Commercial Financing and How to Guestimate a Commercial Triple Net Lease Rate
What's a Fair NNN Rent for a Commercial Property to Get Commercial Financing?
You are a commercial mortgage broker or a commercial mortgage banker. You are seeking a new commercial mortgage loan on an owner-used commercial property. The owner's tool company occupies the commercial property. You need to prepare a pro forma operating statement in order to apply for a commercial mortgage loan, but you don't know what lease rate to use.
No problem. Just work backwards from the commercial property's value. If you know the commercial property is worth $600,000, just assume a cap rate of 9%. Nine percent of $600,000 is $54,000 per year in net income, after operating expenses.
If we assume the property is leased on a triple net basis, then the only operating expenses are replacement reserves (say, 3% of effective gross income) and management (say, 4% of effective gross income). We therefore multiply the $54,000 in net operating income by 107% (3% plus 4%) to arrive at the effective gross income of $57,780.
The effective gross income is just the gross rental income less 5% for vacancy and collection losses. Finally, simply take $57,780 and divide it by 95% to get the triple net annual gross rental income of the commercial property!
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