Triple Net Lease Reserves

Rental Property Investor · League City, TX · Member since 2014 · 4 posts · 1 vote

How much cash reserves should you keep for a triple net lease? Do you try to cover your monthly expenses for X months for when you have to find a new tenant? Do you base it on the building cost or size? I'm trying to figure out how much money I should keep on hand so I don't have cash flow problems if a tenant moves out.

Thanks.

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Jameson Sullivan

Real Estate Broker · Tacoma, WA · Member since 2016 · 545 posts · 252 votes

I would say it's asset specific. "Triple Net Lease" doesn't give us enough information, it's simply the contract structure. Is this an A class single Tenant building or a C-class strip center? The quality of your tenants and location of you building will dictate what kind of reserves you need moreso than will the lease structure. Your building could sit vacant for 3 to 6 months or longer if one of your tenants leaves. Additionally there is likely going to be substantial costs in re-tenanting the building including commissions and TIA which need to be accounted for.

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Leah Stuever
Realtor · Dallas, TX · Member since 2019 · 194 posts · 164 votes
6y
Commercial leases are generally longer terms (5 years or more). But you certainly want months or expenses saved up. It really depends on your area and how long you think it will go without a tenant.
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Jameson Sullivan
Real Estate Broker · Tacoma, WA · Member since 2016 · 545 posts · 252 votes
6y
I would say it's asset specific. "Triple Net Lease" doesn't give us enough information, it's simply the contract structure. Is this an A class single Tenant building or a C-class strip center? The quality of your tenants and location of you building will dictate what kind of reserves you need moreso than will the lease structure. Your building could sit vacant for 3 to 6 months or longer if one of your tenants leaves. Additionally there is likely going to be substantial costs in re-tenanting the building including commissions and TIA which need to be accounted for.
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
6y
Jennifer are you looking to buy a NNN property, have one under contract, or ALREADY own a NNN property?
We mainly call the whole industry NNN but it can mean a lot of different types of properties.
With a retail center specifically there will be so much reserves per sq ft an appraiser uses when you get a loan (typically 10 to 25 cents a foot) in underwriting. Some retail center leases have CAM caps each year on how much expenses a tenant will pay. This is important when you purchase because a new roof and parking lot can be hundreds of thousands of dollars in costs. Even if tenants reimburse they do not have the funds all at once so they owner amortizes over a long time to get the money back. Some investors that buy build in models for replacing the parking lot and roof over XX number of years. The stability to the cash flow model and whether a tenant rolls out or not has various factors being a national, regional, or mom and pop tenant and the lease structure.
If you are paying cash for the property then how much reserves you keep out is subjective and a preference. There is a lot of analysis that goes into buying a retail center. You need a specialist for proper evaluation or at the very least a commercial retail attorney to guide against missteps in the process.
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Ronald RohdePro Member
Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
6y
Originally posted by @Joel Owens:
Jennifer are you looking to buy a NNN property, have one under contract, or ALREADY own a NNN property?
We mainly call the whole industry NNN but it can mean a lot of different types of properties.
With a retail center specifically there will be so much reserves per sq ft an appraiser uses when you get a loan (typically 10 to 25 cents a foot) in underwriting. Some retail center leases have CAM caps each year on how much expenses a tenant will pay. This is important when you purchase because a new roof and parking lot can be hundreds of thousands of dollars in costs. Even if tenants reimburse they do not have the funds all at once so they owner amortizes over a long time to get the money back. Some investors that buy build in models for replacing the parking lot and roof over XX number of years. The stability to the cash flow model and whether a tenant rolls out or not has various factors being a national, regional, or mom and pop tenant and the lease structure.
If you are paying cash for the property then how much reserves you keep out is subjective and a preference. There is a lot of analysis that goes into buying a retail center. You need a specialist for proper evaluation or at the very least a commercial retail attorney to guide against missteps in the process.

To add, you can get a maintenance audit which makes recommendations for physical plant repairs and replacements, that should be the biggest cost should a tenant vacate. If its a national tenant or personal guaranty, they typically don't just "walk away" if you budget in some legal costs, you should be able to negotiate a release payment of at least a portion of total remaining rent owed.

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