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-
Patrick Coffey
"It
is easier to build two chimneys than to keep one in fuel."
-
Benjamin Franklin
How
to Get Your Tenants to Pay for Everything!
By
Toby Unwin
"Why
did we spend so much money last month?" I asked my accountant.
"We
paid the property tax bill," he replied.
"Why
was that bill double what it was last year?"
"When
you bought the building, they re-calculated it based on the
new sales price."
It
was annoying. And, as a beginning investor back then, it was
an expense I'd not anticipated. Much of the expected profit
for the year would go to the government. One more reason a "how-to" crash
course in commercial real estate would have been helpful. I
was not happy.
The
next time I brought a commercial property, I was ready. I bought
the company that owned the property instead of the property
itself. No instant tax hike. I'd been a clever boy.
But
once Katrina hit, gas prices went through the roof, along with
my electric bills. While small in the grand scheme of things,
they seemed to go up about 50 percent - thousands of dollars
for some of my properties. For instance, the electric bill
for an office building I owned went from $2,000 to $3,000 a
month. I had to eat those costs until I could re-lease the
units at higher rents. Another annoyance.
In
retrospect, my problems with unexpected costs could have easily
been avoided by the simple use of something called a Triple-Net
(NNN) lease.
I'd
heard of Triple-Net leases, but never thought much about them.
I mistakenly thought they were for big-box single-tenant leases
or "class A" offices in a new fancy building - both
types of properties I usually stay away from. (I don't like
single-tenant properties due to the risk of the tenant moving.
And class A office space is usually bought by the MBA crowd
spending someone else's money. They can outbid you on everything,
and don't care if the building cash flows.)
Then
one day I found a potential investment - a shopping center
down in South Florida. It had NNN leases.
"So
what?" I thought.
But
my broker, Raul, was very excited. "Toby, that means the
tenants pay for everything."
I
wasn't impressed. "Big deal," I thought. "With
the buildings I have now, I can pass on some repair expenses
to the tenants after a year or so. As far as the bottom line
is concerned, it will work out roughly the same as a standard
lease."
Boy,
was I wrong.
Under
NNN leases, the tenant is responsible for all expenses
related to the building - repairs, taxes, insurance, etc. On
some properties, it may not make much difference over a standard
lease where the owner pays most of the expenses. For example,
if the expenses on a property are low and the tenant is paying
a high rent, a standard lease may not cost you more money.
But during times of inflation - or in a building requiring
multiple, expensive repairs - the Triple-Net lease is a lifesaver.
The
expenses of running NNN properties are accounted for on a balance
sheet under "Common Area Maintenance"(CAM) costs.
Tenants pay their share of CAM as a proportion of the rental
space they lease in the building.
We
went ahead with the due diligence on that Triple-Net shopping
center in South Florida. I noticed that there was no management
fee included. (The sellers had been managing the property themselves,
and had offered to stay on in that capacity for us.) I was
grumbling to myself that I'd have to pay a management fee out
of my profits on the center - but my broker interrupted me. "Management
fees are usually included in CAM," he said.
It
was like a light bulb went on in my head. I had thought NNN
was just about the building expenses!
I
started thinking, "What else could I put into CAM and
have the tenants pay for? What about leasing commissions? Can
I include those?"
Well
... I found out I couldn't.
Many
of the leases on the property were due in the next couple of
years, and I didn't want to get stuck having to pay some hefty
re-lease commissions. So I asked the seller, "If we paid
you more for management, could you throw in leasing for free?"
"Sure," he
replied.
NNN
leases were starting to become a whole lot more interesting
to me. And during the financing process, they sounded even
better.
"What
happens if the roof blows off?" some underwriter with
a thick New York accent whined.
"Tenants
pay. Their problem," I replied.
The
underwriter had to take all the "reserves" (the projected "just
in case" costs underwriters calculate into deals when
they evaluate them) out of his calculations. And suddenly the
property got a whole lot more finance-able.
As
soon as I took possession, the manager suggested we raise the
CAM fees to anticipate a rise in property taxes. The tenants
moaned, and I didn't blame them - but it wasn't my fault ...
it was the government's. And since the terms of their leases
were clear, the tenants knew I wasn't passing on unnecessary
costs.
"One
of the AC units is on the way out. Can I replace it?" the
manager asked.
"Sure.
And put a nice one in," I said.
What
a relief not to worry about the cost of a new air conditioner.
And what a joy to have those extra profits pour into my bank
account to buy that new car or book a vacation for my family.
With
all these cost-saving benefits, can you understand why I plan
to renew all my tenants on NNN leases whenever possible? And
why, when I'm looking
for new properties, I now give extra attention
to those with NNN leases in place. (And about a third of all
properties listed have them.)
If
you're sick of repairs and rising prices - or if you're simply
interested in a property with predictable expenses and profits
- you should look for properties with NNN leases. Making the
tenants legally pay for everything is just one of
the many reasons why commercial properties are far more lucrative
than residential ... and can be much easier to buy.
