When evaluating single tenant investment properties for sale, how much does a 5 year lease detract from the value of a property versus a 10 year lease, if at all. Also, how much does a gross lease detract from the value compared to a NNN lease? Is there an easy way to evaluate this? Assume all other factors are equal - location, tenant strength, market, etc.

Details:
- National credit tenant w/ corporate signature
- Just signed 5 year option - four 5 yr options remain
- Been at location for +/- 20 yrs
- Located on main retail corridor w/ other national tenants
- New NNN lease deals of same tenant are pricing w/ cap rates in the 5.5 - 6% range

It depends on multiple factors.A true triple net the landlord doesn't pay for anything.

With modified triple net or a double NN or single N the landlord has some costs involved.

The true triple net brings the lowest CAP.The other leases where the landlord is responsible for some things will increase the cap usually 50 to 150 basis points to compensate.

There is more value in a long term lease as usually net investors are looking for safe havens and tax shelters and are NOT chasing yield like multifamily etc.

The downside to net investing for corporate tenants is the rent increases barely keep up with inflation.As a net investor you have to know if that net tenant moves or goes under how much TI will be needed for that space and what will go in there at what rate.

Properties that have long term tenants the building is usually older so if not on a true triple net the buyer has to watch out for capital costs that are looming.The 5 year option renewal with more options definitely does not carry as much weight as a new build with long term lengths guaranteed instead of options.

Super-
I have mine priced at 7.25 knowing that it will get bumped up from there. I knew there would be a spread between mine and a new & true NNN, but just wanted to get some input on how wide the spread might be. Much appreciated!

It just depends on the cash flow the property produces. You can project out cash flow for the property over the lease term, factor in a reversion price based on a terminal cap rate, and then discount those cash flows back to the present to determine a reasonable value. Good web-based financial modeling software like [url=http://www.turbometrics.com]TurboMetrics[/url] TurboMetrics can help you with this.

An investor is taking a greater risk with a gross lease. If energy costs spike or property taxes increase the investor will be on the hook for all the increases. This is the reason investors prefer NNN investments or gross leases with expense stops. As far as the length of the lease, I would say the strength of the tenant would be more of a factor for a prospective buyer than the length of the lease. The lease is only as good as the signature backing it. If you have a strong tenant and a 5 year lease with options you should have no problems.

Great points - I agree!