Buying NNN comercial ( first time ) what can go wrong ?
Hello fam, 
I am a  general contractor who operates in the tri state area, I have  my company for over 4 years now, I managed to set a side half million in profit and trying to buy some level of saftey, I found a deal for a comercial building that is rented already at 10% cap ( the building is 15 years old ) so it’s in a good shape and it’s rented to one tenant for 8 years contract and the tenant is one of the sp500 companies so no worries about the rent, I truly never done this before and the building is about 2.7 million. I think I can buy it but I don’t know what can go wrong and also how to find the right bank for the finance, my down payment can get to 20% of the deal, and it will be making net after all payment around 100k a year. 

Now what do I need ? 
A- how to analyze the deal right 
B- tips on dealing with the local banks ( I emailed two local banks already)
C- can I submit an offer before the bank or I should have bof first ( I had a proof of fund before from a hard money lender for 2.7 mill but I don’t want to use him because his percentage is so high ) 

Thank you all in advance
[{"id": "i5qkjw3", "text": "You\u2019ll be hard pressed to only have to put 20% down on the deal.  20% is standard for conventional mortgages in residential markets (for owner occupancy) and 25% is standard for owner occupancy for commercial projects.  If it\u2019s purely an investment property, I can\u2019t see you getting more than an 75% LTV loan on the property and it will likely be difficult for you to get approved if you\u2019re not owner occupying 50% or more of the building.  \n\nThe bank is likely going to require 675k down and want to see several months of payments saved up.  I personally wouldn\u2019t expect you to be able to close on the deal without high income, excellent credit, and $800k cash.\n\nIf you\u2019re a newbie, 2.7M is a big deal.  I\u2019d almost recommend going for something much smaller first to learn the ropes. You just don\u2019t know what you don\u2019t know and 2.7M is not the size of a property you want to learn the hard way on.\n\nFor someone at your level, I would definitely get preapproved before submitting an offer because you don\u2019t really know what kind of buying power you have and you don\u2019t want to throw 20k earnest money at something that you can\u2019t actually afford.  \n\nI\u2019d say get prespproved for the 2.7M first, talk to your lender and make sure that you could actually buy that property, and then if you hit all green lights talk with a local commercial investor/broker and do your DD.", "replies": [{"id": "i5qtzn4", "text": "I was approved before for 1.7 mill based on 200k liquid, I do the construction/development for living btw,  but I never bought something to just hold as a cash flow my overall feeling that buy and hold should be easier than putting up the whole building from scratch, I\u2019ve built storage units and multi family buildings before from excavation to COO, but you are right tho I don\u2019t know what I don\u2019t know. That\u2019s why I\u2019m asking for advice, \nOn the other side my credit score is 744 and I can get the 800 cash if I wanted but the question is who is the best to contact, local banks ? Or hard money  and get them out of the deal after a year ?", "replies": [{"id": "i5tzm77", "text": "You will be close qualifying with $500k down on $2.7M. You will likely need at least 20% down.\n\nShop hard with lenders. Maybe they will ask you to put a bit more down.\n\nDebt Service Coverage Ratio &amp; amortization period are big for you.\n\nTry to find a lender that will take a 1.2 DSCR &amp; do a 25 yr AM.\n\nYour numbers will work well enough to allow 20-25% down.", "replies": [], "depth": 3}], "depth": 2}, {"id": "ita0i14", "text": "Hello.  Forgive me if this was already mentioned but being a SP 500 business is inconsequential unless the lease is corporate guaranteed.  That is your ideal situation as a landlord.  A corporate guarantee is when a corporation agrees to back all NNN lease obligations in the event the tenant/operator defaults.  There are plenty of SP 500 businesses that don't offer a corporate guarantee, but only one by its unit operator, for example.  https://nnndeals.com/corporate-guarantees-in-nnn-leases-deep-dive/", "replies": [{"id": "ith8b54", "text": "I\u2019m not entirely sure what that has to do with my comment, but in terms of financing, it will be much easier for the OP to get financing on a building leased by an extremely established company (corporate guaranteed or not) than a small business, like most commercial spaces in the &lt;$3M range are.  \n\nA corporate guarantee may give you some warm fuzzy feelings, but isn\u2019t going to ultimately influence the value the bank places on the building.", "replies": [{"id": "ithq0yd", "text": "I meant to reply to the OP.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i5qsktf", "text": "Perform quality due diligence.  How much time remains on the Tenant's initial term?  