How red is this red flag and why do I still want this deal?

5 Replies

Hey everyone! I am under contract for a NNN with a government entity in Houston TX. It has an 8.5% cap rate and they just signed a 5 year lease.

I am having the oddest experience. The tenants have not held up their end of the NNN and upon a property inspector's visit, it appears as if this is sorely needed. For some reason we cannot reach the manager on the premises and are now dealing with the facilities manager for the region. Being a US government entity, it is a safe investment for 5 years but why on earth is it not being maintained? How can I enforce that they get it up to code and continue-if I complete this purchase.

Other properties rented by the US government have been well taken care of, I have never experienced not being able to reach the manager.  If this cannot be enforced before my purchase-God knows it will not happen during my ownership.  Even if they continue to renew for another 20 years the building may only be worth the land it is on.

Appreciate any thoughts on this one!!! I so badly wanted this one to work I am having a hard time letting it go!

In this case I would send a certified letter (return receipt) or FedEx to the person above the regional manager.  In the letter you can state your difficulty in reaching the property manager and list whatever deferred maintenance items the tenant should be taking care of per the lease.  That should get the attention of someone high up to get some heads rolling.

if it doesn't I would send another letter so the same higher up stating the actions you will take that will be billed back (plus any administrative surcharge) to the tenant for not performing per the lease.  

Originally posted by @Dale Shin :

In this case I would send a certified letter (return receipt) or FedEx to the person above the regional manager.  In the letter you can state your difficulty in reaching the property manager and list whatever deferred maintenance items the tenant should be taking care of per the lease.  That should get the attention of someone high up to get some heads rolling.

if it doesn't I would send another letter so the same higher up stating the actions you will take that will be billed back (plus any administrative surcharge) to the tenant for not performing per the lease.  

 Yes unfortunately it is a little more complicated then that.  I think I mentioned it is leased by the government so the steps taken are time consuming and  maintenance will not be completed before my due diligence period.  Enforcing it with this particular institution from other lessors has often not happened.  As much as I like the deal, it is not worth it.  Thank you for you response-was just hoping it would have worked!

Bottom line is if you cannot get what you want in DD period then you have to get the seller to give an extension or get out of the deal.

You can't let it go past the point of no return and hope it works out in the end.

If they just signed a 5 year lease this doesn't make sense. They would request that the owner make repairs to the building before committing to the space on a new lease. Even if they were renewing an option and there was deferred maintenance they would request the seller fix things.

Maybe your idea of acceptable and workable condition is different from theirs. None of us here are involved in the deal so are on the outside looking in.

If it is just a 5 year primary term it sounds like a renewal option because they are longer than that to start. 5 years is very hard to get decent finance on so you must be paying cash or putting 50% down. 

I have never rented to the government so take this with a grain of salt. I see buildings being left to rot all the time on NNN and the people leaving are often forced to fork out large amounts of cash to make the repairs. Even more often the landlord is in a better position to modernize the building as the departing tenant is forced to pay the landlord for the damaged building and tenant improvements that would have had to been replaced anyways.

Also, they are the people printing the money after all.

Originally posted by @Cagney Moreau :

I have never rented to the government so take this with a grain of salt. I see buildings being left to rot all the time on NNN and the people leaving are often forced to fork out large amounts of cash to make the repairs. Even more often the landlord is in a better position to modernize the building as the departing tenant is forced to pay the landlord for the damaged building and tenant improvements that would have had to been replaced anyways.

Also, they are the people printing the money after all.

 That fits the situation! I appreciate your experience.