How involved are you in an NNN lease?

Question

If you have a NNN lease, in which the tenant is responsible for all building and grounds maintenance, how do you ensure maintenance gets done? If the roof has reached the end of it's life, for example, do you ask the tenant to replace it, or do you let them make that call? How would you coordinate this with the tenant?

Nyron Isaac · Answer

In a NNN lease, your role is that of an asset manager, not a property manager. You are responsible for enforcement, while the tenant handles execution.

To ensure maintenance gets done, your lease agreement must mandate Annual Independent Inspections and require the tenant to submit proof of active preventative maintenance contracts (especially for HVAC systems) every quarter.

Regarding the roof: You never let the tenant make the final call on a major structural asset. If you have a standard NNN lease, the roof structure usually falls on the landlord to replace. If you have an Absolute NNN lease, the tenant pays for it, but the cost is typically amortized over the roof's useful life. If a tenant defaults on deferred maintenance, you issue a formal Notice to Cure. If they fail to fix it within 30 days, your lease should allow you to hire your own contractors, do the work, and legally bill the tenant directly as 'Additional Rent.' To protect your asset's value, look into financing these corporate-backed deals via Commercial Non-QM Platforms under an LLC; they underwrite the credit rating of your tenant rather than your personal DTI, making the capital stack highly scalable

Joel Owens · Answer

You talking freestanding building with 1 tenant or multi-tenant retail center?

With absolute NNN lease you do nothing with the property the tenant does it. If you have a loan with a lender you might update your personal financials to them as the real estate owner once per year so 1 hour or 2 time. Occasionally you might forward a property tax bill.

For maintenance if you are concerned they maintain the building even with absolute NNN lease it depends on the tenant.

You have

1. Investment grade credit tenant national brand

2. Private national brand

3. Subsidiary of the ones above where might have 500 stores guaranteeing the lease across multiple states instead of the 7,000 in the brand

4. Large franchisee

5. Small franchisee

6. mom and pop not associated with a brand

Often it's not that tenants are willfully negligent. It's that they might have maintenance inspector one or a couple working for them full time to visit the stores and with thousands of them they might get around to them every few years. So unless some employee at store is telling them gutter hanging off side or small leak in ceiling etc. nobody knows.

You as property owner can pay for your own inspection report periodically and the findings of that you can send to the lease admin for the business and they create a ticket for the work to be performed and then seen back proof it has been completed. It's good to ask that person doing repairs take pictures that way tenant can send you pics of work that was done compared to saying they just fixed it. It keeps tenant typically from doing cheap repairs not done right to the building also.

If you are buying the property we have engineer report typically 1,500 to 2,000 that goes over building and system with life expectancy while under due diligence in purchase and sale agreement. Are you trying to buy a property or just learning?

Ronald Rohde · Answer

If Tenant is responsible for roof replacement that is different than maintenance.

You should have a real estate department contact. I'd just send notice of observed violations and when does tenant expect to remedy.

Evan Polaski · Answer

@Catherine Clare, as noted, a full roof replacement is a capital item, not a maintenance item.  In my limited experiences, which sort of straddle your situation (I have worked with multitenant NNN leases and STNL that are ground leases more often than not), you as landlord are responsible for the primary structure, as it pertains to actual capital items.

Depending on the lease language, you may be able to replace and bill back the amortized annual cost of the roof to the tenant, but in my personal experiences, being able to do this per a lease is the exception, not the rule.

John M. · Answer

You can't force him to replace the roof right before the end of the lease.  If it's a true absolute NNN lease then you have no say as it's not your building.  I.E. you only own the dirt.  You could negotiate a monthly reserve fee to help pay for the roof over time when you are negotiating the new absolute NNN Lease.

A lot of leases are vague when it comes to HVAC, Roofing, and pavement but they need to be addressed in detail as these are huge capital investments.

As far as the tree goes, give them a deadline to do it themselves before hiring someone.

Ronald Rohde · Answer

I would bother them about the tree if its a lease duty. The roof is harder, but I'd just plan on them not renewing and you pay the bill.

Michael K Gallagher · Answer

@Catherine Clare it depends on what is in the lease.  that will generally tell you who is responsible and what recourse you can take if the TT is not cleaning up or managing the property properly.  I'd start there, but generally in true NNN capacity yes they are responsible and you could remedy the issue and bill them back for the work is generally what is in leases.

Catherine Clare · Answer

Thanks for the replies. This is a freestanding 1 tenant absolute NNN leased to a mom and pop in a small town.  This is my only property and I'm new to this.

Recently I noticed a tree in the drainage ditch behind the building had fallen. I offered to have it removed and bill the tenant but he said he'd take care of it. That was about a month ago and the tree is still there. Do I bother him again or let it be?

This made me think long term - the corrugated metal roof is original from 2007 and could need to be replaced in 2037 assuming a 30 year life, which would be just before the end of the lease if he renews all options. Would I tell him he needs to replace it in a certain year? Just let him make the call?  How would I go about handling this?

How involved are you in an NNN lease?

Most Popular Reply