Made one offer for 4 properties using it. Fell through, seller got really flakey and wanted a ton of cash with it. Worked out a solution for that but she fell through completely. Real basket case.
One of the amazing things about long term NNN leases, is that they are considered “real property”, and can be mortgaged, bought and sold, just like buildings. See the following URL:
http://www.realwebfunds.com/services/NNN_investment_property_mortgage_loans.asp
Some of the most prestigious properities are controlled via NNN laeses, where one party has fee simple ownership of the land and buildings, and another control over the property via an NNN lease.
Among the most famous is the World Trade Center, where the Port Authoirty of NY and NJ owns the building and ground, and Larry Silverstein the NNN lease for 99 years. He paid $400 million for the lease plus making annual rent payments. He can go get a mortgage on this NNN lease if he wanted to.
The Empire State Building had a NNN lease held by a group headed by Donald Trump, but a few years ago, they bought the building and grounds itself, and merged the two.
On a micro basis, Queens County where I lived in saw it’s population soar from 1.8 million to 2.1 million from the 1990 to year 2000 census. With an average household of 2.1, there were 140,000 family formations in this period. Yet the average permits for new housing is 300/month. or 36,000 for the ten year period for new units. So, housing starts is actually 100,000 units shy of demand.
Housing prices is greatly affected by the scarcity of land. In Queens County, there’s no additional land to build on. Broward County FL, with a comparable population, similar population growth, did not experience the same price spikss due to the larger availability of land.
While the population statewide may have stagnated, the growth or stagnation is not uniform, creating shortgages somewhere, and overages elsewhere. Queens County, grew by 15%, not an insignificant amount.
The upstate NY economy had not been well for years, with industrial jobs moving south and west. BUT, Wallstreet, despite the internet, had not migrated south or west. Instead, it has grown. So NYC is a whole different story.
Connecticuut is another example. Property values zoomed in the Stamford CT area 10 years from the mid 90’s. Chief reason was the growth in jobs. Yet in the Hartford, the insurance capital, shrunk, housing prices fell, as insurance companies consolidated.
Frank,
Thanks. I am learning tons of great stuff from you.
How did your friend structure a NNN master lease? Just a bit of upfront cash or tons like Larry Silverstein $400 million?
A friend of mine told me how he almost went under in the early 90’s. He sold his Queens properties as fast as he could but still wound up with half a dozen or so. Did the best to survive juggling meager rental incomes with expenses. Lots of people he knew lost everything. Prices of homes just went into a free fall for some years.
So the whole NYC has grown to be dependent on Wall Street - spinning off tons of high paying jobs trickling prosperity down to the man peddling pretzels in the street corner. The question is will this credit fiasco cascade through the NYC economy? Will we see Wall Street guys jumping out the window again?
What does your crystal ball say?
The way I understand it, this investor started doing the leasing deals as a way of doing “no money down”, and initially structured the leases so he’ll be paying 10% less than what the tenant is paying,essentially a management fee. Keep in mind, market rents are often highr, but the trick is to lock in low rents in the master lease, and hopefully, make the money as the sub-tenants renew them.
You can pay up front, pay “option fees” etc, in different combinations depending on the needs of the lessor and lessee.
His favorite tactic is build enough of a spread in to find a “subtenant” to do all the dirry work, collect an upfront fee from the subtenant even whiles he’s not paying one to the fee simple owner.
One thing I learned wathcing my dad and some other older owners is they trade “top of the line” rent for less stress. So it wouldn’t surprise me even if the owner knew what the market rent was, he’s not pushing for it.
I asked my dad why he’s not charging $1,000 more on a video store he’s renting too. His logic is that he can put the guy out of business struggling to pay the rent. So at a $1,000 less, the tenant can take it nice and easy, and he can take it nice and easy.
I haven’t followed Silverstein that closely, but I understand Donald Trump had some difficulties in the last downturn, similar to what you described.
As to NYC, it is dependent somewhat on Wall Street, but is diversified in the sense it’s a “transportation hub” (the port of NY & NJ), entertainment (headquaters of CBS, NBC, ABC, Time-Warner), among many others. One of it’s growth industries surprisingly is “ethnc foods”. I can imagine someone starting a “wonton” factory in Queens, NYC, rather than in the south or west. Can you imagine some “good 'ol boys” making wontons in Alabama??
Thanks Frank…You’re the MAN!
Your friend’s master lease approach is giving me an idea. I am currently evaluating a small office building where the expenses are so hard to pin down, i.e. large discrepancies between tax return and stated - so I am thinking of a master lease to gain an accurate picture of expenses and exercise the buy option in a couple of years.
Wonton factory, ha…I heard there’s a fortune cookie maker here in Maryland.
I asked my dad why he's not charging $1,000 more on a video store he's renting too. His logic is that he can put the guy out of business struggling to pay the rent. So at a $1,000 less, the tenant can take it nice and easy, and he can take it nice and easy.
Hmmm…this makes one think! There’s certainly some wisdom in that one…