In last week’s blog, we discussed whether selling your triple net (NNN) lease property now is the best choice. If you’ve decided it is the right time to sell, there are four important things to do before listing your triple net lease property.
- Create a tax plan
- Audit the lease and all addendums and clauses
- Review loan terms
- Gather all due diligence documentation
1. Create a Tax Plan
Depending on the US state in which you own the property, selling a NNN investment means you may be liable for either state and federal or just federal capital gains taxes. There are also depreciation recapture and income taxes to think about. Therefore, before you list your property, plan your tax strategy, and consider executing a 1031 exchange to defer all federal capital gains taxes. Since the 1031 exchange must be closed within 180 days, planning ahead means you will have the time you need to identify a replacement property and handle all the transaction details before you hit the time limit.
Creating a tax plan is also particularly important if the property is owned by more than one owner, in which case the owners may decide to restructure the partnership before selling the property.
2. Audit the Lease and All Addendums and Clauses
When selling your NNN property, don’t forget about the tenant’s rights and the lease. If the lease states that the tenant has the first right of refusal (the tenant has the right to purchase the property before another buyer), make sure you follow the correct procedure for ensuring the sale to the tenant is carried out properly.
- Some right-of-refusal addendums are vague, stating that the tenant has a right to purchase the property before it is listed on the open market. In this case, it’s open to interpretation – the seller could sell the property “off-market.”
- Other right-of-refusal addendums can be very specific, stating, for example, the list price for the property and the terms under which it will be sold.
- Another right-of-refusal clause might give the tenant the right to match any offer presented by another buyer. This agreement could range from a formal procedure to a simple, informal communication with the tenant.
Regardless, it is in your best interest to do your due diligence on the rules of the lease and the laws in the location of the property. Make the lease and any amendments or other agreements available to the buyer. Include any letters or emails received from or sent to the tenant as well. Communicate clearly with the tenant throughout the sales process, especially if the tenant has intentions of buying the property.
3. Review Your Loan Terms
If you have a commercial mortgage or loan on the property, you will need to have a lawyer review the terms of the loan. For example, a commercial mortgage-backed security (CMBS) loan contains additional considerations for the sales process.
On the other hand, if the buyer can assume the loan, this may allow you to negotiate a higher selling price. In order for this to work, however, you will need to account for the time it will take to complete the transaction to make sure the deal will fit within the lender’s time constraints.
4. Gather All Due Diligence Documents
When selling your NNN property, especially if you’ve owned it for many years, gathering all the documents needed for due diligence takes time. You can make this step more efficient by preparing the documents before you begin the selling process. Ensure you have everything a buyer needs from you in order to get a clear picture of the property before listing the property and accepting offers.
Due diligence includes documents and confirmation of the following:
- Tenant financials and the individual store’s P&L statement.
- The full lease contract; all addendums, and clauses.
- Proving the tenant has the necessary building and liability insurance.
- Proof of taxes paid.
- Title review and easement agreements.
- A clean Phase 1 Environmental Report.
- Confirming the survey lines have not changed.
Due diligence documents also include assessments, zoning reports, copies of maintenance, environmental surveys, and more. This essential part of the sales process ensures the buyer that your NNN property is sound. If any inconsistencies or issues come up, the buyer could cancel the offer contract and move on to another property.
To Wrap It Up – A Proactive Sales Strategy Can Help Sell Your NNN Property Faster with Fewer Setbacks & Better Profitability
Selling your triple net lease property is sometimes an investment decision that needs to be made. When you follow these 4 steps, you’ll enjoy a more strategic sales process with fewer setbacks, increased predictability, and better profitability.
As you consider your selling options, Westwood Net Lease Advisors recommends working with an experienced triple net lease team to help you benefit from the full value of your investment. Our expert team is here to help you with every step of the process, including the 1031 exchange, and streamline the transaction for a comfortable, profitable experience. Contact us for a no-obligation, free conversation. 314-997-5227