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NNN Due Diligence Question - Posted by pjw
Posted by pjw on March 29, 2004 at 16:05:31:
I am currently looking at purchasing an office building that is an absolute NNN. After running the preliminary numbers the property appears to fit my investment objectives. The only item that needs to be researched a bit further so far is that there is only 3 years remaining on the lease and currently no options for renewal. I’ve talked with the agent and he said that he wasn’t sure if the tenant was going to renew but thought there was a good possibility. My question is. What is the best way to contact the company and determine what their plans with the facility will be in the future, and if they are planning on signing a new lease. Will companies usually divulge that information? If they are unsure of signing a new lease should I offer some type of incentive for them to make sure they stay. (ie. no rent increase for the year)
Thanks in advance for all responses.
Re: NNN Due Diligence Question - Posted by ray@lcorn
Posted by ray@lcorn on March 30, 2004 at 15:37:29:
pjw,
You may get an answer from the company and you may not. But do not make your investment decisions based on either scenario. Whatever the answer is to a renewal three years from now today is irrelevant simply because none of us has a crystal ball that guarantees conditions will not change.
If your goal is to lock in the tenant for a longer period, then since they have no renewal option the way to start the conversation is to ask if they would like to lock in their space now for a new lease period of say five to ten years. That will do more to flush out their feelings than to ask if they are going to renew. But keep in mind that in doing so you are also locking yourself in to setting a rent rate today without knowing the market conditions three years from now.
If the property is a good piece of real estate with or without the tenant, then my strategy would be to make a projection based on what is known today. In the third year I may budget for a turnover, but also an adjustment to market rents. But then I’m a “roll the dice” type… three years is more than enough time to develop options for the space, which gives leverage in renegotiating lease terms at the time.
ray
Re: NNN Due Diligence Question - Posted by Thomas Mote, CPM
Posted by Thomas Mote, CPM on March 29, 2004 at 17:45:37:
My experience is that typically a tenant (NNN, Gross, Net, Full Service, etc.) will not talk to someone who is not involved in their deal. You may find an exception and it NEVER hurts to ask–most people will probably view you as an interloper.
Easier suggestion. Based on a standard cost of $1/sf for moving costs, determine if the tenant has a significant investment in the space (i.e. reason to stay), and if the landlord’s relationship is strong or non-existent, etc. (reason to stay). This is usually as close as you will get UNTIL you get into diligence.
Once you have a contract, I would INSIST on meeting the tenant contact (usually the head of the firm or their counter-part but will vary) and ask them this question. I can provide a set of good interview questions for this if that would be helpful.
Most firms do not look at renewals three years in advance. Since there is not a renewal option they can exercise, they will probably assume that they will be forced to start over on a new lease form. That is sometimes the major problem that makes people “consider” moving.
If it is a large firm, think of disruption, cost of moving, cost of rebuilding phone/cable plant inside the space, and any other technical and corporate ID items they have in their current space. If you can put a dollar value on those things that will probably help.
Let me know if you have any questions.
Tom Mote
Re: NNN Due Diligence Question - Posted by Judy McCallum
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Re: NNN Due Diligence Question - Posted by Rob Whittington
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Re: NNN Due Diligence Question - Posted by John Martinez
Posted by John Martinez on April 03, 2004 at 14:10:37:
The last commercial property I sold had a provision in the offer that permitted the buyer to attempt to negotiate an extension on the lease, subject to my final approval, prior to closing. The lease was extended and the new buyer had a lease that extended another five years.
Re: NNN Due Diligence Question - Posted by pjw
Posted by pjw on March 30, 2004 at 12:21:53:
Tom, Thanks for the response…If you don’t mind I would be interested in seeing your interview questions that you were talking about. It amazing how the same question asked a different way will get a completely different response.
In the mean time I am going to take your advice and try to put a dollar value on the cost the tenant would create by vacating. Thanks again.
Re: NNN Due Diligence Question - Posted by Nicole Curtis
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Re: NNN Due Diligence Question - Posted by Bobby Bell
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