9,100 sf discount retail box, 7.1 cap, 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 I'd spend my worry, not the roof. I look at low price point rural stuff constantly and 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 doesn't renew. You carry it dark for nine to eighteen months, pay the taxes and insurance yourself, pay to reconfigure for a smaller user, and re-lease at $8 if you're lucky. That's 72,800 gross against your 122,400. If the whole thesis needs the option periods to get exercised, you're underwriting a corporate real estate committee's decision eleven years out.

Doesn't mean don't buy. It means the eleven years of coupon has to pay you back most of your basis in cash and amortization, or the residual has to be land you'd want anyway. Across from a grocery anchor on the main strip is the one detail in your post that makes me think 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 on a nine year old membrane and an unresurfaced lot is light. I've replaced two flat roofs on smaller buildings and the number I'd budget for 9,100 feet is somewhere in the 90k to 130k range installed depending on whether you tear off or overlay, plus insulation code upgrades that get triggered on tear off in a lot of jurisdictions. Mill and overlay on the lot is another 40k to 70k for a box that size.

So call it 160k of landlord capital over your hold, spread across eleven years, that's closer to 14,500 a year than 6,000. Redo your cash on cash with that and you're around 3.0 percent, which is a strange thing to accept on a leveraged single tenant deal.

The move I'd make is not a cap rate argument, it's a credit at closing. Get a roof consultant report, get two bids, and ask for the number as a price reduction. Sellers who won't move on cap rate will sometimes move on a documented capital item because it feels like a fact rather than 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 you settle on the 6.4. There's a whole 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's typically fully amortizing over the lease term with no balloon. Pricing keys off the tenant's own bond spreads. It's not right for everyone, minimum loan sizes are often larger than 1.1m and the prepayment terms can be brutal, so confirm what's actually available to you in writing.

But the concept is the answer to meridian's point. If the risk you're taking 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 you're only getting paid for one of them.

Also ask your quoting lender what remaining lease term triggers a proceeds haircut at their shop, and what happens if the tenant gets downgraded during your term. Some net lease loans have 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.