Depending on lease terms, some major capital expenses, such as structural, major electrical, or parking lot repair, can still be landlord obligations. Even in an absolute triple-net lease, imprecise language can leave loopholes or gray areas. Furthermore, tenants may resist paying for capital expenses if there is any possibility that the deficiency or damage occurred before they took occupancy. Without the necessary CRE expertise or technical resources to address these types of issues, building owners could face significant expenses, hassle, and even legal exposure.

Reducing and Managing Landlord Risk

The key to profitable and low-stress investment in NNN sale-leaseback assets is a comprehensive risk management program that supports the owner not only at acquisition but throughout the hold period and at the end of the lease term. There are four key components:

1. Pre-acquisition assessment. For existing buildings, a Property Condition Assessment (PCA) is the preferred tool for a complete picture of the condition of the building and its systems. For new construction, a construction closeout report may be sufficient. In either case, the landlord will have documentation of the state of the building before the tenant take occupancy.

2. Annual follow-up assessments. A lot can happen over a ten- or fifteen-year lease term. Annual assessments allow landlords to be certain that maintenance standards are upheld and that small problems, such as a roof leak, don’t become big problems, such as mold or structural issues resulting from water intrusion. Annual assessments help investors protect the value of their real estate assets.

3. On-call Owners Representative services. Particularly for landlords with geographically diverse portfolios, having an on-call representative to address problems that arise can prove invaluable. A qualified Owner’s Representative will know how to handle whatever issues arise and eliminate the frantic search for the right contractor or consultant when there is a problem with the building.

4. Lease Exit Condition Assessment. Near the end of the lease term, before the tenant vacates or renews, landlords should have another Property Condition Assessment to ensure that the building has been properly maintained and that any outstanding maintenance or repairs are completed or accounted for before the tenant vacates.

It is worth noting that these four components are most effective when performed by the same consultant. Consider this recent example in the case of an investor who purchased a newly constructed building from a well-known, national credit retailer on a triple-net lease. A year into the lease, the landlord received an order from the city, initiated by complaints from a neighbor, to rectify an “unsightly” rooftop HVAC. The landlord contacted his on-call Owners Representative—the same consultant who assessed the site a year prior. The consultant was able to provide documentation such as permits and approved plans that included the rooftop unit to the landlord’s attorney, who used the documentation to respond to the city and resolve the issue. Using a single consultant with a programmatic approach allowed the landlord to enjoy continuity of service—one phone call to solve the problem—and benefit from the consultant’s familiarity with the asset and access to past documentation.

Conclusion

Many national retailers, including restaurants, drug stores, specialty sellers, and retail service providers use the NNN sale-leaseback model to expand geographic presence while reducing debt and avoiding the risks of real estate ownership the risk to be successful in a sale-leaseback investment. By engaging a consultant with expertise in the business of commercial real estate as well as the engineering and construction of commercial buildings, sale-leaseback investors can protect their cash flow and capital while enjoying the hands-off ownership experience.