Net lease land value article

When the value of real estate outweighs the purchase price.

This article was written by our CEO David Sobelman. Please visit here to learn more about David and the 3 Properties team.

Depending on your motivations as a net lease investor, one comment I regularly hear from our clients is that they want low rents from their tenants to use as a safety mechanism if the company defaults or vacates the property altogether. 

Ultimately, the landlord wants the ability to raise rents when negotiating with a new tenant to be more in line with market rates.  

However, one metric that is rarely seen in a net lease investment is when the rents are so low that the value of the land alone outweighs the overall purchase price of the property with a market cap rate attached to the tenant’s credit.  

For example, if net rent is $200 per year, and the cap rate/market return for that tenant’s credit is 6.00%, the price of that asset would be marketed for about $3,333.33; ($200.00/.06 = $3,333.33). 

However, what if the real estate is so strong and the market has determined that the value of the land alone sits at $5,000 without a building on the property, a tenant paying rent, or any other factor that goes into the underwriting of a net lease investment? 

3 Properties shameless ad: check out this Valero portfolio that is priced below land value.

We’ve heard two arguments for this situation:

  • Best investment ever!
  • It depends on how long the tenant has the right to occupy the property under the current lease.

In either of the above conclusions, it’s clear that much of the risk embedded in a net lease investment is drastically reduced when an investor is able to buy the property below its real estate value – sans any metrics that influence the property based on tenancy.

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