45.  Long Term Lease to AAA Tenant

We discussed the effects of a long term lease to a cor­poration controlled by the seller or syndicator or other insider. We pointed out many of its drawbacks. Is a long term lease to a national corporation different? A national corporation, rated AAA (over $1 million), will, at the time of the leasing probably require certain concessions, since it is such a desirable tenant. The rent will probably be low. But at the time of making projections of distribu­tions from the property, the amount of the rental income will have been considered. The projected distributions will be based on the rent. So you don't have to worry about the fact that the rent is too low.

The rent will be stable for a number of years. The very reason that the nationally-known tenant enters into a long term lease is that it wants to be sure that the rent will not suddenly be increased after it has been on the premises for a few years and has built up good will. On the other hand, such a lease should contain reasonable escalator clauses or inflation clauses, which provide for reasonable increases either based on increased sales or on an increase in the cost of living index.

The following is an excerpt from a brochure explain­ing the operation of a long term lease to a large mail or­der house. (The name of the tenant has been deleted.)

"Based on the lease now in effect, the tenant would have paid a total rental of $105,000 in 1959. Based on presently projected sales of $700,000 for 1960, a rental of $122,500 is expected."

Compare these provisions with the ones of a net lease to the syndicator or seller in the brochure which you ex­amine. Does the net long term lease to the syndicator pro­vide for the possibility of an increase of 16% in a single year?

A lease negotiated at arms' length with a national ten­ant would probably contain clauses which offer better protection against inflation than the lease which the syn­dicator prepared for the benefit of the corporation which he, himself controls.

In the second place, it is rather unlikely that a long term lease negotiated with a nationally-known tenant at arms' length will contain provisions that the tenant gets any benefits from mortgage refinancing. That important growth factor will not be impaired.

Finally, a lease with an AAA tenant would at least provide reasonable assurance that the rent will be paid in good or bad times for the duration of the lease. You would probably be willing to take the risk that General Motors or Sears Roebuck will continue to pay rent even during a recession. The syndicator's corporation, which may be the tenant under a long term lease prepared by him will probably have no other assets but the leasehold. So if things go bad, it will fold. In fact, the syndicator will probably advise you in the brochure that your dis­tributions are dependent on the ability of the property to produce income, not on the syndicator-tenant's finan­cial status.

In the long term lease with an AAA tenant, you will probably have three features which make it vastly prefer­able to a long term lease given to a corporation con­trolled by the syndicator or another insider:

1. There would be reasonable escalator or anti-inflation clauses.
2. The tenant would ordinarily not share in the benefits from any refinancing of mortgages or from the resale of the property.
3. You would be reasonably sure that you would receive your distributions for the duration of the lease.

The above statements are necessarily of a general na­ture. They refer to the situation as it will probably be. Of course, it is impossible to form a judgment on any lease without knowing its provisions. The main features of a long term lease will probably be set forth in your brochure. Read these provisions. The brochure may state that you may examine the long term lease or an abstract of its major terms at the office of the syndicator. Don't be bashful. Go and take a look. The lease will affect your income for many years and may have substantial bearing on the growth factor of your investment.

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