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I bring up this type of tenancy because of COVID . The government allowed tenants to skip out and default on paying rents without consequence . The tenants either defaulted on the rent or overstayed the term . In either event , the tenant becomes delinquent , and the owner attempts to evict them . The tenant or affiliates may become illegal trespassers .
There are many examples of a landlord attempting to get rid of an illegal tenant only to be jerked around through the court system , with multiple appeals requested by the tenant . They are usually granted . Then comes multiple bankruptcies , not only of each tenant , one by one , but unknown people who supposedly moved in without notice to the landlord . Then comes the transients and fictious folks who show up declaring that they are a tenant and request that the process start all over because of their fraudulentlyclaimed tenancy . The courts , particularly in states like California , just turn their backs on this behavior .
The focus for the property owner becomes using legal avenues to evict the tenants and regain occupancy of the property . This process has great cost and frustration .
4 ) TenancyatWill . This form of tenancy reflects an informal agreement between the tenant and landlord . The landlord gives permission , but the period of occupancy is unspecified . The term will continue until one of the parties give notice .
Rehabilitated Property or New Construction :
Establishing market rents becomes essential in underwriting a rehabbed or new building . When there is an extended time delay for a leaseup period , such as with the new construction of an incomeproducing property , future cash flows need to be estimated to the point of income stabilization . Then the future stabilized income will be discounted , using an estimate of a market capitalization rate and a discount rate formula .
Work with a competent commercial appraiser to assist and calculate the correct market Cap Rate . Do not try to do this yourself without the help of an appraiser who knows the type of real estate and local market .
Below is an example : The market Cap Rate for a commercial property with triple net leases ( NNN ) has been determined to be 6.5 %. Triple Net or
( NNN ) refers to a leased or rented property where the tenant pays all expenses related to the operation such as taxes , insurance , maintenance , and occasional capital improvements . The 10,000 square foot multitenant property under consideration generates monthly rents of $ 1.50 per foot . On a ( NNN ) example for a Cap Rate analysis , one would apply a 10 % vacancy collection and loss factor and 5 % for nonchargeable expenses that tenants usually do not pay including reserves . The NOI would be $ 153,900 .
The NOI and Market Cap Rate are known so you can calculate the value :
10,000 SF rentable X $ 1.50 = $ 15,000 Per mo . X 12 Mos . = $ 180,000 = potential gross income . $ 180,000 –$ 18,000 for 10 % vacancy = $ 162,000 –$ 8,100 for 5 % nonchargeable expenses to the tenants = NOI = $ 153,900 $ 153,900 NOI /. 065 Cap Rate = value = $ 2,367,692
From an investment standpoint , market Cap Rates can show a prevailing rate of return at a time before debt service . The Cap Rate procedure will assist a lender and investor to measure both returns on invested capital and profitability based on cash flow . An informed lender or investor should understand that there may be dramatic variations in a property ’ s value when unsupported or unrealistic Cap Rates are applied .
Work with a competent commercial appraiser to assist and calculate the correct market Cap Rate . Do not try to do this yourself without the help of an appraiser who knows the type of real estate and local market .
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