Navigating leased fee sales: Valuation, property tax implications, and lessee impact in NNN properties

The realm of commercial real estate is multifaceted and complex, particularly in the niche space of leased fee sales within triple net lease (NNN) properties. These transactions involve selling a property while it remains under an existing lease. This article aims to provide an in-depth understanding of the intricacies involved in leased fee sales, focusing on their valuation, commercial real estate property tax implications, and the consequent impact on lessees.

Understanding leased fee sales through name brand freestanding retail stores

Leased fee sales in commercial real estate are exemplified by properties that are occupied by name brand freestanding retail stores. These businesses are frequently involved in transactions that highlight the distinct characteristics of leased fee interests in NNN properties. In these arrangements, tenants are responsible for expenses like property taxes, insurance, and maintenance, making these properties highly attractive to investors.

When an investor acquires such a property, they inherit not just the real property but also the existing lease terms. The stability and reputation of tenants often translate to a sales price premium compared to fee-simple sales in an open market. This premium reflects the investor’s confidence in the tenant’s ability to provide a stable, long-term income stream. In contrast to standard commercial property sales, acquiring a property with tenants of that size and classification means adhering to the existing lease terms, significantly influencing the property’s valuation and investment appeal.

Valuation challenges in leased fee sales of NNN properties

Valuation of NNN properties in leased fee sales is a complex process, particularly for properties with tenants like the name brand freestanding retail stores. A critical aspect of this valuation is understanding market rental rates, drawing insights from comparable properties, such as former drugstores that have transitioned to different retail uses. These comparative rates establish a baseline for potential income in the event of a tenant change. Common occurrences of these scenarios are freestanding retail tenants, like dollar stores, filling the space of the former drug stores when the drug store permanently shuts their doors.

This broader perspective incorporates the property’s current lease conditions and its income potential under alternative uses. At the end of the day, the current tenant can leave the property, which would open the property up to the current market conditions. It is crucial to analyze the market value of the property excluding the current tenant and lease terms. The goal of commercial real estate valuation is to find the fee-simple market value which would exclude all business value of the current NNN tenant.