When you have a Triple-Net lease in place, your carry costs are limited to any debt on the building and large, structural damage to the property. Without a tenant, your carry costs increase significantly.

The “NNN” of “Triple-Net” stands for (1) Taxes, (2) Insurance, and (3) Maintenance. A tenant would usually pay for these operational expenses. When vacant, you are on the hook for each of those expenses – and they add up fast.

Carry cost can be as high as $15,000 - $35,000 per month depending on local taxes, age of the building, insurance, and any outstanding loans on the property.

Rite Aid paid inflated rents that are not supported by today’s market. While recapturing your lost rent is likely impossible, market rents may or may not support your basis in the property.

If you purchased your building a long time ago (let’s say 1999), you have a low basis in the property (i.e. you paid very little relative to the property’s current valuation). It is likely that any loan on the building is paid off at this point, allowing you to capture the entirety of the base rent paid by any tenant. Your NNN expenses are low which will allow you to take more time to find a good tenant. While you will still have big bills to pay (leasing commissions and a tenant improvement allowance), you can survive Rite Aid’s exit if you have been responsible to save money over the years.

If you recently invested in your building and used debt to fund the purchase, your position is not nearly as strong. Your basis is likely far higher than the present value of the building. Debt service will consume a large chunk (maybe the entirety) of the base rent of a new tenant. While you are looking for that new tenant, your NNN expenses will be high, draining your cash reserves. When you do find a tenant, those commissions, a tenant improvement allowance, and free rent will prove to be additional burdens that may prove a market deal infeasible.

Advice: Hire an appraiser to conduct a rent study. A good appraiser is worth the money and we recommend that you procure an MAI designated appraiser. You can search for an appraiser at the Appraisal Institute or reach out to our team who can help connect you with a firm.

Leasing commissions are close to inevitable – and it is a BIG bill. Commission rates on deals under $10M are usually in the ballpark of 3-5%. A 10-year lease at market rates could easily yield a $200,000 bill for agent commissions.

To calculate what a leasing commission could be on your lease deal, use the formula below:

(Base Rent/Mo.) x (12) x (Lease Term) x (Commission Rate) = Lease Commission

A Tenant Improvement Allowance is key to competitively marketing your property and securing a quality tenant. A TIA in excess of $500,000 is not uncommon for a space the size of a vacant pharmacy.

To calculate the possible cost of a Tenant Improvement Allowance, use the formula below:

(RBA) x (Expected TIA/SF) = Expected Tenant Improvement Allowance

For Example: If the RBA (Rentable Building Area) of your property is 17,272 SF and a tenant candidate asks for $29/SF in TIA, then the total TIA would be $500,888.

The Tenant Improvement Allowance is typically due upon completion of construction and the remittance of all documentation verifying contractors have been paid and legal occupancy. This period is typically 12-18 months.