All Forum Posts by: Will Kenner

@Greg Rementer Hey Greg, that's great you're entering the commercial NNN rental world! Coming from residential leases, NNN leases are so much more advantageous because they protect you from increased operations costs and maintain a steady net rental income. Sounds like you have the basics down with what the tenant will be responsible for covering.

For utilities, you have two options: 

1. Put them in your name, pay them directly, then charge the tenant back through the NNN charges.

2.The easier approach is to have the tenants put the utilities (water, sewer, garbage, electricity) in their name. That way they manage all those bills, and it's less for your to keep track of and bill the tenant for later on. If you have multiple tenants and only one meter for a particular utility, this won't work, and you'll want to manage that utility as in option 1. This goes for garbage too if you have multiple tenants using common dumpsters. But you could have each tenant get their own dumpster. 

Other expenses (insurance, property taxes, maintenance) will then be charged in the NNN portion of their rent. Since these expenses are for the most part known for the year, estimate out what they will cost for the year, then determine the cost on a monthly basis and charge the NNN accordingly. If a tenant moves in mid-year or between property tax payments, then you will have to calculate the pro-rated amount for these expenses.

At the end of the year when you reconcile your expenses, you'll have a few possible scenarios:

1. If your expenses exceed what you collected in NNN, then you bill the tenant for the difference in one lump sum at the end of the year. You will then set next year's NNN charges based on those expenses. Of course if you know what your new property taxes will be, or insurance premium increase, then factor those in as well.

2. A second option is to take that deficiency, if it's small, and amortize that over the next year's NNN payments. The tenant would then pay the adjusted NNN as calculated in #1, along with the monthly portion of the deficiency from the prior year.

3. If expenses are less than what was estimated and the tenant over paid, then this balance can be amortized over the next 12 months and you would reduce the NNN charges for the next year accordingly, still determining the next year's NNN as in #1.

Either way, you will need to keep meticulous records of all expenses, pro-rated amounts, etc. Not only will this ensure you are collecting everything you can for expenses, but you will be able to show the tenants the exact expenses and what they paid should they request them. Often in commercial leases there is a provision that states the landlord will provide a cost breakdown and explanation of NNN charges to the tenants at the end of the year.

Certainly there is more bookkeeping and tracking involved but again, you get the added benefit of not having to incur fluctuations in expenses like you do with residential leases, and your net rental income is consistent. 

Hope this broad overview is helpful. There are a few other items to consider (base-year provisions, tenancy pro-rations) but the above covers the basics that will get you going. Certainly if this sparks other questions let me know!

@Diorca Gonzalez, @Brent Coombs has a great point. Perhaps starting with a house hack would be an option as well. If you currently have a primary residence and have the flexibility to rent part of it out, then that would be an easy first step to the rental world. If you don't have one then you could consider buying one, benefit from a low downpayment FHA loan, house hack it to cover part of your mortgage while you get experience managing a rental, then jump to the next house with another low downpayment FHA loan and convert the first property to a full rental.

@Jonathan Leake That makes sense, I see where you're coming from that at lease renewal both the rent increase and added insurance expense would be a significant for your tenants (assuming you're renewing those leases with existing tenants.) At the same time it would be advantageous to get your leases configured so they are best for protecting your properties. It may cause a slight interruption in the short term, but in the long term you'd have your leasing protocols optimized and in your best interest. I would do a little research and find out if other rentals in your area also require renter's insurance and most importantly talk with your insurance company that holds your master policy on the property. The rules and conventions may vary from state to state, so I can only speak to what is typically done where I operate properties - Washington state. If other rental properties in your area require renter's insurance, and your rents are at market rate, then there would be little reason for your tenants to go through the headache of moving just to save a few dollars and still have to get insurance. As for tracking policies and their expiration, I easily manage this both with Stessa (to track transactions and expenses, and it's free) and Avail (paid subscription for online rent payments and leasing). If you only have a few units under management, either of these options would be a great option for you to use. 

@Lev D. Congrats on the BRRRR. Yes, typically rates are higher for loans on investment and commercial properties as compared to loans on a primary residence. (In my experience typically ~1% higher) I would still shop around a few banks, definitely check with local credit unions as they can be much more flexible than the big banks, or work with a mortgage broker to make sure you get the right product for what you are trying to do. Sometimes it's not always about the lowest rate that makes for the best loan product. Hope this helps!

@Diorca Gonzalez I'd recommend going to a real estate meet up in your area and making connections with other investors that you could partner with for your first deal. That way, you can make your first move into real estate without needing funds for an entire down payment and reserves, and you'll get the benefit of having someone experienced managing the deal who you can learn from for your next deal. As for property type, both STRs and LTRs are great, just be sure you are ready for "a job" if you go the STR route. STRs will be very much hands-on, require tighter systems and processes, and thus require a lot of your attention. An LTR will also require systems, processes, and attention, but with longer periods between turn-overs, this can be much more manageable for your first property. Hope this helps and good luck!

