9,100 sf discount retail box at a 7.1 cap with flat rent for 11 years: pay ask or push

Dumb question from the back of the room: if the landlord still owns the roof, why does anyone call this triple net? Is that just how the listings are written or did I misunderstand what the three nets are?

The town size is where the worry belongs, well ahead of the roof. In low price point rural retail a 9,100 foot box in a 6,000 person town has maybe two credible backfill tenants, and one of them is a church that will want it at four dollars and want a year of free rent to build out. So run the downside honestly. Year twelve the tenant does not renew. The box carries dark for nine to eighteen months, taxes and insurance come out of pocket, there is a reconfiguration cost for a smaller user, and it re-leases at $8 if the market is kind. That is 72,800 gross against the 122,400 going in. If the whole thesis needs the option periods to be exercised, the underwriting rests on a corporate real estate committee's decision eleven years out. That does not mean do not buy. It means the eleven years of coupon has to return most of the basis in cash and amortization, or the residual has to be land worth owning on its own. Across from a grocery anchor on the main strip is the one detail in your post that suggests the dirt has a floor under it.

Following hollow's point. What's the parcel and what's the land worth vacant? If it's two and a half acres of hard corner commercial with signalized access, there's a number under this deal that isn't the lease at all, and in a lot of small midwest towns that's 150k to 300k an acre depending on the traffic count. If it's a mid-block interior pad behind a shared lot with no separate curb cut, the residual is the building and the building is only worth what a user pays.

Pull the plat and the county GIS before you argue price. I'd also check whether the parking is fee owned or under a reciprocal easement with the grocery center, because those agreements sometimes limit what use can go in the box later. That's a state by state and document by document thing, so read the actual REA rather than the broker summary.

Six thousand a year of reserve against a nine year old membrane and an unresurfaced lot is light. On 9,100 feet, a flat roof replacement generally budgets in the 90k to 130k range installed depending on whether you tear off or overlay, plus the insulation code upgrades a tear off triggers in a lot of jurisdictions. Mill and overlay on the lot runs another 40k to 70k for a box that size. Call it 160k of landlord capital across the hold. Spread over eleven years that is closer to 14,500 a year than 6,000. Rerun the cash on cash with that number and it lands near 3.0 percent, which is a strange return to accept on a leveraged single tenant deal. The move that tends to work here is a credit at closing rather than an argument about cap rate. Get a roof consultant report, get two bids, and ask for the number as a price reduction. Sellers who will not move on cap rate will often move on a documented capital item, because it reads to them as a fact instead of an opinion.

The five year balloon against an eleven year lease is the structural problem and nobody's priced it yet.

At refinance you'll have six years of term left and flat rent. Lenders on net lease generally size to the remaining lease term, and once you're inside about seven years of term the proceeds and the rate both get worse, sometimes materially. Confirm that framing with your own lender in writing, because their credit box moves and mine is not yours. If rates are where they are today you might be fine. If net lease cap rates widen 75 basis points, your exit value on flat rent drops around ten percent and your refinance proceeds drop with it.

What I'd want is a longer fixed term even at a worse coupon. Six and a half or six seventy five for ten years, self-amortizing or with a balloon past the primary lease expiry, changes the deal from a rate bet to an actual bond-like hold. That's the whole appeal of this asset class and a five year balloon throws it away.

Also, going in at 7.11 on an investment grade eleven year flat lease in a 6,000 person town is not obviously cheap to me. Secondary market pricing on that credit has been in that neighborhood for tertiary locations, which means you're getting paid nothing for the town.

Genuinely asking, since everyone here is treating the flat rent as an obvious defect. Why do these leases get signed flat in the first place? If I were the owner I'd want bumps, and if the tenant wanted flat rent I'd assume they paid for that somewhere else, like a higher starting rent or a longer term. Is the $13.45 per foot against a $9 market basically the tenant prepaying the escalations up front?

Ember has it roughly right, that's the trade in a build-to-suit. The developer built to a cost and the rent was set to a yield on that cost, so the starting rent reflects construction, not the local rental market. The flat structure is the tenant's price for signing fifteen years.

Quill, my long hold view is simpler than everyone else's. Options are not term. Underwrite eleven years and a residual, and if the deal only works when you count sixty years of options, it doesn't work. I've held land through two full cycles and the thing that saved me every time was that my basis was defensible without the current use.

What's your all-in basis per foot? 1.72m over 9,100 is $189. Replacement cost on that box today is probably $170 to $210 all in with sitework, so you're buying at about replacement with a credit tenant attached. That's not a disaster. It just means the lease is giving you the yield and the real estate is giving you nothing extra, and in a town of 6,000 I'd want the real estate giving me something.

On the debt, one thing to ask about before settling on the 6.4. There is a lending product built around exactly this asset, credit tenant lease financing, where the loan is underwritten against the corporate credit and the lease payment stream rather than the real estate, and it is typically fully amortizing over the lease term with no balloon. Pricing keys off the tenant's own bond spreads. It does not fit everyone, minimum loan sizes are often larger than 1.1m and the prepayment terms can be brutal, so confirm in writing what is actually available to you. The concept is the answer to meridian's point. If the risk being taken is corporate credit, match the debt to the lease and stop taking a separate interest rate bet on top of it. A 1.36 DSCR with a five year balloon on a flat lease is two risks stacked, and only one of them is being paid for. Also ask the quoting lender what remaining lease term triggers a proceeds haircut at their shop, and what happens if the tenant is downgraded during the term. Some net lease loans carry covenants tied to tenant rating. Read that section.

I'm about to close on my first small rental so I'm the least qualified person here, but the screening habit transfers. Before you argue price, get a tenant estoppel certificate signed. It's the tenant confirming in writing what the lease says, what's been paid, what they think you owe them, and whether there's any open dispute. On residential I'd never take the seller's word on a tenancy and this is the same thing with a bigger number on it.

Ask for the estoppel, the full lease with every amendment, and any letters between landlord and tenant about the roof. If a prior owner acknowledged a leak in writing, that changes thicket's reserve conversation entirely.