Hello, I have a question regarding how credit rating and term length effect how NNN assets are evealuated
 

hello,

I am very curious about abs. NNN assets, I want to to take this opportunity to ask you guys a question.

**Does a tenant's credit rating affect the value of a abs. NNN asset?**

I am eager to know if the credit rating has any direct relationship to the cap rate of a property.

For example, 7/11 is rated AA on their corp site . if AA Bonds are currently at a 4% discount rate, then does that credit rating have any effect on an advertised cap rate? Does this mean that if 7/11 has a AA credit rating, and the discount rate on AA bonds are at 4%, and the advertised 7/11 has a 4% CAP, does that they're directly correlated and that any 7/11 should be valued at a 4% cap rate??

If they are related please explain how credit rating affects advertised cap rates of credit rated assets.

If they're not related please tell me how they're not related.

See example:

I am looking at a 7-11 right now in texas as a practice problem. ([https://www.buynnnproperties.com/7-eleven/](https://www.buynnnproperties.com/7-eleven/) )

This 7-11 is advertised as follows:

PP **$7,252,500**

CAP:**4.00%**

Years Left:**15.4**

Lease Type:**N/A**

BOND TRACKER: [https://fred.stlouisfed.org/series/BAMLC0A2CAAEY](https://fred.stlouisfed.org/series/BAMLC0A2CAAEY)

Another point I want to ask as well:

**May someone please explain how term &amp; credit affects the valuation of a NNN Property?**

Lets say that 7/11 has 3 years left on their term, their NOI is 52,000 per year, and their credit is AA rated; how would you evaluate this property? If the owner is asking 1,000,000.00 as an asking price is he out of his mind? (5.2% cap)

