Triple Net Lease - 6 Unit Apartment Building

[Michele Harrington]

A few months back I sent a letter to an absentee property owner of a 6 unit brick building that had been run down for years. Initially I was interested in purchasing, renovating and leasing the units out - there are (3) 2 bedroom/1 bath (approx. 1000 SF ) units, (2) 1 bedroom/1 bath units (approx. 750 SF) and a office unit on the ground floor (approx. 750 SF) , these units would rent out between $950 and $1,300/month - however, the owner was not interested in selling but she did offer the option for a triple net lease. 

I understand the basic concept of a triple net lease however this doesn't seem to be a typical set-up in the area that the building is located in. Also, I am concerned about how long it would take to recoup my money as well as the risk involved. The building is a complete gut renovation and with nearly 5,000 SF of building requiring utility upgrades as well as running all new MEP's throughout the 6 units I am already pushing the $500K point.

Wanted to reach out and see if anyone has any knowledge on whether this deal is worth pursuing - at this point it seems that she is looking for someone to assume all risk and give her a brand new building with zero effort involved. 

[Neal Collins]

@Michael Le He would be the tenant in this scenario, therefore responsible for maintenance. He would then sub-lease each unit on gross leases typical of residential leases.

This is a master lease essentially. I like @Nick L.'s suggestion of a master lease with an option to purchase. Here's what I would do:

1. Get the financial records from the owner and negotiate the NNN lease so that your monthly payment is equal to the current NOI. Make sure your lease terms don't graduate and definitely have your lawyer go over it.

2. Negotiate an option to purchase at a date in the future at a value based upon today's NOI.

3. Fix up the property and systematically raise rents over the course of your NNN lease.

4. When the lease is starting to wind down go figure out how to finance the property. At this point you should have forced the value up significantly and have leverage when talking with banks to get a solid loan to value.

Good luck.