Reduce a Tenant’s Rent in a Triple-Net Property

 By Randolph T. Mason, CCIM, SIOR

Partner, Commercial Realty Specialists

Even having a discussion about a rent reduction is a serious undertaking.  A distinct advantage to agreeing to rental reduction is that the tenant will continue to pay the triple-net building’s operating expenses.  Should the tenant vacate or go out of business, the building’s owner still needs to pay the property taxes, insurance, building maintenance, landscaping and other miscellaneous operating expenses.

If a rental reduction is agreed upon, ideally it will generate some cash flow to help service any debt – as the saying goes, “a little of something is better than a lot of nothing.”  Additionally, the lease could be extended if this is in the property’s best interest.  If a tenant is requesting a rental reduction, it is not unreasonable for the landlord to request a personal guarantee from a creditworthy entity, should one not already exist.

In these uncertain times, it is not uncommon for a business owner to be running their business with a fight-or-flight mentality without a comprehensive business plan in place.  As a precondition to rent reduction, the landlord may want to discuss the tenant’s business plan, which may even help motivate the tenant to create one if it doesn’t exist, ultimately helping the tenant.  The tenant will also need to provide the current financials along with the restructuring plan.

In some cases, though, a rent reduction may not make sense – especially if it is just delaying the inevitable.  In other words, the tenant may be going out of business.  If a reduction is granted, it’s important to remember the value of the building will decrease against the cap-rate valuation method.

Generally, if often makes sense in a soft market for a landlord to consider a reduction in rent in order to mitigate the landlord’s losses, should the building ultimately become vacant.

 6 Ways NNN Properties Can Get (or Stay) Leased

By Randolph T. Mason, CCIM, SIOR

Partner

Commercial Realty Specialists

In these interesting times, it is imperative for property owners to do what they can in order to keep up (or get) their properties leased.  While there are many tricks to the trade, these few pointers may speed up the process.

1.  Be responsive to inquiries from potential tenants or leasing representatives.  If an inquiry is made and there is a long delay to respond, that tenant or broker may just go to the next building down the street.  I am figuring out that many inquiries come via email, therefore being responsive should be relatively easy.  Always consider attaching brochures, floor plans and access codes to lock boxes and anything else that will make it easy for a potential client.  It makes a lot of sense to create a standard signature block on your outlook that would have much of the above information.  I am also finding communication via texting is increasing in popularity.

2.  Have a combination lock box on the building if someone can’t be there to show it on a moment’s notice.  Convenience is critical to clients or brokers when they want to view a potential building.  It is not uncommon for a prospect to see a building and want immediate access.  If they are able to call the sign on the building and get the access code, that betters your chance of leasing the building.  If you’re worried about vandalism then consider having a motion-detecting camera installed inside the building where the recording begins once motion is sensed.

3.  Considering offering an above-average tenant-improvement allowance, brokerage compensation, free rent or other terms that could entice the client and their representative.  I know landlords offering leasing incentives of $1-$3  per square foot in order to have their building stand out above the pack.  Also, some landlords are offering touring incentives in order to get their building on the touring list by the tenants’ representative.  If the broker has 30 opportunities to show a client, what can you do in order to get the building higher up in the food chain?

4.  Complementary space planning services is on the rise.  Many landlords will suggest a space planner lay out the building to help entice a tenant to visualize what the building could look like should they become the occupant.

5.  Many landlords are providing storyboards in the front lobby area or reception area that show building standard carpet and paint samples, along with hypothetical floor plans.  This gives prospects an idea of what the building could ultimately look like.

6.  Be aggressive with your leasing terms.  Don’t be afraid to let the market know that you’re flexible in your rent, tenant-improvement package, potential moving allowances or other incentives that could entice a potential client to move into your building.

To be sure, this current market is challenging for both tenants and landlords alike.  Landlords that realize this and understand the tenants’ issues, concerns and motivations are more likely to retain and attract tenants.  There is opportunity in all cycles of the market.

Investing in Triple Net Properties

By Randolph T. Mason, CCIM, SIOR

PARTNER

Commercial Realty Specialists 

If you could have an investment that paid you regularly with limited management, would that excite you?

If so, a long term triple net leased property to a sound company with good financials (and maybe even personal guaranties or a letter of credit) may be an investment for you.

One of the exciting components of a triple net investment is that the tenant is the one who maintains the property and typically pays all of the buildings operating expenses.  You as the owner, receive your rent.  Should you have any debt service on the building, this rental income goes to pay that expense, the balance is for you.

