It may seem odd, but deciding when to sell a Triple Net Lease property starts even before you finalize the purchase. It’s called an exit strategy, and it’s the best way to maximize profits and ensure you reach your investment goals.
However, even the best laid plans go awry, and circumstance may arise that force you to consider selling an investment property.
Here are some of the most common reasons why owners decide to sell a Triple Net Lease property.
Capitalizing A Favorable Profit In A Triple Net Lease Deal
Selling in order to reap substantial profits is one reason why some investors decide to sell.
Whether it’s because of an unexpected offer, favorable market conditions, a recent change in zoning laws, or increased financing options, there are plenty of good reasons to cash in on a good deal if your main investment goal is to make a certain percentage profit.
1. Loans Coming Due
Unlike residential loans which are usually spread out evenly over a 20-30 year period, comercial loans vary in terms of the length of the repayment period.
There are three types of commercial loans in a Triple Net Lease: Balloon loans; intermediate term loans, and long-term loans.
Intermediate loans are due for repayment within three years, and are paid back through monthly installments. Long-term loans last for five to 20 years, and are also paid back in monthly installments.
A balloon loan, on the other hand, come due within five years or less, and are not paid back through monthly payments. Instead, owners pay a large lump sump at the end of the loan.
When a loan comes due, the investor must decide whether or not to try and line up a new loan or source of funding, or simply sell the property.
Some investors prefer to just sell the property and get a new loan, rather than going through the tedious process of lining up new lenders, especially when you take into account pre-payment penalties.
2. Upcoming Tenant Vacancy
The prospect of a tenant vacancy decreases the value of a commercial property. So, if a major tenant has indicated that they plan to stay, then just the opposite can occur.
Because a buyer can now be confident that the main tenant will remain with the property for a set period of time, the value of the property often goes up. This allows the investor to reap high profits.
On the other hand, there is a case when the lease expires and the major tenant may not take definitive steps to renew their lease. This could result in a major loss of value to the property.
In addition to the potential loss in rental income, the difficulty of finding a replacement tenant in a reasonable amount of time. Plus tenant concessions, is often more than many investors are willing to deal with.
And although selling a commercial property that has a year or less to its lease is nigh impossible, selling the property when there are a couple of years left on the lease can be done.
3. Death of Owner
The death of a long-term owner is another not uncommon reason for the sale of a commercial property. The heirs may be unwilling to deal with managing the property, or they might prefer to cash in on the profits and re-invest the proceeds into another investment.
This is especially true for investment properties which were owned for a long time, but were neglected by the original owner. As long as the property doesn’t have a large tax liability, finding a buyer who has the time, energy, and capital to invest often makes more sense.
4.Too Much Work
Although most savvy commercial real estate Triple Net Lease investors try their best to get a full picture of a property’s potential, occasionally they underestimate the amount of work it will take to make things work out.
It could be that the property requires more renovation work than projected, is a multi-tenant with a lot of lease turnover, or the owner simply finds themselves busier with other projects than they anticipated.
Regardless, some investors decide it’s simply easier to sell the property.
5. Partners Separating
Partnering with another investor has a lot of benefits, but sometimes partners discover their goals are no longer the same. Once this happens, partners often decide to dissolve the partnership and sell off any assets, splitting the proceeds.
6. Reduce Tax Liability
The larger the property, the larger the depreciation that can be claimed. Some owners prefer to sell a property that has a lot of equity, or that has appreciated significantly, so they can cash in on a property that will reduce their tax liability.
7. Diversifying a Portfolio
Sometimes an owner ends up with an imbalance in their portfolio that puts them at risk. This could be due to the property type, the area the asset is located in, or simply because the property isn’t performing like the investor expected it to.
In any of these instances, the owner might choose to sell the property in order to reduce risk, increase diversification, and increase cash flow.
If you’re an investor considering purchasing a commercial real estate investment, an essential part of your due diligence is to find out why the owner is selling. Not all the reasons above are bad ones – it all depends on your personal investment goals and risk tolerance level.
If you want to learn more, please do not hesitate to contact Westwood by our online application form available on our website.