ATTENTION, Commercial Real Estate Investors!

ATTENTION, Commercial Real Estate Investors! 

Beware of the fine lines embedded in the existing tenant leases tied to the property you are about to buy!

Scenario: 

John Doe purchased a 4-tenant strip mall property located at a busy corner in a commercial district.  He paid $3 million for it.  At the time of sale, the land and improvement value were assessed at $1.2 million, with property tax amount of $13,440 (1.12% of assessed value).  He was told that the property was a full NNN property and that all operating expenses (property taxes, insurance and common area expenses) would be reimbursed by the existing tenants.  What he was not told was the fact that one of the tenants occupying the largest space (35% of total sq. ft.), with 6 years remaining in the lease term, had a lease clause that excluded reimbursement for the property tax increase triggered by an ownership change and/or property sale.  Due to this oversight, John Doe will:

• Not be reimbursed for 35% of the property tax increase amount on the $1.8 million increase in assessed value for the remainder of the tenant lease term; and  

• Lose out approximately $42,336 (35% of estimated 1.12% tax amount on $1,8 million for 6 years) total in six years, until he can re-negotiate at lease extension time or finds a new tenant with a full NNN lease.

The devil lies in the details, so be sure to thoroughly review the lease language for all subtleties that are buried. If you don’t feel qualified, get help from a source that has the needed experience to uncover these hidden "land mines."

If you need help or advice concerning these topics, don’t hesitate to contact Pacific Coast Commercial - if your need is Property Management / Accounting related ask for Robert Phillips; if your need is Brokerage related ask for Vince Provenzano. 
Contact (619) 369-4600 for all Inquiries

This article was authored by Jin Kwak – Pacific Coast Commercial Recovery Analyst.

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