can i change regular lease to NNN after purchasing commercial prp

Question

I have a question about regular lease commercial property.

Its only 2 tenants and they have 15 year lease, but no tax or insurance on them. Can I convert after purchasing  amendment to the lease and change it to NNN lease?

They have regular "hot docs" commercial lease.

Please advise.

Thanks for the help in advance

Joel Owens · Answer

Have you closed on the property yet?

If not and your tenants are on NN or gross leases then you need to analyze how old the building is. If it had new roof,parking lot redone recently etc. where big capital items are done for next decade or so then gross leases if you keep expenses low might come out well.

If property is old and is fixing to need lots of capex and tenants are on gross leases then that can be bad. You would need to get a credit from seller at closing for a reserve to pay for all those things so it does not reduce your expected cash flow returns with the property.

To get the tenants to amend the existing long term leases you would have to give them something of value. If they have a long term gross lease at low rent then good luck getting them to agree to change ANYTHING to NNN. Why would they if rent was cheap and landlord pays for everything??

So you really need to dig into the leases and see what is possible to offload expenses onto the tenants for base rent with CAM instead of gross leases. Also with gross leases pay attention to if you purchase a property and property taxes rise with gross leases it is eating into your returns. Again getting a reserve from the seller might be an answer.

Ryan Cox · Answer

@Apurva Rathod You can negotiate a midterm lease change but it would be a change that your tenant would have to agree to.  Think about what you can offer your tenant that would make it a win for the tenant to change (term, concessions, etc).  Coming up with a win/win scenario is your best bet to successfully negotiating a midterm lease change.