Now
that houses and condos in many cities are starting to linger
on the market like a bad smell in the basement, it's a better
time than ever to see the money you've been missing in commercial
real estate.]
[Ed
Note: Toby Unwin is an active commercial real estate investor
and creator of the groundbreaking One
Deal From Retirement commercial real
estate course.
As
an ETR reader, you can receive a free copy of Toby's $300 Deal-Maker
Pro software that quickly analyzes the profit potential
of any commercial property - but only if you act within the
next 72 hours. Keep
reading to find out how to get your copy.]
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-Justin
Ford
Notes
From Michael Masterson's Blog: Responding to Unhappy Readers
Some
readers of Seven
Years to Seven Figures: The Fast Track Plan to Becoming a Millionaire are
unhappy because it does not give very specific, how-to advice.
But that wasn't its purpose. It did give plenty of principles
and rules and made plenty of specific observations ... but
it wasn't a how-to book. That would have made it a textbook.
Still,
I should find a way to respond to people who make that mistaken
criticism about the book ... and to answer questions they might
have.
[Ed.
Note: Read the rest of this article on Michael
Masterson's blog.]
A
Simple Formula for Weight Loss
By
Al Sears, MD
You'd
be amazed by the number of patients who ask me to put them
on "diet" supplements. You know the ones: "fat
burners," "cortisol blockers," and "metabolism
boosters." Fantastic claims are made for them - but when
I look for evidence, I usually find pseudoscientific gobbledygook.
Slick
commercials and print ads, hoping to convince you that losing
fat is as easy as popping a pill, win over a lot of folks.
In fact, a recent survey of 1,444 people who tried to lose
weight found that 34 percent of them used diet supplements.
But
the track record of those supplements is poor. And besides
... you don't need a "magic pill" to lose weight.
The best way to stimulate fat loss is simply to exercise and
eat more protein.
Nature
programmed your body to burn fat when it gets a lot of protein.
Protein signals your brain that "the hunting is good," so
the fat is not necessary. (What do you need to conserve fat
for if you are going to eat well again tomorrow?)
You
can also speed up your metabolism without supplements. Building
new muscle, especially the big muscles in your legs and back,
will automatically do it.
For
a sensible, fat-burning plan, remember this formula: Fat Loss
= High Protein/Low Carbs + Short, Strong Exercise.
[Ed.
Note: Dr. Sears, a practicing physician and the author of The
Doctor's Heart Cure and 12
Secrets to Virility, is a leading authority
on longevity, physical fitness, and heart health.]
The
Worst Thing About the Holidays: So Many Annoyances!
By
Charlie Byrne, ETR's Editorial Director
When
I was a kid, we went "over the river and through the woods
to grandmother's house" every Christmas.
Well,
okay ... actually, there were no woods. And "the river" was
the Hudson River - so we sat in traffic on the Cross Bronx
Expressway between New York and New Jersey for hours on end. I
have no idea how our family of eight fit in one car - but I
imagine that, as "the baby," I spent a lot of time
sitting on laps, looking out over the George Washington Bridge.
Nowadays,
most of the family is in Florida, and travel is not my problem.
It's what happens when we get to my sister's house down in
the Keys, where she hosts a motley crew of about 25 family,
friends, and miscellaneous hang-arounders for Christmas dinner.
First,
we all have to help snapping what seems to be about 50 pounds
of green beans. I lend a hand begrudgingly, because I know
from past experience that most of them will never reach a human
mouth. I have no idea where this green bean thing came from, but
it sure wasn't my idea.
At
some point in the afternoon, there's a call for Dawn to play
the piano. Dawn says "No no no" ... and her mother
says "Oh come on, all those years of lessons" ...
and Dawn says "I hate the piano" and ...
Eventually,
of course, Dawn sits down to the piano that was last tuned
sometime during the Eisenhower administration. As for her piano
playing ... well, I love Dawn and she is a very good at website
design, Scrabble, and sending thank-you cards promptly.
Later
on, Kathy rings the dinner bell right smack
at the most exciting juncture of the Knicks/Celtics game. She
simply has no sensibility for the true meaning of the holidays!
Then,
during the meal, some inconsiderate glutton takes too much
gravy early on, and I barely have enough to smother my seconds
of roast beef and mashed potatoes.
Finally,
I have to deal with the dilemma of not being able to eat Peggy's
pumpkin pie, Grace's apple pie, and Carla's pecan pie all at
once.
Perhaps
this tall glass of Bailey's Irish Cream will help me decide
...
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Word
to the Wise: Platitude
A "platitude" (PLAT-uh-tood)
- from the French for "flat" - is a stale or trite
idea.
Example
(as used by Wilfred Sheed in The New York Times): "The
average sports memoir is a prodigy of simpering modesty and
high-minded platitude: enough to rot the mind and sap the morals
of the sturdiest child."
