Sell or Lease? What is the market price to sell my commercial restaurant property ?

[Rebecca Jao]

Hello everyone, 

New to this. Please help!! My husband and I own a free standing 5K sqft restaurant building in Tempe, AZ (1 mile away from ASU). We operate an restaurant in this location for 10+ years now. There is a lot of hard work. In the past 3 years, I frequently have investors who is interested in this building and asking the same question, "How much will you sell this building?". My husband and I wonder that what shall we do next, either lease it or sell it. What will be the fair market lease price and sell price in Tempe, AZ. If I lease it, what is a fair CAM per sqft Landlord shall charge beside the base rent in Triple NNN lease? I looked some comparisons on loopnet and other sources. The sell price per sqft ranges from $1,200 to $400. They are such a huge difference. I know the commercial building sell price is related to lease value too. Shall we lease it out first with good tenant to increase the value of the building and sell it done in the road? During our journey in the past, there are few bad experience that we got ripped off, so this time, I am going to do my research and try to make the right decision. Please help and thank you for your time to hear from me. We appreciate.

[Joel Owens]

I was in food business for decades before getting into commercial real estate the last 20 years so know it well.

FIRST you have to separate out does your current business itself without the building have any value?

Example you are owner operator and it clears 200k a year profit so at a 3 multiple worth 600k about as a business. If someone wants to buy the business they may want to own the building also or they may want to buy the business but lease the building. Additionally they might want owner finance with some down for the business, building, or BOTH. 

The reason you are seeing a wide range per foot of sale price is because there are hundreds of variables in NNN properties. There is age of building, design of building, parcel size, usable land, shape of the parcel, sightlines from the road, access from the road, any junior anchors beside it and large anchors behind it to drive interconnectivity on a daily basis.

If the building is typically more than 15 to 20 years old you are not landing a national tenant for it. They will often want a new building constructed and building today with labor and materials is very expensive versus retrofitting existing building.

When I buy value add vacant buildings the goal is to double the return on investment within a 3 year period.

So if I can use the existing building and retrofit to same concept ( example previous burger inc. but now Whataburger wants to come in ) then not as much tenant improvements to convert.

So if rent 20 a foot for 5,000 ft that is 100k NOI NNN a year. 7 cap value is about a 1,400,000 stabilized value

So if I buy it for 400k and have 300k in it more 700k to get new tenant in the value is then around 1,400,000 based on NNN 20 a foot and a 7 cap rate exit value.

If you want a premium price then you would need to sell to an end user tenant ( regional or national in nature) that wants to buy the building and put their concept in there. They are very picky on sites and slow to respond and can take 6 months to 1 year or more. When they go under agreement they have to get site approval from corporate and have to get permits from the city and county and do not want to close on a property until then. All of that takes many months of time.

If your land is 1/2 acre or less with bigger building 5k sq ft and limited parking will be a tough sell most likely. Most QSR restaurant concepts and others tenants desire 3/4 to 1 acre plus usable parcels these days. it gives them lots of options with designs and layouts to maximize sales per foot. Many want double drive thru's as since Covid places have gone 80% drive thru and 20% eat in when it used to be reverse unless it's a specific sit down restaurant without a drive thru.

You could have 40,000 cars per day go by your property but if there is a median with turn around or they can't see it easily and have to work to get to your building that is a negative. You could also have 40k cars a day on the road but on your side of traffic have only 10k and 30k is on other side.

You could also have a big breakfast, lunch, or dinner model and have your property on the wrong side of the road for that ( going home side versus going to work ).

I can go on and on have specialized in this for decades. We buy nationally sites for all cash but of course do not pay a premium. It's just another property to us that either pencils for our goals or does not. Tomorrow there will always be other properties hit the market nationally for consideration.  

So you have to work through what is properties and business highest and best use and how long will it take to achieve that possible outcome? Then you have to decide based on your life circumstances what makes the most sense for you. You could have something make more money in a 3 year horizon but you need your return in 6 or 12 months etc.

Do you have an address of the property for a Google street view to see how it is positioned on the road and in the market?