@Paul Nieberding Nice work scaling up! In my experience I've typically secured a property under contract in my name, with the addition of "and or assigns". This way, I don't have to worry about setting up the LLC until after I've done my due diligence and I'm sure I want to buy. At that point, it's an easy call to my real estate attorney to draft up an operating agreement and articles of formation, as well as register with the secretary of state. This is all fairly boiler plate documentation and costs only a few hundred dollars - small price to pay to get it right the first time. Then once the LLC is officially recorded with the state you can assign the contract to your LLC and complete the transaction. Regarding an umbrella policy, you'll want that regardless of whether your properties are in an LLC or not. As you are accumulating more assets, you'll want to have that umbrella coverage to protect your hard earned investments. It's another layer of protection in the event a judge decides they can "pierce the veil" of the LLC and go after your personal assets.

@Jonathan Leake I'm no legal or insurance expert, and of course rental laws can vary widely from state to state, so I can only share what our protocol is. We require all our tenants (both residential and commercial) to have renter's insurance and list the LLC that holds the property as a named insured. As you alluded to, what is written in a lease and what is enforceable and defendable is often up for interpretation once in front of an attorney. Therefore requiring your tenant's to have renter's insurance gives you another layer of protection, and another avenue pursue in the event the tenants causes damage or negligence.

Is there any particular reason you are hesitant to require renter's insurance, (concern it would reduce the number of applicants, unsure of coverage amounts.....)  or you're simply wanting to avoid redundancy between the protections in lease wording and insurance? 

Investment Info:

Retail commercial investment investment.

Purchase price: $1,740,000
Cash invested: $452,000

Buy-and-hold investment purchase of two fully leased 4000sf commercial buildings located within a commercial development, situated along the major highway leading into town with high visibility and ample parking. Built in 2004, the buildings offer timeless architectural design with all the modern amenities and construction.

What made you interested in investing in this type of deal?

After dealing with eviction moratoriums and unfavorable landlord-tenant laws, our focus was redirected to expanding our commercial property holdings. This particular property provided a relatively higher cap-rate, competitive price/sf, is well maintained and newer construction, has full tenancy with NNN leases, and is situated in a rapidly growing area. The interior configuration of the buildings allow for flexible reconfiguration to accommodate a variety of tenant uses.

How did you find this deal and how did you negotiate it?

Negotiations of the final purchase were based on comparable price/sf and cap rate for the area, as well as anticipated deferred maintenance that was estimated during the initial property visit. After completing the due-diligence, no additional repairs or deferred maintenance was found that warranted renegotiation of the purchase price.

How did you finance this deal?

The initial offer included a partial seller-financing option, providing tax-favorable interest income for the seller. Due to seller's financial needs however, a full cash-out offer was ultimately agreed upon, and a conventional commercial loan with a 10 year term amortized over 25 years with 27% down was secured. Funds to close were provided by the equity partners in the deal and from cash accumulated from the operation of other rental properties held in the portfolio.

How did you add value to the deal?

The property is currently developed to its highest and best use with minimal value-add opportunities as the property has been well maintained and operated efficiently. Upon tenant turn-over, there is the opportunity to further divide the rentable spaces to accommodate up to a total of 8 retail tenants, increasing tenant diversification.

What was the outcome?

The deal was closed on January 11th and rental operations have been seamlessly transferred.

Lessons learned? Challenges?

Financing was initially secured with a local bank which, during underwriting, changed from a 30% to a 40% down payment requirement. With minimal time of the financing contingency, financing was transferred to a credit union that funded two prior deals. They were able to pick up where the prior bank left off, and expedite their underwriting since all inspections and appraisals were complete, and funds were already in escrow. Lessons learned - have a back up and make business relationships.

@Jordan Berry Thanks for your input, I was thinking the same thing!

I'm currently negotiating a PSA for a multi-tenant commercial property and one of the tenants is a coin-op laundromat business. The lease is full NNN, so utilities and maintenance/repairs within the suite are on the tenant. Therefore water/energy efficiency is of the tenant's concern and not mine, in addition to the condition of fixtures within the suite. The building was constructed in the early 2000's so the electrical service, water mains, and sewer lines are all relatively new. During the feasibility period I'm planning on conducting the usual due-diligence with a thorough inspection of all the property's systems and structures (utility services, roof, HVAC, maintenance history, lot survey, tenant interviews) along with a Phase 1 ESA. I'm curious what else should be considered/evaluated during the due-diligence that would be specific to having a laundromat tenant. Dry-cleaners of course can pose a significant contamination issue with a property, but would a regular self-serve laundromat have similar contamination potential? So far on the financing side I've had differing opinions from two banks. One bank says they will classify the property as Special Purpose and require a Phase 2 ESA at a minimum because of the laundromat tenant, even though they only account for about 20-25% of the leased space. The other bank says they will classify it as fully Commercial (which is more ideal) since the laundromat is less than 50% of leased space.