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 the most recent renewal negotiations.
I informed the owner we would have been able to achieve a higher price had we been able to go to the market as a vacant property.
But, you ask, 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 in which to insert the elements of the deal, I suspect in this instance it was the tenant who provided the template.
Lease favoured tenant
It was written in the favour of the tenant.
It was much more of a gross, rather than a net lease. The terms 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.
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 indicated 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 you to achieve a proper return on your investment.
Even if you believe you have the rental amount correct, there are many nuances within the 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 and fully understand all of the elements and implications of their agreement.