Any public research on NNN/STNL lease decay and the impact on valuation?
Hi all, 

I'm very interested in how the value of NNN properties change based on lease term remaining. I have done some searches on google scholar but came up empty handed. There seems to be little research available on this topic. 

Ultimately, I would expect lease decay to negatively affect price/value for NNN assets. Any thoughts or opinions are welcome!
[{"id": "hbc71z2", "text": "It\u2019s not something that can be academically studied\u2026 lease decay is a legit concept, but the intrinsic value impact is going to be wildly dependent on so many other factors. For instance: are the in place rents way below market? Yes, then it\u2019s probably not going to impact value much at all. Is the tenant highly specialized with tons of specialized equipment and leaseholds? Does the lease require full restoration? Looks like low risk the tenant won\u2019t renew. Is the owner occupier market strong or strengthening? In some markets a vacant building will sell more to a user than it will be worth on a lease/cap rate value basis, in which case there is a very low risk of value degradation at end of lease. Bottom line, too many variables to definitely assume lease decay is going to lead to lowering value. The market dictates value and the market looks at all variables.", "replies": [{"id": "hbcfxgj", "text": "Very good points. Would be interesting to see if there is a statistically significant delta in value from a similar sample. As you said there are so many external variables that it is tough", "replies": [], "depth": 2}], "depth": 1}, {"id": "hbc7y11", "text": "As is the case in many financial valuation applications, there are a number of ways to think about valuation and apply a value to an asset.\n\nOne way to think about a NNN property is as a fixed income instrument.  Assuming the property is stabilized, you can think of the cash flows as having a certain amount of riskiness to them and they also have a duration.\n\nAt any point in the time series of the cash flow stream there are also observable greeks such as delta, gamma, theta, etc.  Specific to your comment about lease decay, what you're describing can also be quantified through theta decay.\n\nELI5 - the closer to lease expiration, the shorter the duration of your cash flow stream and the quicker the theta decay becomes.  The closer to expiration (maturity of the cash flows) the quicker the value of your cash flows pulls to par.  \n\nEdit: Now the reality is there is more to the value of the NNN asset (or really any form of real estate) than just the stabilized cash flow streams. Even in extreme cases, such as a NNN asset being at the end of their useful life and having no possibility of seeing another dollar from lease payments, there could be other forms of value that you can derive from the property.  One example being the residual value of the land if the building is truly a tear down - this could be positive, or could be negative.  There is a broader conversation to be had about valuation, but for the context of your question I'll leave it there for now.  Hopefully this helps.", "replies": [{"id": "hbcdk61", "text": "r/thetagang and r/vegagang have entered the discussion ;", "replies": [], "depth": 2}, {"id": "hbcg7ia", "text": "Very true. I guess it is similar to bond greek calculations if the STNL is corporate leased. I wish there was more research on this topic!", "replies": [], "depth": 2}], "depth": 1}, {"id": "hbc8v8z", "text": "In Chicago most of the investment-grade (retail) STNL - industrial is like 95% NNN with rents going up up up - did fine. Some abatement or deferment but very few closure (unless we are talking anchor style props which have been going the way of the dodo before Covid)", "replies": [], "depth": 1}, {"id": "hbctsqk", "text": "Discounted Cash Flow analysis.\n\nYou simply need much more information than remaining lease term to understand what affect that has on a property's value.\n\nThe closer a lease goes to running out, the closer a property's leased fee value gets to its fee simple value.\n\nAre the rents above, below, or similar to market rents?\n\nHow likely is the tenant to renew a lease?\n\nHow long does it take to bring in a new tenant?\n\nWhat are the costs to bring in a new tenant?", "replies": [{"id": "hbdc0s4", "text": "Would be interested to see data on a highly traded tenant (Dollar General, Walgreens, etc.) to maybe reduce the amount of variables. This way it would be easier to isolate movement in valuations based on certain factors such as term/location/etc.\n\nYou make a great point on the linear relationship between leased fee and fee simple value converging at thee end of term. \n\nThanks!", "replies": [{"id": "hc71bkg", "text": "&gt; Would be interested to see data on a highly traded tenant (Dollar General, Walgreens, etc.) to maybe reduce the amount of variables. \n\nThat info exists.  Call the large national NNN brokers or if you google around you can find some additional info.  \n\nYou are looking for stuff like this:\n\nhttps://www.bouldergroup.com/media/pdf/Net-Lease-Drug-Store-Report.pdf", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hbelhqw", "text": "To add somethings not mentioned yet.\n1. Buying a pool NNN leases of a single business could be viewed as getting a slight premium over investing in similar bonds of the public company.\n2. Land value can offset some decline in value from lease term.\n3. The decline in value is not just lease term but also building depreciation. A custom built building for a STNL will often have the tenant require it to be torn down and rebuilt at the end of the extension option period to sign a new lease. If not you will have low value building like an old custom built pizza hut that has been repurposed into a low rent mom and pop mexican restaurant.", "replies": [], "depth": 1}, {"id": "ihaeh3a", "text": "The Boulder Group has some online newsletters tracking national credit NNNs.", "replies": [], "depth": 1}]