Sell commercial property for profit with long term lease

Greenwood Vlg, CO · Member since 2017 · 26 posts · 2 votes

Hello,

How can I sell a property with 15 year lease for a profit after 5 years?

For example: I buy a commercial property for 1 million, NNN with a cap rate of 5% and 15 year lease. Hypothetically, after 5 years there is a real estate boom and I want to sell the property for a profit. How can I sell the property for a profit that since the cap rate of the property is fixed at 5%? If I want to sell it for 1.2 million the cap rate will come down to 3 or 4%? Why would any investor buy it?

Does it mean that on a long term lease even if there is a real estate boom I cannot cash in?

Thank you

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Brent Coombs

Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes

@Sunitha Alli, I take it that the rent DOES increase every year? Therefore, your commercial property IS increasing in value each year, right? ie. So long as you're not forced to sell it at a higher cap rate than you bought it, fine, right?

But if the cap rate is already as low as 5%, why would you ALREADY be interested? Safe, and sought-after location, right?

So, the same reasons might apply to cash-up investors when you want to sell at LOWER than a 5 cap! Welcome to BP...

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Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
9y
@Sunitha Alli, I take it that the rent DOES increase every year? Therefore, your commercial property IS increasing in value each year, right? ie. So long as you're not forced to sell it at a higher cap rate than you bought it, fine, right?
But if the cap rate is already as low as 5%, why would you ALREADY be interested? Safe, and sought-after location, right?
So, the same reasons might apply to cash-up investors when you want to sell at LOWER than a 5 cap! Welcome to BP...
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Sunitha Alli
OP
Greenwood Vlg, CO · Member since 2017 · 26 posts · 2 votes
9y
@Brent Coombs , Thank you for the reply. This property is 15 year NNN lease with 7% increase every 5 years. So, even if real estate booms in 5 years, I will only be limited to 7% increase in rent as my profit? Due to long term lease?
What happens if interest rate go up in the next 5 years from current 4.25 to 5.25? Then there is no profit at all!
Sorry, I am novice investor in commercial real estate and trying to understand.
Thank you so much,
Sunitha
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
You put 10 year debt on the property so you have financing in place for most economic cycles. Full peak to troughs happen about every 7 to 10 years.
It's the reason I do not like 5 year term financing unless you are doing a value add deal to sell or refinance with no pre-pay penalty. A 5 year loan might shave off 25 basis points. Would rather get the 7 to 10 year fixed rate debt at 25 to 40 basis points higher.
With STNL leases the more the years wind down the higher the cap rate goes as it is harder to finance unless paying cash. 1 million property is very tiny in commercial world so lot's of cash buyers. The higher the prices go 3,6,10 million the more debt tends to be used.
With 10 year debt if interest rates rise then your loan balance tends to be less so even at a higher rate on refi the cash flow might be the same.
STNL is typically for very wealthy investors looking to outpace inflation and generally make a ton of money themselves like 200,500k or more a year from a job or business or they are in retirement looking to be passive and estate planning.
Triple net is not typically a yield play for returns unless you are buying properties with a few years left on the lease and rolling the dice, or doing a re-purpose on a property. Also you can become a real estate developer and have a higher cap rate to cost with equity but you are having a job then and not passive. I know because I am a commercial broker helping clients buy these properties and I am also a retail developer/investor myself.
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Sunitha Alli
OP
Greenwood Vlg, CO · Member since 2017 · 26 posts · 2 votes
9y
@ Joel Owens Thank you. Excellent point about STNL and NNN leases and who they are meant for.
It appears the best way to make money is to find a vacant or almost vacant property in a good location for a cheaper price. Find a tenant and hope to sell the property for a higher price (with higher rent).
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
Yes that's an equity or re-purpose play.
I do those for myself but do not transact those for commissions as there is no money in it for me. Maybe a small 20,000 check for my time.
Same thing with a multi family building under 3 million. Lot's of issues on the deal and takes a lot of time,effort,and energy to close it.
If something is going to take a big portion of my time it has to be a larger property with a big payout. I am an investor also so whether transacting and making commissions, developing, or buying existing I want great upside for my time.
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Sunitha Alli
OP
Greenwood Vlg, CO · Member since 2017 · 26 posts · 2 votes
9y
@Joel Owens Thank you.
Pardon me for my ignorance but does the 'agent' not get full commission if I sell the property after finding the tenant? Trying to understand when you said you do not transact those for commissions as there is no money.
There are two agents involved: 1. Agent used when I buy 2. Agent used when I rent. Are those 2 not paid in full if I sell in a year or two?
Thank you.
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
Say you buy a shell dark building for 600,000.
If buyer broker that is 18,000 check at 3% commission. If that is an agent and they share with their broker they might get half of that or 9,000.
I am a broker and owner of my company so would get the full 18,000 as an example.
There are brokers that find the retail tenants to sign the leases. Those are tenant rep brokers. They get paid on the lease. So if a 10 year lease was signed at 100,000 a year that is 1,000,000 in income potential if no rental increases. At 3% that would be 30,000 but if they are not the broker then have to split with their company.
If you had a triple net lease at 100,000 a year then a 10 cap value is 1,000,000 and a 5 cap value is 2,000,000. Generally if a developer sells they wait 1 year so they pay long term capital gains instead of short term. They might also 1031 exchange into something else.
If the land is already zoned commercial then generally the site plan for the specific tenant needs approval.
If the broker double ended for 6% then 120,000 commission possibly or one side 60,000.
The immediate benefit is the purchase commission and the leasing commission.
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Sunitha Alli
OP
Greenwood Vlg, CO · Member since 2017 · 26 posts · 2 votes
9y
@ Joel Owens
Makes sense. Thank you.
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