Triple net lease with replacement rent

[Sean Harris]

I'm brand new to the commercial space so I'm just trying to learn a few things. I recently found a commercial property that has a NNN lease with a 100 year ground lease with 84 years remaining and it states that it has replaceable rent at $5.50 PSF. What exactly does the replacement rent mean? Does this mean I can potentially raise the rents by $5.50 PSF? The asking price is 400k at a 4.46% cap rate.

[Greg Dickerson]

Originally posted by @Sean Harris:

I'm brand new to the commercial space so I'm just trying to learn a few things. I recently found a commercial property that has a NNN lease with a 100 year ground lease with 84 years remaining and it states that it has replaceable rent at $5.50 PSF. What exactly does the replacement rent mean? Does this mean I can potentially raise the rents by $5.50 PSF? The asking price is 400k at a 4.46% cap rate.

 Replacement rent is a metric we use to determine if development makes sense. It's the amount of rent needed to justify the cost of development. It's similar to replacement cost. If replacement rent is lower than market rents including a margin for return then that's one box checked in the feasibly process. You need to be able to build cheaper than you can buy and the rent needed to justify the project should be lower than market rents or it doesn't make sense to build unless there is zero inventory and pent up demand.