Unscrambling Property Interests

Properties involving Triple Net Leases (NNN) are among the most popular investments for both institutional and individual investors.[1]  Under a NNN lease all property expenses are paid  by the tenant, not by the landlord.  However, many leases that are advertised as NNN contain certain “carve outs,” or exceptions. The most common exceptions are the roof, structural walls (but not demising walls), and foundation. These selected expenses remain the responsibility of the landlord. At times, a property may be offered as a NN lease, indicating that one of the three expenses is to be paid by the landlord. Only a careful reading of the lease will reveal which category of expense will be the landlord’s responsibility. Continue reading

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Valuing a STNL Leasehold

Single tenant, net-leased properties (STNL) have become very popular with many commercial real estate investors. These are properties frequently featuring both well-established retail and specialty tenants such as Walgreens, Rite Aid, Home Depot, Dollar General, Sonic Restaurants, and banks, tenants whose branded improvements are located on land under a long-term ground lease, usually 20-50 years.

These properties are usually marketed with heavy emphasis on the financial strength of the tenant, and on the fact that the NNN lease relieves the owner of the improvement of almost all management responsibilities.  As such, they are presented as near-ideal, low-risk investments, especially for investors who have grown weary of management chores. Continue reading

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Einstein Died

Einstein died and was immediately wafted to Heaven where St. Peter welcomed him warmly. “Alas,” said St. Peter, “your suite is not quite ready.  So may we invite you to relax in the ante-room for just a bit ? …
But to help you pass the time, we have a young lady here with an IQ of 170 who can discuss with you your Theory of Relativity.” “But if that’s not satisfactory,” said St. Pete, “we can send out a young fellow with an IQ of 180 who can discuss with you your Unified Theory. And if that’s still not adequate, we have someone with an IQ of 75 who can discuss with you the future of interest rates.”
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The matter of interest rates is of great interest to most investors, but it is of very special interest to the Federal Reserve bank whose primary charge is to manage inflation and support full employment. The Fed has a number of tools to accomplish this, but perhaps the most important is the control of interest rates. Continue reading

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Valuing the Leased-fee Interest under a Ground Lease

When a property is leased employing a ground lease, two separate interests are created: the first is the leasehold interest, held by the tenant; the second is the leased-fee interest, held by the landowner/lessor. What is unique about properties subject to a ground lease is that the lease conveys to the first tenant not only the right to use and possess the property but also the right to develop it, subject to the terms of the ground lease.
Once the property is improved, the leasehold interest may be transferred to a new owner who acquires title to the improvements. The leased-fee owner may also transfer title to a successor-in -interest, but the title transfers subject-to the ground lease.

At expiry, virtually all  modern ground leases provide that the improvements on the land revert to ownership by the landowner/lessor. During the term of the ground lease the landowner is said to hold an estate in reversion, which is the leasehold interest which awaits him/her at expiry. Continue reading

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Are Leasehold Interests Exchangeable?

A real estate investor who is contemplating an exchange of a fee-simple property into a leasehold interest (ground lease) property needs to be careful that the new  or remaining term of the ground lease, together with available options to extend the lease, totals at least 30 years. Continue reading

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Pensions at risk by record unfunded liabilities

The United States is beset with many severe financial problems, not the least of which are the looming collapse of the Social Security System, an expanding public debt of $20+ Trillion and the impending collapse of Medicaid and the Affordable Care Act (Obamacare). But perhaps the greater threat to the financial health of the individual American is the enormous unfunded liabilities that continue to be accrued not only by the federal government but also by states, cities and municipalities of varying sizes which are contractually committed to funding the retiree’s pension payments.

In 2013 Moody’s estimated that the shortage of  funds available for federal pensions, civilian, and military employee benefits amounted to $3.5 Trillion. The Director of the Congressional Budget Office, Keith Hall, recently estimated that the state public pension plans are now unfunded by $4.7 Trillion. Total unfunded liabilities now exceed $9.2 Trillion.

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