There are many attractive opportunities for investment in real estate, particularly triple net properties. However, there are several complexities to such investments, and an informed buyer can minimize his or her risks by being prepared. The comments below present an overview of the most common considerations that a buyer should focus on, when considering an investment in triple net properties:
Basic Documents
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Start by obtaining complete copies of all pertinent documents pertaining to the property, including all exhibits mentioned in those documents; this list may include:
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Lease or ground lease under which the tenant occupies the property;
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Short form of lease as recorded;
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Property Description (must be sure it matches property description in Purchase Agreement, and in title report);
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Site Plan;
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Environmental Survey Report;
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Environmental Questionnaire;
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Declaration of Protective Covenants (must review for possible assessment of CAM charges);
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Instruction manuals and warranties for any equipment located on the property;
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Boundary survey;
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Occupancy permit; and
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Zoning letter.
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Confirm that parcel is separately assessed and taxed; obtain current tax statement.
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Check with local authorities regarding pending special assessments or impact fees.
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Confirm tenant has not given mortgage or assignment of tenant's interest under the lease.
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Review title report to confirm seller is in title, and there are no unexpected encumbrances; promptly issue a written objection to Seller regarding any unacceptable title conditions.
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Obtain tenant's estoppel certificate, confirming that tenant acknowledges the lease is in full force and effect, that there are no modifications to the lease, and that no party is in default under the lease. This document should require tenant to make diligent investigation of matters certified by tenant, and not be stated merely as "to the best knowledge of the signer". Start the process of obtaining the estoppel certificate early, as many leases require significant advance notice to tenant, in order to obtain the certificate from tenant.
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Study the Lease to ensure it addresses all pertinent issues, especially the tenant's responsibility for certain matters which are normally tenant's obligation:
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Payment of utilities - If tenant will not sign addendum to lease, should still insist on letter from tenant, confirming tenant's duty to pay all utility bills. If any amounts remain unpaid, local government can lien the property, effectively forcing Seller to pay;
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Comply with all government regulations - There's no telling what new requirements may be imposed by the government (i.e., supplemental ADA requirements or new building code provisions), but they are nearly always enforceable by the government against the property owner, so there should be a lease addendum confirming tenant's responsibility, or at least a confirming letter from tenant;
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Payment of property taxes and assessments;
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Maintenance of all aspects of building;
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Payment of premiums for property and casualty insurance; and
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Provide proof of liability insurance.
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Check for local taxes, which could include a transfer tax based on the purchase price, a property owner "privilege tax", commercial rent tax, sales tax, state or local income tax, and personal property taxes which may be billed to property owner even though assessed based on value of business equipment owned by tenant (must confirm such taxes are separately billed).
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Find document governing property access and review for maintenance authority and maintenance obligation.
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Review whatever environmental info is available from Seller, and explore environmental contamination insurance; some leases expressly make Landlord liable to tenant for ANY contamination, now and in the future, unless Landlord can establish the contamination was due solely to the acts of Tenant or any party other than Landlord. Proving who caused contamination is often impossible, and the "default" responsible party may be Landlord.
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Arrange for professional inspection of all buildings and other improvements, and carefully review inspector's report.
A prospective Buyer is often represented by a broker who specializes in real estate investments. A competent broker is an invaluable source of additional information and advice. Of course, it is critical for the Buyer to consult with a qualified attorney experienced in real estate investment transactions before any documents are signed.