Before I write my first post, I’d just like to say that I think this is a great website for not only beginners, but for everyone involved in the real estate industry, regardless of experience.
Ok, onto my question…My father owns a couple of apt. buildings (I’m the property mangager) and we’re planning to do a 1031 exchange, selling 1 building and possibly buying another apt. building or a multi-tenant strip center. My question has to do with retail strip centers. I’ve done some research on NNN Leases and it says that tenants take care of all expenses. So, tenants would pay a portion of real estate taxes as well it seems. That’s where I’m still a little bit “hazy.” Let’s say, for example, there are 6 retail tenants and real estate taxes comes out to $36,000. Would each tenant have to pay $6,000 for real estate taxes or no? Would some have to pay more? What happens when one of the tenants breaks the lease and moves out, who would cover for taxes then? If anyone owns a strip center, or knows more about this info I kindly appreciate your feedback. Thanks
They pay a percentage based on their square footage. Figure out what percent they lease, thats the percent of expenses they pay. With NNN they pay a percent of everything, including your insurance.
That is correct. The tenants pay based on the % of the total property that they occupy. Property tax, insurance, management, landscapping, sweeping, some repairs are covered by NNN. Ideally all of your operating expense should be covered. In case of a vacancy the portion owed by the vacant unit will be uncollected, hence will come out of landlords pocket.
I have a small strip center and all of my tenants are triple net. At the end of the year I submit a statement to each tenant and either collect additional reimbursements or refund the savings.
Thanks for responding. I’m currently looking at a strip center that’s a pretty reasonable price, only problem is the owner is not willing to negotiate on the price. What’s the point in being involved in real estate then if you can’t negotiate on the price? That’s have the fun right there :smile
Also, all the leases expire in 2009, not good.
The fact that leases expire in 2009 might actually be good for you if the current rates are below market. Do some market research and see if there is potential to increase rent once lease expire.
Another option would be to look at a single tenant, NNN (credit rated). The financing is easier & better to obtain. However, the properties are usually priced with very low cap rates.
Check the existing leases to make sure that they specify the allowance of cost recapture (RE Tax, Insurance, Operating Expenses, Management Fees, Maintenance, etc). If the leases don’t and they have renewal options that don’t allow the leases to be altered, then you may be stuck with the expenses and no way to recapture them.
Remember to factor in the new RE Tax after purchase. When you buy the property, the taxes will generally go up substantially and the tenants may already be struggling to pay the rent.
If the Seller has not been charging the tenants for the CAM, Tax, O&E, then the tenant’s lawyer may argue that that portion of the lease is void as a result of the failure to enforce the terms.
A good broker is worth every penny they earn and generally are paid by the seller. If the seller refuses to pay a commission to the buyer’s broker then factor a consulting fee into the price. You’ll pay now or pay later, but it’s better to make that choice up front from knowledge rather than surprises.