Tell me about triple net leases....and toilets.
 

Wife and I are looking at a space for a cafe.

$39 sq/ft 940 sq/ft, $5.75 triple net.

Never had a triple net lease. Building in general looks to be reasonably well cared for, local owners, mom and pop operation. The back half of the building is an auto repair shop.

What kind of exposure am I looking at with a triple net lease? Is there any sort of cap on increases in cost? Am I liable if the place needs a new roof, furnace, etc? If I find out the auto repair shop has caused some horrible environmental problem, are we responsible?

The other issue is bathrooms. It needs them. Big time, current bathroom is basically third world. Owners are willing to 'participate' in improving them. How should that be divided up?

If any of you commercial RE gurus could give me advice, it would be much appreciated.

On top of everything else, you are pro-rata responsible for the building's common area maintenance (CAM) and property taxes.

I don't know much about triple-net leases, but toilets are used to put stuff from your body that you don't want anymore.

HD,

Do you have experience in the cafe/restaurant world. The margins are brutal.

I was in the dance band on restaurant Titanics in college and would be happy to share some of the common mistakes I saw.

I also worked at some very successful ones as well.

NNN Leases
 

Triple net leases require that you pay your prorata share of property taxes; the building's insurance cost; and maintenance (be it common area maintenance or a new rooff). All leases are negotiable, but usually you would have to pay your share of a new roof...So you better make sure it is in good condition prior to executing any lease. As well, know what your share of property taxes and insurance will cost you before hand.

Again, this is all negotiable, but generally bathrooms are considered tenant improvements, and as such, your expense to build one or rehab one.

Be aware that new restaurants are generally charged incredibly high fees by the governing municipality prior to issuing permits, so look into the cost of fees and permits prior to signing any lease. Additionally, restaurant fixtures can be very expensive, as well, so go in with your eyes open.

I don't understand your $39/sq.ft, $5.75 nnn statement...They don't jibe. But increases in rent is something you negotiate but generally the rent will increase by the CPI (the Consumer Price Index).

In this environment you should have the ability to negotiate fairly favorable terms. The next hard hit area of real estate will be the commercial sector, and as such, find out how your neighbors are doing and whether or not they are paying their rents...Because if they are having difficulty, your traffic may be negatively affected.

Good luck,,

Exactly !

$39.00 Per Sqft Per Year ?
is $3.25 Per Sqft Per Month

The Cams / NNN charges will be an addition to that.
At those rates I would ask the landlord to bring the restrooms up to municipal standards (thier cost).

I hope you have high traffic flows at those lease rates. Rates everyware have taken big hits in the last 18 Months. Take your time.

If you have any assets, or are otherwise really adverse to possibly filing a personal bankruptcy in the future, think twice, then think twice again, about you or your wife signing a personal guaranty of the lease, esp. if the lease has many years on it.

You are a bold man. There are many things I will do in this world to make a buck but having a cafe or bar is not one of them. The time and energy it takes is beyond imagination and the chances of actually making it are as slim as a gnats pubic hair.

The only places that might have a chance at making it are strip joints or donut shops - either way you will be friends real quick with John Law...

$39 a year per sq foot.

So yes, it would come out to about $3000 a month just for rent. Steep, no doubt.

A donut shop with strippers!!!!! Why didn't I think of that?

Sounds like pretty prime space for that rent in Seattle. Hope it is! There seems to be a fair amount of space in a lot of the north Seattle neighborhoods I'm familiar with, particularly Ballard, and Greenwood.

I've got a commercial building in the middle of Fremont, and that appears to be about the rate that Suzy Burke or Mike Peck are charging for their spaces. I'm "about" the same for my retail storefronts depending on which space, some higher, some a little lower. Note that there's a couple of open locations in Fremont as well.

Your tenant improvements are going to be pretty big $$ if there isn't anything in the space right now.

You can contact me directly if you feel like it.

Eric
elinden@earthlink.net

You can call it "The Hole-y Place"

Must be regional. In Washington State $39 a foot is steep from what I'm hearing. In Washington D.C. $39 a foot gets you something you wouldn't be able to use. Although realtors sure do take nice pictures and then when you show up you notice that the 6 foot ceilings are there! I guess its hard to compare Washington State and Washington D.C. but in all reality a good retail spot in D.C. is about $55 a foot in a good place, higher for a better place, and I know of stores in georgetown happily paying $110 a month and making money in this economy.

