Value of Commercial Lease?

Question

Wanted to know if there is a guideline on putting a value on a commercial lease? Say, I am a business leasing a location in a desirable area. My business might not be worth that much but the lease might have more value. How would I go about putting a value on the lease itself?

Joel Owens · Answer

Yeah and generally the landlords making mistakes won't be on premium sites and give way under market rents............. : )

Mostly new developers with mom and pop tenants back filling at lower rents because the national and strong regionals who are experienced operators have passed on the developer's sites.

Those tenants tend to get more picky on location, access, visibility, traffic counts, quality of the center construction, site layout flow,etc.

Smart businesses know rent rate is not the only factor to consider. You can pay cheap rent and be in a substandard location and just do okay sales. The goal is to generally be in a great location for a fair rent and not a high rent. That way you do a bunch of sales but rent is not too high. It's a complex game commercial tenants and landlords play. Landlord wants highest rents, annual rent increases with personal guarantee on the lease, and disclosure of ongoing sales to see trending health of the business to mitigate risk etc.

Tenants want low rent, short term lease with early termination outs, no personal guarantee, no disclosure of sales, rents that go up in blocks every 3 to 5 years instead of annually etc.

This is why when you develop a site as a landlord you want the best of the best site so you control the terms of the leases as many tenants want to be there with only so many spaces available. When you own just on okay location center typically it is back filled with marginal tenants where some go out of business more frequently and rents are lower.

There is a definitely an art to the business.

Daniel Chang · Answer

In general, the answer to your question is none-nada-nothing.  A lease is generally considered a liability.  So from the tenant's perspective that lease isn't worth anything.

However, let's take the following situation, generally all would need to fall in line:  Long term lease in a highly desirable area, market rate in the area outpaces the lease growth, the lease itself is freely assignable or can freely have a sublease, ok then yes the lease is worth something.  For instance, if market rate is $40 PSF, but the lease is paying $25 PSF with 10 years left, then there is value owning the leasehold.  You can then sell/assign the lease, or sublease it and keep the difference.

In the above case, the landlord made a mistake.  So unless you find a landlord who made a mistake, again in general, the lease isn't worth anything.

Priyanshu Adathakkar · Answer

The landlord controls the lease, it is not marketable by the tenant. You can use it as a value enhancer if you are selling your business and the location is critical to the performance of the business but no dollar value can be put to the lease itself.