {"id": "hiy48vc", "text": "If it is a low cap rate, long term lease, you are basically buying a bond if it\u2019s truly n,n,n. Please remember what happens to bonds when interest rates rise as the same thing will happen to your property. The cap rate should also reflect the credit worthiness of the tenant. Junk bond credit quality requires a higher rate. Make sure your eyes are wide open because bag holding real estate sucks!", "replies": [{"id": "hj0zc3o", "text": "Could you explain what happens with bonds when interest rates rise", "replies": [{"id": "hj11a7w", "text": "Sure- rates go up- value of bond goes down. The same with cap rates- if the market goes from, say, a 6% cap rate to an 8% cap rate, the value of the property (income stream) goes down by 25%. For example, say the property has 100k NOI, at a 6% cap it\u2019s worth $1,666,667. At an 8% cap, it\u2019s worth $1,250,000. If you think these historically low interest rates will hold or even decrease, buy it. However, if you think they will go higher, you may be stuck holding this for a long time. As the lease term gets shorter, the value can be further impacted. Your salvation may be much higher rents down the road but it is anything but an \u201carm chair\u201d investment. I\u2019ve been in the market since 1991 and have seen numerous cycles. We are clearly at the low end of historical interest rates now but that can change.\n\nAnother consideration is long term, flat fixed rents or token increases over a long term can be crushed by inflation.\n\nPlease use caution!", "replies": [{"id": "hj2jylw", "text": "I see so as as rates rise it may be best to seek these type of investments in a high interest rate market obviously due to prices lower and the yield being higher?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hiy5u8h", "text": "Term, corporate guarantee, each party's responsibilities, location (if they do leave at end of term, are you stuck with a tough to lease asset).", "replies": [], "depth": 1}, {"id": "hiyagts", "text": "To add here: pay attention to the base rent compared to the market. There are various reasons a tenant would be paying higher than market rent (usually it was a build to suit with improvements amortized in the rent). You could have a great tenant with decent term left, but when the term is up you can bet they're going to negotiate. They'll have a lot of leverage if they were paying above market rent, especially if it was due to TI.", "replies": [], "depth": 1}, {"id": "hiyarzk", "text": "To add here: pay attention to the base rent compared to the market. There are various reasons a tenant would be paying higher than market rent (usually it was a build to suit with improvements amortized in the rent). You could have a great tenant with decent term left, but when the term is up you can bet they're going to negotiate. They'll have a lot of leverage if they were paying above market rent, especially if it was due to TI.", "replies": [], "depth": 1}, {"id": "hiyb20b", "text": "What KIND of single tenant?\n\nRetail? QSR? Industrial?", "replies": [{"id": "hj1i526", "text": "Big difference between a free standing retail vs a multi tenant small bay.", "replies": [{"id": "hj2u2yw", "text": "He specifically stated single tenant but yes massive difference.", "replies": [{"id": "hj50pc1", "text": "True. How about a 60s vintage 14\u2019 clear warehouse (single tenant)", "replies": [{"id": "hj520fu", "text": "Is it net leased? Float it to them", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hiyfyyt", "text": "\\- What is not reimbursable by TT (nothing is truly NNN)\n\n\\- LL obligations\n\n\\- Make sure lease term and the term of your loan do not mature close to one another\n\n\\- Indemnification language (i.e. environmental)\n\n\\- Go dark, lease termination, early termination (ie due to LL actions/negligence, TT business/relocation, property damage, etc)\n\n\\- Calculation/mechanism/process of getting reimbursed per lease in the year TT lease expires and vacates the premises.  \n\nSome of the language in the lease may be one sided in favor of TT because the lease could be TT's form of lease, so be aware of what you are getting into.\n\nCorporate guarantee is typically not worth the paper it's written on unless you are able to confirm it's the parent corp that is on the hook (most times it it not).", "replies": [], "depth": 1}, {"id": "hiyskf6", "text": "Single tenant is risky because their success is your success. Confirm their rent payments have been the correct amounts and on time. Check into their business and financials as much as you can.", "replies": [], "depth": 1}, {"id": "hj045bt", "text": "Location location location. Walgreens on the corner of Main Street has value beyond the tenant. Dollar General in the middle of no where is worthless beyond the tenant.", "replies": [], "depth": 1}, {"id": "hj1ic1y", "text": "OP. We really need more clarification on what you\u2019re buying. As a lawyer, I\u2019d recommend you get a lease abstract done. It\u2019s a few hundred bucks but really helpful in this scenario.", "replies": [], "depth": 1}]