Sale/Lease-back pitfalls...what would you be concerned about in this deal?
I'm working on a quasi sale lease-back deal for an industrial building and I'm wondering where the pitfalls are.

The owner is planning on selling his business to one of his employees and would also like to sell the building to me.

The property has 2 tenants with the owner using 75% and a third-party using 25%.  The third-party tenant has been there for 20 years. They may close shop in a few years and if they did the other business would very likely takeover their space as well.

I'm proposing a 5-year absolute lease where all building expenses including taxes, insurance, maintenance, and structure are covered by the tenants. This theoretically reduces my risk and allows me to make a stronger offer on the building that would amount to somewhere around current market value but I would have a much better lease than other NN/NNN properties. 

My concern is that I pay market price and end up having to do a NN lease in 5 years if the tenant vacates, which would diminish my expected return. Or worse, the tenant delays major repairs that come up over the next 5 years and I'm stuck paying for them after they leave and I can only sign a NN lease all while having had lower rental income for the 5 year lease period.

Am I too pessimistic?
[{"id": "j0sjm6f", "text": "Are you paying higher price per sf than market vs comp sales on the market? \n\nMy biggest worry would be if the leaseback tenant is paying higher than market rent and therefore you\u2019re paying higher price per foot than comparable properties. If your leaseback tenant goes BK and you have to re tenant the building, you\u2019re going to be eating shit. I\u2019d be weary of a company being bought and leasing. The new owner will have a much larger overhead than the previous owner who owned the building. I\u2019d have to be really comfortable with the business and the their cash flow. This is what I would focus on. \n\nIf your biggest concern is what you\u2019re going to have to do in 5 years, I wouldn\u2019t worry about it too much. Collect the rent and figure it out in 5 years. \n\nAs an owner i wouldn\u2019t worry about deferred Maintence from a tenant and if it is their obligation in the lease to take care of Maintence, then bill them for it. \n\nDo you have to do a deal right now? I would wait 6-12 months to do a deal unless you have to.", "replies": [{"id": "j0skuch", "text": "Thanks, my offer price is 20% below market for a building like this so I definitely have a cushion but I also have target returns I need to hit for a deal like this.\n\nI don't have to do the deal but if I get the terms I want it would be very attractive, especially considering the absolute net lease. The primary business renting 75% has been in business over 10 years in this location and I'm told has good financials but obviously we will see during due diligence.", "replies": [], "depth": 2}], "depth": 1}, {"id": "j0sr8ld", "text": "You need to size your loan to the cash flow. Discount the NOI with a 10% vacancy, 5%management fee, 3%replacement reserves. It if still cash flows at a 1.20x or better, take that deal. Also use 5% rent escalators annually.", "replies": [{"id": "j0sv3gc", "text": "Thanks. It's at 1.53x with 5% vacancy, 4% management, and $0.15/sf reserves. I added increases to rent in multiples of $100 to keep it simple for the tenants and it starts at 4.8% increase and drops to 4.2% over 5 years. Seller financing is part of the deal, which is helping with the DSCR.", "replies": [{"id": "j0u1d1c", "text": "That\u2019s  strong deal. Even with interest rate repricing risk, assuming the bank 1st resets in 5 years, that\u2019s a nice deal. Do it!", "replies": [], "depth": 3}, {"id": "j0u1exh", "text": "Any environmental issues?  Do a phase 1", "replies": [{"id": "j0uuur8", "text": "Definitely need to do an updated phase 1. The seller said they have one from the purchase 10 years ago and there was nothing of note but I will certainly do an update.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "j0tcb1o", "text": "I'm looking at a similar deal from the other side (business buyer side).\n\nIn all cases like this, businesses sell for about 3x NOI and RE sells for 17x-20x NOI, so the strong inclination is going to be for the RE lease to be absolutely as high as the business can afford, thus reducing business valuation but increasing RE much higher.\n\nIn my scenario: Seller wants to rachet the lease on the business way way up to support the RE valuation.  Business CAN pay that, just barely.  Should the business rev slip to 2021 or 2020 levels it will be insolvent (after debt svc).\n\nIf the buyer of the business is using an SBA loan, be forewarned you'll need to do a 10 year lease per SBA guidelines, and (I believe) the lease is subordinate to the SBA debt.", "replies": [], "depth": 1}, {"id": "j1mdl4q", "text": "Make them give you a year in advance notice if they\u2019re leaving", "replies": [], "depth": 1}]