We've had a vacancy for 3 years at a pad site (former bank) in our 100k sqft shopping center.
We currently have an LOI to lease the space for a good credit restaurant tenant - but the cash on cash return isn't great. We wouldn't break even on our Landlord costs (LL Work/TIs/Commissions) to reposition the space until year 7 of the 10 year original term as deal stands today.
If I believe our intention is to hold/operate the whole center through the 10 year lease period - should I include a terminal value on the padsite when underwriting the individual deal IYO? IF there was sale, it would be of the whole shopping center, not the individual padsite. It's really the accretive "added value" to the center I'm trying to isolate.
I would say yes. Just like you’d take a reversion cash flow on an assumed sale. If you’re already going to assume this lease is happening, why cut yourself on a terminal value.
HOWEVER, be aware of the actual lease details. Is it 10 year term? If so, does it have options?
If it’s only a 10 year deal, it wouldn’t necessarily make sense to calculate a terminal value on free and clear moving forward. Restaurant deals are expensive (this one probably less expensive than the current lease bc you’re converting to a restaurant space), so you’ll a cost event again at year 11 to either renew or bring in a new tenant that if otherwise excluded likely artificially inflated your accretive value.
Hopefully others can chime in.
Thanks for the reply! Yeah I'm just concerned the break even is in year 7 of 10 year term. They have options to renew but I'll be conservative in my renewal/re-tenanting costs.
I guess one thing I'm still struggling is with is:
The vacant pad site has a value now, but I'm only showing the cost to reposition the space in my analysis. Lets say pad site is worth $700k as is (Land and vacant unusable shell with no signed lease) - Lets say after renovating the padsite/completing LL Work/signing leases the value is $1.8 million based on the in place NOI. Should I only be accounting for the delta between original value/repositioned value In my IRR calc to truly isolate the accretive value of the deal IYO?
Here is a thought, who cares about the breakeven, if you are doing a lease NPV analysis. As you mentioned, there is no reversion or sale, so why would you expect to recoup your cash flows in 7-years. Don't forget a 5-year hold is a 20% cash on cash to recoup. And that is a big metric. so of course a 5-7% coc isn't going to give you your money back in 7-years.
Agree re: break even
I agree. I think the questions you should be asking yourself are: If I send this deal away could I do better? and will putting the $$ into this create a sufficient yield?
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