How do you deal with large cost increases for NNN tenants upon the sale and reassessment of a property?

I'm looking at NNN-leased multi-tenant commercial properties in FL. Due to annual caps on increases in property tax assessments, all buildings in FL are paying ~2% property taxes on significantly under-valued assessments. After a purchase happens, the cap no longer applies and the property will get assessed to roughly the sale price, and this will result in a significant increase in property taxes. Given that the leases in place are NNN, in principal these costs just get passed right onto the tenants and should not affect the cap rate, but I'm wondering based on people's experience how true this is in practice? Do commercial tenants know/expect these increases, or does this generally result in pushback and some form of rent easement being required--thus reducing the actual ultimate return? Curious to hear people's experience with that, as well as any other similar potential pitfalls in that situation. Thanks!
In Buying Property - Asked by Eli B. - Feb 3, 2013
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Justin C.
Jacksonville, FL

Good question. Your business sense serves you well. Unfortunately for the tenant, unless it is clearly spelled out in the lease that their is some kind of cap increases tax and insurance (sometimes occurs with larger tenants, possibly anchor or co-anchor), then you are completely within your legal rights to incrase taxes and insurance with the pro-rata adjustment occuring as the costs are incurred (or shortly thereafter, upon an adjustment).
Certainly, when the economy is doing what it is and mom-and-pops, in particular, struggle to make their payments, the prospect of their rent increasing by $1-$3/SF because the RE taxes have been re-assessed due to the sale is not going to be popular or well received. Still, it happens all of the time, and if the tenant is in place and paying their bills, they will just have to strap on and play by the rules...increase and all. I am not suggesting that you don't get some fall out and that some tenants get tipped over the edge of having to consider other options (not paying, shutting down, abandment, etc.). Do you homework before buying. Make certain you are comfortable with the in-place tenants doing well in the center. If they are already struggling, start thinking about their replacement and at one base rent you can achieve.

Feb 4, 2013
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Tai N.
City Of Industry, CA

I completely agree with Justin C. The only thing I would add is ask permission from the owner to talk to the tenant first, if the owner is okay talk with the tenant about their business and get comfortable, keep it light. Of course, if it is a National Credit Tenant who do you talk to? The manager is a good place to start, then compare it to the financials provided during your due diligence to make sure the story on the paper matches what you see. Good luck.

Feb 20, 2013
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Eli B.
San Francisco, CA

Thanks for the feedback, guys. Your answers are pretty much as I expected: check the leases, consult the tenants, and assume more potential blowback from smaller tenants than larger ones. I'll update the thread if/when I manage to close on a property and actually go through this process. In the meantime, if others have previous experiences with this type of situation, chime in!

Mar 10, 2013
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