Comparing Two Similar Properties with Different Lease Terms

[Chris T.]

I am not sure the best way to ask this. When comparing similar commercial (NNN retail) properties, is there a method of estimating the sales price based on the remaining terms of the lease?

EXAMPLE: There are two identical properties. Both NNN, same national tenant, 15 years remaining in the lease, same initial base rent etc. The difference is the terms of the lease and the initial cap rates.

Property 1 has a purchase price based on a cap rate of 6% but rental bumps of 10% every 5 years including options.  

Property 2 has a purchase price based on a cap rate of 7% but rental bumps of 5% every 5 years including options.

I know how to calculate the IRR to compare the two while I own them, but say I go to sell at year 10 and they each have a 5 years remaining plus options. Is the 1% difference in Cap Rate a reasonable estimate or will that cap rate spread/contract due to the shorter remaining lease terms and difference in rental increase schedules?

I am just trying to figure out the best way to fully compare two similar properties.

[Joel Owens]

3 million and under in price about 70% are all cash purchases so debt does not affect the market as much. When you go 4 million and up even if investors have all cash it flip flops where about 70% use debt and some about 30% pay all cash. Reason is even if they have it to pay all cash they do not want all of that concentrated into one property. So on larger properties a shift in debt for NNN can affect cap rate more on resale. Additionally there is a smaller pool of buyers in the 4 million and up space so the cap rate expands some.

Anything with 10 years left on it for primary term you tend to not see much slippage on the resale cap rate. When you get down into 5 or 6 years left the cap rate rises a bunch due to uncertainty if the tenant will renew the option period and less guaranteed years on the lease. Those deals are purchase more for all cash. So if you buy NNN with 20 or 15 years a good strategy might be too sell with 8 to 10 years left or more in primary term.

Also even though tenant might be the same the purchase price might be different and the area quality not the same. Quality of the area and demographics along with the tenant can affect desirability of the asset and what buyers will pay for it.