Advice if you’re considering selling your leased building

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Occasionally, I’m asked how I get column inspiration. For me it’s a combination of reporting on macro trends in our industrial real estate market, advice I give my clients, issues that have arisen in transactions, and happenings with the business owners I counsel. Sometimes, a column idea falls from the sky - which happened today. 
 
Allow me to set the stage. I received an email from a client who recently relocated his business to a smaller leased location. The previous business address is owned. Upon my client’s vacation of the premises - he leased it to a neighbor. His plans - near term - are to move to a bordering state. Continuing to OEM real estate in California would create a undo tax burden on the income received vs selling the California asset and redeploying the proceeds into a leased building in a tax friendlier state. This, his motivation to sell. My client asked what considerations should be given for the framework of the lease agreement - allowing marketability and security. 
 
Below is the advice I offered. 
 
The lease should reflect a market lease rate - or as close as you can get. Value is a return on this rent. Consider swapping a couple of months free to get a higher rent figure. 
 
Build in sufficient annual rent increases. Most are written with 4% annual bumps these days
 
All “purchase rights” - options, rights of first refusal, rights of first offer should be eliminated. 
 
Make sure the tenant is responsible for all property tax increases when the property is reassessed after sale. 
 
The AIR Single Tenant Net Lease is widely used to document the deal. It’s common and most investors are familiar. 
 
Most investors want a relatively new roof and hvac units. Under a NNN lease, your tenant is responsible for maintenance and repair of these items but replacement is the owner’s responsibility - which can then be billed to the tenant monthly over twelve years. So, consider replacing these before sale. 
 
These days a five year lease is a minimum. 7-10 is much better - especially if you have the 4% kickers. 
 
Finally, credit of the tenant is huge. You’ll want to have two years of P and Ls, balance sheets, and corporate tax returns on hand. I’d see if you could get the principals to personally guarantee the lease to add a layer of security. 
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.