How many options?  Also, consider the difficulty of leasing the property to another Tenant if current one vacates.  What are carrying costs?  Condition of all mechanical systems.  Roof.  Foundation.", "replies": [{"id": "i5qumot", "text": "The tenant is leasing it fro 8 more years  with option to renew ( I\u2019m planning to exit after 5 )  what yo I think  is the perfect holding time ?\nThe building is 15 years old ( I\u2019ll check the foundation myself and my team ( I own a GC company ) and if anything we can do it ourselves", "replies": [{"id": "i5r9jwu", "text": "If youre planning to exit before the end of the lease and miss the uprent opportunity, why not buy something else that will have a higher cash-on-cash return?", "replies": [{"id": "i5rbqlo", "text": "I just don\u2019t know, I am a simple man with 500k who wants a cash flow on it", "replies": [{"id": "i5sd9rj", "text": "Have you considered single family or multi family homes?", "replies": [{"id": "i5sruox", "text": "Takes too much time", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "i5sy2bc", "text": "Keep in mind at the time of your \"planned exit\" the market may value you property lower.  Also, may not have Buyers.  Most investors will not purchase investment properties if there are only a few years remaining on the lease.  Cannot predict the future and assume you'll be able to exit under certain conditions.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i5qsy94", "text": "What type of \u201ccommercial\u201d if it\u2019s industrial you can do 20% down. Whether you should is another question. \n\nOverall, I like the deal. How big is the rentable sq ft? How easily can you find replacement tenants and at what rent?\n\nI think you can do this with a strong lender, attorney and broker relationships. \n\nWill you self manage? May be worth it to hire a PM for one year then self manage. \n\nHow did you find it? Dear god don\u2019t say loopnet.", "replies": [{"id": "i5qtcs1", "text": "The rent is 24/Sqft \nIt\u2019s not industrial it\u2019s retail rented  \nAnd yes I found it on LoopNet and it\u2019s just one day old and I don\u2019t think it\u2019s gonna last \nI am only two hours far from the deal I think I should manage it and even if I hired a part time pm for it it\u2019s okay I\u2019m just trying to buy and hold for 5 years and get out", "replies": [{"id": "i5qv64r", "text": "We\u2019ll, for a 10 cap I suppose that\u2019s the risk you take. \n\nBe sure to understand lease structure and reimbursements. I guarantee you your tenants will try to take advantage of you. \n\nDo you own P&amp;L don\u2019t rely on losing agent numbers. \n\nI understand you can check physical plant. But honestly it\u2019s just a small piece of the underwriting. Financing and income will be bigger drivers of success.", "replies": [], "depth": 3}, {"id": "i5r2zyw", "text": "If there's 3 years at the end of the lease, when you sell, your cap rate is going to be really high at your exit point fyi.  Best to get an early renewal then sell.", "replies": [{"id": "i5ta6ws", "text": "Do you mind explaining why the lease length term impacts cap rate in the year of selling?", "replies": [{"id": "i5uid2o", "text": "The longer the lease remaining the lower the cap rate.  Otherwise the risk at expiration of tenant leaving is early in your cash flow analysis.  Risk of a tenant leaving in 2024 is much more expensive than 2034, so there are huge variances in cap rates.  Look at a Boulder group net lease research report.  They show the average spreads on cap rates based upon lease term remaining.", "replies": [{"id": "i5ukk96", "text": "Cap rate is a formula. Since the current NOI would be the same regardless of the lease term, are you saying that CRE brokers will adjust sales price to be higher if a longer, more stable long term lease exists, but reduce price of a comparable property with a short remaining net lease (resulting in a higher CAP rate)?", "replies": [{"id": "i5wvyt6", "text": "Of course they would adjust.  Would you pay the same for a 20 year Walgreens lease and a 2 year lease to a mom and pop retail? Of course not.  Risk is different.  Cap rates reflect risk.", "replies": [], "depth": 7}], "depth": 6}, {"id": "i5ukng8", "text": "And thank you for recommending the report. I'll review that!", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "i5r6rcf", "text": "Length of tenant lease plays a big role in property value. So if they only have a couple more years when you plan to exit, the property is higher risk for the new buyer.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i5qzqrq", "text": "Unless I'm misunderstanding, there's something else going on with this property. Single tenant nnn with what would seem to be a reputable company at a 10 cap doesn't exist.", "replies": [{"id": "i5r1o47", "text": "you may be right !   \n\n\nwhat questions do you think I should ASK?", "replies": [{"id": "i5r59rk", "text": "Tough to say without seeing the property. Sometimes you can just ask why the cap rate is so high. Maybe the company is in bankruptcy.  