Posted by Mike on July 15, 2008 at 18:14:16:
I guess it all boils down to how the lease is composed. For example, the corporate may include a lease clause saying the lease is guaranteed by the “corporation” but the corporation may be a sub-corporation and not the main corporation.
i.e. Doctor’s Associates, Inc. (Subway restaurant) is the corporation but the lease could be under “Subway Store #300, LLC”
Single-Tenant NNN Closing Down - What happens? - Posted by Mike
Posted by Mike on July 01, 2008 at 15:21:01:
Starbucks will be closing down hundreds of their low performing shops. If they decided to leave and close shop, what happens to the landlord who owned the single-tenant NNN property?
Will the landlord and tenant negotiate how much the tenant will pay since they will not be staying for the rest of the lease term? I doubt the landlord can recover the whole rent for the entire lease term.
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.
Tai
Re: Single-Tenant NNN Closing Down - What happens? - Posted by George
Posted by George on July 06, 2008 at 23:54:43:
I would think that Starbucks would be obligated to pay rent and meet other lease obligations through the end of the lease term, unless there is some out for Starbucks in the lease wording. From what I’ve seen, I believe Starbucks only signs 10 year leases. The landlord may be able to just sit on a dark property and collect rent. Perhaps Starbucks could find another tenant to sublease to for the life of the lease. Correct me if my assumptions are wrong.
Re: Single-Tenant NNN Closing Down - What happens? - Posted by brandoncbsre
Posted by brandoncbsre on July 01, 2008 at 16:47:46:
This is somewhat off-subject…I never will understand Starbucks. They pay an ungodly amount of money for their lease to justify a rediculous selling price on the building. I know they use the cash to grow and expand, but they need to sell a couple thousand coffees each month just to pay the rent. It makes more sense to me to buy the building, retrofit it and keep it. They would cut their overall expenses significantly and build equity for the balance sheet. They should still be able to grow as I am sure they can finance the building and renovations 100% creatively.
Just a rant…I know, I know some people like NNN investments.
Re: Single-Tenant NNN Closing Down - What happens? - Posted by Mike M
Posted by Mike M on November 15, 2008 at 04:12:34:
Thats why you save the money that comes in, do debt reduction and get these properties paid off as fast as possible because all you do is wait around for something to happen. Also, I would have a diversified portfolio of NNN properties, not just 5-10 Walgreens, etc.
Re: Single-Tenant NNN Closing Down - What happens? - Posted by Bob Smith
Posted by Bob Smith on July 07, 2008 at 12:47:50:
Starbucks could just abandon the location and stop payment. Most
states have abandoned the long-standing notion that landlords can
enforce payment on a lease for the remainder of its term, instead
requiring landlords to mitigate their damages by replacing, as soon as
possible, the defaulting tenant, whereupon the defaulting tenant’s
obligations cease.
Re: Single-Tenant NNN Closing Down - What happens? - Posted by George
Posted by George on July 08, 2008 at 24:23:54:
I really think you’re wrong on this one. I don’t believe that tenants can just abandon leases prior to term. When KMart went bankrupt several years ago, one of the main reasons they did so was to use the bankruptcy process to allow them to get out of paying rent on the stores they wanted to close. A tenant has an obligation to pay rent for the life of the lease term. From what I’ve read the only other way they can get out of it is if there is catastrophic destruction of the property from natural disaster or otherwise.
Re: Single-Tenant NNN Closing Down - What happens? - Posted by brandoncbsre
Posted by brandoncbsre on July 07, 2008 at 17:49:18:
Does this apply for a corporate guarantee on the lease?
If so, then why are these people willing to buy the buildings at a 7% CAP?
Re: Single-Tenant NNN Closing Down - What happens? - Posted by Bob Smith
Posted by Bob Smith on July 07, 2008 at 20:44:48:
I don’t know if it’s possible to enforceably avoid this judicially created
doctrine by using appropriate contract terms. As to 7-cap credit-
tenant deals, I assume the reason the tenant keeps paying after they’ve
abandoned the location is because an eviction would no doubt damage
their credit rating, which is huge for a public company. Most Starbucks
locations are franchised, and most (don’t know about Starbucks)
franchisors won’t guarantee a franchisee’s lease, though they do aid in
site selection and in negotiating the lease.
Re: Single-Tenant NNN Closing Down - What happens? - Posted by brandoncbsre
Posted by brandoncbsre on July 08, 2008 at 04:56:31:
I checked on whether or not Starbucks is franchise company. The following is straight from their website.
"Does Starbucks franchise?
Starbucks does not franchise operations and has no plans to franchise in the foreseeable future.
In North America, the majority of our stores are Company-operated. As an exception, Starbucks may enter into licensing arrangements with companies who provide access to real estate which would otherwise be unavailable such as airport locations, national grocery chains, major food services corporations, college and university campuses and hospitals."
I would imagine that leases are corporate guaranteed and therefore should continue to be honored.