Posted by ray@lcorn on August 25, 2005 at 18:13:43:
Dominick,
The easiest way to get you and the trustee off the hook is to get an MAI appraisal based on the building’s cost plus a market rate of return to the owner/developer.
The appraiser will research the market, pick the rent range for Class A single-tenant buildings, add for the additional amenities, and assume the build-out as part of the cost. The fact that the building is new, single-tenant, with a long-term lease, will eliminate the current market conditions as a factor.
If you want to double check the appraisal rent assumptions, commercial brokerages in many metro areas do annual reports on office space occupancy and costs. Local economic development offices often compile such stats for companies seeking to locate in the area.
My guess is that’s where your range of $13-$19 psf came from. That range is similar to a small metro we operate in, and in my opinion the terms you propose sound like a reasonable deal. The start rate of $16 psf is below the top of the market in recognition of the tenant-paid build-out and NNN terms; the annual increases are dead-on standard practice; and the lease term of ten years would be the minimum the company would consider to justify the build-out expense, and the minimum a developer (you) would consider to deliver a built-to-suit project.
But this is one guy’s opinion based on minimum information, and local market factors are a heavy influence on the long-term value. You’ll need to make sure you’re on firm legal ground as far as the ESOP goes to avoid any problems down the road. Be sure your attorney is in the loop.
Question for Ray?NNN Lease Structure? - Posted by Dominick
Posted by Dominick on August 25, 2005 at 24:27:55:
Ray,
We currently have an single-tenant office building under development for a company that my partner and I used to own. January 1, 2005 the company went ESOP (Employee Stock Ownership Plan) and although we are still running the company (president, vice-president) we are no longer the majority stockholders. The building that is under construction is going to be owned solely by my partner and I in a single asset LLC and will be leased back to the company NNN. Here is where it gets a little tricky, we are playing both sides of this and obviously don?t want to sell ourselves short as the building owners, but the price must also be fair for the company as the tenant.
The building is a definitely an ?A? building, roughly 31,000 square feet, great location, finest appointments all around, and is complete with a small fitness center. The tenant is paying for the build-out. The office market is depressed in our area but is starting to show signs of turning around. I feel in 2 years time the market will support rent much higher than where it is today. We will probably only be with the company for another 2-3 years, but are planing to hold the building at least 3-5 years. We are trying to find a ?fair? price per square foot for both parties. People have suggested anywhere between $13 and $19 a square foot; quite the range to say the least. We were originally talking about a 10-year, NNN lease, with a 3% yearly price escalation. I just don?t want to set a price too low now, and have a very low building value in 2 years when the market turns around.
Is there a way to find the ?fair market rent? for a building that is setting the standard in this area? I would really like to see this space go for about $16.00 a square foot (I think it is worth that as compared to other properties a little out of our market), however, I must be able to justify this figure to the ESOP trustee. Any suggestions?
The other option we considered was a shorter lease say 3-5 years with terms to be re-negotiated at expiration. However, since the tenant is paying for the build-out, we didn?t think that as the fiduciary of the company this was a responsible decision.
Any suggestions are much appreciated. Thanks in advance for your help.