Negotiating a NNN Lease Renewal

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Negotiating a NNN Lease Renewal

Chris T.Pro Member
Rental Property Investor · Charlotte, NC · Member since 2013 · 491 posts · 253 votes

I own a STNL retail property with a national tenant currently on an absolute NNN lease. At the next lease renewal, they have a 5 year option with a 10% increase (two renewal options left total). The lease states that they have to give 120 days notice prior to the renewal date, but I would like to begin the process well before then. My goal would to ideally get them on a new lease with a 10 year term. In seeing similar properties with the same tenant they seems to be signing 10 year initial term leases with 7.5% increases every 5 years. The value in a 10 year term (better refinance rates/sale value) would be worth it to me to drop their rental increases to 7.5%

My question is, is this something I could realistically handle myself (with a lawyer of course) or do large national tenants really want to deal with licensed brokers?    If it is something I can approach as the owner, how far out are companies looking when it comes to renewals?  If there is additional value using a broker, how best to find a leasing broker that has experience with a specific tenant?

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Joseph CacciapagliaBusiness Member
Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes
6y

If you have a lawyer that routinely handles these types of lease negotiations, you should be fine without a broker, but one way or another, you need someone with insight into the current market for lease terms. I've had clients that negotiated early extension options with national NNN tenants on several occasions. You have to be offering them something of value though. It seems like the 2.5% lower increase would be compelling, but it will depend in part on how well the location is doing and what market lease rates are today. They may have been planning to negotiate a lower rate with you, instead of exercising their option.

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  • Joseph CacciapagliaBusiness Member
    Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes
    6y

    If you have a lawyer that routinely handles these types of lease negotiations, you should be fine without a broker, but one way or another, you need someone with insight into the current market for lease terms. I've had clients that negotiated early extension options with national NNN tenants on several occasions. You have to be offering them something of value though. It seems like the 2.5% lower increase would be compelling, but it will depend in part on how well the location is doing and what market lease rates are today. They may have been planning to negotiate a lower rate with you, instead of exercising their option.

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  • Chris T.Pro Member
    OP
    Rental Property Investor · Charlotte, NC · Member since 2013 · 491 posts · 253 votes
    6y

    @Joseph Cacciapaglia - Thanks for your response.  How far out is it reasonable to begin these discussions with the corporate tenant?  6 months, 12 months, more?

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  • Joseph CacciapagliaBusiness Member
    Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Chris T.:

    @Joseph Cacciapaglia - Thanks for your response.  How far out is it reasonable to begin these discussions with the corporate tenant?  6 months, 12 months, more?

     I have seen people do it as much as a couple years out, because they needed to in order to refinance. The further out you are, the more value you have to offer them.

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  • Jameson Sullivan
    Real Estate Broker · Tacoma, WA · Member since 2016 · 545 posts · 252 votes
    6y

    What type of use and what market? You may want to consider including a local broker. The Tenant likely isn't going to sign a NEW 10 year term at the option rates. If they chose to sign a new deal, they will ask for new deal terms including CURRENT market rents (which may be higher, or could also be much lower than their option rent), TI and free rent. I don't think the 250 bps are going to convince them. But again, ask a local broker.

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  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    6y

    I think you can do it yourself if you know your market rates. Who placed you into this building/tenant? I'd start there

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  • Joel OwensBusiness Member
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    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    6y

    Do they disclose ongoing quarterly, annual, or both unit level location sales? If they do not is there a provision upon an owner or sale refinance they have to give financials?

    What you are trying to do is assess how well the location is performing for them and then compare that to their typical national average in rent they pay per sq ft and their AUV (average unit volume) nationally. 

    I agree a 5 year renewal is typically worthless to the owner. Most STNL lenders will not finance anything with less than 7 years remaining primary term for the best rates. That usually means an all cash buyer or someone putting down a ton and getting a small 30% loan. For that  a lot  of buyers want a high cap rate on equity which erodes your resale value. If you get a 10 year signed then sell in 3 years you still have 7 years remaining on the lease and then the buyer sees they can likely get great financing and have say a 10% rent bump in 2 years.

    I have seen some buyer purchase at low cap rates regardless of years left but location had to be an A+ with and A+ tenant to feel strongly if the tenant went dark they had high dirt value to re-tenant and upside.          

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