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Financial advisory
When Reviewing Properties, Sometimes that Lease “Positive” is Really a Negative BY CHRISTOPHER MILLER, MBA
SPECIALIZED WEALTH MANAGEMENT
OCOULD THAT POSITIVE BE A NEGATIVE?
ver my years in the real estate business, I have seen properties marketed many different ways. I’ve seen more than a few marketed in surprising ways. Perhaps the strangest examples involve properties marketed with a negative characteristic
described as a positive one. This article will review a couple of “negative sold as positive” examples that I commonly see. After you’ve read it; you will be able to identify these situations while evaluating potential acquisitions. More importantly – you’ll learn what extra research is necessary in these cases.
“TENANT HAS SEVEN 5-YEAR OPTIONS TO RENEW THEIR LEASE”
Representing options to renew as a benefit rather than as a liability is probably the worst offender out there. Giving a tenant an option to renew is essentially handing them a call option. When the tenant’s lease comes due they will pay the LOWER of market rent or the option price.
Let’s walk through a quick example: Say that you own a small shopping center, and have a Hallmark franchisee as a tenant. The store pays $25 per square foot, per year for a 2,500 square foot space, and has one 5-year extension option at $27.50 psf/ yr. When Hallmark’s current term expires, your tenant will look at the market. If the market rent in the area is $35 psf/yr; they’ll happily exercise that option to renew at a sizable discount. If, on the other hand, the market rent is $25 per year (or lower), Hallmark will not use that option and will instead re-negotiate the lease with you. So to summarize: an option to renew can ONLY be beneficial to a tenant – and that means it can only be detrimental to a landlord.
This does not mean that you should avoid tenants with options. Signing a great national-name tenant will usually require granting an option to renew. This isn’t, however, a “great attribute” of your property – especially if it’s one of those famous “no rent increases for 75 years” string of options favored by tenants like Walgreens.
“BELOW MARKET RENT TENANTS.”
This seems to be a favorite claim among listing
Christopher Miller is a Managing Director with Specialized Wealth Management and specializes in tax-advantaged investments including 1031 replacement properties. Chris’ real estate experience includes work in commercial appraisal, in institutional acquisitions for a national real estate syndicator and as an advisor helping clients through over four hundred 1031 Exchanges. Chris has been featured as an expert in several industry publications and on television and earned an undergraduate business degree and an MBA emphasizing Real Estate Finance from the University of Southern California. Chris began his real estate career in 1998. Call him toll-free at (877) 313 – 1868.
AMM1/6 APARTMENT MANAGEMENT MAGAZINE - DECEMBER 2021 67