Net Lease Appraisals

Net Lease Valuation Specialists

Colorado Appraisal Consultants is a leading provider of appraisals for net lease commercial real estate properties. We have advanced valuation tools and models specifically designed for this property type.

Net Lease Property

The Appraisal Institute defines a net lease property as follows:

“In general, income-producing property leased, often for 20 years or longer, to a national creditworthy tenant. Some real estate market studies treat net lease properties as a distinct property type.”

Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).

Experience

We have experience with virtually all net lease sectors such as:

– Fast Food
– Quick Service Restaurant (QSR)
– Full Service Restaurant
– Lube Shop
– Tire Shop
– Automotive/Auto Parts Sales
– Service Station
– Urgent Care
– Hospital
– Health Care
– Land Lease
– Medical Office Building (MOB)
– Bank
– Big Box
– Dollar Store
– Grocery
– Pharmacy
– Daycare
– Medical
– Distribution
– Retail
– Office
– Specialized Manufacturing
– And more…

Tenancy

Net lease properties are typically leased to either franchise tenants or corporate tenants. In some situations, the value of a property with the same brand may be different if leased to the corporation vs. the franchise, but this is not always the case.

Net Leases

Net leases have a variety of terms and names. In general, net leases are also referred to as:

– Triple Net Leases (NNN)
– Absolute Net Leases
– True Net Lease
– And more…

Most net leases are structured so that landlords are responsible for “structural foundation” repairs and maintenance and tenants are responsible for all other operating expenses and maintenance.

The lease will typically describe exactly who is responsible for what, but structural foundation components typically include exterior walls, foundation, roof structure, and parking lot repairs and maintenance.

Some net leases have zero landlord responsibilities, some do not.

How to Value a Net Lease Property

The valuation of a net lease property is heavily influenced by the income stream on the property. The two best methods to value this property type are the sales comparison approach and income approach.

Each method should still consider the income stream generated because the most probable purchaser, an investor, is buying the property for its income producing potential.

Income approaches are generally straight forward for this property type. Typically, no vacancy and/or operating expense deductions are appropriate and potential rental income (contract) is equivalent to net operating income (NOI). Cap rates are often best indicated by looking at sales of similar brands that have similar remaining lease terms, tenant type, year of construction and/or landlord responsibilities.

Unlike most other commercial real estate, the ‘competing market’ for net lease properties is national. It is not uncommon to have comparable sales and/or comparable cap rates located throughout the US. In some cases, it is better to go out of state and use the same brand verses staying in the local market area and using a different brand as a comparable sale or cap rate indicator.

Buyers and sellers of this property type are generally not limited to a single state or market area.

We have advanced valuation models that adjust comparable sales to reflect the income stream of the subject. Our tools utilize both regression and cap rate/NOI differentials. This adjustment is made to property rights  within the adjustment grid. This takes the guesswork out of why certain sales are higher or lower. Most appraisers lack the proper understanding and tools to adequately take into account NOI which can easily lead to a value error. It is imperative to have a solid mathematical adjustment framework to adjust property rights if you are appraising this type of property.

Net Lease Valuation Model

We are considering licencing our income adjustment model because it is powerful and simple. The model requires zero guesswork or decision-making.

The model only requires six comparable sales and the subject. Data inputs for each property are extremely simple. The only required inputs are sale price, property size (building area) and NOI. The sales should be the same brand to avoid further adjustments. An analyst can input this information in minutes and/or re-use information they have already compiled.

The results are plotted via linear regression and an NOI differential.

The model provides an indicated subject property value based on objectively defined income streams and what the market is paying for them. Typically, no further adjustments or subjective inputs are required. Unlike the income approach that requires a determination of a cap rate, this method only requires NOI and basic sale data.

Please contact us if you are interested in learning more.

Pricing and Turn-Around Time

Please visit our pricing page for pricing and turn-around time on your net lease appraisal needs.