NNN Long Term Leases, do they have any value with 8% inflation?
For example, I got a broker's marketing package today for a 25 year ground lease NNN for a Taco Bell at a 4.5% CAP Rate.  No inflation clause, 10% rent increases every 5 years.  

Let's say 8% inflation is the new normal.  


That lease is losing 8-4.5+(10% every 5 years increase, 2) = 1.5% per year in real dollar terms.  Is it worth anything in that environment?
[{"id": "idgwea2", "text": "What are you comparing it to? If that money is sitting in your bank account you\u2019re just losing 8%. It\u2019s also a NNN lease so Taco Bell is eating the costs.", "replies": [{"id": "idia77u", "text": "You are assuming that financing is not an issue.\nIf that is needed it does not pencil out", "replies": [{"id": "idifusz", "text": "Yeah, no argument. I\u2019m assuming the buyer for 25 year ground lease is a coupon clipper. This isn\u2019t a screaming deal but every investor has a different criteria/risk tolerance and this could fill a need.", "replies": [{"id": "idk1r4m", "text": "I understand all your saying.    \n\n\nI guess I'm wandering if we have 5 years of 8% inflation (\\~50% compounded) and it has a 10% rent increase in year 6, these things really lost money.  What's the value then?\n\nI agree that buyers of these are wealthy and not generally hurt by this.  But in 2027 there's no way they are worth anywhere near a 4-5% CAP.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "idh7hdz", "text": "There\u2019s a rate of return that you\u2019d pay for it, may not be 4.5% or not, but the market will correct if enough buyers need more yield.", "replies": [{"id": "idl9hbh", "text": "Can you explain This comment to me like I\u2019m 5? I\u2019m intrigued in the relationship between yield demand and how the market corrects", "replies": [{"id": "idlh28a", "text": "Sure. What I meant was the listing broker and seller priced the property at 4.5% return (cap rate). I bet that tenant has other property\u2019s that have sold over the past 18 months on ground leases at cap rates in that range which is why they priced it that way. OP is saying \u201chey, how am I going to get a 4.5% return when inflation is higher than that?\u201d If enough buyers are like OP then buyers will require more yield l, I.E. higher cap rates I.e lower prices for real estate (because the leases have been signed already so that\u2019s not changing - if rent isn\u2019t changing yield and pricing are the the only variables that can move on the see saw if you will). Sellers will push back on these new buyer underwriting levels. One side will eventually cave. In my experience it\u2019s usually sellers because they have more difficult time frames, more times than not, for transactions to occur. Make sense with that explanation?", "replies": [{"id": "idmorzu", "text": "Thank u!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "idh7ic3", "text": "This is essentially an annuity with Taco Bell as a tenant. The biggest benefit you'll probably get is depreciation, which can be used to offset the income from this lease and other sources (check with CPA on how to maximize this). Do a cost segregation study when you acquire the asset so your CPA can depreciate appropriately. The 2017 tax law changes also allowed bonus depreciation for FFE, certain improvements, which basically allows you to take several years of depreciation at once in the first year of your ownership. Again, check with your CPA about eligibility, logistics, etc, but this could be an income offset play in the short and long term.", "replies": [{"id": "idhtadk", "text": "This is the best answer. On a more macro level, real estate is inflation resistant for this very reason. Generally as inflation increases values across the board, real estate values rise as well, thus creating a hedge. Additionally as maabeatt alluded to, while prices are relatively inelastic in the short term, they become more elastic over a longer term. Which is a long way of saying the market will shift to reflect those changes, but it\u2019ll only really be noticeable in the long run. Hence time in market over timing market.", "replies": [], "depth": 2}, {"id": "idhwz87", "text": "This is a long worded answer and missing out the most important part. You want to be the tenant with 2% annualized increase in rent in an 8% inflation rate environment. Buying a 4.5% cap rate in an 8% inflation rate environment with only the prospect of long term rent growth at 2% is terrible. You might as well park your money in low interest rate bonds and watch inflation eat away at your capital. This is as bad of an idea as buying rent controlled apartments at a super low cap rate.", "replies": [{"id": "idihdd4", "text": "Yeah, i'm not saying it's a good or bad idea. I'm just highlighting that depreciation can be just as important as yield if you have wealth to put somewhere and recurring income coming in. As a real estate developer with high net worth capital on our side, this is a very big part of our strategy, depending on the project and the right investor's situation.", "replies": [], "depth": 3}], "depth": 2}, {"id": "idhx577", "text": "You're not buying any FFE if it is a NNN lease.", "replies": [{"id": "idih465", "text": "ah - yes, fair point", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "idijc52", "text": "Is it a true ground lease or just a nnn deal.  Does the tenant own the building?  I\u2019ve had a few of those deals cross my desk where the tenant owns the building and they are shocked at the actual leasehold value is, or I should say sandwich leasehold value.", "replies": [], "depth": 1}, {"id": "idj82np", "text": "publicly traded NNN REITS are trading at 7-8 cap, 4.5% is silly unless you want to use the depreciation", "replies": [{"id": "idj96rt", "text": "ticker NNN is at 7 cap on 2022E numbers", "replies": [{"id": "idk6qk5", "text": "I don't follow REIT's much.    \n\n\nMy theory is apartments/storage are better buys right now due to their ability to increase rent.  Long term NNN leases are dogs I wouldn't touch without an inflation clause.    \n\n\nHave apartment REIT's held up better than NNN REIT's?   \n\n\nWhat's NNN throw off in dividends, ie dividend/share value?", "replies": [{"id": "idk73tp", "text": "Agree - I\u2019m not much in triple Net REITS, but would rather take the public option NNN vs the private option.\n\nApartment reits have been killed recently (urban apartment - EQR, AVB, UDR, single family homes - AMH, INVH) and sunbelt apartments (MAA, CPT) have been down 20-25% since the start of the year. Mortgage rates have increased and has killed apartments.\n\nIf you ask my opinion, think mortgage rates are at or near a peak and apartments are fairly attractive", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]