Could be a single unit franchisee with no money and dealing dales.  Maybe the building needs a new roof.  Maybe it's not truly a 10 cap.  Could be almost anything.", "replies": [], "depth": 3}], "depth": 2}, {"id": "i5r6l0x", "text": "This is where I start to desperately check and see if it used to be a gas station or has an oil tank in the ground. \n\nSaw a Burger King once the was a deal, it also just happened to have a massive environmental issue.", "replies": [{"id": "i5r8e2b", "text": "Could be buying a building on leased land too. Brokers can be sneaky some times.", "replies": [{"id": "i5r9l4i", "text": "Very true. This would be a great time to dump a lemon on a new buyer.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "i5r8tow", "text": "The 10 cap itself suggests an unreliable tenant.", "replies": [], "depth": 2}, {"id": "i5te6wd", "text": "This.", "replies": [], "depth": 2}, {"id": "i5ujzl1", "text": "Came here to say this. Does not exist. Even if it had environmental issues, someone would just buy it cash all day", "replies": [], "depth": 2}], "depth": 1}, {"id": "i5r2ts1", "text": "Just find a partner with some experience to cut down your overall liability.  Happy to look at the deal if you are interested in partners.", "replies": [], "depth": 1}, {"id": "i5ricpx", "text": "&gt; the tenant is one of the sp500 companies  \n\nIs the tenant a \"Credit Tenant\" defined as one having a credit rating of \"Baa3/BBB-\" by the rating agencies. If so there are banks out there that will do 80% and match the term of the loan to the lease term. Usually they will require some experience managing a portfolio, but that might be approved as an exception with strong Debt Service Coverage.", "replies": [{"id": "i5roy2k", "text": "I have zero debt ! With a high income would you think that would help", "replies": [{"id": "i5rq0pq", "text": "Having a strong guarantor helps, but the most important part of the guarantor is liquidity and net worth not income or lack of personal debt. I will take a guarantor with $10MM in net worth and $1MM in liquid assets with $100,000 in debt over one with $100,000 net worth and zero debt.  \n\nLook, no NNN property is being sold with a 10% cap rate unless there is something going with it, the location, the tenant, or a combination of the above. I think you mentioned this is retail, is this a tenant closing stores?", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i5rius1", "text": "Hire a debt broker. They can answer all of your questions and help you source the best debt.", "replies": [], "depth": 1}, {"id": "i5rkemn", "text": "There\u2019s no way that a 10% cap has 8 years of term to a Fortune 500. Is it a ground lease? Does it need a lot of work? Is it in the middle of nowhere? Something ain\u2019t right.", "replies": [{"id": "i5rot42", "text": "That\u2019s why I\u2019m here to ask I\u2019ll go back to the guy and ask him.", "replies": [], "depth": 2}, {"id": "i5sl8l3", "text": "I came here to say this.\n\nA 10 cap NNN with 8 years remaining on industrial with a major national credit tenant. Hits all the buttons but is super fishy.\n\nPlease don't tell me the building is 30' plus ceiling heights and newer than 2005...\n\nIf all is true, we have some 1031 money coming up and the experience to partner with you. DM me if you like after you get answers.", "replies": [{"id": "i5spmuc", "text": "Haha exactly. I\u2019d be throwing money at this deal if all was legit.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i5rxu1l", "text": "I\u2019m 90% certain I know the listing your talking about. If it\u2019s a pharmacy, the issue is that it\u2019s a leasehold. You don\u2019t have ownership of the land, only a lease for a specified term. I\u2019ll leave it to the attorneys/experts on here to clarify what that means to you.\n\nI\u2019m not trying to be an ass here, just being honest with you - if you don\u2019t understand what you\u2019re looking at (and it seems that you don\u2019t), you should probably sit with a broker or an investor and get some advice or help. The commercial world is full of sharks who will eat your lunch if you do something stupid. Find a broker who is willing to work with you and hold your hand to find you a entry-level, low maintenance, slight cash flowing property.", "replies": [{"id": "i5slzka", "text": "I actually need to thank you deeply, I didn\u2019t claim to know this world I came from the construction background and that is why I\u2019m asking \n\nDeep thanks !!", "replies": [], "depth": 2}, {"id": "i5ug8sg", "text": "You right. Typically for leasehold interest deals you are only in ownership of the improvements aka the building and not in ownership of the underlying land. \n\nYou are able to deduct your depreciation of the improvements as well as payments made for the ground lease. \n\nNote that for a leasehold interest to qualify for a 1031 exchange, it must have a lease term of 30 years or more. \n\nYou only want to target leasehold interest deals with at least 50 years of term.