Be very careful about the hospitality industry. The purchase of a note may very well lead to the foreclosure and ownership of the property. The value of a hotel is usually by the number of rooms, the location, whether it will be served by a franchise labeled company and what occupancy at what rates you might expect.
Be prepared to become a hotel manager, which can be quite trying these days. Or, be prepared to try to sell this in a very depressed market.
You should like pay only cents on the dollar value of the note if you are buying this at auction. The question is "how few cents"?
I don't know who the tenant is, but if this is a recognized, credit tenant with a solid guarantee on the lease, the 5% every two years is a good bump.... with one proviso..... you should start with a decent cap-rate. The cap-rate should be around 7%, give or take a quarter to a half-point. You of course can back into your rent through this. For example, if you believe the market cost per sf is $500 for your property, there are 3000 sf of improvement, the value from this approach will be $1,500,000. 7% of $1,500,000 is $105,000 NOI. $105,000 NOI divided by 3,000 sf is $35 annually pure NNN rental income. You have to comp your area to see just what similar properties are trading for in order to really determine what you are willing to accept in initial rent.
Having a new 20 year lease is an advantage in an NNN property.
While we do not know what the inflation is going to do over the next 20 years, the fact is that it is quite common for NNN leases to run out 20 years. This is the trade off you will get for the security of the income from a NNN credit tenant over that period.
If it were me and it met all the standards required for a quality tenant and an initial cap rate as suggested, I would "take the deal".
Robert R. Baird | Chairman Emeritus
DRE Broker’s Lic.# 544165 (One of the oldest active licenses in CA)
CAP-RATE Commercial Real Estate Inc.
Oct 13, 2010