NNN lease with high cap rate. Too good to be true?
Hi - I have an offer to acquire NNN property with high single digit cap rate (8% conservative).  At least 15 yrs left in initial lease with multiple extensions afterwards.  Common household recognized brand with BBB credit rating.  

Is it too good to be true? Any gotchas to be aware of etc
[{"id": "hqdid28", "text": "The golden rule in commercial real estate is, \"if it's too good to be true, it probably is.\"\n\nThat being said, it's not unheard of, but it is rare. Who calculated the CAP? Was it you or the seller/broker? An 8% is high, so it makes me think there is some risk associated with either the Tenant or the building.\n\nHave you seen the lease or the cash flow statement? There could be termination rights at regular intervals that shorten the lease from fifteen years to something closer to five.\n\nWhat do you know of the tenant? Are have they said they're having issues with the rent? Is it a true NNN deal, absolute net, or a double net acting as NNN?\n\nWhat's the condition of the building? Are there large CapEx expenditures on the near horizon? What type of building is it? The average CAP for the asset class will determine just how risk adjusted the property is. Where is the building located? If it's in a more rural area then this rate might be average. However, if it's in a primary market, then you should really exhaust every measure to find out why the rate is that high.", "replies": [{"id": "hqdm1os", "text": "To answer some of your (good) questions... Have not seen the lease yet. No rent arrears.  Location is relatively rural but in path of very popular vacation spot for high net worth and affluent crowd.\n\nI'm told its clean NNN? What would be an example of double net acting as NNN?", "replies": [{"id": "hqdp7nc", "text": "Verify who is responsible for the roof, HVAC and walls. I have seen a number of listings being presented as NNN leases but not being absolute NNN leases (where landlord has truly no responsibility or obligation to the site or building)/", "replies": [], "depth": 3}, {"id": "hqekq3c", "text": "The rural nature of the property is the likely culprit behind the higher cap rate, but get a copy of the lease for sure.\n\nI've never heard the phrase \"clean\" before when talking about NNN. The general way that Tenant's force the LL into a double net is by modifying the maintenance section to delineate very particularly between \"maintenance\" and \"repair\". If they structure the language correctly, they can put a bunch of responsibility back on the LL. The Tenant may call it a \"modified\" NNN lease in some instances.\n\nMy company does this all day long. Our \"NNN\" leases exclude out all structural maintenance and repair which we define as essentially anything that's not the interior of the building or a fungible item. We get a PM agreement for the HVAC, but all repair is on the LL.", "replies": [{"id": "hqemvg2", "text": "\"Clean\" was my layman's usage. It is an absolute NNN.  Waiting to get my hands on lease papers to confirm", "replies": [], "depth": 4}, {"id": "hqfjasl", "text": "Rural market alone would not get the cap rate that high on a 15 year absolute nnn lease with a credit worthy tenant.  I just sold a 10 year NN lease with credit tenant at a 6 cap in the most rural of markets.  Something else is going on here.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hqdircr", "text": "There is always a reason for a high cap rate. Location comes to mind first and foremost.", "replies": [], "depth": 1}, {"id": "hqdixkj", "text": "Is it a franchise or corporate backed?", "replies": [{"id": "hqdmfs7", "text": "Corporate. No franchise", "replies": [], "depth": 2}], "depth": 1}, {"id": "hqdlmur", "text": "I've seen plenty of 8% cap rates. Usually means Midwest or rust belt location with low land value.\nIf the building is custom build out for the tenant, it will only be worth slightly more than raw land value at lease expiration. This is because any new credit tenant will likely want to tear down the building to do their own custom build out. \n\nIn places with low rent growth the extension options can br worthless because they can be above market rent.