How to think about valuing a Goodwill lease with 3.5 years left in initial term?
I'm looking at an asset that includes a 12,000sf Goodwill lease, and I'm looking for guidance on how to value that lease. It has 3.5 years left on a 10 year lease in which there are no rent escalators. In 2028, Goodwill has a single 10-year extension option. Rent escalates 10% for the first five years of the renewal term, and then another 10% the second five years. It's a NNN lease except for gas, which is included in the base rent.
It's located in a suburb of a Top 50 US MSA and has a good retail location. I have no indication whether they will renew. It's important to note that if Goodwill does not renew in 2028, the space could be used as an expansion of the conjoining property (the primary asset which I'm pursuing). I'm estimating it could generate $100k - $120k of NOI by 2031 in that event.
Is this a scenario to apply a cap rate to the current net income, under the assumption they will renew in 3.5 years? Or am I present valuing the remaining rent and adding some consideration for the future potential for the space?
Finally, does anyone have any experience with Goodwill as a tenant? Anything interesting to share? I.e., do they typically extend their leases? Renegotiate? Are they good about maintaining property appearance?
Thanks very much.
Based on the most helpful WSO content, here are some insights and guidance on valuing a Goodwill lease with 3.5 years left in the initial term:
Valuation Approach:
Cap Rate Application:
Present Value Calculation:
Factors to Consider:
Experience with Goodwill as a Tenant:
Conclusion:
This approach ensures you account for both the current lease terms and the potential future use of the space, providing a balanced valuation of the asset.
Sources: Apartment Renewal Negotiating Tips, NYC Tenant Horror Stories, Q&A: Property Manager, Anyone own any property on the side?, Real Estate Interview Questions Master Thread
Do what you do but assume a couple of scenarios. First, they renew - slap a cap rate and call it a day. Second, they choose not to renew - space is vacant. Slap a cap and see what happens to returns.
Third - they don’t renew - assume market rates for the space and the downtime with TIA and leasing commission.
Talk to brokers if you don’t know what a market rent for that space is.
I never had Goodwill as a tenant but never seen one that didn’t renew. Do you have their lease? It should outline the date when they are supposed to give you a notice of non renewal
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