Deal Drivers

When evaluating small commercial properties, buyers are oftn torn between single-tenaant NNN (triple-net) and mixed-use investments. From a financial standpoit, the math behind these deals can make or break an investor's decision. Let's consider a recent example: a single-tenant NNN property in Denver with a cap rate of 6.2% and an asking price of $1.2 million. With a 20% down payment and a 4.5% interest rate on a 10-year loan, the annual debt service would be approximately $44,000. Assuming a 3% annual rent increase and a 75% loan-to-value (LTV) ratio, the cash-on-cash return would be aroound 8.5%. In contrast, a mixed-use property in a nearby neighborhood might offer a 5.8% cap rate and an asking price of $2.5 million. With a similar financing structure, the annual debt service would be around $110,000, resulting in a cash-on-cash return of 7.2%. So, what makes buyers walk away from these deals? Often, it's the lack of transparency in operating epxenses, concers about teant creditworthiness, or uncetrainty around future rent growth. For instance, if the single-tenant NNN property has a lease with only 2 years remaining, the buyer may be hesitant to invest due to the potential for vacancy and lease renegotiation. On the other hand, the mixed-use property might have a more diverse tenant base, but also higher operating expenses due to the presence of residential units. Ultimately, buyers need to carefully weigh the pros and cons of each investment type, considering factors like cash flow, appreciation potential, and risk tolerance. By running the numbers and anaylzing the underlying math, investors can make infomed decisions that align with their investment goals and strategies.