Hi,
I am in the process of purchasing a ground floor NNN retail condo property. Only thing that the Landlord would be responsible for is the interior structure of the units (floors and ceiling). The tenants are national corp (starbucks, verizon, etc).
Tenants all have maintenance agreements for their HVAC (for semiannual preventive maintenance schedule). Condo association takes care of the common area and repairs. Each tenant pays for the condo Hoa and property tax.
In this case, do I need hire an inspector to do a physical inspection or no? My broker tells me that I don’t need to and the inspectors tell me that I should do a full inspection.
What is the risk if you do not do an inspection and there are issues later? Are all issues really covered by the tenants? Are you sure? Did the lawyer say the contract is completely clear and therefore you could sue the lawyer if they are wrong about this?
How much do you value knowing? Will anything in the deal really change if you find a problem? Will the seller make a concession so the seller ends up paying?
I bought one of these units, although mine was brand new so i didn’t even think about my own inspection. You probably can get a report from the association or from starbucks (whoever did the build out…it’s usually the tenant). The important document to get is an occupancy permit. Before the tenant can occupy the building they will have to get this permit/inspection performed.
This property is a triple net in the sense that it covers 3 things: taxes, insurance, and HOA fees/internal expenses. Even though the landlord is
responsible for the structure it’s rare that this kind of ownership incurs much
expense.
There are properties that are called “Absolute” NNN properties. Yes they use the word absolute to differentiate themselves. These are typically the ground lease opportunities. Think Wall Greens paying an investor/landlord 6%, but the investor just owns the dirt, and Wall Greens does everything else. I.E. the Landlord has “Absolutely” no expense or worries.
[QUOTE=midlifeman;885915]This property is a triple net in the sense that it covers 3 things: taxes, insurance, and HOA fees/internal expenses. Even though the landlord is
responsible for the structure it’s rare that this kind of ownership incurs much
expense.
There are properties that are called “Absolute” NNN properties. Yes they use the word absolute to differentiate themselves. These are typically the ground lease opportunities. Think Wall Greens paying an investor/landlord 6%, but the investor just owns the dirt, and Wall Greens does everything else. I.E. the Landlord has “Absolutely” no expense or worries.[/QUOTE]
I think you are still mixing up the term.
In the Walgreen example, I would own the dirt and the building. A build to suit situation where the building is mine. The tenant pays all operating costs plus pays rent.
What exactly is included or excluded should be spelled out in the contract so we do not really have to get the term perfectly correct.
Here is a definition from Wikipedia. Not an authoritarian source. At the same time it does capture the essence. Investopedia has a similar definition.
A triple net lease (Net-Net-Net or NNN) is a lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three “Nets”) on the property in addition to any normal fees that are expected under the agreement (rent, premises utilities, etc.). In such a lease, the tenant or lessee is responsible for all costs associated with the repair and maintenance of any common area.
NNN is common when there is a single tenant and they want the benefits from controlling the site (including parking, etc).
Nope! I’m not mixing things up at all. I own both types of properties so I would know the difference between a nnn and an absolute NNN. Just sit back and learn from me John instead of using wikipedia to define your opinions (ouch!)
[QUOTE=midlifeman;885926]Just sit back and learn from me John instead of using wikipedia to define your opinions (ouch!)[/QUOTE]
Two things.
I am all for learning. It works best when the information is clear and accurate.
I cited Wikipedia and Investopedia as the wording was clear. It does not matter what the source is if the info is correct. If the information is wrong, the source will not make it right.
I’m late to the party here, but want to clarify the terms being used.
Absolute NNN is a term with no definitive weight. Brokers use it as a descriptive term for true triple net properties, as opposed to double-nets or hybrids that require the LL to bear a capped amount of maintenance cost (Dollar General used to be the heaviest user of the hybrid NN, but as of 2010 they are using a true NNN lease).
You may also hear the term “Bond lease” to describe a NNN property with a lease that carries the same debt priority (for the tenant) as a corporate bond.
A ground lease is just that, no ownership of the structure, and also none of the tax deductions for depreciation.
Bottom line, you will be well served to read every word of the lease, or have a competent attorney read it for you to make sure you’re buying what you think you are. Do not accept a broker’s word, the tenant, or the owner.
Triple net leases exclude roof and structure for tax reasons. If the owner retains none of the burdens of ownership a long term lease can be characterized as a sale for tax purposes. There’s a nasty little surprise, eh? Roof and structure are commonly chosen because at inception (i.e. new building) the roof is under warranty for 20 years or so, and the structure is covered with insurance. Therefore the responsibilities are retained but financial risk is minimal. (Obviously as the asset ages the roof warranty ticks down, which is the reason non-bank, permanent lenders require CapEx reserves.) In the condo example here, floor & ceiling is a rough estimation of the typical roof & structure clause.
To the original question of whether an inspection is needed, I’m sure this post is too late to be of use, but in my view there is NEVER a reason not to do a physical inspection. The tenant may default (Starbucks specifically closed about 500 stores at the onset of the recession, violating the go-dark clause). Do not rely on the Certificate of Occupancy as that only represents the condition at that moment in time. Things wear out, and major system replacements may or may not be LL responsibility during the lease, but they dam* sure are when vacant. I would not buy any property without having a qualified professional inspect the structure and systems.
(ouch!)