Whether buying land for its potential equity increase over the holding period or for immediate development, it is important to understand its “highest and best use”. This entails gaining a complete understanding of the site from a topographical and economic standpoint. Brockway Commercial has extensive relationships with local governments and meet with them on a regular basis to understand permitting, zoning, flood zones, water and other utility accessibility to ensure that the land can be developed for its intended purpose.
A ground lease is an agreement where the owner leases land to a tenant who is allowed to develop a piece of property during the lease period; at the end of the lease all improvements typically revert back to the land owner. This type of investment is a valuable addition to any portfolio, whether to serve as a hedge to other riskier investments or to simply give peace of mind that a stable reasonable return can be achieved over the holding period.
Some of the aspects of ground leases which make them attractive investments are:
- Recognizable industry leading tenants
- Long term leases, typically 10 – 20 years
- Little to no management required of the landlord
- Since the landlord retains full ownership of the land there is no gain recognition at the time of the lease, whereas there would be if the land had been sold to the ground lease user.
- When the lease term expires, the land reverts back to the landlord to be leased again.
Cap rates on ground leases vary based on the quality of the underlying tenant, but they are generally on the lowest end of the investment spectrum, with tenants such as McDonalds, Chick-fil-A and Chase Bank commanding the lowest cap rates. Since cap rates are inversely related to price, lower cap rates generate the highest sales price.
Single Tenant Buildings
Single tenant properties can be “Build to Suit Properties”, built according to the specifications of the occupying tenant or they can be properties built speculatively by a developer that are occupied later on by a tenant.
Typically, operating expenses, property taxes and insurance are paid by the tenant; however, at times these leases can call for the landlord to repair and pay for roof and structural repairs.
Multi-Tenant Buildings / Shopping Centers
Multi-tenant properties come in all shapes and sizes, from small centers of only a few thousand square feet to shopping centers with several hundred thousand square feet. Smaller centers are generally non-anchored, in other words they don’t have any national large anchor tenants. Larger centers will typically contain anchors such as PetSmart, Staples, Target or Walmart.