Home » Industrial

Tag: Industrial

3 Things You Might Not Have Known About a Triple Net Lease

Posted on by Jonathan Aceves

For investors looking for a long-term steady source of income with minimal risk, a triple net lease offers a promising prospect. Unlike double net leases, which require tenants to pay some degree of the rented property’s maintenance costs, real estate taxes, fees, and property insurance, a triple net lease requires the tenant to pay all of those costs, in addition to rent and utility bills.

Without a net lease contract, the landlord (or investor) would typically pay for the building’s insurance, taxes, maintenance costs, and any other fees while renting to tenants, so a triple net lease, also known as a “triple N”, typically benefits real estate investors.

But when considering whether to draft up a triple net lease agreement, there are some important considerations to keep in mind. In this article, we will take a look at three things you might not have known about a triple net lease.

1. You Need A Portfolio of Properties

To invest in a triple net lease agreement, you will typically need to lease at least three commercial properties, and preferably more. Ideally, you will want a single tenant to rent all of the commercial properties in your portfolio, such as office buildings, parks, shopping centers, restaurant chains, pharmacies, or banks.

Since you are investing in high quality properties with all the upkeep and fees taken care of, you can enter the agreement without fear of losing your investment. Particularly given that the normal term for a triple net lease agreement runs from about ten to fifteen years, with a steady rent appreciation throughout that time. So, you are pretty much guaranteed a return on your investments at minimum.

You do, however, need to have a minimum accreditation of at least $1 million. And this net worth accreditation does not include the value of $200,000 in income, or a primary residence. Interested investors without access to sufficient investment offerings can invest in a real estate investment trust, or REIT, that pairs smaller investors with other partner investors.

2. The Issues of Taxes

For investors whose properties are sold, it is possible to simply transfer the initial capital into a new triple N lease agreement without paying additional taxes. This is called a 1031 tax-deferred exchange, and allows the landlord to continue their holdings almost uninterrupted.

On the flip side, however, triple net lease agreement holders have been deemed passive investors by the IRS, which means that they are not considered to be an active business or trade. As a result, landlords with a triple net lease agreement may not be eligible for the 20% tax deduction that most landlords count as a benefit. Even if a landlord with triple net lease agreements puts in significant work to oversee the tenant’s financial responsibilities (property taxes, building insurance, and regular maintenance), and takes on some level of economic risk in signing this agreement, they are still considered passive investors, and thus may need to renegotiate their contractual terms if they want to be eligible for increased tax deductions- or find a way to record and prove that they put in at least 250 hours each year of active engagement.

For tenants, one drawback of entering into this type of lease agreement is assuming the burden of paying property taxes. If a community raises the tax rate annually, or raises appraisals on commercial properties, then the tenant may not have recourse to contest the higher tax prices. For this they would have to rely on the landlord, who may be less willing to spend time and money conducting a private appraisal to fight the higher appraisal. This is to the detriment of the tenant, who is left footing a higher bill.

If a landlord adopts this fully hands off approach to investing, however, it may backfire on them in the end. If the lease expires and the tenant chooses to move somewhere with lower taxes, then the investor will suddenly assume all responsibility for the property’s fees, including the higher taxes, while searching for a new replacement tenant. And if the property has higher prices than other similar ones, it may be difficult to find a tenant willing to pay more on a regular basis for a similar building.

3. Tenants Can Benefit Too

A triple net lease agreement places all the responsibility for the property on the tenant, from a broken pipe to ensuring that the property’s Wi-fi is up to speed. So, it may seem like it only benefits the investors who own the building. In fact, however, this is not the case. Since tenants bear all the responsibility for the property, they also benefit from having more freedom with the building. They can change and re-arrange the interior and exterior of the building to fit with the needs and aesthetics of their brand. That way, tenants representing specific companies can keep a consistent appearance across all the properties they manage. This is a huge benefit, particularly for tenants who may not have a sufficient amount of capital to invest in their own property purchases.

In addition, triple net leases are generally more flexible, allowing the tenant to take full charge of the property without the landlord overseeing daily operations, but with the reassurance that there will be a limit on tax and insurance increases during the course of the agreement. Since the tenant is absorbing the risk of the investor’s overhead fees, they can often negotiate for a lower base rental fee amount that works better for them.

A Sound Investment

Despite the possible risks, a triple net lease agreement is a widely favored interaction between tenants and landlords that utilizes the landlord’s investment capabilities combined with the tenant’s on-site assistance, regular maintenance, and payment of fees. For commercial real estate investors, drawing up a triple net lease agreement is a smart approach to investing in commercial real estate with minimal risks and a slow, gradual, long term appreciation of the initial investment capital.

 

Industrial Basics – Why Care About Ceiling Height?

Posted on by Jonathan Aceves

You’ve probably seen ceiling height called out in listings for warehouses and manufacturing buildings. But why should that number matter to you?

 

What is “clear ceiling height”?

