Canadian Real Estate Wealth’s November/December mega-issue is on the way. In addition to our cover feature, 75 Cash Flow Plays for 2020, we will, as usual, be sharing the strategies of successful investors like you.
One article we’re particularly excited about is Kirill Perelyguine’s piece on triple-net leases. In it, Perelyguine writes:
Commercial leases offer a number of benefits for the investor-owner. First, the type of commercial lease agreement that the tenant signs - Triple Net - means that the tenant is responsible for their proportionate amount of the property tax, maintenance and insurance, sometimes even the major structural repairs to the property. In the case of a single-tenant property, the tenant usually pays for all of the associated costs, leaving the landlord with the “clean” net amount of rent, which makes it much easier to calculate cash flow and make long-term financial projections.
CREW readers can look forward to reading Perelyguine’s expert take on the many pros and handful of cons that commercial investors run into when working with triple-net clients when the next issue hits newsstands in October.
Our impatience getting the best of us, we asked Perelyguine, who is both an investor and a broker at Royal LePage Real Estate Services Ltd, about some of the downside risks involved with renting commercial space to big-name tenants and why triple-net leases aren’t more celebrated by commercial investors
Most investors opt for higher rates on shorter terms, so the longer length of a typical triple-net lease can be a turn-off. But the shorter the term, the more a landlord will need to be involved. Triple-net leases, on the other hand, largely take care of themselves.
The stakes, however, are much higher should anything go awry.
“There’s still limited upside. You’re getting this property, but you can’t add much value besides what you already have there,” Perelyguine says. “You cannot do a development proposal and create a condominium development there, so your possibilities are limited. You’re also running the risk of a complete vacancy.”
To that end, Perelyguine names Sears, Zellers and Target as ostensibly too-large-to-fail companies that have since gone under.
“If you have a tenant like that in your 50,000 square foot property on a long lease, you’re thinking it’s a win-win situation, but what if, all of a sudden, things change? You can’t go after that company because it’s bankrupt, so you’re stuck with a big-box property you don’t know what to do with,” he says.
“The carrying costs really hurt at that point because the property tax and everything else will be on your shoulders. So you have to come up with a solution, which will probably be painful.”
But given the right tenancy, not to mention a host of other factors, triple-net leases are unlikely to fail, even over the course of decades.
To ensure you get the full picture of working with triple-net clients, subscribe today to Canadian Real Estate Wealth, Canada’s only newsstand magazine dedicated to making you more money in real estate.
Or keep an eye on some of our favorite triple-net clients – Walmart, Shoppers Drug Mart and Indigo – where CREW is sold.
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