Real Estate Trends – Land Leases
One of the trends in the real estate development scene over the past couple of years has been the increasingly common use of land leases for chain retail stores. The typical scenario, historically, was that when a chain store wanted to open up a new location they (or their preferred development partner) would buy an out-parcel of a shopping center or a piece of land along a highway and construct their building.
Land and shopping center owners have recognized the high prices that these new locations were selling for in the single tenant net lease market (STNL or NNN) and figured they too could latch on to this phenomena. They started to switch their tactics and try to get these chains to enter into a long term land leases rather than just selling them the land. This is all fueled by the record low cap rates these NNN properties are selling for (typically in the 5-7% cap range). So, as an example, if an out parcel that may once sold for $1,000,000 could now lease to a national credit tenant for say $125,000 per year. The long term land lease then would potentially have a cap rate value in the STNL market in the $2 million plus range ($125k divided by the example 6% cap rate equals $2.08 million), a boost of 100%!
Typically these long term land leases may go out for 20-50 years. The longer the lease the more valuable the land, especially if they have periodic increases over the term. The cap rate applied to income is of course a function of the marketplace, but is valued most importantly by the credit rating of the underlying tenant.
These types of land lease scenarios tend to work better for stronger locations that have higher demand or competition. In those cases the land owner is dealing from strength and can more easily dictate the terms and conditions. In less desirable locations or in locations where most of the ‘usual suspects’ have already located, then the land owner may be less able to push the land lease scenario.
The primary problem with this land lease imposition is that it shuts out a lot of good local and regional businesses from being able to build their stores at those locations. The land owners will try to hold out for the national chains that historically enter into land leases and can pay for the annual land lease costs in addition to the building lease costs. Land owners and developers need to realize that there is a relatively small universe of national credit tenants that are willing and able to go the land lease route.
For more information on this subject please contact Dougall McCorkle.
Dougall McCorkle
Premier Commercial Inc. – lic. Real estate brokers
239-860-3368
Dougall@premiermail.net