  • “Clear ceiling height” is the height at which product can safely be stored on racking. It’s also defined as the height of a building from the floor to the bottom of the lowest-hanging item on the ceiling, such as sprinklers or HVAC ducts.

 

Why should ceiling height matter to you?

  • Warehouse capacity is determined by clear height. So, a tenant can increase the capacity of a warehouse by 10% to 25%, just by increasing clear height from 32 feet to 36 feet. After all, true warehouse capacity is how much product can be stored in a three-dimensional space—a measurement of volume (cubic feet) rather than area (square feet).

 

How have ceiling heights changed over time?

 

What impact do ceiling heights have on building operations?

  • A pallet of goods generally measures 64 inches, meaning that a building with 32-foot ceilings can stack between four to six pallets high. A building with 36-foot ceilings can provide between 10% and 25% more capacity. But the cost of the additional height has to measured against the cost of a larger building with lower ceilings—assuming that a user could actually make use of the higher ceilings.
  • Low ceiling heights affect how much inventory can be stored in a building, as well as what kind of equipment and machinery can be used or moved around in a building. Many manufacturers have equipment that requires high ceilings—think monorail systems to move merchandise for processing.

 

Can low ceiling heights be remedied?

 

What’s the takeaway?

  • During site selection, ensure the team you’re working with is thinking creatively in order to identify the space you need for your operations. Ceiling height is one of many factors that can help you maximize a warehouse’s full potential.

 

 

This post originally appeared in Jonathan Aceves’s blog and is republished with permission. You can read the original here. 

Industrial Basics – Roll-Up Door Considerations

Posted on by Jonathan Aceves

If you are interested in buying a warehouse or industrial building there are a few critical items to familiarize yourself with. Roll-up Doors are a defining feature of  industrial buildings, and it’s important for users and  investors to know some the details regarding their selection, use, and construction.

What are different kinds of industrial building doors?  There are a few different types of industrial doors; overhead doors, roll-up doors, and scissor doors.   Here’s an overview with some pros and cons for each type:

  • Overhead Doors (Or Sectional Doors)–these doors fold or bend to open, and slide into an overhead track.  They don’t coil, and they may have multiple sections, like residential garage doors.  When these doors are open, they hang overhead in front of the opening.
    • Pros: Often the panels that make up an overhead door are much wider and thicker than the small slats of a roll-up door, and can be heavily insulated.
    • Cons: Because the track hangs in front of the door, they limit the ceiling height of a building, and are seldom used for industrial buildings.
  • Scissor Doors (or Scissor Gates or Security Grilles) open to the sides, like a mesh, and often function as security measure in front of a storefront or opening, and can be used as a movable fence.  Often these doors are closed during operating hours for air flow and visibility.
    • Pros: These doors are easy slide open, and don’t take up much space. You can also easily see through them.
    • Cons: Generally used as security gates, often in conjunction with roll-up doors, and not usually used by themselves.  They also are not insulated and don’t block the elements.
  • Roll-Up Doors (Coiling Doors).  These doors are series of slats in a coil that pull into a drum with an enclosed greased spring.  They can be insulated or non-insulated.  These are are the industrial doors that probably come to your mind: ubiquitous in self-storage facilities and warehouses.
    • Pros:  Dont’ swing out (maximize space in warehouse), open and close quickly, are difficult to penetrate, and when open provide clear and open visibiliy.  Roll up doors coil into a drum, and provide maximum use of interior space.
    • Cons:  More difficult to insulate as they roll into

What size doors do you need?  That generally depends on what size vehicles will be using the door, what size the loading dock is, and how high the materials are that you will be moving.  For loading doors, trailers tend to be 8′-8’6″ wide, so a 9′ door will accommodate a 8’6″ trailer, and 10′ high door should provide unobstructed access to most trailers.

What have been your experiences with the selection and operation of industrial doors?  Are you satisfied with your current doors?  Do you have a certain type or size of industrial door and have regrets or lessons learned?  We’d love to learn from your experience!

This post originally appeared on Jonathan Aceves’ Blog.

The Four Primary Uses of Sale-Leasebacks

Posted on by Jonathan Aceves

The Four Primary Uses for Sale-Leasebacks

All business owners should be familiar with the Sale-Leaseback as a tool for raising capital and potential exit strategy. As opposed to bank financing, the Sale-Leaseback can have some advantages, and today we will explore the four different ways they can be used by a business owner.

  1. Financing: Allows for off-balance sheet financing (100% of equity can be made available for investment, as opposed to 75% with traditional financing) and at a lower cost
  2. Improved Returns: Firms may earn a higher return on their primary business rather than in real estate, so they consider moving capital to principal business to expand operations
  3. Balance Sheet Improvements: Tool for improving the balance sheet which can be important for exit planning and larger corporations
  4. Exit/Repositioning: When a firm determines they want to exit a given market/location, they can execute SLB to cash out of a given asset in advance, and then have 5-10 years to find new location.

