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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.

 

Augusta Economic Overview

Posted on by Jonathan Aceves

Why Augusta?

Augusta, Georgia, is enjoying a renaissance that looks to continue for the long term.

The city is recognized globally as a cybersecurity capital, thanks to the relocation of the U.S. Army Cyber Command headquarters to the region’s already significant military presence at Fort Gordon. Then there’s its well-deserved international reputation as a health care destination, a high concentration of diversified and advanced manufacturing, several key hubs for corporate professional services, and a young, diverse, educated and upwardly mobile workforce.

All of these are accelerating a growth trend years in the making. These impacts have been seen in the city’s downtown area, with several projects set to break ground, as well as in the greater MSA, including surrounding Columbia and Richmond counties on the Georgia side, and Aiken and Edgefield counties on the South Carolina side.

As a result, Augusta, Georgia, is not only an attractive destination for work, but also an affordable and fun place to live.

So, the question isn’t why, but why not?

Top Employers and Growing

The roll call of corporate names who make Augusta home is long and diverse: Amazon, EZ GO Textron, Cardinal Health, Graphic Packaging, Kellog’s, FPL Food, LLC, Augusta Coca-Cola, Kimberly-Clark, John Deere, Starbucks, SITEL, ADP, Unisys, Electrolux, Delta Air Lines, Taxslayer, Comcast, T-Mobile, Teleperformance, WOW Communications, and many more.

Augusta is widely known as one of the best locations for national and regional corporate headquarters, health care and life sciences, manufacturing, energy, customer service centers, major retail investments, and hospitality ventures. As a result, corporations from the U.K, Germany, Australia, France, Canada, and elsewhere have chosen to make a base here.

Cyber has more recently taken its place at the table, fueling much of Augusta’s economic activity in the past several years. In addition, Amazon has plans for two separate distribution warehouses off of I-20 in Columbia County; the first is set to open in July, and the second was announced in spring 2021.

Other key components driving Augusta’s economy include Augusta University, Georgia’s research university and home to the state’s medical school; Savannah River Site, home of the Savannah River National Lab; and Plant Vogtle, an expanding nuclear facility. These two large energy projects provide 12,000 and 6,000 jobs respectively.

As the region’s single largest employer, the U.S. Army Cyber Center of Excellence and Fort Gordon employ about 25,200 workers. Augusta University and its associated health system employ another nearly 8,000 people.

Manufacturing is a major growth sector; Augusta’s top 10 largest manufacturers employ about 5,600 workers. Meanwhile, other major corporations specialize in customer-service-based work.

Major Economic Drivers

Military/Cyber: Augusta is the home to the nation’s U.S. Army Cyber Command headquarters, located at Fort Gordon. The Cyber Command HQ oversees five regional cyber centers in Arizona, Hawaii, Germany, Korea and Kuwait, and conducts global operations 24/7 with 16,500 soldiers, civilian employees, and contractors worldwide, to operate and defend military networks and protect critical U.S. infrastructure against global cyber threats. Its affiliated Cyber School is also expected to train about 1,500 students annually. Fort Gordon, established in 1914, is home to the U.S. Army Signal Corps; its Signal School focuses on communications technology. It’s estimated that 150 military personnel separate from the military each month, and of these, 60% have a background in information technology or intelligence—a fact that contributes to Augusta’s strong labor force.

Health Care: More than 51,000 jobs are provided by health care alone in the Augusta MSA. The Augusta MSA is home to a regional hub for health care, with nine major hospitals serving 18 counties and beyond. Augusta University Health is Georgia’s only public academic health center; it features the region’s only hospital solely dedicated to serving children, the Children’s Hospital of Georgia, and it also serves as the primary teaching affiliate of the Medical College of Georgia, the nation’s 13th oldest and 9th largest medical school. University Health Care System has served the region for more than 200 years as a not-for-profit community health system; it is Augusta’s oldest and the state’s second oldest hospital. Doctors Hospital is a full-service emergency care facility and features the nation’s largest burn center. Additionally, Augusta is home to a Department of Veteran Affairs hospital, the Charlie Norwood VA Medical Center. Neighboring Aiken and Edgefield counties are served by Aiken Regional Medical Center, with 245 beds and 183 physicians covering more than 40 specialties.