Sorry if its a clusterfuck of questioning

Please lmk if anyone can provide any guidance

thank you
[{"id": "ihej92d", "text": "It's all subjective in the eye of the buyer. Frankly for the 7/11, as I buy and invest in all kinds of these and much larger deals every day, I would want it at a mid to high 5 cap today in given financing environment. Forget the 4 caps. Not enough profit.", "replies": [{"id": "ihhdfec", "text": "I am developing a class A 50k warehouse for an A credit tenant NNN 12 years, delivery in q4 next year. Tertiary market. Rent is above market because of extensive TI. Where\u2019s your gut on cap rate on an exit on that in Q4 2023?", "replies": [], "depth": 2}], "depth": 1}, {"id": "iheji83", "text": "And yes, for the 3y LXP 7/11, he's out of his mind. Unless they have early indicated renewal or extension, I'm only buying that at maybe a 7 cap without higher certainty of renewal. Depends on location and size of property as well, to evaluate residual value if 7/11 vacates.", "replies": [{"id": "ihejr8h", "text": "Ok so I wasn\u2019t going crazy, \n\nThank you so much I appreciate you\u2019r insight!", "replies": [], "depth": 2}], "depth": 1}, {"id": "ihejx8y", "text": "A few things that impact CAP rates on NNNs:\n-the two you said (creditworthiness/ term)\n-location (is it main and main in a great, growing part of town or is it in a bad spot with income/ population decline)\n-are the rents sustainable? I can price a deal more aggressively on the CAP if the rents are really cheap and easily replaced. \n-the cost of debt. You aren\u2019t seeing it as fast in single tenant yet, but as a rule of thumb CAP rates follow interest rates.\n\n\nTo answer your initial question, yes, the tenant\u2019s credit has a lot to do with the value, but so do the other factors.\n\nEdit: age/ condition of the building. Even though it\u2019s a NNN and the landlord will have \u201cno responsibilities\u201d tenants will often agree to an extension of lease if the seller installs a new HVAC or roof so they don\u2019t have to during their next term. So it follows, newer building, lower CAP rate.", "replies": [], "depth": 1}, {"id": "ihenrk0", "text": "Credit rating and cap rate are (in theory) correlated especially when the rent is market rate and the term is super long. Not perfectly correlated as others have mentioned there are other factors like age of building, location etc. markets are not perfect with pricing and cap rates are usually factoring in location, in-place vs market rent, term, annual bumps etc\u2026", "replies": [{"id": "ihenwde", "text": "Thank you so so much for your response. This gave so much clarity to me thank you", "replies": [], "depth": 2}], "depth": 1}, {"id": "ihergp9", "text": "I\u2019m not sure why you wonder how \u201cNo Nut November\u201d is affecting assets????", "replies": [], "depth": 1}, {"id": "ihfb49q", "text": "Why did you punctuate the word \u201cabsolute\u201d lol.", "replies": [], "depth": 1}, {"id": "ihg0p1r", "text": "The cap rate represent the amount of risk in the asset for the buyer.  In theory a buyer should be willing to pay their risk free rate plus a risk adjusted increase based on their perceived risk in the deal.  Every buyer interprets risk differently which is why not all buyers value an asset exactly the same.   The credit of a NNN tenant is one of the most significant risk factors (along with term) so it absolutely has a direct impact on the Cap rate.", "replies": [], "depth": 1}, {"id": "ihg20yu", "text": "*\"Sorry if its a clusterfuck of questioning\"*\n\nThat was a clusterfuck of questioning.", "replies": [], "depth": 1}, {"id": "ihycdqr", "text": "u/irepresentprespa \\- Nice to meet you, I am CEO of AlphaRE a CRE Brokerage Company and I have personally spearheaded over sold 1,000 transactions of Single Tenant Net Leased Assets.\r  \n\n\nCREDIT RATING: \n\nShort Answer is Traditional Economics does hold true that a better credit rating will on average, achieve a more compressed cap rate than an asset with less than Investment Grade Credit. (if you hold ALL other factors constant; meaning, same geographic area, or similar demographics, similar lease term remaining, similar age, &amp; rent figures etc..)  \n\nLonger Story for another time is the difference in spread between a credit tenant vs. a non credit tenant STNL NNN investment may not be as significant or wide as you may think. Further more, that spread does not remain constant as it fluctuates with risk on, risk off, market demand factors. Last, because it is nearly impossible to hold all factors constant (you would literally need the exact replica features except for varying credit ratings backing the lease. ) For example, I had 30 transactions blow up in March-April 2020 as the REITS pivoted to Investment Grade Credit Only Acquisitions which declined both demand for non-credit assets and declined supply of credit assets available. Then the euphoria investment environment of 2021 and supply of new inventory fell to a record low leaving investors scrambling to fulfill their 1031 exchanges which I would argue likely compressed the spread between credit &amp; non-credit spread to nearly zero.\n\n&amp;#x200B;\n\nLease Term: Traditionally this is the more important value driving factor here especially with credible tenants with strong financials, simply put.. the longer the lease term, the longer the guaranteed income remaining &amp; the longer there will not be any expense exposure. Unlike bonds which return a lower yield when closer to maturity, the yield typically increases with STNL NNN assets as the leases approach expiration. The reason for this is the potential for expensive releasing costs which can routinely cost 1/4-1/2 Million if not more. Expenses such as tenant improvements, cap ex, commissions, lost opportunity cost, expense exposure etc increase their without any expense exposure \n\n&amp;#x200B;\n\nWith all that being said, I must say that I vehemently disagree with u/Sir_Ogm. A blanket statement like that is way too broad but I would buy that $1M deal in a heartbeat depending on the location and how many option periods are remaining. $50k a year is nothing for some markets for 7-Eleven. I've seen some rare instances that pay upwards of $50k a month but they do $10M in sales... \n\n&amp;#x200B;\n\nIf you are serious about buying a NNN deal, feel free to reach out.\n\n\\- Braden\n\nwww.AlphaRE.com", "replies": [{"id": "ii1pztg", "text": "That was a lot of rambling for a 1 post new sock puppet account. Why not write from your normal account?", "replies": [], "depth": 2}], "depth": 1}]