Net Benefits: The Value of Triple Net Escrow Settlements
By Randolph T. Mason, CCIM, SIOR
Partner, Commercial Realty Specialists
Escrow plays an important impartial role in the sale of a property, and a competent escrow agent is invaluable.
Escrow, an arrangement in which a disinterested third party holds legal documents and funds on behalf of a seller and buyer and distributes them according to the seller’s and buyer’s instructions, provides protection and convenience for both the seller and buyer. The buyer can instruct the settlement company to disburse the purchase price only upon the satisfaction of certain conditions, while the seller can instruct the company to retain possession of the deed to the property until their requirements have been met, including receipt of the purchase price.
Both buyer and seller rely on the escrow or settlement company to carry out their mutual consistent instructions relating to the transaction and to advise them if any of their instructions are not mutually consistent or cannot be carried out in the time frames agreed upon.
Another benefit is that both the buyer and seller can move forward separately but simultaneously in providing mandatory disclosures, property inspections, reports, loan commitments and funds, deeds and many other items, using the settlement agent as the central depositing point. The agent keeps the transaction paperwork organized and accounted for.
When escrow instructions from all parties to the transaction are clearly drafted, fully detailed and mutually consistent, the settlement agent can take many actions on the party’s behalf without the need for consultation or interruption. This saves all parties time and helps facilitate the closing of the transaction.
An escrow company can help in the following areas:
- Acting as the impartial stakeholder, or depository of documents and funds;
- Processing and coordinating the flow of documents and funds;
- Keeping all parties informed of progress on the escrow;
- Responding to the lender’s requirements;
- Securing a title insurance policy;
- Obtaining approvals of reports and documents from the parties as required;
- Prorating and adjusting insurance, taxes, rents, et cetera;
- Recording the deed and loan documents;
- Maintaining security and accountability of monies owed and owing.
Net Benefits: The Value of Triple Net Escrow Settlements
Reduce a Tenant’s Rent in a Triple-Net Property
By Randolph T. Mason, CCIM, SIOR
Partner, Commercial Realty Specialists
Even having a discussion about a rent reduction is a serious undertaking. A distinct advantage to agreeing to rental reduction is that the tenant will continue to pay the triple-net building’s operating expenses. Should the tenant vacate or go out of business, the building’s owner still needs to pay the property taxes, insurance, building maintenance, landscaping and other miscellaneous operating expenses.
If a rental reduction is agreed upon, ideally it will generate some cash flow to help service any debt – as the saying goes, “a little of something is better than a lot of nothing.” Additionally, the lease could be extended if this is in the property’s best interest. If a tenant is requesting a rental reduction, it is not unreasonable for the landlord to request a personal guarantee from a creditworthy entity, should one not already exist.
In these uncertain times, it is not uncommon for a business owner to be running their business with a fight-or-flight mentality without a comprehensive business plan in place. As a precondition to rent reduction, the landlord may want to discuss the tenant’s business plan, which may even help motivate the tenant to create one if it doesn’t exist, ultimately helping the tenant. The tenant will also need to provide the current financials along with the restructuring plan.
In some cases, though, a rent reduction may not make sense – especially if it is just delaying the inevitable. In other words, the tenant may be going out of business. If a reduction is granted, it’s important to remember the value of the building will decrease against the cap-rate valuation method.
Generally, if often makes sense in a soft market for a landlord to consider a reduction in rent in order to mitigate the landlord’s losses, should the building ultimately become vacant.
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Blending & Extending Net-Lease Agreements
Keep Your Triple-Net Expenses to a Minimum
By Randolph T. Mason, CCIM, SIOR,
Partner, Commercial Realty Specialists
Triple-net-lease tenants and owners often ask me how they can limit their building’s operating expenses. I have eight tips that I often share with them that can be employed to keep those expenditures to a minimum.
1. Maintain your HVAC system regularly. A brand new HVAC system could last 20 years or more if properly serviced and maintained. The service is generally inexpensive if done each quarter. Maintenance typically includes filter cleaning or replacement, lubricating all moveable parts and checking for leaks or unforeseen damage to the unit.
2. Inspect and maintain your roof. Often, cleaning roof and drain-spout debris is overlooked. This will create a pool on top of the roof during a rainstorm. It does not take long to regularly inspect the roof, and should a minor repair be necessary, take care of it to prolong the life of this asset.
3. Maintain your parking lot. It is not uncommon for a NNN tenant to forgo the reslurring and restriping of the parking lot periodically, but it should be done every three years. When a parking lot is not maintained adequately, cracks and subterranean erosion to begin to occur and then it becomes nearly impossible to simply reslurry. After major erosion occurs, it becomes necessary to repair and resurface the parking lot.
4. Regularly wash and inspect your windows. This will help lengthen the life of window seals. If left to run its course, damage from weather can decay the rubber seals. It’s much more expensive to replace those seals than to simply maintain them, and the rubber is necessary to stop window leaks which — can lead to a greater problem for the building: mold.
5. Maintain the fire sprinklers. It is important to inspect the fire-suppression systems regularly. An annual checkup and a five-year certification should keep the fire insurance company satisfied.
6. Pay attention to landscaping. A simple way to lower landscaping costs is to plant drought-resistant plants and ground cover. Slow-growing plants will require less maintenance and are often eco-friendly. It is also imperative to check for a leaky backflow, malfunctioning sprinkler systems or standing pools of water, all of which could indicate an underground leak or broken pipe.
7. Maintain the outside metal. It is important to properly maintain outside metal with a good coat of paint to help inhibit the growth of rust. Keep a close eye on metal joints or where exterior metal meets the concrete base.
8. Have your property tax reassessed. If rents in your area have decreased, there is a good chance that the value of your building has decreased as well. This could warrant a tax bill reduction. It may make sense to talk with the local tax assessor.
With a proper schedule, you can keep your buildings NNN expenses to a minimum and when properly maintained, the useful life of a building and all its components can be extended — all of which help to reduce operating expenses.
The Art of Tactful Negotiating Encouragement
By Randolph T. Mason, CCIM, SIOR,
Partner, Commercial Realty Specialists
There are many times in a negotiation where being tactfully persistent (to hurry up) is important in a transaction. As an example; when a commercial property market has a low vacancy rate, and a potential tenant or buyer is looking at either leasing or buying the property. Tactfully encouraging the procuring side to move quickly is beneficial to both parties.
A real life example happened when a property was available for lease, in a market with a 1%- 3% vacancy rate. A tenant had committed to lease the property, but was not moving as fast as the property owner would like. We needed to tactfully inform the tenant’s representative that there continued to be a great amount of interest in the property and they needed to encourage their client to expend more resources in order to consummate a transaction. The encouragement was successful and the tenant ultimately got the building and was able to commence business; and the owner of the property was happy to finalize the transaction. Tactful encouragement provided a successful outcome to all parties.
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