The cap rate on a NNN property is only as good as the lease language nobody reads until closing
I keep buying into the idea that a 6.5 cap from a publicly rated tenant is a clean, comparable number, and then a deal lands on the desk where the headline cap and the actual yield are two different conversations. The thing doing the most work in any NNN valuation is what the rent schedule actually says about who absorbs cost increases over time, and that varies so much from lease to lease that two deals priced at the same cap can perform completely differently at year seven.
Take a pharmacy box at 6.5 cap, 10-year primary term, rent flat through the whole term, and a tax expense stop set at year-one assessed value. A reassessment in year four pushes taxes up 40 percent. The tenant covers what the lease says they cover, and the landlord eats everything above the stop. The actual yield on that deal compresses without the price moving. Nobody repriced it. The cap was real at signing and wrong by year five.
The better-performing deal in the same asset class might price at 6.2 and have 10 percent bumps every five years with no caps on reimbursements. On a 10-year hold with any inflation in operating costs, that 30 basis point gap at acquisition can close and reverse.
So the question I keep coming back to is whether people in this room underwrite to the headline cap at acquisition or build a year-by-year cash flow that accounts for the bump schedule, the expense structure, and what happens if assessments move. And if you do the full underwrite, how often does it change which deal you take?
