Refinancing a NNN property has a few intricacies that set it apart from the typical commercial loan refinance. Corporate guaranteed leases (among other strengths) have attracted many prominent capital sources to this arena.
However, due to special use nature of many NNN buildings (For example a fast food restaurants, drug stores, etc) and that many properties contain a single tenant, lenders can be cautious. This lack of tenant (and income) diversification and the special use characteristics creates increased risk for the lender in case of default.
Currently (as of 12/07) credit sources for NNN properties are becoming more and more conservative within this category due to the 'credit crisis'. Many lenders within this category have simply stopped lending on NNN properties.
Below is a brief underwriting discussion on what to expect if you are currently considering or conducting a nnn property refinance.
LTV
Loan to value, meaning the value of the property versus the loan amount, seldom exceed 65% and is commonly capped at 60% within the NNN category. However exceptions are made with this. An example would be with strong corporate guaranteed leases.
DSCR
Debt Service Coverage Ratio restrictions are typically capped at a relatively low 1:1.10. Meaning that for every $1.10 of net income the property produces the mortgage payment will not exceed $1.00. Said in another way, after all expenses and mortgage has been paid, the owner needs to net at least $.10 to qualify.
Exceptions can be made with this as well. It is not unheard of for major drug store occupied properties to qualify for DSCR as low as 1.03.
Tenant Evaluation
Much analysis goes into evaluating tenant's strength. Lenders scrutinize the tenant's financial position, time left on the current lease and other relevant information. The time remaining on the current lease is of particular concern on a NNN property refinances. Many banks/ lenders will not allow the fixed period of the loan to extend the remaining term of the lease. Some traditional banks will not allow the loan amortization period to exceed the length of the lease.
Property Analysis
Market value and market rent will be evaluated and compared to the subject property. Age, appearance, location, accessibility, and local market conditions, as well as other factors are considered.
Credit Worthiness
The personal credit worthiness of the borrower will often be checked. Business performance and credit rating will be heavily evaluated as this is one of the key components of underwriting.
