Home › Guides

Selling an Industrial Building with a Tenant in Place

By Javier Brown, Commercial Real Estate Agent, MGR Real Estate · DRE #01755491

Many Inland Empire industrial owners want to sell while the building is still leased. Maybe you're retiring, rebalancing into a 1031 exchange, or simply ready to cash out. A leased building can sell very well, but the sale works differently from selling an empty one. The lease becomes part of what you're selling, and the tenant becomes part of the process.

Here's how to prepare and what buyers will look at.

Step 1: Know who your buyer is

A leased industrial building usually appeals to two groups:

• Investors buy the income. They focus on the rent, the remaining lease term, the tenant's strength, and how the current rent compares with today's market rent.
• Owner-users want to occupy the building themselves. A long lease can actually be a problem for them, because they can't move in. A lease that ends soon, or a tenant who's ready to leave, can open the door to these buyers.

Which group fits best depends on your lease. That choice shapes your pricing, marketing and timing, so it's the first thing to decide.

Step 2: Gather the lease documents

Buyers will ask for the full lease, every amendment, and any side letters. Pull these together early and read them yourself, or have your agent review them, looking for:

• Remaining term and options: does the tenant have renewal options, and at what rent?
• Rent and increases: what's the current rent and when does it go up?
• Expense structure: is it NNN, modified gross, or something else? Who pays the roof, HVAC, and parking lot?
• Right of first refusal or first offer: some leases give the tenant the right to buy the building first. You must follow that clause exactly.
• Security deposit: it transfers to the buyer at closing.

Missing amendments or unclear terms slow buyers down and can reduce what they're willing to pay.

Step 3: Organize the income and expenses

Investors will want at least the last couple of years of operating statements: rent received, property taxes, insurance, repairs, and what was billed back to the tenant. If you've been reimbursed for expenses under an NNN lease, have the reconciliation records ready. Clean numbers make your building easier to underwrite and easier to finance.

Step 4: Talk to the tenant at the right time

The tenant is going to find out. Buyers need to tour, lenders need inspections, and the buyer will require signed tenant paperwork. It's better for the tenant to hear it from you first, at a planned moment, than from a sign or a stranger in the parking lot.

Things to explain to the tenant:

• Their lease stays in effect. A sale doesn't cancel it.
• Tours and inspections will be scheduled in advance and kept to a minimum.
• They'll be asked to sign an estoppel certificate (see below).

Check your lease for the notice the tenant is owed before any entry.

Step 5: Estoppel certificates and SNDAs

An estoppel certificate is a short document signed by the tenant confirming the lease terms: rent, term, deposit, and that there are no defaults or disputes. Buyers and lenders nearly always require one. Most leases require the tenant to sign within a set number of days of a request.

An SNDA(subordination, non-disturbance and attornment agreement) may be needed if the buyer is getting a loan. It protects the lender and confirms the tenant will recognize the new owner.

Ask early. A slow estoppel is one of the most common reasons a closing slips.

Step 6: Price it the right way

For investors, price usually comes down to the building's net operating income and the return buyers in today's market expect for that type of building, tenant and lease term. A below-market lease with years remaining may lower the price. A lease that's close to market rent with a solid tenant can support a strong one.

For owner-users, price is driven more by comparable sales of similar buildings, but timing of possession matters.

A good valuation looks at both approaches and tells you which buyer pool is likely to pay more. That's exactly what my free commercial property valuation covers.

Step 7: Plan for inspections and the building's condition

Buyers will inspect the roof, HVAC, electrical, plumbing, fire sprinklers and the parking area. If the lease makes the tenant responsible for maintenance, you may want to check whether that's actually been done before you list. Fixing small items in advance, or at least knowing about them, avoids surprises and price renegotiation during escrow.

Step 8: Keep the tenant cooperative

A cooperative tenant makes everything easier. Some sellers offer small courtesies, such as handling tours around the tenant's schedule or addressing a long-standing repair request. You don't need to give away anything big; just respect their operations. A tenant who feels respected is much more likely to sign estoppels quickly and keep the building looking good during tours.

What I've seen work

I represented the seller of 1200 Jefferson Ln in Colton, a 1.645-acre paved and fenced M1 yard that closed at $2,000,000, and I represented both the buyer and the seller of 2280 S. Riverside Ave in Bloomington, a 9,510 SF industrial building that sold for $2,260,000. In both cases, preparation was what kept the deal on track: organized documents, clear pricing, and a plan for tours and paperwork before the first buyer called.

Frequently Asked Questions

Can I sell my building if the tenant has years left on the lease?

Yes. The lease stays in place and transfers to the buyer. It mainly affects who the best buyer is and how the building is priced.

Does the tenant have to let buyers tour?

Most commercial leases allow the landlord reasonable access with advance notice. Check your lease for the exact terms.

What if my tenant has a right of first refusal?

You must offer the tenant the chance to buy on the terms the lease requires before or after you receive an outside offer. Have the clause reviewed so the process is handled correctly.

Should I wait until the lease ends to sell?

Not always. A leased building appeals to investors, and a vacant one appeals to owner-users. A valuation can show which way is likely to bring a better result for your property.