How to assess a deal (sell it or lease it?)

Question

When deciding whether to sell or lease a commercial property you own (but no longer need), what are your deciding factors?

For instance, say the value to sell is $500k, and the potential 10 year NNN lease rate is $5k/mo, making it a 12% cap rate. (Assume same new user is offering to either buy or lease, at your choice.)

What other factors besides cap rate do you consider? Quality of tenant?

How do you determine the fair annual rent increase? Is there a norm?

If you provide options to renew (say three 5 year options), how do you determine the rent rate in those future options? Is that rent generally controlled by the deal you set in the original 10 year lease? If not, how is it determined? Is there a norm for valuing these options (do they impact the rent amount)?

How sale-able are properties like this once they are leased? Are they best sold with the lease in place (as I know often happens with residential rentals) or are they best sold empty?

What professional(s) are best to advise a small time investor on these sorts of decisions?

Anything else to consider?

Thanks for any tips or links you can provide!

Chris Seveney · Answer

@Stephanie Z.

Lots of questions here but first regarding selling or leasing:

If you have another investment you can make then run the IRR for this property and the other investment to see what is a better deal.

In regards to leasing this property NNN. Get a commercial broker to handle the transactionX they will provide guidance on the terms.

Typically buyers want a lease in place on commercial properties. If you did a 5 year term typically rent is fixed for the five years and options to renew will state the rent increase.

This may vary by market.

In regards to the tenant you will want to look at their financials to see how strong a company they are.

There is a lot more to this but this is some of the high level info.

How to assess a deal (sell it or lease it?)

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