Renting out an old Payless Shoe Store at NNN

Commercial Real Estate Investing
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Renting out an old Payless Shoe Store at NNN

Account Closed
Member since 2019 · 3 posts · 1 vote

I'm a complete novice at commercial real estate but jumped in head first. I now own a property in Florida that was a payless shoe store in a very busy area. After I bought it I was contacted by a number of brokers looking to help me rent it. I negotiated with a couple of them and finally signed a triple net lease with a fast food franchisee. They are doing construction to the property now. I have a ton of questions 

1. The lease states that they carry insurance but it seems to me that they don't take possession of the property until the certificate of occupancy is in their hands. For that reason should I have insurance on the property in case of hurricane, fire, damage, etc. and furthermore should I carry insurance on the property after that as well. (There's no loan on the property.)

2. They don't begin paying on the lease until they have the certificate of occupancy but because they are doing the construction it is up to them to get it. Does that seem right or do I need to go through my lease again?

3. Based on the above questions how badly did I screw up this lease by agreeing to rent beginning with the Certificate of Occupancy.

4. And last, When talking to the engineers, contractors, tenants and brokers, how do I make it sound as though I know what I'm doing when I clearly do not? (This is slightly rhetorical. More looking for a 'What should I not say.)

I've read through a lot of these posts and they've helped me get to where I am now with the property so I appreciate all of you that have contributed and hope to add something to the forum, hopefully not as a 'What not to do.' 

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Eric Lefteroff
Real Estate Agent · Renton, WA · Member since 2019 · 27 posts · 29 votes
5y

Did you have a broker representing you when you signed the NNN lease? If so, how is their commission being paid? 50% upon lease signing and 50% upon C of O? If that, or something similar, then your broker should continue to work with you and be able to answer these questions.

1) You should always have property insurance on your property along with other types of insurance. I would recommend finding a reputable insurance agent and working with them to determine the best coverages for you.  You own the building and still need insurance protection.

2) It is completely normal to have rent start upon the issuance of a C of O in a retail space.

3) You didn't screw it up.  

4) When speaking with industry professionals I would encourage you to ask lots of questions and get referrals from people you trust.  You need to balance your fear of not being taken advantage of with the opportunity to learn.  Speak with several professionals in each discipline.  This should help you identify who is legit and who is inexperienced or shady.  For example, if several GCs say it is so much to build out something for a similar price then that's probably about right.  If one or two are substantially low or high compared to the majority then you could probably eliminate them from the running.  For conversations with tenants, get representation from a broker.  A broker worth their weight will spend adequate time helping to educate you.  If they don't have much time for you then go with someone else.

Hope this helps.  Good luck!

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  • Jim K.
    Rental Property Investor · Charlotte, NC · Member since 2017 · 271 posts · 259 votes
    5y

    Hey @Account Closed, I would recommend hiring an experienced NNN broker to consult with you and to represent you. You can ask them to do a fixed fee instead of managing the deal throughout its lifecycle.

    0Reply
  • Account Closed
    OP
    Member since 2019 · 3 posts · 1 vote
    5y
    Originally posted by @Jim K.:

    Hey @Account Closed, I would recommend hiring an experienced NNN broker to consult with you and to represent you. You can ask them to do a fixed fee instead of managing the deal throughout its lifecycle.

     I thought about that but it seemed like the majority of what a broker would do for me is negotiate the lease. That part is already done and the lease is signed. All I need now is advice on whether or not to insure the property and how to get the tenant the certificate of occupancy since they are doing the construction.

    Is there really enough left to do that a broker would take the time to work with me on it? 

    0Reply
  • Eric Lefteroff
    Real Estate Agent · Renton, WA · Member since 2019 · 27 posts · 29 votes
    5y

    Did you have a broker representing you when you signed the NNN lease? If so, how is their commission being paid? 50% upon lease signing and 50% upon C of O? If that, or something similar, then your broker should continue to work with you and be able to answer these questions.

    1) You should always have property insurance on your property along with other types of insurance. I would recommend finding a reputable insurance agent and working with them to determine the best coverages for you.  You own the building and still need insurance protection.

    2) It is completely normal to have rent start upon the issuance of a C of O in a retail space.

    3) You didn't screw it up.  

    4) When speaking with industry professionals I would encourage you to ask lots of questions and get referrals from people you trust.  You need to balance your fear of not being taken advantage of with the opportunity to learn.  Speak with several professionals in each discipline.  This should help you identify who is legit and who is inexperienced or shady.  For example, if several GCs say it is so much to build out something for a similar price then that's probably about right.  If one or two are substantially low or high compared to the majority then you could probably eliminate them from the running.  For conversations with tenants, get representation from a broker.  A broker worth their weight will spend adequate time helping to educate you.  If they don't have much time for you then go with someone else.

    Hope this helps.  Good luck!

    1Reply
  • John Mocker
    Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes
    5y

    Joe,

    You need to have coverage for the Property and Liability for that location.  I would find out what coverage the the tenant has in place and see if they can add you as an additional insured for the Property and Liability.  If not, you may need to get your own coverage.

