Why Your Lease Rate Matters As A Property Owner by Michael Bruni

Maximizing the Value of Your Commercial Property: Lease Rate Essentials

When purchasing a commercial property to lease or renewing a lease on a property you own, setting the right lease rate is critical. Your lease rate not only impacts your immediate cash flow but also directly influences your property’s valuation. Here’s what to consider:

The Income Approach: Setting the Right Lease Rate

Your lease rate plays a pivotal role in determining your property’s value through the Income Approach—a common valuation method. Even if selling isn’t your current plan, undervaluing your property with a low lease rate could harm your equity.

Example Calculation:

• A 5,000 sq. ft. warehouse purchased for $500,000 needs a lease rate of $8/sq. ft. NNN to achieve an 8% cap rate (or an 8 cap).
• Formula: 5,000 sq. ft. × $8/sq. ft. = $40,000, then $40,000 ÷ 0.08 = $500,000.

If your lease rate exceeds $8/sq. ft., your property valuation increases, providing a higher return. Conversely, a lower lease rate reduces both valuation and return. Factors like lease type, property expenses, maintenance responsibilities, and deferred maintenance also affect valuation.

Analyzing Market Rent Rates

While the Income Approach is key, market rent rates—dictated by local supply and demand—are equally important. For instance:

• If your desired lease rate is $8/sq. ft. NNN, but market rates in your area are $7/sq. ft. NNN, your property might have been overvalued during purchase.
• This could result in a property valuation of $437,500 instead of $500,000, affecting your financial goals.

Using the Income Approach during the purchase process ensures you align your purchase price with realistic lease rates.

Setting a Competitive Lease Rate

To attract tenants, your lease rate should be competitive within your market:

• If you purchased the same 5,000 sq. ft. property for $400,000, an 8 cap would only require a lease rate of $6.40/sq. ft. NNN.
• If market rates are $8/sq. ft. NNN, pricing slightly lower—at $7.50 or $7.75/sq. ft.—could make your property the top choice for tenants while still maximizing your returns.

Tenants may even offer full market rates depending on demand and how well your property meets their needs.

Lease Terms Matter

Don’t overlook the importance of lease structure and terms:

• Consider factors like lease length, annual rent escalations, renewal options, and clauses like Right of First Refusal (ROFR). These details significantly impact long-term returns and property value.

Preparing Your Property for Sale

When the time comes to sell, ensuring you’ve optimized lease rates and terms will maximize your property’s market value.

For expert guidance tailored to your property, call me at (813) 995-5544. Let’s discuss how I can help you achieve top dollar while setting your property apart from the competition.