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i5s4u4c", "text": "May get a little heat because it\u2019s in a commercial subreddit but I was doing some research on triple net leases and honestly with how low the CAP rates could be , I began looking at multi family. With multi family it\u2019s probably easier to expand as you can Cash out refi and not worry about some lease term ending ; putting you in a tight jam. You can use that money that\u2019s built in equity as a down payment in another property. Worth mentioning that you can finance with 20 down. STNL can require possibly 30% down. Know the cons though. You will be dealing with regular tenants and all so do a decent due diligence. Or hire a management property if you really wanna go that route.", "replies": [{"id": "i5sdk0f", "text": "NNN lease backs seem scary to me, what happens if the tenant doesn\u2019t renew the lease? I\u2019ve never understood. IMO they are for higher net worth individuals and 1031 exchanges mostly.", "replies": [{"id": "i5sutrg", "text": "It\u2019s common that a tenant uses  their options because after being at the location for long enough , they have an accurate indication of how much their profits are and all. With that said , you can always try and negotiate with them by lowering price enough. If they choose not to , you repurpose. Repurposing can be difficult but before buying the property , it\u2019s smart to do due diligence including understanding what lot , built property , and what type of a company would want that. By waiting for it to be repurposed and finding tenant , you can be losing heavy sums of money ; that\u2019s why when you get a 25 year deal with brands that usually preform well, the CAP rate is super low. They know it\u2019s guaranteed for a while. It due to that reason I feel like multi unit can be better for people who are willing to be a little more hands on for a lot more money. A single lease wouldn\u2019t hurt to be lost or renewed", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i5stsqg", "text": "Read the lease. Net lease investments are advertised as \u2018NNN\u2019 but in fact are not. There can be exit clauses for the tenants, landlord responsibility for roof and structure, speaking for California - prop 13 protection, where real estate tax increases upon sale are not covered by tenant\u2026 assuming location is strong, price per foot is in line with market, and nothing glaringly wrong with the building/dirt (environmental concerns), ITS ALL ABOUT THE LEASE!\n\nI should also add that convention max LTV for net lease deals is about 65%. \n\nGood luck", "replies": [{"id": "i5tbob1", "text": "65%, really? I have talked to many a bank that will go 70% on commercial deals. I was under the impression 70LTV was more standard as a starting place for CRE, no?", "replies": [{"id": "i5tfj7j", "text": "Depending on relationships, strength of borrower and the asset itself, yes 70% happens. Prototypically though, 65% is a standard industry assumption for net lease deals.", "replies": [{"id": "i5ulxod", "text": "I didn't realize that. Thank you for sharing!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i5ujaco", "text": "I did residential real estate investing for almost 20 years and ventured into commercial real estate at the end of 2020. Bought a sit-in national chain restaurant building when the seller was desperate to get out and there weren\u2019t many banks financing restaurants at the time. So I got a good deal at 10%+ CAP against a cash offer. I think I lucked out at the time. \n\n  \nAnyway, even though I negotiated the price for the building, I asked for 60 days for due diligence and paid a commercial real estate broker 10K to help me with the due diligence stuff since I never did it before. Mind you, the lease was an Absolute Net and had 5 more years to it so I really needn\u2019t worry (because the tenant is a national brand with thousands of outlets), but I still wanted the peace of mind. That broker was quite helpful and educated me a lot on many aspects of CRE. \n\n&amp;#x200B;\n\nMy suggestion is, hire someone who is experienced and pay them for their time to help with due diligence. That will be the best money you would\u2019ve ever spent.", "replies": [], "depth": 1}, {"id": "i5ukkgj", "text": "No decent lender will touch you unless you have assets to pledge for collateral or experience leasing / operating commercial properties. Good luck!\n\nBy the way, if it\u2019s a 10% cap then the market sure is worried \u201cabout the rent.\u201d If it were a sure thing, it would trade much tighter - probably closer to 5%.", "replies": [], "depth": 1}, {"id": "i5ulg27", "text": "In your case, always get either/both a commercial buyer's agent and a commercial mortgage broker to represent you in any purchase. If you need a referral for a mortgage broker, let me know. I'm working with one the smartest there is.", "replies": [{"id": "i5vixl3", "text": "Send the contact info I really appreciate it.", "replies": [], "depth": 2}], "depth": 1}]