Advice about leasing my land

[Susan Anderson]

Hello- I own a property located on one of the busiest streets in my city. A franchised coffee business would like to lease my land. Nearby is a Panera, Chipotle, and Starbucks.

Currently there is a cement block building and 2 homes on the land (all owned by me). The interested party would like us to pay for 50% of demolition for the building and 2 homes. I would also need to pay 6% to the realtor who brought the interested party to my attention. 

My realtor cannot give me numbers or information on whether or not this is an acceptable offer for me. Her opinion is only that it is a good offer.

How would I go about assessing this? As you can tell, I am new to land leasing. It would take me about 2 1/2 years for this deal to be profitable for me after my expenses. The land lease would be for 15 years. 

[Henry Clark]

Run the numbers

1.  How much cashflow if you leave the way it is?

2.  How much is the demo cost?

3.  What happens to the coffee shop building at the end of the lease?    Do you take ownership? 

4.  Lease terms?  Taxes, upkeep, insurance?

5.  How good of a spot is it, if you clean off?  

Run the scenarios.  

[Susan Anderson]

1. We will probably double our cash flow.

2. Demo costs will be roughly 50k.

3. We can keep the building at the end of the lease.

4. They are initially offering a 15 year triple net lease with a 10% increase at year 6 and 11…with four (5 year) options.

5. The site is a half acre with direct access to one of the busiest streets in our city. Our property is across from a Starbucks, Walmart grocery store, next to a Chipotle… The neighborhood is turning over and becoming a profitable part of town thanks to a world-class research hospital and medical campus nearby.

Thank you for your advice!

[Matthew Paul]

They want it , make them pay for everything .  Even renting it while going thru permits and approvals .  

LAND   they arent making any more of it .

You need a GREAT attorney asap .

[Michael K Gallagher]

Quote from @Susan Anderson:

Hello- I own a property located on one of the busiest streets in my city. A franchised coffee business would like to lease my land. Nearby is a Panera, Chipotle, and Starbucks.

Currently there is a cement block building and 2 homes on the land (all owned by me). The interested party would like us to pay for 50% of demolition for the building and 2 homes. I would also need to pay 6% to the realtor who brought the interested party to my attention. 

My realtor cannot give me numbers or information on whether or not this is an acceptable offer for me. Her opinion is only that it is a good offer.

How would I go about assessing this? As you can tell, I am new to land leasing. It would take me about 2 1/2 years for this deal to be profitable for me after my expenses. The land lease would be for 15 years. 

@Susan Anderson There is a lot that can go into these deals, to figure out the best use of these kinds of plots you can look at many different options. but in general if this is a credited tenant national chain looking to ground lease, I'd expect them to pick up the bill for scraping the lot especially if its not listed on the MLS.
If they want you to put up demo money I'd expect the lease terms to be exceptionally long to make it worth it for you.  

personally I'm seeing more build to suits and Reverse build to suits happening lately rather than ground leases, but the end user can have a lot to do with that.  with the cost of building being what it is ground leases are hard to make work from a developers side.  How big is this lot?  is there an argument to develop a multi tenant building and put the coffee shop on an end cap to maximize your profitability?  is the building they want to build making the best use of your land for after they vacate?

Also I don't know your market but from my experience, when I've approached owners about outparcel land leases, granted these are usually about .6 - .75 acres they run in the $60K-$100K annually for rent.  Granted these are out-parcels at an anchor retailer so they are the cream of the crop so make sure you take that into account with your parcel but to give you an idea, the payoff of 2.5 years for what I'm seeing as maybe $100K in upfront costs? just seems like a very low rental number from my experiences.  but again I'm not sure what market you are in so that could be par for the course.   

But I'll echo @Matthew Paul here, if you don't have an attorney in your corner or a commercial broker with experience in these kinds of deals I'd recommend getting one pronto.

Happy to dig in deeper if it would be helpful to you, 
Cheers, 

Michael 

[Susan Anderson]

I have a very good attorney for lease agreements. 

I believe I should ask that the interested party to pay for the demolition and also request that rent begins immediately? The letter of intent requests that they have 150 days following permit approval and developers completion of infrastructure to the site.

I don’t think my requests for demolition costs to be paid and rent to start right away are unreasonable? Contractors can get behind.

The listing shows that the road my property sits on has a VPD (vehicles per day) of 21,159. Additionally, 157,272 employees and 10,045 businesses in the area with over 1,000 new apartment units within walking distance. Walmart, Panera, Chipotle, Walgreens, and Starbucks are very close neighbors.

The space available is .52 acres and the asking rate from our real estate agent is 120k/year. 

The interested party is offering 100k per year with 10% increases every 5years (starting on year 6, then 11) with 4 options (at 5-years) to increase the length of the lease.

Does this seem like a decent offer from the interested party? This will be my first land lease with this property. We have always rented our building and the 2 houses. Now that the neighborhood is turning over, I believe a land lease would be the best chance for me to increase my earnings (with less headaches).

Thank you for your comments and input. It’s embarrassing, how little I know…

Susan

[Joel Owens]

I have been in NNN as a principal broker and investor for almost 20 years now. I own properties nationally.

Traffic count is decent at 20k plus.

1/2 acre now is tiny site. Most tenants now want 1 acre plus for double and triple drive thru's. 100k rent is pretty high for 1/2 acre ground lease.

You need to assess the franchisee coffee tenant and their ability to pay over time. Lease it theoretical and could be for 100 years and means nothing if they go dark in a few years. You want personal guaranty, required updated business and personal financials every 4 months or so, and business guarantee covering ALL of their franchise locations. Make sure you attorney is familiar with NNN properties because I have seen attorneys make tons of mistakes with the leases.

Rental increases every 5 years is usually reserved for the Starbucks and Chick Fil A's of the world. Franchisee you want increase every year to blend yield up faster. Any investor wanting to buy your ground lease later with just an okay tenant will want to see max yield every year on the investment and a slightly higher cap rate with purchase price to offset perceived risk.

You need to know average ground leases in the area per ft. Typically ground lease is much less per foot than absolute NNN. You want that ground lease rent way under NNN as a buyer so that if property goes dark you have upside. You owning the property already not a main focus for you. I think clients always tend to look at what they get NOW for cash flow versus what value they get on exit if they ever want to 1031 exchange out.

The rental increases could be set to annual and to the greater of CPI up to 5% a year or 2.5% increase whichever is GREATER. That way you have a higher inflationary year you get more yield.

The tenant is trying to get the best long term deal for them. You need to know how desirable your site is in the area. The strength of your site will tend to determine how much you can push the tenant on terms.

Another option is to tie in ground rent at say 100k but then tenant pays bonus rent above a certain annual sales number per year. That way if they do really great at the site so do you. The rent still increases each year that's just a bonus. Again the tenants like to find unsophisticated landlords so they can take advantage.

The weaker your site ( C site example with just a few bites interest) versus an ( A site with 8 tenants rushing to win the site ) tends to weaken the chances of getting them to agree to your terms.