\n\nWith Covid surging again this could be a bad tenant that doesn't pay rent to conserve cash when thing get bad. Lots of credit rated retail tenants stopped paying rent during the lockdown.", "replies": [{"id": "hqehah1", "text": "Lots of new dollar generals across the street from the old dollar general in the midwest. I had a client buy an old Wendy's for $300K after they moved down the street.", "replies": [{"id": "hqflv3l", "text": "What did he do with it?", "replies": [{"id": "hqgaccn", "text": "BBQ. I wanna say he put another 300 into it when it was all said and done. Sorta looks like a Wendy's from one side, but had a patio outdoor seating installed on the other. Parking lot redone. Huge smoker setup in the back.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hqdr33t", "text": "Termination options?\n\nIs the credit rated entity actually on the lease and/or guaranteeing the lease?", "replies": [], "depth": 1}, {"id": "hqdrm5l", "text": "What kind of rent escalations? Lots of medium box stores only have bumps every five years. Given the inflationary environment and long lease term you could cede a lot of your potential return to inflation.", "replies": [], "depth": 1}, {"id": "hqdynr2", "text": "&gt; BBB credit rating\n\nIsn't this kind of low?\n\nWhat is the interest rate on their corporate debt?\n\nLots of folks asking other good questions in the comments here.", "replies": [{"id": "hqej3xp", "text": "Yeah I'm not sure how ratings work. The company is CVS Health btw.", "replies": [{"id": "hqel5h1", "text": "CVS leases typically have termination options every three to five years of the lease. Occasionally they also have provisions where they don't have to pay rent for the final year or two of the lease.\n\nAs for the credit rating, that's somewhat less important than cash flow, cash on hand, and the security deposit/LOC associated with the site.", "replies": [{"id": "hqeq7ym", "text": "Termination right was my first guess as well.   In my area NNN CVS deals are trading sub-5%.  With 15 years of term remaining it would mostly take the location out of play, so there has to be risk remaining in the term to make this an 8% deal.   I\u2019m assuming CVS does not report sales?", "replies": [{"id": "hqfr2l2", "text": "No they do not.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "hqeplu2", "text": "CVS Health is closing 900 locations over next 3 years.\n\n[Article 1 on RIS News](https://risnews.com/cvs-closing-900-retail-stores-starting-2022)\n\n[Article 2 on CNN](https://www.cnn.com/2021/11/18/investing/cvs-store-closures/index.html)", "replies": [{"id": "hqfrhs7", "text": "If it\u2019s an older store with no drive-through good chance it\u2019s on the chopping block.", "replies": [], "depth": 4}, {"id": "hqho7jp", "text": "That has to be it.   Good find", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hqf1zqt", "text": "BBB is investment grade.\n\nhttps://www.researchgate.net/figure/International-Credit-Rating-Agencies-Scores-Meanings-and-Color-Coding_tbl3_332126048", "replies": [], "depth": 2}], "depth": 1}, {"id": "hqf1q10", "text": "Does it have a terrible loan with call protection?", "replies": [], "depth": 1}, {"id": "hqhfqvn", "text": "This sounds too good to be true. Have you checked if they recently opened a location nearby? Could be this is a location that is on the chopping block. Can you easily replace them if they leave? Thats really the only thing i would look at.  15 year Cvs should trade for 6 cap even in rural.", "replies": [{"id": "hqhodke", "text": "After some digging around, that is likely the reason.", "replies": [{"id": "hqhoo0d", "text": "Its not worth it. I would rather you buy a small strip center locally with a good mix of franchise and mom and pop tenants.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hqieozu", "text": "Without divulging too many details, high cap rates can happen.  Listing Brokers can make mistakes.  I just bought one (not a small deal either), with an effective 11% cap in a highly desirable area.  Everything else in the area is trading at 5.5-6.5% cap.  The broker confessed to my broker that a miscalculation happened.   \n\nIn other NNN situations, in less desirable areas, the properties sell for cheaper compare to its income.  For example, a Dollar Tree in an area with low population.  In those situations, there is higher risk, thus the discount on the property.", "replies": [], "depth": 1}, {"id": "htn3e6y", "text": "Beware the complete HVAC refits", "replies": [], "depth": 1}]