Scoring a Homerun in NNN Real Estate: A Deep Dive into an Exceptional Deal

Taco Cabana NNN Investment Success Story Shows How Investors Can Execute Proven Strategies To Generate Uplifting Returns

NNN real estate investors are always looking for that “homerun” deal. But what constitutes a great deal exactly? Is it buying a desirable building in a prime location? Or is the driving factor the security aspect of buying a NNN property with a rock-solid national tenant and corporate guarantee on a long-term lease? For an investor that enjoys a more hands-on approach to investing, there also is intrinsic value to be found in buying a property that needs a bit of sweat equity in renovation or bringing in a new tenant to significantly raise the property value.

Depending on your objective, the answer can be any or even all of the above scenarios. As an analogy, one can buy a car with choices that come in all sizes, styles, performance metrics, and price points. Do you want to buy that used Toyota minivan or Audi Cabriolet convertible? It all depends on your ‘investment’ objectives, rate of returns, and price point.

In this blog, we will highlight a compelling deal that checks all of the boxes for net lease investors: A NNN property in an A-quality location that has upside potential derived from its excellent real estate and a pre-existing below-market rent.

NNN Taco Cabana, Cypress TX: (click here for more info) This property is located in a highly affluent suburb 25 miles north of Houston. It is situated on an out parcel at a busy Target-anchored shopping center surrounded by over 750,000 sq ft of retail. This property has an absolute NNN lease – zero landlord responsibilities! There are short time frames remaining on the base term, and the tenant has three multiple 5-year renewal options with a 10% rent increase in each option.

The property benefits from phenomenal traffic exposure. It faces the US 290 Freeway that sees an estimated 162,300+ vehicles pass by each day. The city of Cypress has undergone explosive growth since the early 1990s and is currently home to more than 182,400 residents with an average household income of $134,500. Cypress also sits within bustling Harris County, which is home to a bigger population of 4.72 million, the city of Houston, and 21 Fortune 500 companies.

The stellar attributes of the location alone make this property very attractive to potential investors. What makes this deal a true winner and a must-have for investors is that the current rent is much lower than the market rate. In the immediate vicinity, similar retail tenants, such as Starbucks, Burger King, and Taco Bell are paying premiums up to $45 - $50+ per square foot. In a scenario where the existing Taco Cabana decides not to renew its lease in the near future, the investor would likely have a queue of retailers/tenants that would line up to occupy this property – and be willing to pay the higher market rent.

To put this investment opportunity into perspective, there was a large pool of interested buyers that pounced as soon as the for-sale listing went live in the marketplace. The seller received 21 offers within days and ended up selling it significantly over the asking price. Even at an above-market price, we believe that the buyer was already a big winner on day one. If Taco Cabana were to choose not to renew its lease at some point in the future, we believe the owner could increase the base rent by up to 50% or more with a new long-term 10 to 15-year NNN lease. Assigning a buyer-friendly (conservative) cap rate of 5% to those new metrics, the potential valuation would increase by 65% to 80%, a sizeable gain for this deal. Setting the price pegged at a more aggressive 4.5% cap rate generate an even bigger upside 125%+ return.

In another scenario, Taco Cabana remains firmly in place, taking advantage of all three of its renewal options. Those renewals translate to zero downtime – and no extra investor responsibility – in finding a replacement tenant. Additionally, each renewal option comes with an automatic 10% rent increase. Those rent hikes mean that the property will continue to produce steady and increasing income over time, which also will help to boost the property value.

The bottom line is that there are different pros and cons to every NNN investment opportunity and different paths that can lead to upside performance. The key is to work with an experienced broker who can help you navigate the marketplace and who has knowledge of the intrinsic value that can be found in the location, real estate, credit tenant, and lease term. If you are interested in more information on the NNN investment marketplace and finding the home run deal that can propel you to the next several levels, please contact Andrew Vu directly at 415.539.1120.