Its all relative and I just took a huge off-topic off-topic tangent. Best of luck, I would prefer to serve alcohol over food. Think about that.

I have worked in, managed multiple locations, and owned restaurants. A large portion of my life has been around the restaurant/hospitality industry. I currently work in the food supply business and consult with existing and new restaurants on a daily basis.

Triple net is not uncommon but I would try for a two year exemption if you sign a five year lease. Leave your self an out on the lease if the business doesn't make it...perhaps a 6-9 month buy out to allow the landlord time to get a new tenant. I assume you will also be responsible for the build out and kitchen s/u. This can get real expensive quickly.
The lease seems high but I don't know your area. Rent needs to be less than 7-9% of gross sales. Remember that you probably have the upper hand when negotiating the lease..not many new businesses opening right now and many landlords are having to renegotiate existing leases to keep tenants.

Based on 1000 sq', your sales need to be no less than $300k a year to make it; or roughly $1,200.00 per day. Be realistic on how many sandwiches and coffees you can sell and see if it makes sense. If the average check is $6.00 you need 200 people a day, 51 weeks a year, 5 days a week.

I love the business and it can be a great way of life if it is a good fit for your personality.

good luck,
Ben

triplenet fees
 

wow.... dont even want to hear that term.......

its brutal..... the triple net fees are killing us!

my girl and i battle with the property management CONSTANTLY over the triple net fees.......

pros:

nice area
building is nice
everything is manicured

cons:

RANDOM and i mean random "upgrades" or "preventative measures" taken by property management at their complete and utter discretion on property. i dont mean a potted plant in the corner.... i mean complete re-paving of a perfectly good PARKING LOT......

repainting of the entire shopping center with no need.

new awnings to the entire shopping center.

then a triplenet bill for 5K and NO i repeat.... NO itemization for the costs incurred, simply a added 5K to the rent statement.

THEN a refusal to provided itemization for the 5K.

i can go on and on...... but i need to keep my temper in check.

triple net lease you say?....... do your research.

i have NNN. i pay property taxes, and that's about all. they insure the building, i insure the business. my insurance covers the front windows. they repaired the roof, installed a new gas heater and put in a metal roll up door. it's all about how the lease is set up.

Those 2 sentences are contradictory.

I'm no expert but I'll add a few things.

Leases will generally start out with a "standard" form. It can be modified. For example, our space has a custom cap on the out of pockets we would incur for HVAC maintenance or replacement, above that it's the landlord's cost.

My understanding is you're generally responsible as the tenant for the interior items and "systems" meaning HVAC, Plumbing, etc. and the landlord the exterior including the roof.

You can specify or negotiate your requirements as far as bathroom tenant improvements (TI's). You might be better off managing any renovations and having them contribute to the cost. TI allowance is the term.

Do you have an agent working with you? I don't want to start another real estate agents are scum debate but a good commercial agent should be involved if you're new at this working on your behalf and not the lessors.

I spent high school and college working in the food services biz and it's why I'm a generous tipper but I'd never go back. Good luck;)

Harddrive,

I am an owner and manager of commercial properties here in Seattle and in Kirkland. As Eric points out, that rate is pretty high for Seattle for all but prime retail locations. The tripple net costs you list is actually pretty good if it is all inclusive. I would suggest you be sure it includes everything though. The NNN costs you quote is low enough I wonder if ther utilities are metered seperately and not included in that number. You want to be sure of that.

As for cost exposure, be aware that all Seattle utilties are scheduled for MAJOR increases in the next two years. I'm talking increases ranging from 28% hike for power to a 48% hike for garbage.

I'd be happy to discuss this directly with you if you want additional advice. Drop me a PM or email with your number and I'll give you a call if you want to talk about this.

Brooke

Very True!

The lease can be set up anyway that both parties agree.

We have commercial properties that we lease with a gross lease ( Landlord Pays Taxes, insurance & maintenance. One all inclusive number (We pad the projected numbers so we can cover taxes, insurance & maintenance) Tenant ends up paying more. We also have NNN Leases the tenant only pays a proportioned share of what the use. They end up paying less.

The sophisticated tenant will not have a problem with NNN leases.

Just make sure that you know what the numbers are. Make sure it is crystal clear to both parties. A good real estate attorney is cheap insurance.

Never under estimate the binding effects of a R/E lease. We have been able to collect judgments on tenants that left early or went out of business. I would prefer to own R/E than lease it. If things get shaky you can always sell.

If you are a tenant and things get shaky. You are at the mercy or the landlord.