Industry: A wide variety of industries call Augusta home, thanks to the Augusta MSA’s highly skilled and trainable workforce, combined with a business-friendly environment and available infrastructure. Advanced manufacturing, aerospace, and chemical manufacturing are among the region’s top sectors positioning themselves for growth, with names like EZ GO Textron, Cardinal Health, Graphic Packaging, Kellog’s, Augusta Coca-Cola, Kimberly-Clark, John Deere, Starbucks, Lockheed Martin Corporation and Occidental Chemical Corporation. Customer service has also made a name for itself here, thanks to three higher education institutions and a major military installation educating a workforce with the soft skills needed to staff a customer service center. Augusta Technical College, for example, has a Customer Service Certificate as part of its course offerings. Companies such as ADP, SITEL, Delta Airlines, Unisys, Comcast, T-Mobile, Electrolux, Teleperformance, and WOW Communications have customer service and managed service facilities in Augusta.

Education: Augusta is projected to add more than 14,700 jobs from 2018 to 2023. Educating the workforce locally will play an impactful role. Augusta University is the region’s only public research university and is a part of the University System of Georgia, employing more than 15,000 people and having 56,000 alumni. Paine College is a private, historically black Methodist liberal arts college. The University of South Carolina Aiken is consistently ranked in the Top Three of U.S. New & World Report’s Top Public Schools in the Regional College in the South category. Both Augusta Technical College and Aiken Technical College provide excellent technical training through multi-service, two-year educational opportunities in the areas of health, industry, business, computer, public service and more.

The Augusta Region’s Advantages

  • The Augusta-Richmond County, GA-SC MSA has been ranked #85 in the nation by Forbes Magazine for Cost of Doing Business, and #161 on Forbes’ list of Best Places for Business and Careers.
  • Augusta has been named by BizJournals.com as “The Most Affordable Place in the United States To Own A Home.” Housing in Augusta is approximately 61% of the national average. Overall, the cost of living is about 82% of the national average. This translates into overall lower operating costs for companies, making Augusta even more attractive for new locations.
  • Southern Business & Development magazine named Augusta as one of the “Top Ten Places in the South With Plenty of Talented Labor.” The 1800-acre Augusta Corporate Park was also named by the publication as one of the “Top Ten SuperSites in the South.”
  • Corporations benefit from Augusta’s low cost of living, supported by:
    • Tier Two Job Tax Credits of $3,000 each year per new job created for five years
    • Low state corporate tax rate – flat 5.75%
    • Low state and local tax burden, below the national average, with local tax assistance/abatements
    • Low-cost utilities
    • Low union representation in manufacturing – only 2.7% state-wide
    • Competitive wage rates
    • Low real estate costs
    • Low transportation costs
  • Other competitive incentives for relocating and expanding companies include:
    • Available land
    • Well-trained and disciplined work force
    • Central location, equidistant from the country’s transportation center, Atlanta, and the country’s financial center, Charlotte, with easy access to I-20, I-95 and I-77, and the ports of Savannah and Charleston both less than 150 miles away
    • Infrastructure / grading assistance at the Augusta Corporate Park
    • OneGeorgia grants, where applicable
    • Enterprise Zone Job Tax Credit Advantages
    • Amendment 65 & 74 tax assistance
    • QuickStart training for employees at no cost
    • Investment tax credits
    • Retraining, corporate headquarters, R & D, ports & child care tax credits

Future Ready

  • Augusta is projected to add more than 14,700 jobs from 2018 to 2023.
  • Since 2010, Augusta has enjoyed more than $1 billion in new investment and has added more than 10,000 new jobs.
  • In 2020, 26 new projects totaling $3.9 billion in potential capital investments and 7,856 potential new jobs put Augusta on their short list for consideration.
  • Also in 2020, 11 new locations or expansions occurred, totally $244 million in capital investments and 587 new jobs in just Richmond County alone.

 

Links:

https://augustaeda.org

https://www.arcyber.army.mil

https://www.youtube.com/watch?v=av2RFhBHKEs

 

Copyright (c)2020 This post originally appeared in Jonathan Aceves’s blog and is republished with permission.

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. 

