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Is the World of Triple Net Single Tenant Leased Investments an Aberration or a Brave New World?

Plain Speaking
By: James Hochman

There is no doubt that with the combination of lower interest rates and short supply of investment grade triple net leased properties, we are in a hot seller’s market. I recently had the opportunity to represent a successful seller of multiple single-family residential properties. He was, through the Internal Revenue Code Section 1031 portal, transitioning into single tenant triple net leased commercial properties. Each one of my client’s new acquisitions was significant—i.e., seven figures or more—and I approached each transaction with a high level of care, an eye for thorough due diligence, and an expectation of receiving detailed and complete due diligence materials.

I was surprised to learn, in each deal, that we must, indeed, be in a brave new world. Here is what I encountered in each deal.

1. “Cut to the chase, man, do you want to buy this property or not?”

Listing brokers who are younger than many of my ties, most of my dress shoes, and a few of my favorite suits had little patience for a careful negotiation or a detailed letter of intent. These brokers and their sellers were interested in price, time of closing, and of course earnest money. They had little patience for inquiries beyond a bare bones offering memorandum.

2. “License, I don’t need no stinking license!”

Rarely was the listing broker located in the same state as the subject property. There was no reference in the marketing materials to a local licensee, unless I asked, in order to protect my client’s—i.e., the buyer’s—broker. I was told “I gotta guy” and occasionally the name of a local broker was disclosed, but only if I asked. One calming thought though: “These are future license law violation defendants, perhaps future clients.”

3. “Due diligence, ok here’s the lease.”

I always ask for silly extras, like the seller’s old title policy, copies of encumbrance documents, a recent survey, and the seller’s environmental reports to name just a few. In some cases, when I read an older Phase I, it was the original builder’s geotechnical study. Surveys I received were often so old as to predate construction of the leased building. Did our seller (one or two generations after the original builder) even commission a Phase I or a survey? As for title—well, I am learning of the existence of many smaller title companies I had not even encountered before. I guess those sellers have found a lower cost provider.

4. “Relax, it’s all about the lease, just check out the cap rate and the national ‘brand’ of the tenant.”

Yes, no doubt that lease is a key asset, but show me the tenant’s financials or the financials of the tenant’s guarantor. Call me old fashioned, but I still care about these things, along with the length of the fixed term after closing, since extension options aren’t always exercised.

5. “Options, you ask? Sorry did we mention that the tenant has an option to terminate the lease early?”

6. “Don’t worry, this lease was drafted by a real professional.”

And indeed, that lease was often drafted by a real professional—i.e., the tenant’s attorney. Welcome to the new world of tenant’s rights, including complete freedom to assign or sublease, no security deposit, no periodic tax payments before tax bills issued, etc.

7. “Estoppel letter, ok yeah, here is the tenant’s form of Estoppel. That’s all we can get you.”

Due diligence 101 includes estoppel letters that are complete, thorough, and attached to a verified copy of the lease. But don’t count on it. You can ask, but the lease only binds the tenant to a very short and basic estoppel letter.

Yes, I guess this triple net single tenant asset world has its own rules, or lack of rules. All we can do is identify risks and issues for our clients. But with that 1031 clock ticking, there are buyers who would rather roll the dice than pay the capital gains tax; and when the tax tail wags the dog, well, Katie bar the door.

Don’t get me wrong, I can make these deals, but I will still represent buyers in a patient and thorough manner. Even if you, dear readers, are younger than my shoes and suits, well, you should be careful, too!


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James Hochman
James Hochman
Schain Banks Kenny & Schwartz

Jim Hochman is a partner at Schain Banks Kenny & Schwartz law firm and freelance writer. Contact him at jhochman@scheinbanks.com.