Re: Single-Tenant NNN Closing Down - What happens? - Posted by Tai
Posted by Tai on July 20, 2008 at 11:01:35:
I have first hand experience with this.
I owned a Healthsouth building NNN lease for 6+ years.
When healthsouth started closing down stores, my building
went dark. for 1 1/2 year, Healthsouth paid rent and
listed the property for sublease. Then one day they
stopped paying rent, and offered 3 month rent to buy
out the lease. there is 4 years left on their lease,
and the mortgage balloon in 1 1/2 years (lease was
assigned to mortgage company as collateral. mortgage
terms usually ends before lease term ends).
even if I wanted to, I could not agree to the lease
buyout because lender will ask for the whole mortgage
be repaid immediately if I did.
long story short, I had to sue Healthsouth to collect
unpaid rent, and pay mortgage/taxes/insurance out of
my own pocket in the mean time. I had to prove to court
that I was trying my best to market the property to
mitigate my loss. One year later, a summary judgement
finally went through, and Healthsouth paid the
judgement (1 year’s rent, with 10% interest, plus 5k
lawyer fees). Then I had to start another suit all
over again to collect unpaid rent.
in the mean time, the lender (GE Capital) sold my
mortgage off as CDO, which then prompty charged me
late fees on my late payments and legal fees to review
the suits (because the lease is assigned to lender,
my suit was filed “on behalf of” lender, which has the
right but not the obligation to pursue Healthsouth).
with the balloon looming, I was forced to choose
between paying off 900k mortgage and keep collecting
unpaid rent one year at a time, or selling off at a
discount (of $300k) but recovering $500k of my equity.
once the judgment was paid, I was able to sell the
property to somebody with the funds to take advantage
of this situation. I took a bath on the sale, but at
least I did not lose my original investment.
2 lessons I learned from this experience:
NNN is dangerous, because corporations do law suits
as a normal course of business, and when they want to
get out of a lease, legal fees and back interest is not
a deterrent at all - they have nothing to lose by going
through this process and seeing if some landlords would
agree to some token buy-out.
if you have a lot of cash, and a good lawyer, there
are money to be made to bail out squeezed NNN landlords
like me, who got into NNN thinking it was a safe and
hassle free passive investment, and who would not have
the funds or wherewithal to play this game when
corporations decide they want out of their NNN leases.