YOU BUY COMMERCIAL REAL ESTATE FOR CASH FLOW…
Paul Levine
Commercial Realtor and Real Estate Advisor | Retired CPA with over 50 years of income tax experience that no other Commercial Realtor has, Income Tax Consultant and unmatched Creatively!
YOU BUY COMMERCIAL REAL ESTATE FOR CASH FLOW…
PART IV…
So far, I’ve talked about the cash flow benefits of the NNN Lease and of self-storage facilities. There is virtually no risk with a NNN Lease. The day you sign the lease when the building is sold to the investor, your income, and just about all of your expenses, are etched in stone for maybe the next twenty years, if that’s the term of the lease. There is one pitfall to a NNN Lease that no one thinks about. Say that you buy a McDonalds on a main street, and it has “normal” traffic and “normal” profits, and everything is going along smoothly. Also, assume that you have a 20-year lease with “normal” rent increases every 5 years. At the end of year 4 someone builds either a public school, a high school, or a private school down the block or across the street from your property. The value of your property just went through the roof, and you are stuck with 15 years or so on your lease with “normal” rent increases.
I have an expression that if you don’t ask for something you will NEVER get it. If I were negotiating that lease for you, I would set up a radius with the school at the center of the circle and include that if anything happens to substantially increase the value of the property or the profitability of the store, the rent accelerates, and different increases go into effect. There are NNN leases that have a base lease amount plus a percentage of sales or just a percentage of sales as the rent and it would appear that this would cover my example but there are times when it will not, and you have to protect yourself.
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If you owned a self-storage facility and apartments or condominiums were built across the street from the storage units, you would raise the rent and make more money. Occupancy would go up and up and up and so would your profits and CASH FLOW, because NEVER FORGET that we are talking about CASH FLOW here. Anyone willing to take a risk, and even a McDonalds has some degree of risk, you are entitled to the rewards. Say McDonalds builds a store that you buy and lease back to them and the store doesn’t do well. McDonalds isn’t right 100% of the time. I’ve seen it!!! Then you are stuck with a single purpose building and no tenant because it’s cheaper for McDonalds to close the store than to run it at a huge loss. This literally happened down the block from me, and a McDonalds stayed empty for years. What if your rent were based on sales then?
So, don’t be afraid to ask for what might seem to be he something ridiculous at the time because it may end up being a very relevant provision in the lease down the road. I have asked for things in negotiations that totally surprised the other side and I’ve gotten it and, in once case made my client over $563,000 with 2 phone calls and one hell of a bluff!!!
It may seem that I am giving my negotiation tactics away, but I am an ex-New Yorker and that is a very special kind of breed, and you have to have a certain air about you to know how and when to ask for the things that I’ve gotten for my clients and myself over the years. You also have to know how to read your opponent across the table and read their facial expressions, body language and even the pitch in their voice. It's a science and, for me, it’s a whole lot of fun and it comes naturally. I just love to win!!!