4 Reasons why you benefit from Exclusive Representation in Commercial Real Estate

Posted on by Jonathan Aceves

In a commercial real estate transaction, a seller can leave a lot of money on the table if the buyer is well represented and they are not.  Worse still, the seller may look to the buyer’s broker for advice and mistakenly believe that they are being represented and receiving advice that is in their best interest.  How do you know if you need independent representation?  Every seller can benefit from having their own representation, and I will lay out a few reasons why below, as well as a few case studies.  

“Plans fail for lack of counsel, but with many advisers they succeed”   

A few years ago, an owner who we will name “Steve” owned an automotive shop on a busy downtown corner.  He was approached by his neighbor, who wanted to buy his building for what Steve believed to be a fair price.  Steve accepted the offer and closed on the property.  A few months later, he realized that due to the capital gain on the fully depreciated building, his taxes were nearly a quarter of the sales price!  Not only had he underpriced the building, but after paying off his mortgage, the burden from tax bill started a process which ultimately led to his bankruptcy.  If a good agent had advised him, they would have advised him of his tax implications, as well as making sure that the sale price was in line with the market.

About two years ago, a woman we will name “Sherry” owned a home in a downtown neighborhood.  Her family was growing, and she wanted to purchase a larger home.  She put an offer on a nearby home which was for sale by owner.  Neither buyer or seller had any real estate experience, and they used a form they found online.  Once the property was under contract, she put her home up for sale by owner.  Within days, a buyer’s agent brought her an offer on her home. Sherry wanted to make sure that the contract was contingent upon her closing on the other property, which the buyer’s agent assured her it was.  There were some complications with her loan, and the seller of the property she was buying refused to give her an extension—and she was forced to terminate.   When she asked the buyer’s agent about terminating the contract on her home, she refused, and said that they would sue for specific performance if she did not sell.  Ultimately, she was forced to sell her home under market value, and rented an apartment across the street.  If a good agent had been involved, Sherry would not have been forced to sell her home for below market value, and likely would be living right now in what she considered her “dream home”.

4 Reasons to have independent representation

  • Representation
    • The buyer’s agent has a duty of loyalty to protect their client’s best interest. Some brokers may attempt to practice what is called Dual Agency.  Dual agency is a slippery slope and frowned upon by most brokers.  Often what happens is that one party is treated as a “client”, and the other as a “customer”—meaning that client receives the duty of loyalty while the customer does not.  All these details should be clearly disclosed to both parties, and failure to do is an egregious license law violation.
  • Better Leverage
    • Another reason to have separate representation is for negotiating leverage. Commercial Real Estate agents, especially CCIMs, are trained to help negotiate the best possible price and terms.  If you are communicating any personal details to the buyer’s broker, then they have a duty to tell the seller—which may completely remove any negotiating leverage you may have had.  Think about it—any personal details which may make the Buyer think you need the money more than they need the property WILL be used against you.  Your exclusive agent’s duty is to protect those details, while working to tip the scales in your favor.
  • Pricing
    • If a buyer’s agent brings you an off-market offer on a property, how will you know if that price represents a fair market offer? Think about it—if someone is willing to go to the trouble to contact you, to do the due diligence and make an offer, could there be someone out there who would pay  a little more?  In my experience, off-market properties seem to sell for about 20% less than they might if they were properly marketed.  Your agent’s role is to make sure that you are priced in accordance with the market, and not leaving any money on the table.
  • Contracts & Due Diligence
    • Your agent should be familiar with the documents and amendments you are reviewing and will be able to advise you about their implications. They will be able to suggest language that would better protect you, or additional clauses to add. They should also remind you to talk with your CPA to determine what your tax consequences will look like.  You agent will also be able to help with due diligence items required by the Buyer—documents such as leases, tax returns, plats–as well as interfacing with government agencies for things such as permits, zoning details and environmental concerns.  They will also be able to connect with the appraiser, and hopefully give them what they need to appraise your property for the highest appropriate amount—something that a Buyer’s agent could not do.

We would love to hear from you!  Please comment below.   Have you ever been in a situation with an unrepresented party?  Or have you ever been in transaction where you lacked appropriate counsel? Do you have any horror stories from real estate deals where good advice could have made a difference?  

Additional Resources: 

SIOR – How to select a commercial real estate broker

Founders Guide – How to choose the right commercial real estate broker

Commercial Property Advisors – Choosing the right commercial real estate broker

This post originally appeared in Jonathan Aceves’s blog and is republished with permission. 

(c) 2020 Jonathan Aceves

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. 

 

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