Comparing one unlevered NNN box, two boxes at 50 percent leverage, and a fractional interest, from the same equity

I'm new to all of this, so point out what I'm missing. B looks like it just doubles everything, including the risk. You've got two tenants who can leave and two loans that come due. How is that safer than owning one thing outright with nothing owed on it?

Ember, two tenants means one going dark costs half the income instead of all of it. That's the argument. Sextant, the thing worth pushing on from the management side is that nothing to do holds right up until it doesn't. When a single tenant box goes dark you own 100 percent vacancy, and now you're paying taxes, insurance, utilities, snow, and a broker to find a replacement in a building shaped for one use. That carry can run 18 months on a suburban pad in a good location. Unlevered, you survive it out of pocket. At 50 percent debt with one of two boxes dark, the surviving rent has to cover both loans and both carries, and that's the number to see before voting for B.

That's the right test. Run it through structure B: if the non-rated box goes dark at year 6, remaining rent covers combined debt service at roughly 1.15 before carry on the empty box, and once taxes, insurance, and upkeep on the vacancy are added, the position runs negative around 40k a year until it's re-tenanted. Survivable with reserves, unpleasant, and it can land right when a balloon is also coming due. In structure A, the same event takes income to zero with zero obligations, so the loss is the whole coupon and none of the equity is at risk of a lender decision. That difference is the whole thing. Debt doesn't change how often bad things happen. It changes who decides what happens next when they do.

On C, the two versions lumped together behave nothing alike. A listed position can be sold Tuesday. A fractional or trust interest generally cannot, and the offering documents usually give the sponsor sole discretion over sale timing, refinancing and reserves, with fees that come out ahead of the investor's distribution. Read the fee table and the transfer restrictions before the tenant roster. Whether that kind of interest works for a 1031 depends on how it is structured and on facts specific to the taxpayer, so that is a question for tax counsel, not a forum poll.

A. Unlevered, 7.1, and I can hold it through anything, including a dark period, because nobody can call the loan. Every disaster I've watched in twenty years of owning things had a lender in the middle of it.

Naive question about A and B. Under a true triple net, if the roof starts leaking while the tenant is still in place, do you ever hear about it at all? Or does that only become yours the day they leave?

Beacon, in an absolute net lease the tenant handles it, and it usually surfaces at inspection or when they ask to assign. Some leases carve out roof and structure to the landlord, and that carve-out is common enough to assume it is there until the lease is read and confirmed otherwise. Sextant, the case for A stands. One tenant is a single point of failure. Owning one thing fully understood beats owning two things where a lender gets a vote.

How do you actually check the credit on a non-rated operator with 300 units? Do they hand you financials, or is that something you have to negotiate into the lease before you buy?

Wren, ask for whatever the current lease requires the operator to deliver, which is often nothing for a private operator. If the lease has a financial reporting clause, that's a decent position. If it doesn't, underwriting runs off unit-level sales if the seller has them, store count, and whatever the operator will voluntarily share during diligence, and plenty won't. Sextant, B only gets interesting if the two expirations are at least five years apart and neither balloon lands within two years of a lease expiry. Otherwise you've built one risk out of two assets.

Sort A and B by how much of the price is land. A 1.5M box on two acres of hard corner in a growing suburb has a floor under it that a 1.5M box on cheap dirt off a highway exit does not. The tenant's credit determines your income. The dirt determines what you have left when the income stops.

The balloon point is the one that should worry a first-time buyer most. A five year loan against a twelve year lease means at year five there's a refinance against an asset whose value depends on a rate environment nobody can see today. Taking the lower unlevered yield to avoid that conversation is a defensible trade for anyone still weighing a first purchase.

Option C is tempting for the obvious reason, since it avoids a second job and avoids being the person deciding what to do with an empty building. But the listed version cuts distributions when things go badly, and that means selling into a down market along with everyone else. That is a different kind of pain, still pain. A split between A and C is the more defensible answer here.

Coming from small multifamily, this reads strange. In a four unit, diversification happens inside one roof: four leases, four move-out dates, one insurance policy. The NNN version buys simplicity by putting everything on one signature. That isn't wrong, it's just the opposite trade from the multifamily approach, and sextant's downside numbers lay that out clearly.

What does "non-rated with 300 units behind the guaranty" actually mean in plain terms? Non-rated sounds bad but 300 stores sounds big.

Juniper, non-rated means no agency has published an opinion on their credit, usually because they've never issued public debt. It says nothing about whether they're healthy. 300 units is real scale, and the question is whether the guaranty covers all 300 or a subsidiary holding a handful of them, because the entity named on the guaranty is the only entity that can be pursued. Sextant, on reuse, if backfill becomes necessary, permitted uses come from the zoning district and those differ by municipality, so pulling the district text on both boxes in B before comparing them on cap rate is worthwhile.

Everything in this thread assumes there's a buyer when the seller wants out. In small markets, a 1.5M box at a 7.1 can sit for a year because the buyer pool is a handful of local people and 1031 money that shows up only when it has a deadline. That illiquidity is the real cost of A and B, and C at least prices it honestly.

Two boxes means two sets of tax reimbursement reconciliations, two insurance certificates to chase, two assessors reassessing after a sale. It isn't heavy work, and it's more than zero, which tends to surprise people the first time they run the comparison. Anyone claiming two net lease assets is exactly twice as passive as one has never sent the demand letter for an underpaid reimbursement.

The question I'd have kept to myself in a room: at 6.6 blended with a lender in front of me, why is this better than just buying a corporate bond from the same tenant? What am I getting from owning the building that I don't get from the paper?

Compass, the building. Bonds mature at par and give you nothing back but principal. Real estate gives you escalators, a residual asset, depreciation on the improvements, and the ability to re-tenant at market rent if the tenant leaves before the term ends. You also give up daily liquidity and you take single-property risk, which the bond doesn't have. Depreciation treatment depends on your own situation, so that's a CPA conversation.

I'd add that in listings I see, the spread between an investment grade tenant and a non-rated operator on similar boxes runs 80 to 150 basis points, which is roughly what sextant's A over B gap already tells you.

What would move the analysis most on a lease like these is coverage at the unit. Plenty of landlords could not tell you what a given location grosses, because they never ask. If that store's four-wall economics are strong, the operator will pay through a bad cycle and even a mediocre credit keeps performing. If the unit is marginal, an investment grade guarantee just means the owner gets paid while the operator runs it dark and stops paying at expiry.

Changing my vote to A. trellis's point about owning 100 percent vacancy did it, plus sextant's negative 40k a year in the B downside. I don't have reserves that can absorb that and pretend it's fine, so I shouldn't own the version that requires them.

Ember, that's the right reason to pick a structure: what can be absorbed rather than what pencils. Sextant, one thing worth adding to the model: put a real dollar figure on the re-tenanting, not just the carry. Broker commission on a ten year lease, a tenant improvement allowance the replacement will demand, demolition of the last tenant's fixtures, maybe a facade change if the new use needs one. On a 6,000 to 10,000 foot box that figure commonly lands between 150k and 400k depending on the market. Whichever of A, B, or C gets chosen, that number is the one people leave out of the spreadsheet.