Ground lease for major gas station Wawa, flying J ect, how to calculate base rent before tenant has cash flow?
After some research I have not found a clear answer how to calculate base rent in terms of a ground lease for a NNN gas station tenant. This is from the developers end with $1.3M on land improvement's on a 3 acre parcel. I noticed the ground rent cap method mentioned Annual Income/Cap rate = Base rent. But how can you set that to the correct rent without that locations sales. it seems that sales comps would leave to much room for error due to every locations NOI varying so much.
Any input how to break out into the correct formula would be greatly appreciated.
Use Price Per Square Foot, not the gross NOI of every comp.
We do these deals a lot and have never contributed close to $1.3MM on a gas station ground lease. Most we’ll do is deliver the land rough graded and stub out the utilities.
I’d call up your local NNN broker and ask, or just look for comps online. There’s no formula for this. Will say low in my markets is $75K, high is $150k (with a car wash).
Typically we’re grading the parcel and delivering with utilities stubbed.
I don't know the correct answer because I don't know retail ground leases well but I would think if your costs are $1.3M then you're solving to a minimum yield via the ground rent. Let's say that is 6% - that means minimum ground rent for your tenant would be $78K / Year. Again, I don't know retail, but perhaps that is the minimum and then you structure some upside participation so that the it's greater of $78K / Year with 3% annual bumps or X% of sales.
The formula you noted is incorrect - your annual income (the variable you're actually solving for) / cap rate (your req'd return) = your cost basis ($1.3M), said differently, you should be looking at this like: Cost Basis ($1.3M) * Cap Rate (Investor req'd yield) = annual income - what you will propose to the tenant to pay in base rent
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