First office building purchase - NNN lease?

Question

We are closing on an office building in about 40 days. Its a 5000 sq ft century home converted into 5-6 separate office spaces with me occupying one for my business. I plan on having some commercial agents through for a better understanding but what dictates when to apply NNN/Gross/Hybrid lease?

When I initially ran my numbers I didn't even know what a NNN lease was so but it sounds interesting to think I can get some taxes and insurance paid for.

When I initially ran my numbers I didn't even know what a NNN lease was so but it sounds interesting to think I can get some taxes and insurance paid for.

Cassandra Sampson · Answer

Hi Adam,

I'm a commercial mortgage broker and we deal a lot with NNN. PM me and we can have a chat.

Cassandra

Adam Craig · Answer

Good tips thank you! I might not have the best location in town but I would say its as desirable location as anywhere in Willoughby. This building is steps away from downtown Willoughby which is the area of Willoughby everyone wants to be due to the emergence of restaurants/coffee shops - it has become THE trendy downtown area in this 4-5 city area.

I will reach out to some commercial agents and see what they have to say.

Adam Craig · Answer

Since I dont own the property I dont have all this information decided. Between bigger pockets and a commercial agent I was going to figure all that out.

I was planning on having them pay for phone and internet unless someone recommends otherwise.

Bob Langworthy · Answer

@Adam Craig, that's what I would do. Do they pay phone/internet separately?

Adam Craig · Answer

This leads me to another question I planned on asking. The electric is divided into 4 meters but the gas is not. How will I go about charging for gas. Could I just take the bill and use square footage to divide it up? Same goes with water...

Bob Langworthy · Answer

@Adam Craig, Are the utilities separately metered/billed? If not, you can't really do a NNN lease if you are also leasing space. If you weren't in the building and one tenant wanted to lease the entire space, you could do a NNN lease. But as long as you have prepared a careful pro forma, you should be fine doing either a gross or hybrid lease. You can make just as much money (but will have a little more work to do).

Hope this helps,

Joel Owens · Answer

Office unless medical office is not typically NNN leases. Usually a hybrid or gross lease.

It is key to inspect the parking lot, interior and exterior of building, roof, and all mechanical, electrical, water systems, etc.

With newer buildings sometimes you can net higher with gross leases or hybrid but in older buildings where landlord is paying lots of costs it can really eat into your net number.

You need to meet with an SIOR broker to see what type of lease structure is common in your area for this type of property before your due diligence period runs out. If for example you want to charge a NNN lease but common for that area and property type is hybrid or gross you will fight an uphill battle to rent the spaces out unless maybe you have the best location in town then you might have some leverage. If your building falls into middle of the crowd where tenant have multiple selections then less leverage and you have to get more competitive to fill the spaces.

First office building purchase - NNN lease?

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