How I Increased the Value of a Property Without Spending Any Money

Here’s how I helped my client gained 65% value increase on an STNL property

It is widely known and understood that the value of a Single Tenant Net Lease (“STNL”) property is closely tied to the lease. In fact, many opponents of STNL properties tell clients that the value of a property declines as the lease term shortens. Although not entirely correct, it does bear some truth (the CAP Rate of the property goes up with shorter lease terms, but many times this is offset with the rental increases built into the lease). What they don’t tell you, is that by utilizing strong real estate fundamentals and repositioning the lease, they can actually increase the value of the property dramatically.

For instance, I once represented a buyer that wanted to get into the STNL market. I was able to find an off-market property that had everything going for it. It was corporate guaranteed, strong location (Southern California) and strong history at the site (they had been there for over 40 years). The one downside was that there was only 7 years remaining on the lease, with no options to extend.

Some would say this was a negative, I saw opportunity.

The operator was still in a lease that they signed back in 1976, and the tenant had occupied the property (with extensions and options for 40 years) . This lease provided for percentage rent, as well as monthly sales reporting. From the monthly reporting we were able to determine that their sales were over 150% of the average unit level sales, and was in fact, one of their better performing locations. Additionally, since they were paying a percentage rent, they were consistently paying percentage overage above the base guaranteed rental rate, almost 30% above the guaranteed rent every month). We came to the conclusion that it was very unlikely that they would leave and relocate given the low rent to sales (5.0% percentage rent), and higher then average sales. My client decided to move forward with the acquisition, and purchased the property for $1,625,000.

After the close, my client asked if I would reach out to operator and see if they would extend the lease. Typically we only reach out when there is less than 2-3 years remaining on the lease, or we are getting ready to sell the property (to get a better CAP rate). I agreed it would be worth a shot, and reached out to their corporate offices. I was put in contact with their general counsel, his very first question to me: “Why would we want to renew right now, when we still have almost 7 years remaining on the lease?”, my response: “The location is one of your best locations, don’t you want to ensure that your still there 8 years from now, and I’m going to make this very easy for everyone involved.”

What I meant by that, was that we weren’t going to ask for any additional money, or higher rent so to speak. We would keep the same lease structure (percentage rent), and terms and only do

an amendment. The amendment was structured in a way that was favorable to everyone, in exchange for a new 15 year lease term, with 2 – 5 year options, we only asked:

1) The percentage rent clause and lease stayed the same; but, we wanted the minimum guaranteed rent to be increased to what they paid the previous year for all rents, this would still keep them at a very strong rent to sales ratio of only 5.0%;

2) They would commit to a remodel of the store, at their cost, as it was an older model, and could use refurbishment. This was actually a win-win situation, in that remodeled/refurbished locations typically see an increase in sales of about 15-20%, so the company would get more sales, and my client would get more percentage rent.

They of course agreed, we worked out the terms of the remodel (minimum amount they would spend, what types of improvements they would make, etc…

My client was very happy with a property that now had an extended full lease term. Cut to 7 months later, I received a call from another broker asking if my client would consider selling this property. I said they might, but also told them about the new lease. Due to the new lease, and higher guaranteed base rent, we would want a lower CAP rate, almost 125 basis points lower than when they purchased the property, and the purchase price would be based upon the new guaranteed base rent. After a couple of weeks of negotiations, we were able to come to a deal, selling the property to this new buyer for $2,650,000. Over 1 million dollars above what my client paid, less than a year previously, a 64% increase in value.

Needless to say, my client was very happy and sold the property and completed a 1031 exchange for another property, with a higher CAP Rate, increasing his NOI even more. And that is how you can create value in a property without putting any money into it.

If you’re looking to create value and maximize your return on your property, please reach out to me for a quick, no obligation consultation at gpino@cbicommercial.com or schedule via my Calendly.