Posted by Mohsin on February 23, 2008 at 06:11:31:
Thank you very much for your advice! I have always found it very helpful!
Mohsin
NNN deals - Posted by Mohsin
Posted by Mohsin on February 20, 2008 at 06:40:08:
I am doing some research to buy a NNN properties. I am wondering if there are other members at the forum, who already own NNN properties and perhaps I can connect with them.
I have also developed my own spreadsheet to do the analysis of the potential deals(ROI, IRR, NPV of cashflow taxes etc.) I would like to share it with some of you and get some feedback.
I am struggling with a proper way to determine the “terminal value” at the end of the lease. I have been using Land basis (usually 20% of price) as residual value + residual value of property after depreciation. The thing I can’t figure out is how to realistically predict real Cap rates 10-15 years down the road.
Thanks in advance.
Mohsin
Re: NNN deals - Posted by ray@lcorn
Posted by ray@lcorn on February 23, 2008 at 24:59:22:
Moshin,
I wrote an article about two years ago about triple nets. For direct access, see this link: http://www.creonline.com/articles/art-286.html
As you will see in the article, the issue of residual value is extremely important in establishing overall returns.
To get a “guess-timate” of the future value you have to leave behind the normal income-based approached to value. This is now a vacant, 15-20 year old, fully depreciated (and potentially obsolete) structure, most likely in need of significant capital improvements.
The proper valuation technique is the replacement cost method, usually the second leg on the three-legged appraisal methodology. This involves increasing the land value over the holding period (usually 2%-3% per year), offset by depreciating the value of the building over the same period. In most cases the raw residual value will be much less than expected.
So much so that most investors balk at the number being too low, and most try to revert to some form of income valuation. But if the facts are adjusted accordingly, there is a rude awakening there as well.
Those conditions above (i.e. vacant, 15-20 years old, fully depreciated (and potentially obsolete) structure, in need of significant capital improvements) significantly affect potential rental income. It will face a leasing market against newly constructed competition. Under those conditions it’s likely a Grade C or worse property, meaning it will not command the same rental rate, or the previous demand as a Grade A or B property. Rental rates will be 10%-25% less than projected market rents, with higher expenses that increased 2%-3% per year during the original lease term from the base year.
So the income statement has lower gross rent, and higher expense, hence lower NOI, and the prospect of a lot of capital (and risk) involved in turning it around. Then comes the codaâ?¦
For that type of asset (i.e. vacant, fully depreciated asset with significant CapEx needed) the projected Cap Rate will be in the historical norms for turnarounds, e.g. 12%-14%. It wonâ??t be a pretty picture, and thatâ??s why one has to be very mindful of the planned hold time on a NNN asset. Like a card game of Old Maid, you donâ??t want to be around at the end of the game.
Hope that helps.
ray
Re: NNN deals - Posted by john
Posted by john on February 20, 2008 at 11:00:51:
Mohsin,
I may be able to help since I own some of these NNN properties. The factors that make a NNN vaulable are the following:
1)Getting a market cap rate for your property or better
2)Long Term Lease with AAA rated Tenant
3 Landlord financial responsibility (absolute NNN or other)
4)Commercial viability of land after lease is up
-determined by surrounding tenant mix, population and demographic trends.
You can’t get caught up in what the cap rate might be 15 years from now. What you need to determine is what your risk tolerance is today and work backwards from there to make your decision. You can E-mail me if you like.