Are You Losing Your Money On Your CRE?

I was having a conversation with a real estate investor a couple of weeks ago and during this conversation he was telling me about a property that he had in escrow and how he was having second thoughts about his purchase, he told me he feels he over paid and he is concerned that he will have to self-manage as he doesn’t feel he can afford a professional management company.

The property he is purchasing it turns out is a retail building in a nice area and has recently had some upgrades, the property is 100% occupied by strong clients and a couple of the leases can be renegotiated to increase his income.

The best thing that he has going for him is the fact that all of the leases are NNN. I recommended him to a property management company that I knew of and trusted so they could discuss the best ways for him to increase his return.

Another  term for the NNN lease is a Triple Net Lease, net-net-net lease, or a hell or high water lease. The true definition of a NNN lease: A lease agreement that designates the lessee (the tenant) as being solely responsible for all of the costs relating to the asset being leased in addition to the rent fee applied under the lease.

The structure of this type of lease requires the lessee to pay for net real estate taxes on the leased asset, net building insurance and net common area maintenance. The lessee has to pay the net amount of three types of costs, which how this term got its name.

After addressing his concerns with the management company, he learned that the management fees are considered a reimbursable expense, and if he hired a property management company, then the tenants would be the ones paying for the professional management not him. 

Additionally, he found out that the previous owner had not been charging back many of the fees that the tenants were responsible for.  By hiring a professional, he was able to save thousands of dollars a year in expenses.

#Although a NNN lease can give you considerable savings, there are many other types of commercial leases that have language in them whereby some expenses can be, and should be, passed through to the tenants. 

If you own commercial property and you aren’t already doing this, you may be losing thousands of dollars a year, and it may be time to get advice from your local real estate professional, whether it be a commercial agent or a property management company.

Tips On Handling Your Inherited Tenant

As a new Investor you will find that most of the time you will inherit a tenant from the previous owner and you think this is a great thing; you won’t have to pay for advertising and you have a built in rental stream already coming in.

This could be true however it is your responsibility to make sure this tenant is someone that you want to keep or legally have to keep.  Like everything else in a new acquisition, DO YOUR DUE DILIGENCE.

Estoppel Certificate

Make sure that you receive an estoppel certificate signed by the tenant.  An estoppel certificate is a document that outlines that everything is the way you were informed.  The certificate refers to the current lease and the terms of the existing lease (if there were any changes). The tenant signs off that they agree everything in the lease is as it seems and there are no additional terms agreed upon, nothing else is owed by either the landlord or the tenant. It should at the very minimum include the below:

1)      The lease dates (commencement and expiration)

2)      The date when rent is due

3)      The amount of rent

4)      Any deposit amounts

5)      If any modifications have been made to the lease

6)      If additional agreements have been made, a list of what those agreements are

7)      That no party to the lease is currently in default

Follow the Lease Conditions

Read the lease thoroughly, you may not love the terms of the current lease, but you are bound legally to abide by the lease until the date of expiration. At this point, you will have the chance to either renew and sign a new lease with existing tenants or give the proper legal notice that you will be ending their tenancy with you. If you decide to start over with a new tenant at the end of their lease, you will want to give yourself plenty of time to market the property.

Set up your own criteria for picking out a new tenant. Complete a rental survey for the area so you can determine what rent amount you will be requiring going forward.

Raising Rents

If you find that your rents are below market, there are several items to consider.

1)      Will you lose tenants if you raise too much?

2)      How much can you legally raise them

3)      Should you offer some sort of concession ie: accent wall or an upgraded appliance?

4)      How long will it take to release if you do lose your tenant

5)      How much will it cost to make the unit ready to relet if you lose the tenant

Lastly, keep in mind that not all of these tips will apply to everyone, be aware of any local ordinances that may affect what you can do when inheriting a tenant, and don’t forget, to introduce yourself!