Now let’s go over what’s currently happening in the market.  Cap rates seem to be stable to a slight downward shift on most types of properties.  Some of the lowest cap rates are apartments, followed by central business district office projects, R&D industrial, neighbourhood retail and industrial properties.  Some of the favourite triplet net properties are not surprisingly those that offer the least risk, which would include Wal-Mart, McDonald’s, Lowes, Walgreens and other high profile tenants.  Should an investor be looking for a higher return on their investment, they should probably look at lesser known, yet well capitalized companies.

While long term triple net investments provide stability and income, there is the fact that one is locked into the long term lease and they miss the chance to capture any gains in the rental income when real estate fundamentals improve.  It’s really give and take.

There still seems to be a strong supply of debt available to long term leases which are leased to credit tenants and the ease of underwriting when it is a single tenant opportunity.  With that being said, we are still seeing institutional investors, REITs, foreign buyers, as well as private investors, investing in all cash transactions.  They have nowhere else to invest their money to achieve a decent return.

So, if an investor is looking for limited management responsibilities, generally a longer term lease with a stable cash flow and the unique tax benefits real estate provides, a triple net investment may be something to consider.

Analysis of a Sale-Leaseback 

By Randolph Mason,
Partner, Commercial Realty Specialists

A sale-leaseback allows a company to raise money from the sale of its property while retaining its use, so a sale-leaseback opportunity typically happens when an owner occupant/tenant would rather not relocate.

When the owner-occupant company sells its building to an investor, the investor is buying the income stream that this tenant or seller would be providing. The higher the income stream, theoretically, the higher the value. But there are challenges, such as when the current owner agrees to an extremely above-market lease rate. Remember, the investor is buying this income stream, so should the seller go out of business, then the investor has the challenge of trying to release the property at an above-market lease rate – and that dog don’t hunt. That is why it is extremely important for the potential seller to understand the realistic lease rates so that they can better appreciate the investor’s point of view.

Now in a sale-leaseback, if the potential seller signs a slightly above-market lease rate, and is an extremely well-capitalized company with a good track record, the differential between the contract lease rate and the actual market lease rate may be insignificant. The length of the lease term is also important to investors.

Investors look closely at the reasoning and financial condition of the seller (now the new tenant) in order to determine the reasons for the sale. Due diligence is very important for all parties.

Sale-leasebacks can be an excellent way for an owner occupant to generate cash to pursue other opportunities like growing their core business or investing in a venture that would provide a greater return to the seller or perhaps to return capital to shareholders.

Keep Your Triple-Net Expenses to a Minimum

By Randolph T. Mason, CCIM, SIOR,
Partner, Commercial Realty Specialists

Triple-net-lease tenants and owners often ask me how they can limit their building’s operating expenses. I have eight tips that I often share with them that can be employed to keep those expenditures to a minimum.

1. Maintain your HVAC system regularly. A brand new HVAC system could last 20 years or more if properly serviced and maintained. The service is generally inexpensive if done each quarter. Maintenance typically includes filter cleaning or replacement, lubricating all moveable parts and checking for leaks or unforeseen damage to the unit.

2. Inspect and maintain your roof. Often, cleaning roof and drain-spout debris is overlooked. This will create a pool on top of the roof during a rainstorm. It does not take long to regularly inspect the roof, and should a minor repair be necessary, take care of it to prolong the life of this asset.

3. Maintain your parking lot. It is not uncommon for a NNN tenant to forgo the reslurring and restriping of the parking lot periodically, but it should be done every three years. When a parking lot is not maintained adequately, cracks and subterranean erosion to begin to occur and then it becomes nearly impossible to simply reslurry. After major erosion occurs, it becomes necessary to repair and resurface the parking lot.

4. Regularly wash and inspect your windows. This will help lengthen the life of window seals. If left to run its course, damage from weather can decay the rubber seals. It’s much more expensive to replace those seals than to simply maintain them, and the rubber is necessary to stop window leaks which — can lead to a greater problem for the building: mold.

5. Maintain the fire sprinklers. It is important to inspect the fire-suppression systems regularly.  An annual checkup and a five-year certification should keep the fire insurance company satisfied.

6. Pay attention to landscaping. A simple way to lower landscaping costs is to plant drought-resistant plants and ground cover. Slow-growing plants will require less maintenance and are often eco-friendly. It is also imperative to check for a leaky backflow, malfunctioning sprinkler systems or standing pools of water, all of which could indicate an underground leak or broken pipe.

7. Maintain the outside metal. It is important to properly maintain outside metal with a good coat of paint to help inhibit the growth of rust. Keep a close eye on metal joints or where exterior metal meets the concrete base.

8. Have your property tax reassessed. If rents in your area have decreased, there is a good chance that the value of your building has decreased as well.  This could warrant a tax bill reduction. It may make sense to talk with the local tax assessor.

With a proper schedule, you can keep your buildings NNN expenses to a minimum and when properly maintained, the useful life of a building and all its components can be extended — all of which help to reduce operating expenses.