Tenant Quality Affects Real Estate Value

I was looking through one of my Valuation Reports the other day, and found a nice quote which demonstrates how valuers evaluate commercial real estate.

“Well located suburban properties, securely leased to national tenants, with modern building improvements, represent prime property investments and sell on yields of between 6.5% and 8.0%…

Properties that do not possess all of these attributes but have reasonable lease covenants of say 5 years, are selling on returns of 8.5% to 9.5%, depending upon location and building quality.”

Now, your mileage will vary – the numbers themselves will change from region to region. But the key is this: a better quality tenant will give you a more valuable property.

You see, it’s all about risk.

With a big, national company, your tenant has a strong financial backing, which means you can have a lot of confidence in your income.

With a smaller tenant, no matter how well-intentioned or business-smart they are, there is inherently more risk. One big lawsuit, one marital split, one fraudulent employee, or some unexpected occurrence, and their business (consequently, your...


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