The multi-family income properties on the lower rungs of the real estate ladder continue to have a tough time. Financially strapped tenants are having a hard time making a living these days and a hard time making the rent payments. Every slowdown in the economy provides fewer dollars to spend and and even those remaining dollars are shrinking in value,
Landlords and investors who bought marginal (they were marketed as "affordable") properties at the height of the last market upswing (i.e., when prices were the highest) are feeling the pinch first. With a high debt-to-equity ratio, no cash reserves (they spent all their money buying the building, right?) and a couple of shaky tenants, many are now on teetering on the edge. In these older, high maintenance properties, the cash flow may have looked like it provided enough to pay the high mortgage payment, taxes, heat, etc. but with nothing leftover for those, predictable, surprise emergency repairs. And buildings do break. Especially "affordable" ones. Add to that mix a couple of tenants that can't pay the rent, and you have a full-blown foreclosure brewing-- and in 90 days or less, the property usually goes irretrievably "toes up.".
NEXT: WHAT HAPPENS TO THE PROPERTY ITSELF?
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Yeah, and what's with this tripple N (ie: NNN) lease stuff...who in their right mind would do this? I've even seen residential, investment property owners now going solely NNN Lease with townhomes and single family home rentals...great for the landlord but again, what tenant (unless they were desperate) would agree to this? Hmmm
ReplyDeleteIn a net lease, the 'net' part goes to the Landlord; the taxes, maintenence, utilities --all the costs of operating the property--are billed to the tenant separately. The Landlord in turn, passes thru the payment to the creditor. In a gross lease, the 'net' still goes to the Landlord; the remainder of the rent is used to pay taxes, maintenence, utilities --all the costs of operating the property. It's the same difference either way but the net lease allows the operating costs to rise and fall with the actual expenses not projected expenses. The tenant knows what it costs to operate the property. The gross lease fixes the expense cost with no adjustment for what actually occurs. A net lease eliminates the penalty for bad expense guesses. In the net-plus-expenses system, costs are actual and known by all. As a practical matter, if the expenses are fixed by the landlord, you can bet that the Landlord is going to guess and fix them high and adjust the gross accordingly. The Tenant just won't know what he's paying for. A $10 net rent plus $7 Taxes and expenses is the same cost as a $17 gross rent. The cost of occupancy is exactly the same. It is six of one, half dozen of the other --but the 'net' lease gives a picture of the costs and allows Tenant and Landlord to see what the real costs of these items are and make a judgment as to whether they are in line with what they ought to be for that type of property. If the expenses are too high, then something will need to be improved to keep the building competitive and retain its tenants.
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