NNN buyers need to know these 5 lease clauses
NNN leases have many provisions that could pose a threat to your successful investment. At the Triple Net Investment Group we vet and monitor the nitty gritty of the constantly changing NNN investment property market like a hawk, and interact daily with hands-on investors, legal experts, CPAs, and other professionals to understand the pragmatic impact of what issues matter and how much. Here are some NNN lease clauses that will require your attention:
Estoppel Certificate
This requires the tenant to sign and confirm various key aspects of the lease in the instance an investor wants to sell the tenanted property. Or, a lender may ask for an estoppel certificate before approving a loan on the NNN property. Landlords, thus, must have a estoppel certificate clause in the lease; if absent, tenants may negotiate in order to comply when the document is required.
Approved Use
Such a clause specifies the permitted commercial use(s) of the property by the tenant. NNN landlords should use language that is restrictive so that tenants stay the course with their business operations. This clause is particularly useful for uses in multi-tenant NNN properties like shopping centers.
Right of First Refusal
A NNN tenant has the right to purchase the property before any other entity if an investor wants to sell it. In other words, if a NNN investor buys a property with an existing right of first refusal, the tenant will have to sign off on it first. Note, this keeps the door open for negotiation by a tenant.
Guarantees
An entity other than the tenant agrees to be responsible for all lease obligations in the instance of tenant default. However, a corporate guarantee is better than a guarantee from a one-member LLC or a sole proprietorship. When NNN leases are guaranteed by a franchisor or an user-operator, this may be worse than having a corporate guarantee. Landlords must do sufficient due diligence and ensure that the guarantor and lease matches the entity whose credit is being evaluated. Guarantors’ credit ratings finances and reputation in other markets should be investigated thoroughly.
Lease Term and Options
NNN leases often have multiple options to extend that could last well over 20 years. Since the options to extend are awarded to the NNN tenant, it provides tenants with leverage when a lease term draws to a close. Strategically speaking, landlords and NNN investors should seek properties for sale with less than 3 years left with no option to extend can be an opportunity to reposition the asset with a higher upside. NNN investors should also be wary of any early termination options or if an option to extend calls for the parties to agree to a new market rate at time of extension.
Call Robert Gamzeh and his team of vigilant advisors to discuss your NNN lease or properties to buy or sell. You can be assured of stellar guidance by calling 202-360-2050.