How and when do you know what wil happen at the end of each, and final, renewal option of a sale - leaseback?

An automatic repurchase? A negotiated one? A hunt for a new tenant? Possibly bankruptcy in the event the mortgage is not yet repaid and a new tenant not found?
In Leasing Property - Asked by Jere C. - Nov 8, 2009
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Joshua B.
Ontario, CA

well, you would start by assuming that at the end of the lease term the tenant will vacate and do you analysis assuming you will have an empty building. will you be able to match the current lease rate at that time? Will tenants be attracted to the location? can the property be used by a diverse range of tenants? can you sell the vacant property for what you owe on it or what is its value vacant (to be considered as a pessimistic reversion scenario)?
second, read the lease. it will (or should) lay out the time frame in which the tenant will have to exercise his option (6 months before the termination date) otherwise you assume hes leaving. you can also contact them in advance to see their sentiment.
third, you have plenty of options. you can build in a right of first refusal for the tenant to repurchase, some tenants may want to repurchase at the end, renewals or extensions will generally be at fixed charges (for larger/national tenants) and could utilize a fair market option, you should always assume the cost to retenant and how difficult that could be, and the value of the property should it be vacant. BK would be an option but not necessarily a good one.

Nov 9, 2009
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James P.
Selmer, TN

You start by reading the lease and either conducting a thorough market analysis yourself, or hiring an experienced appraiser to conduct one for you. At each renewal point, the tenant will either renew, or he will exercise one of the other options available to him. Then analyze the situation using best-case--worst-case--most likely case methodology. For each available option, refer to the market analysis to help determine the likelihood of that outcome. Arrange these outcomes from least-likely to most-likely, and make your decision based on your experience. Again, an experienced commercial appraiser can help with this.
Much of your final decision will depend on your own opinion of where the market will be during and at the end of the lease term. Is the subject area deteriorating? Do you forsee a lot of vacancies in this area? Do you depend for the viability of your subject on retail trade? If so, is the population and residential property value in the subject's trade area increasing, stable, or decreasing? What would you forecast the market conditions to be at the end of the lease term? Why?
Again, an experienced commercial appraiser can help you reach these answers.

Nov 12, 2009
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Gregory G.
San Francisco, CA

What type of tenant, location, revenues, etc... It all depends on the deal.
Gregory Garver - Commercial Real Estate Broker
Broker License# 01716531
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Dec 3, 2009
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