    You may have the option in the lease, once the tenant occupies the property to purchase the Insurance and charge back.  This would give you control over the Insurance for your exposure.  I would check with your Real Estate Attorney and an experienced Commercial Insurance Agent.  See what they recommend for your options

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    5y

    Commercial NNN brokers do not have time to work on a fee basis. The ones worth anything anyways. They are busy closing regular transactions.

    Property management - low money

    Tenant rep or landlord lease rep- low money

    Closing transactions minimum 2 million or higher - good money most times

    Syndicating as a sponsor and a broker - Good money

    I focus on last 2.

    Consult on a deal mid process or post is a waste of time for a broker. Why would a broker spend the same time to make 10k as they would to make 60k? They wouldn't which is why I don't focus on consulting. Consulting mid deal or after the fact the buyer or now owner has likely made a ton of mistakes going it alone especially new to the space. They wants lot's of help for low money.

    Options now are to go to a local commercial retail attorney that specializes. Additionally a landlord rep tenant broker. 

    You have tons of questions.

    You might could find a development company consultant to help that are used to new ground up builds and repositions but they are not cheap.

    The lease may or may not be marketable going forward to appeal to a buyer or their lender. Next time you really might want some help in the beginning. All kinds of issues can happen. Construction can be delayed. Tenant can get into disagreement with health department on costs and how to finish out. Contractors for tenant could botch the job and file liens. CO might take a long time and tenant misses opportune time of year for a good launch for their concept. 

    No legal advice given. 

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    0Reply
  • Sam B.
    Member since 2019 · 106 posts · 32 votes
    5y

    @Joe Fauntleroy

    Hi Joe, congrats on the progress you’ve made so far with this property.

    I bought my first commercial property 6 months ago, and I too struggle trying to act like I know what I am talking about with lawyers, contractors, city officials, etc... it’s just a steep learning curve. I try to research the most I can online before asking questions. I have also found that it’s best to deal with guys you trust, focused on the long term relationship, and are willing to explain things.

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    5y

    Well here is how I deal with being in the learning phase of my RE career something along the lines of " i am learning so may be asking questions along the way and I appreciate any and all information you provide" 

    i literally have asked hundreds of questions and most of the time folks are happy to slow down and use words that are not jargon etc 

    IOW, be honest and humble and people will generally understand and be happy to "dumb it down", answer questions, etc.  they were newbs at one time too ;) 

    0Reply
  • Benjamin Goodman
    Investor · Boston, MA · Member since 2018 · 45 posts · 31 votes
    5y

    @Joe Fauntleroy I’ve been getting my feet wet in commercial as well. I think you need a good commercial attorney not a broker...

    1Reply
  • Juan Martinez
    Investor · Lehigh Valley, PA · Member since 2013 · 27 posts · 7 votes
    5y

    @Joe Fauntleroy great job on the acquisition! I’ve been a commercial owner for a while (retail, restaurants, warehouses). A few important points I’ve learned over the years are as follow:

    1. Hire a great real estate attorney to help you draft a strong lease, highlighting insurance requirements and other important points depending on who you are leasing to( restaurant, retail etc).

    2. Hire a great insurance broker to assist you through the insurance process as you get the building ready for a tenant, a experience insurance agent will give you clear options as the building goes through the transformation in the process of getting a CO.

    3. In commercial deals is normal for rent commencement as soon as CO is obtained or when they first opened the door for business in the case of a restaurant. But this can be negotiated when first drafting the lease prior to signing, you can get quite creative...

    Much success on your commercial journey...

    1Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    5y

    @Account Closed

    No matter what was missed, great job.   What's the saying, its better to have tried and failed, than not try at all.  Start developing a checklist for future projects, unless this was a one off.

    As noted above, you want a copy of their policy with your ownership name as an Additional Insured.  You need this updated annually.

    You have two insurance periods to be concerned with:

    a.  Construction-  They should/will have a policy covering them during construction, even before occupancy.  Have them add you to that policy.  If they can't get it to you, or its a problem, at a minimum go to your Personal insurance company and tell them the situation and get a "Liability" only policy.  This should be very cheap ($200) for 6 months or less.  You will be exposed for Property, because I doubt your local personal insurance company will do a policy, or if they do it will be extremely expensive.  When we first started, we went with our local insurance company.  Switched to a Self Storage specific carrier and the premium was half.

    b.  Ongoing- as part of your contract require annual updated copies with you as additional insured.  Tell them the dollar coverage you require and the deductibles.

    COO- you might have put a deadline, after that rent kicks in or a termination clause.  Is the build out going to be 1 month or a year?   

    Additions-  Also part of the contract should state what additions, fixtures, etc. stay after they leave.  You don't want a hole in your roof or wall if they take out a 3 year old HVAC system; grills, drive up fixtures, tear up the floors taking out fixed tables, etc.

    Contract period/renewal/rate escalation-   another component for you to check or ask about.

    Triple NNN- being new, you might make sure you understand this concept and understand what is or isn't covered. Property tax, new roof, new parking lot, HVAC, landscaping, etc. Make sure you understand what NNN is and isn't per your lease, so you are budgeting for it. Your biggest worry is if the tenant does not do maintenance prior to the end of their lease.

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