NNN Leases
Can anyone tell me when triple net leases came into vogue? 20 years ago I never ran across one, now they seem all the rage. Can anyone tell me when this escalation occurred?
- Franchise topic:
Can anyone tell me when triple net leases came into vogue? 20 years ago I never ran across one, now they seem all the rage. Can anyone tell me when this escalation occurred?
NNN- Beware the fine print
Triple net leases are nearly as dangerous as Franchise Agreements, and require intense due diligence. NNN leases are mainly written for retail spaces - office space is still mostly "gross". There are several ways severe nastiness can happen to a tenant/lessee. Prop 13 in CA effectively froze property taxes a couple decades ago, but the building gets revalued for tax purposes when it is sold. I was a Subway franchisee in a building that had been owned by the same family trust since 1939, and when they sold the building a couple of years ago, my pro-rata portion of property taxes went from $18/month to $500+/month - OUCH! Also, and this was alluded to in an earlier post, many leases have NO restrictions on how to characterize an expense that can be passed on to the lessee. So even though the Landlord is putting on a new roof for $150K that they will then amortize over 20 years or so, they will charge the existing tenants the entire amount of the capital improvement in the year incurred. So even if you have 3 months to go on your lease, and then you are moving - so sorry, you get to pay the freight for the next few tenants. Ugly but true. What is really annoying though is when the landlord charges the tenant all other expenses of managing the building, including the overblown salary of the lazy and incompetent property manager and the rude accounting clerk. A NNN lease gives the landlord NO incentive to carefully and prudently manage expenses, because all the costs get passed on to the tenants.
Is there any defense? Pay a good commercial real estate attorney to represent you (tenant/lessee) to the landlord before you sign that lease. Don't trust "your" broker who only gets paid big bucks by the landlord when you sign that lease. Get a fixed number for the CAM charges in the lease, and negotiate an annual ceiling to the escalations. And get a clause that amortizes any capital expense that the landlord makes. There are many more nuances to NNN leases, but this is a start.
These are the battles the franchisee must fight before, during, and after the challenges of dealing with a usually predatory franchisor. Tell me again why people elect to do this!?*
NNN - EZ investment
Double and triple net leases have been in vogue for some time now. I think you'll find that NNN Leases rise in popularity will closely parallel the overall interest in Section 1031.
Triple Net properties tend to be "Equity Investments", rather than "Cash Flow Investments". The investor will usually finance a significant portion of the purchase price and pay the resulting mortgage with the lessee's monthly owed rent. The investment payoff does not result from the monthly cash flow, but rather from the equity acquired using the lessee's rent money.
Few real estate investments are simpler than investing in a triple-net-leased property. It has even been compared to buying a bond.
Believe & Succeed,
Dale
FranSynergy, Inc.
Synergizing Franchising!
www.fransynergy.com
NNN
I assume you are referring to NNN leases in strip malls and mixed-use type leases since this forum is about franchises - besides the McDonald's of the world, franchisees are all pretty much in shared small retail. NNN is much more common in strip mall type situations versus AAA office, etc.
I started seeing NNN dominating the major markets around 15 years ago. In places like Nevada and Arizona, they were created as a vehicle to hedge additional exposure for the developer/landlord and in response to more investors looking to flip the property in a hot market where they build equity for 5 or so years off of the rent paid by tenants - versus just "living" off the cash flows like the old days.
I think the rise of NNN might have also been the other variables like common-area insurance, utilities and maintenance costs becoming more unpredictable in the late 90's. If you can get your tenants to take on all the risk of utilities, etc...that's a good deal, eh?
It went from NN to NNN to completely offload all the remaining variables to the tenants. The banks were driving the demand for NNN arrangements more than anyone else - again to offload risk.
Trouble is - what works well in a strong economy does not always function in a not so hot paradigm...it is starting to backfire. The combination of out-of-control business property tax increases, utility costs, etc. are placing pressure on the landlords...some landlords are even waiving annual escalators or lowering base rents since finding replacement tenants is not as easy as it was even 12 months ago in many markets and they certainly cannot flip that property as easily.
In my area, the vacancies and space for rent signs are quite noticeable. This is going to be interesting because the former hyper-growth municipalities are counting on business and land taxes to fill the gap caused by the other revenues decreasing. Economics 101. We'll see.
I just want to thank Dan and
I just want to thank Dan and Dale for their contributions to this thread. And encourage others with insight to post.
FuwaFuwaUsagi
Has anyone seen a study
Has anyone seen a study that examines the rise in tripe net leases and business failure?
My instincts tell me that once corrected for the general economy there should be a correlation.
FuwaFuwaUsagi
When NNN Leases Were Popular
My guess is that the triple net lease rage is quite recent. Google Trends lab shows a huge jump on Internet searches for "Triple Net lease" since January, '08. There are isolated articles on these leases from trade journals of the late 90s though.
Triple Net
I would have guessed that facilitated real estate income trusts - the more bond like the underlying security the more "faith" people have the in valuations.
People just don't like any variations in their returns.
Michael Webster PhD LLB
Franchise News
NNN Leases on Commercial Property --to Dan
Is this a kind of securitization of the commercial real estate market where leases for entire Malls are packaged and sold as investments? As Landlords moved to push the costs of utilities and maintenance of untilities on the tennants, did these NN and NNN Leases then provide good investment vehicles?
We have a upscale outside walking Mall about five miles away that is only about one-quarter occupied by retailers, independents and franchises, after three or more years. The wide brick streets that must have been expensive had to go under repair after some hard summers and some hard winters.
Lots of vacant spaces and very sad for the merchants. Some businesses have already failed into the sunset. Who takes the loss on these investments when the Mall fails or never takes off? The banks? The developer/landlord? The Investor! Who? We know the tennants, many of whom are franchisees, lose their investments.
Is there any planning that goes on by the Cities or is the constant development of huge shopping areas in very close proximity to each other always a boon to the cities?
Is there any correlation between this over-building of commercial realestate and the NNN leases and the sub-prime mortgage problem where mortgages were bundled and sold as securities?
Bob: The links were a gold
Bob:
The links were a gold mine. Thank you.
FuwaFuwaUsagi
NNN Leases
The remaining downside for landlords/investors is that these leases are usually based upon leased area. Any unoccupied space the landlord still has to pay that pro-rata share of maintenance, taxes, insurance, and common area utilities such as parking lot lights, watering landscaping, etc. So if vacancy rates go up they miss the rent, and have to make up the missing share of expenses.
These have been common on free-standing built to suit properties going back 20 years that I know about.
Tenants should always make sure that the formula is based upon leased area, not leaseable area, because if you were so unfortunate to get that clause your expenses go up as vacancies increase.
Make no mistake the tenant is always paying for everything whether it is a triple net or not, the difference being that triple net can adjust yearly based upon taxes, insurance ( a real sobering experience in many coastal areas lately), and maintenance/utility costs.
It is nice that major capital expenditures be amortized over the useful life so you don't pay your share of a new roof in the last year of your lease as you prepare to vacate.