Could a long-term national lease devalue your commercial real estate?

We were recently called in to value and market a single tenant property with an existing lease in place. The tenant had been granted an option to renew during their last renewal negotiation.

I informed the owner that we would have been able to achieve a higher price if we were able to go to the market as a vacant property.

Isn’t a long-term lease with a National tenant a good thing?

Typically, it is! 

Whereas it is usually the Landlord who provides the lease template to insert the elements of the deal, I suspect it was the Tenant who provided this template.

It was written in the favor of the Tenant.

It was much more of a gross rather than net lease which did not require the tenant to pay for property management, parking, property insurance, repairs and maintenance or any portion of capital improvements.

The effective net annual income was therefore significantly lower than it should have been.

To make matters worse, the option to renew provided for a five-year extension of those terms if the tenant chose to exercise it.

A good property

The property was well located and well maintained with good street appeal.

Even when we applied an aggressive cap rate to the NOI the subsequent value was lower than comparable sale data was indicating it could have been.

Moral of the story

Hire a commercial broker to negotiate your lease.

The brokerage fee is a very small line item necessary for proper return on your investment.

Even if you believe you have the rental amount correct, there are many nuances within the lease agreement itself that can significantly impact the value of your property.

In this case, the owner realized many years of below market income from a national tenant who would have easily paid more.

Therefore it’s as important for tenants as it is landlords to know what their lease reads.

Do you even have a binding lease? And was everyone aware of the terms agreed upon in that lengthy lease document?

Posted by Barry Stuart

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