How Do You Evaluate A Ground Lease Opportunity?

6 Replies

I have a piece of land that's zoned retail at a very busy intersection. Rates in the area are about $20 NNN annually. How do I go about figuring out how much I can get for a ground lease? The lot is a little over an acre so I believe the large footprint tenant opportunity is there. Thanks!

You get the most for a corner fronting 2 streets with high traffic counts.

1 acre is tough for a pharmacy as usually it is 1.5 to 2.5 acres. If they loved the site they might could figure out something or buy a parcel next to it to make it work.

Pharmacy generally pays the most followed by banks, gas stations, food, Auto Stores  etc. 

You want to set annual rent at no more than 10% of expected sales. The expected selling cap changes in the market from the time they get built and they occupy. If they do not renew the primary lease term then generally you get the building by default.

Most important is how the lease is constructed so if you want to sell the income stream down the road it is positioned to be  looked on favorably by lenders and the buyers. Once the primary term lease is executed good luck in getting them to change anything after the fact. I have seen some developers use some bad leases before.  

@Quy Huynh

I would say talk to a commercial broker who specializes in this area.  I noted you are located in Southern California.  If this land you are referring to is in Southern California as well, message me and I'll get you connected with someone who can help you through my firm.

@Daniel Chang  I do live in Socal however, the property in question is in Florida, but thank you! 

@Joel Owens : "You want to set annual rent at no more than 10% of expected sales."

Joel, let's say their expected sales are $1,000,000 per year. The Ground Lease should then be marketed for $100,000 annually and for the sale side, if the cap is, let's say, 8%, the value would be $1,250,000?

If I am incorrect, please give me an example. Thanks Joel! 

10% rent to sales ratio is max. Generally the lower number the better.

Yes the 8 cap is correct.

I would have to see your parcel to see what makes sense for highest and best use so you could extract the most money out of it.

Also part of the marketability of the lease is the quality of the lessee.  I've seen too many deals that blew up during the sale process because a tenant received a credit downgrade.  Doesn't sound like much but...

Most lenders us Standard & Poor's for the credit guideline versus the other 2.

BBB- or better with a guarantee from the parent corp. gets the best loan terms for an investor buying the property off of a seller as it's investment grade.

Anything under BBB- is considered credit grade but junk status. Doesn't mean it is a bad company just how they measure things. Some companies are not even rated. Standard & Poor's releases quarterly reports talking about possible downgrades with a company on the horizon. So if you know they are BBB- already and fixing to downgrade that is a big deal. If they are BBB+ going to BBB then still should qualify for the investment grade CTL type loans.

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