Making money on the spread vs "i hope this appreciates". Credit Worthy, NNN long term tenants
Hi All,

I'm fully admitting I'm a noob to this whole CRE thing but I'm trying to figure out if there is a play at this point in the real estate cycle.  I see a lot of things out there which have cap rates significantly below what I can loan at, which seems like you better really know what you are doing or really want to bet on an area appreciating.

Is it stupid for me to be considering NNN, Corp/franchose guaranteed businesses that are more on the outskirts of desireable areas?  I feel like you could make some money on the cap rap to loan interest spread, have fairly dependable income, with a long shot off chance of appreciating in the future.  Is this just hoping for unicorns or is it a reasonable approach?  

There are risks no matter what you do but if the cash flow is reasonable and it's backed by a Walgreens, dollar store etc worst case I can lock in some decent returns and principal paydown and continue to expand if the market corrects.




[{"id": "ef2rdj3", "text": "If you buy a dollar general at an 8-8.5% cap rate in a tertiary market using standard leverage (65-70 LTV) you\u2019re going to be earning maybe 11-12% cash on cash.  In 8 years you will have made your money back. In 15 years you will have made double your initial equity back.  And then the lease is up and it\u2019s up to dollar general to renew.  If they don\u2019t, that box is worth like $30psf (maybe not even that) because it\u2019s in a town of 2,000 people 3 hours outside of the nearest major MSA.\n\nNNN properties can make a great fit for a portfolio, but I\u2019m only interested in major cities, growing population, areas with substantial rent growth.  Anything else can leave you in a bad spot in 15 years. ", "replies": [{"id": "ef3ptac", "text": "Is that the most aggressive LTV one can hope for on a NNN typically? If the DSCR were there, are they done at anything higher?", "replies": [{"id": "ef3v4x8", "text": "That\u2019s about as good as a reasonably priced first gets.\n\nIn a roaring market you can find a mezz lender who will go to 75-80 for 500-700 over Libor. When the market turns your V goes down and you end up refinancing the mezz loan or even the whole stack with a hard money bridge loan at whatever libor is replaced by plus 1000+ or you walk away.", "replies": [{"id": "ef3xl1b", "text": "Thanks. Do NNN lenders get funny about seller seconds on a CLTV basis?", "replies": [{"id": "ef43kuz", "text": "They generally want CLTV to stay below 65-70, but will allow a bit more leverage if the lending environment is competitive, the CRE market is on the upswing, and you agree to a higher rate on the first.  That last point is the most important ;-)", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "ef59eqk", "text": "Without taking into account any mezz, you can even stretch leverage to 75%. A local bank can offer 5-7 years at that leverage. Typically floating rate but sometimes fixed rate is also offered. I am on the cmbs side and though on retail we prefer sub 70%, when its a good market and if there is a investment grade tenant with 13+ years left on the lease (you need LED to be at least more than 3 years more than the loan term to get good treatment from rating agencies), we can even offer 10 year fixed rate non recourse loan at 75% leverage, which is basically as good as it gets for a non multifamily product. ", "replies": [{"id": "ef5fm2m", "text": "Those are decent terms. Is that 75% a max CLTV or do they permit a second on top of that?", "replies": [{"id": "ef5h5yz", "text": "I will never say never, you might see mezz, but honestly I would not count on it. Depends on the lender and the product being used. ", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "ef433dd", "text": "You can raise equity that\u2019s very happy with those returns. The real risk is your tenant goes bankrupt early on in the lease and you can\u2019t find another one.", "replies": [], "depth": 2}, {"id": "ef44c05", "text": "This is helpful.  What if the market is like 1 hour from a major city and not totally Podunk?  I feel like you could thread the needle a bit here and not end up in the middle of farm land.  Also, if the strategy is to sell and 1031 halfway through you might need to lower the selling price a bit but could reduce much of the risk right?  Or is swapping around properties just also a dumb idea.  \n\nI'm going to start working with brokers here in about 3 months but just wanted to go in with an opinion up front so I appreciate this.  \n", "replies": [{"id": "ef455qu", "text": "If we go into a recession in 2020-2021 and immediately start dropping interest rates again you could end up doing well in any NNN deal.   If interest rates go up from here cap rates are going to follow and you aren\u2019t going to be able to jump around like what you are thinking.  NNN deals with 15+ years on the initial term sell for top dollar.  Something with 8 years left sells for less.  It\u2019s adjusted for term/location/rent to sales of the tenant/market rents, so no free lunch.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ef3icev", "text": "So, your questions are a little confusing.\n\n- First, what do you mean by \"I see a lot of things out there which have cap rates significantly below what I can loan at, which seems like you better really know what you are doing or really want to bet on an area appreciating.\"  Are you saying the cap is so high that a bank won't loan to you? If that's the case, I would also reconsider that purchase.\n\n- Credit worthiness will be a requirement of the banks underwriting regardless of the lease structure. A nnn is no better or worse than a standard lease, it's just a matter of how the deal is structured. NNN leases are common in CRE deals, specifically retail.\n\n- unsure as to what a cap rap to interested spread is.\n\n", "replies": [], "depth": 1}]