Triple Net (NNN)

Are you looking for a place to do business?  

A term you will likely hear during your search is “Triple Net”.  It sounds like a special device used to catch insects in the summer, but it’s not.  These 3 nets catch numbers not insects.  Triple Net is a term used to describe a type a lease, aka the Triple Net or NNN Lease.  

To assist in remembering the 3 nets, the acronym TIM will come in handy.  Think of good ol’ uncle Tim.  When calling a sign on an office building, a shopping center window or in front of an industrial building and the leasing agent says, “this space is $12 triple net.”  

What they are saying is, your monthly rent or base rent will be $12 times the amount of square feet to be leased, which produces an annual rent number.  Divide by 12 and this is the base rent.  Because it is a triple net lease there are additional charges or additional rent on top of base rent for Taxes (real property tax), Insurance (fire hazard insurance) and Maintenance (air conditioning, snow removal, lighting, etc...).  

Taxes Insurance and Maintenance (TIM) are the 3 nets referenced in the term Triple Net.  A pro rated estimated of the triple net charges can be added to the monthly rent payment or billed at the end of the year.

Another common term of interest related to leasing is CPI, which I will discuss in the next post.

Understanding Real Estate Terminology

I had a friend relate a story the other day that may help illustrate the importance of using a commercial broker.

My friend, we'll call him Tom, mentioned that he got an unexpected bill in the mail from his landlord for $3,500.  Tom further explained that when he assumed the lease for his office he didn't understand what triple net or (NNN) meant.  Unexpected costs like this can be avoided.  I could elaborate

Tom will be renewing the lease in the next couple of months, and I have encouraged him to hire a real estate broker to guide him through the renewal process to assist with real estate terminology, common practice and procedures, and most importantly to ensure fair market rent or better and assist in finding an adequate attorney who practices real estate law, who will be able to review and revise the lease to ensure fairness.

Next post I'll explain triple net (NNN), so no one else reading this blog will make the same mistake.

Determining Net Operating Income (NOI)

A standard formula for calculating Net Operating Income or NOI would helpful in the Grand Junction market to assist commercial brokers and principals evaluating properties based upon capitalization rate (cap rate).

Gross Potential Income (GPI) - Total potential income if all leases were at market value
− Loss to Lease (spaces leasing for less than market value)
− Vacancy and Collection Loss (actual figures preferred / sometimes figured as a percentage)
= Net Rent Revenue
+ Miscellaneous Income (income from late charges, signage, vending machines etc..)
+ Expense Reimbursements (utilities, taxes, insurance etc.)
= Effective Gross Income (EGI)
− Operating Expenses (taxes, maintenance, insurance, janitorial, management etc.)
= Net Operating Income (NOI)

Capitalizing a property’s NOI for the next year is often the easiest way of estimating the property’s present value. Generally, using next year’s NOI to capitalize is recommended.

It is important to make sure the NOI is accurate from the sellers perspective in order to avoid overpricing a property, and from a buyers perspective in order to ensure investment strength and avoid overpaying.

Smaller Industrial Buildings with Yard

One might think finding a stand alone industrial building with a yard would be easy to come by.  I've been searching today for one between 4,000 and 6,000 sq. ft. with two 14' overhead doors and a drain.  I've found plenty of smaller sized,  build-to-suit, multiple tenant buidings or stand alone buildings with no yard, but have had difficulty locating a propery either for  sale or lease that matches these parameters.

The onlne databases are limited however.  Some landlords will only place a sign on the property, making it invisible to all but those driving around.  So that is where I head to next, to see if I can pull a rabbit out of my hat.

The Lease Buyout

Over the past 4 months I have put together buyout options for 3 Tenants.  In the process I have developed a handy spreadsheet that makes the math and presentation come together much more quickly.  A buyout sounds simple enough; pay the remaining amount on the lease.  There are other costs however for landlords consider when a tenant requests an early termination.

1) The remaining amount on the lease, or the difference between what a new tenant will pay and what the current lease schedule states.

2) Rebate for commissions paid in advance for the lease.  A lease is a promise to pay and typically the landlord will pay a leasing agent or broker a percentage of the gross rents for the lease in advance.  If the tenant moves out however, the promised income may not come, and therefore a rebate on the commissions can also be requested.

3) Present value of cashflows.  The present value, or lump sum right now value of periodic payments over time is less than total amount over time.  This is also referred to discounted cashflow.  It was somewhat tedious to figure out, but now it's a handy tool in my toolbox.  

4) Any unpaid rents

In the buyouts mentioned above, the landlords decided not to demand the full payment but rather enough to cover the costs of releasing the space, such as vacancy loss, preparing the unit for another tenant, leasing fees etc...

Although the market and economy are turbulent, there are so many things to be learned now that will improve business practices during fatter times.