Help updating rental rate on a special use commercial building
I need help updating the rental rate on three commercial properties that I own. The buildings are special use and unique and there is a lot of history with them so let me explain. Then I'll share my numbers.
I sold my company in 2015 and leased three of the six properties to the buyer. The buyer has a 5 year lease, with two 5 year extensions. We are now approaching the first option period.
Prior to my sale, these were buildings rented from me by my company. A typical owner lease back. Because the money was moving from one pocket to another, the lease amounts were never really updated or shopped to compare to the open market. Basically as long as the banks and the overreaching (read obnoxious) manufacturer we represented were satisfied then we kept the rent at what we thought was reasonable.
When I sold to my buyer, we took the existing rental rates and carried them forward with the buyer. The buildings were somewhat run down, and the sale was MUCH more important than the rent. They said they were pleased with the rental rates and thought they were very fair, certainly a better deal than building new buildings. The buyer has a triple net lease on these buildings. The only hiccup is I have to carry some insurance for acts of God but other than that they maintain everything and they just cash flow.
Since the buyer has been there, they have upfit the buildings and they frankly look better than they ever did. They have repaved parking lots, painted exterior and interior, completely redone and updated the show room and offices, and now they are stabilizing the soil around the building, effectively turning it into concrete. The rent shows up on the 1st every month without fail and they have been a better tenant than I was to myself.
Lastly, one of the reasons I sold was the overbearing manufacturer is pressuring all my former peers, including my now tenant, to build new buildings. They've figured out that they can improve the brand by spending other peoples money. So far my three properties are not in the cross hairs, but the other three properties we had are. One has a replacement building being built now. One will be starting probably next year, and the last wasn't worth replacing. This is more than just talk and threats from a manufacturer.
The buyer likes my buildings, but the land is a bit lacking at 3 acres. They'd rather have 6 acres or so. Other than that, they are happy.
So, here are my numbers. This is just one of the buildings but the premise carries across all three, except maybe the land here has appreciated a bit more.
3.0 acres
Building 15,020 square feet
Building is a heavy industrial facility, built in 1972, with an addition in 1999. Facility is special use with heavy overhead cranes, loading ramps, wash pits, etc. It would be useful for its current use, or it could be rented to a heavy highway construction company or a competing brand equipment dealer. Other than that, there are not a lot of people who would want this building. It is a limited market potential.
The building was appraised in 2001. This was back when you could talk to the appraiser and we got tippity top dollar in our appraisal.
2001 Appraisal
Land = $165,000
Building - $785,000
Total $900,000
The tax records I can pull have the following numbers.
2006 Land & Building = $258,130 (We certainly didn't complain about the assessed value)
2009 Land & Building = $472,080 (We did complain, they didn't care)
2015 Land & Building = $458,732 (The year of the purchase of my business)
2018 Land & Building = $515,109
The rent for this property through all this time, back to 2001, has been $10,743.68 per month, triple net, or $128,924.16 per year.
The direct land around this property has developed pretty heavily during this time frame. There is still open land but all the farm land is gone, replaced by condos for college kids. Our side of the street is still industrial though, and our neighbor, the gas company, has had ongoing environmental issues for decades. They may be finally resolved but I don't see our side of the street turning into condos anytime soon. My strong preference is to keep my current renter in place.
My question, how do I go about setting the rental rate for this property at renewal in December. Similar properties don't have market rents. These are usually related party transactions, something I know from going through the appraisal process several times. The appraisers can never find anything to compare that is actually comparable. So my thought is to use the tax basis property value trend as a basis for the updated rent. With that logic, the land/building value has gone up 10% since the purchase in 2015. So I'd recommend that they increase the rent 10% to $11,818.05. They will of course counter an increase with reminding me of all the money they've spent on the building, and I'll counter that the rental rate was set in the early 2000s and they are still getting a deal.
I'd really love some advice on where I'm going here and how to have a better basis for setting a rental rate. Right now, this is the best I have. The owner is a Harvard lawyer and has access to WAY more information than I do now as I'm basically on the outside. However they've been fair to me in every transaction so I think we can work our way through it if I just have good basis for my demands.
Thoughts?