Financing

Sale-leasebacks are a popular means for companies to fuel growth by moving capital out of real estate and into their principal business.  Often, releasing capital in real estate is more affordable and has better terms than bank financing.  With bank financing, you may only be able to release 75-80% of the equity in your real estate, and that loan will likely come with a 3-year balloon payment.  And often the appraised value of the building is the value of the vacant building.  With a Sale-leaseback, a business owner can tap into 100% of the equity in the real estate, with no balloon payment, and often the value of the NNN lease to an investor is higher than the appraised value of the empty building (depending on the owner’s creditworthiness and balance sheet).  Also, a risk of bank financing is that if the appraised value falls below the agreed-upon LTV, the loan is in default and immediately called (think 2008).  The sale-leaseback puts the market risk on the new owner.

Improved Returns

If the returns from a company’s principal business are higher than the returns on the real estate, it often makes sense to move equity out of real estate and invest it in the company’s core business.  The goal is always to maximize return.  For example, if the business is able to gain a 20% return from day-to-day operations, and the ownership of the real estate where the business resides is only netting an 8% return, returns would increase if the business could divest of the real estate to allow for greater investment in the core business.  Through the signing of a long-term lease, the real estate can be sold, the business remains in operation in its current location, and operations could conceivably be expanded with the opening of a new location or other operational expansion. 

Balance Sheet Improvements

As a seller looks to exit their business, it can become important to improve financial statements.  With this strategy, the seller replaces a fixed asset with a current asset. This increases the current ratio (current assets/current liabilities).  Sometimes referred to as the Working Capital Ratio, investors see this as an indication a company’s ability to service its short-term debt. 

Exit/Repositioning

A Sale-leaseback can be a useful tool for a business that knows it wants to move from a given location into another market or trade area in the future.  It can also be a means to exit from an overly specialized or obsolete building.  An example could be a prison or a hospital, or a retailer realizing that growth is moving in a given direction and determining that in 10 years it will move to follow growth, or that they will centralize their operations in a new building. 

We’d love to learn from your experience! Have you ever considered a Sale-Leaseback? As a broker, have you ever put one together? What have mistakes have you made/lessons learned?

This post originally appeared on Jonathan Aceves’ Blog and is republished with permission.

The Four Primary Uses of Sale-Leasebacks

Posted on by Jonathan Aceves

The Four Primary Uses for Sale-Leasebacks

  1. Financing: Allows for off-balance sheet financing (100% of equity can be made available for investment, as opposed to 75% with traditional financing) and at a lower cost
  2. Improved Returns: Firms may earn a higher return on their primary business rather than in real estate, so they consider moving capital to principal business to expand operations
  3. Balance Sheet Improvements: Tool for improving the balance sheet which can be important for exit planning and larger corporations
  4. Exit/Repositioning: When a firm determines they want to exit a given market/location, they can execute SLB to cash out of a given asset in advance, and then have 5-10 years to find new location.

Financing

Sale-leasebacks are a popular means for companies to fuel growth by moving capital out of real estate and into their principal business.  Often, releasing capital in real estate is more affordable and has better terms than bank financing.  With bank financing, you may only be able to release 75-80% of the equity in your real estate, and that loan will likely come with a 3-year balloon payment.  And often the appraised value of the building is the value of the vacant building.  With a Sale-leaseback, a business owner can tap into 100% of the equity in the real estate, with no balloon payment, and often the value of the NNN lease to an investor is higher than the appraised value of the empty building (depending on the owner’s creditworthiness and balance sheet).  Also, a risk of bank financing is that if the appraised value falls below the agreed-upon LTV, the loan is in default and immediately called (think 2008).  The sale-leaseback puts the market risk on the new owner.

Improved Returns

If the returns from a company’s principal business are higher than the returns on the real estate, it often makes sense to move equity out of real estate and invest it in the company’s core business.  The goal is always to maximize return.  For example, if the business is able to gain a 20% return from day-to-day operations, and the ownership of the real estate where the business resides is only netting an 8% return, returns would increase if the business could divest of the real estate to allow for greater investment in the core business.  Through the signing of a long-term lease, the real estate can be sold, the business remains in operation in its current location, and operations could conceivably be expanded with the opening of a new location or other operational expansion. 

Balance Sheet Improvements

As a seller looks to exit their business, it can become important to improve financial statements.  With this strategy, the seller replaces a fixed asset with a current asset. This increases the current ratio (current assets/current liabilities).  Sometimes referred to as the Working Capital Ratio, investors see this as an indication a company’s ability to service its short-term debt. 

Exit/Repositioning

A Sale-leaseback can be a useful tool for a business that knows it wants to move from a given location into another market or trade area in the future.  It can also be a means to exit from an overly specialized or obsolete building.  An example could be a prison or a hospital, or a retailer realizing that growth is moving in a given direction and determining that in 10 years it will move to follow growth, or that they will centralize their operations in a new building. 

 

Join Our Community

Sign up to get updates and stay connected!

Get Started Today!

Let our agents help you find the perfect property.

Contact an Agent