Posted by ray@lcorn on April 22, 2003 at 07:54:35:
I remember this deal… you were going to run the body shop with a manager if I remember right? I’ve had some lessons like that of my own.
If you package this thing up for marketing to investors there should be some interest. For truly hands-off NNN deals there are more buyers than sellers like never before. And because the standard credit tenant product is being priced so high, the second and third tier properties with local tenants are getting looks from investors that would normally not even be in the game.
I just did a similar deal on a special use property and showed the investor a 9.5% pre-tax return and they were ecstatic. We offered the deal with our management thrown in at cost to insure a hands off deal for the investor. The upside to us was similar to your situation in that it helped the rest of the project to get rid of a probem owner.
Need a little advice. I own a 8,000SF building. I was trying to sell the building to the new tenant. I can’t get him bought. So now I have been toying with the idea of turning him into a Tenant and sell the building to an investor. Here are my numbers. The building will appraise for 595,000 to 625,000. I have not approach the tenant thats been in there since September. But what I was going to get him to do is sign a 10 year lease. Here are the numbers as I see it.
LEASE TERM 10 YEARS
TYPE OF LEASE NNN
RENTAL AMOUNT $4,666.67
SALES TAX $326.67
INSURANCE 1/12TH ESTIMATE $500.00
REAL ESTATE TAXES 1/12TH $504.64
ADJUST ANNUALLY FOR TAXES, INSURANCES, AND INCREASE IN RENT THAT?S TIED TO THE CONSUMER PRICE INDEX.
YOUR RENT WILL BE $5,997.98 PER MONTH.
THE ANNUAL ADJUSTMENTS IS WHAT I AM TRYING TO FIGURE WHAT TO TIE IT TOO AND BE FAIR.
Based on what I have show you what do you think I should add and also should I figure the Maintenance in there?..Just a idea.
Posted by ray@lcorn on April 21, 2003 at 16:05:02:
Jonathan,
Not sure what you’re aiming for here… is this the pitch to the tenant for a new lease? Is he currently a tenant or not? You can’t get him financed, so you’re going to increase the rent? I’m confused.
If this is a pitch to a new tenant, a triple net lease includes maintenance expenses to be paid by the tenant, so it would be a good idea to include an estimate of routine maintenance costs.
You don’t say what kind of property this is or how tight the market is. A 10 year lease with annual increases pegged to the CPI is a good place to start, but most tenants are going to want level rent for a few years in exchange for the long term lease. Don’t be surprised if there is some negotiating to be done.
I’m curious as to why sales tax is charged? Is that a local thing?
Thanks for the response. Sales tax is required for Commercial Leases. I was trying to sell the property to him. Its a Paint & Body Shop that I bought subject too 2 years ago. I operated the business (what a mistake). So when the opportunity came up this guy that is in the building now was being moved out of his old location because of an expansion of another building. He moved into my operation with one months rent which convers my mortgage payment and taxes on the building. We wrote a Contract to purchase and I am unable to get him financed because of his book keeping and so forth. We have had him in front of several lenders. In anycase I am at the point that I don’t want to deal with the month to month situation. I wanted to make the terms attractive for an investor to purchase.
I am not worried about the tenant he is either going to agree to the terms or he can move. Month to month is nice…lol. But I want to cash out of this puppy.
Posted by ray@lcorn on April 21, 2003 at 18:47:57:
Jonathan,
Okay, now I understand. I couldn’t figure out what was happening.
With that being the case I don’t think I’d want him on a ten year lease. A tenant with weak or bad credit hurts the value of your building just as bad as a hole in the roof. But then if he’s paying a market rate, and on time, then he’s better in place than an empty building. But short term is better.
I think I’d try to do a three year deal with say 5% annual increases (I like that better than the CPI… more certain and definitely justifiable). With edgy tenants I often include a clause that provides for either an automatic rent increase or a technical default if the rent is late three or more times within any twelve month period. That caps the downside for a new owner in having to deal with a problem tenant.
Also, on a triple net like this you may want to pay the expenses and then collect from the tenant. I don’t like counting on that kind of tenant to keep my taxes and insurance premiums paid. We typically add a 10% administration charge to the maintenance expenses when we are responsible for scheduling and payment.
As you craft the lease keep in mind the terms will also have an effect on the value. I’m not sure how you’re handling the enviro matters with the body shop, but I’d want some sort of indemnification clause from the tenant making him responsible for clean-up, and carry any insurance riders that may be available in addition to a general liability policy naming you as additional insured.
Thanks again for the info> His credit is good. Just shows no income. Get this his lawn guy does his books…don’t ask.
I built this building 3 years ago. Former owner fell into a substance abuse problem and I was developing this commercial park at the time and I did not want to see a foreclosure at the enterance of my park so I made a deal he couldn’t refuse. Sign here and the 3rd copy is yours. The enviro stuff is self contained. I know accidents happen and spills but I don’t plan to keep this puppy long. I jsut want to make the terms attractive to an investor. I thought a long term lease would be helpful. But I like your ideas also. Thanks again.