SmithREServices - Sacramento Commercial Real Estate & Investors Guide

01.23.2008

Money scales You had a vacancy in your center and after a few months, you finally have a new tenant. Hurray!…or is it?

As with all of real estate, it depends. Let’s look at what that new lease might do to the value of your shopping center.

I. Local or National: If you signed a local tenant, that means you’ve said no to a national one, in practice. Investors generally prefer the stability of a national or regional tenant, so when there is a choice, go national.

II. Market Rent: Your agent has shared with you what market rents are but no one has agreed to pay your rent so you accepted less rent to lease the space. Let’s look at one scenario of how this might affect you.

Assumptions: Market Rent is $2.00 per square foot (psf) net net net (nnn). Vacant space is 2,000sf. Lease term is 3 years. Actual NOI is $349,400.

If you accept a tenant at $1.90psf nnn, that adds $45,600 to the equation making the actual net operating income (NOI) $395,000. If you cap the NOI at 6.5%, you would have an asking price of $6,076,923.

If on the other hand you had a vacancy showing $2.00psf nnn, that would add $48,000 to the equation making the Proforma NOI $397,400. When you cap that NOI at 6.5%, you would have an asking price of $6,113,846.

That’s a difference of $36,923 potentially coming out of your pocket just because your tenant is paying $0.10 below market rent. Remember, a vacancy can be considered a positive if: A. Your bottom line can take the hit; B. If the buyer has tenants who could fill the space under his management; and C. If you plan to hold the center past the term of this new lease.

III. Tenant Mix: Let’s look at another scenario which illustrates how the tenant mix could affect your shopping center’s value.

Assumptions: 20,000 sf center. 4,000 sf are vacant. Tenants: Nail salon, insurance agent, restaurant, mailbox store, bookstore, spa and karate studio.

You elect to sign a dry cleaning plant to fill the space. Prior to this tenant, there were no environmental concerns with your property. With this new tenant, any buyer who needs a loan to buy your property will have to pay for both a Phase I and a Phase II to confirm that the ground is environmentally sound. If problems are found, they must be remedied prior to the loan funding. Additionally, as the owner, you will have some additional environmental guidelines that must be met while you own the property as well as some potential liability.

Clearly, this increases the buyer’s due diligence cost but more importantly it raises questions as to lifelong responsibility for the affected land. These questions can directly translate to a reduced value of your shopping center.

When you consider the type of tenant, the market rent and the tenant mix, it is critical that you keep in mind your long term goals. If you plan to sell within the next 3 years, consult with an investment professional now.

These examples are very basic and not intended to be exhaustive in nature. To have more specific information about your property, Smith Real Estate Services, Inc. is a great place to start.

It simply makes good sense to work with an agent/broker who has your long term goals in mind, not just one who wants to earn a quick commission. When you work with an investment professional, you will have access to all the value they can bring to you. This value runs through the decisions you make during your holding period as well as when you sell your center. Choose your agent wisely.