Posted by ray@lcorn on January 17, 2004 at 10:16:04:
Alex,
I can tell you without a doubt you will not find the word “pure” in the lease. That’s industry vernacular for a lease that clearly puts all of the responsibility for maintenance and expenses on the tenant. You have to parse each of the lease clauses regarding maintenance and expenses very closely to establish who is responsible for what and when.
These leases are written by lawyers working for the tenant, so it is advisable that you emply your own lawyer to protect your interests. If it is an existing lease you’ll be bound by it’s terms. If it is in the negotiating stage you’ll find very little is negotiable, but it is important that you understand exactly what you’re getting into.
Posted by ray@lcorn on January 16, 2004 at 20:45:28:
Alex,
If the lease is a pure triple net, with no landlord responsibilities, then the answer is usually no, the GOI is the NOI.
In cases where the landlord has responsibilities for roof, structure, and/or major system repairs, then a replacement reserve must be deducted from the gross income.
You wrote: “then a replacement reserve must be deducted from the gross income.”
I think I respectfully disagree with you here. You could deduct “repair expenses” from Gross Income, but not reserves. Reserves should be listed after NOI and don’t affect the cap rate. Only those items which you will likely expense would affect NOI… repairs/maintenance, etc. Captial improvements or capital reserves by their nature aren’t expenses…they’re capital improvements. Otherwise, the cap rate gets way off.
I know it sounds like splitting hairs, but with people who are new at this, it could screw up their calcs.
Just my opinion, but seems to be supported by my real estate financial books.
Thanks. That makes sense. I will then verify if the leases are pure NNN, I hope to find the wording that spells “pure” NNN, sometimes theses agreements are not intelligible to the average human.
Posted by ray@lcorn on January 22, 2004 at 09:16:04:
Marc,
Point taken, and I agree. I got tied into the premise of equating GOI with NOI as the post questioned… and I should have been clearer. I take the reserve into account for cash return and IRR calcs, but not for a cap.