Lease-to-Own Commercial Property: What You Need to Know

For businesses seeking flexibility in securing real estate, a lease-to-own commercial property agreement may be a strategic option. This approach offers the potential for ownership without the upfront financial commitment of a traditional purchase. Our Pickett Sprouse Commercial Real Estate brokers share insights into how lease-to-own agreements work, what to include in a contract, and the benefits and risks involved.

What Is Lease-to-Own in Commercial Real Estate?

Lease-to-own, also known as rent-to-own, typically takes one of two forms: a lease purchase or a lease option.

• A lease purchase is a binding agreement that requires the tenant to buy the property at the end of the lease term.

• A lease option gives the tenant the right, but not the obligation, to buy the property at a predetermined price.

Due to the flexibility and lower risk for tenants, lease option agreements are more commonly used and are the focus here.

How Lease Option Agreements Work

As broker Brad Gregory explains, a common structure might involve a five-year lease, with a purchase price agreed upon at the start based on the projected value at lease end. The tenant can choose to buy the property within a defined option period.

Some agreements include an option fee—a non-refundable payment for the right to purchase. While these fees are sometimes significant, Brad notes they are often “rolled into the purchase price” rather than paid separately.

Key Components of a Lease-to-Own Contract

A solid lease-to-own agreement should include:

• Parties involved (tenant and landlord)

• Property description

• Lease term and monthly rent

• Option price (agreed-upon purchase amount)

• Option period

  “You may have it where the tenant has the option to buy the property during the first two years of the five-year lease,” says Brad. “Or it could be that after you lease it for three years, you have a two-year option.”

• Purchase terms

• Responsibilities for maintenance, taxes, and insurance

• Any incentives offered

Are Incentives Common?

Sellers may offer incentives to encourage a future sale. Brad shares an example:

“Let’s say rent is $5,000 a month. If the owner is offering an incentive, they may give the tenant $1,000 credit per month toward the purchase price. If they stay for 24 months, that’s $24,000 toward closing costs or reducing the price.”

That said, these incentives are more common when proposed by the landlord than by the tenant.

Who Handles What? Tenant and Landlord Responsibilities

Lease-to-own agreements often shift more responsibility to the tenant, especially in cases where ownership is the eventual goal. Key questions to answer include:

• Who pays for property taxes?

• Who covers insurance?

• Who maintains the building and parking areas?

“You’ve got full-service leases, where the owner pays all expenses, and triple net (NNN) leases, where the tenant covers everything,” Brad explains. In lease-to-own arrangements, tenants are often responsible for maintenance. “It’s in [the tenant’s] best interest to make sure that it’s maintained properly.”

How to Calculate a Purchase Price

Determining the purchase price upfront requires a forward-looking approach. Broker Mark O’Neal, CCIM, emphasizes the importance of calculating net operating income (NOI)—the property’s income minus expenses.

One common valuation method applies a capitalization rate to the NOI.

“You are also agreeing on an acceptable rate of return that applies to the risk from ownership of the property,” Mark says.

Broker Emilee Collins, CCIM, adds:

“The cap rate is the rate of return on the income that is expected on a property in the first year of holding.”

Pros and Cons of Lease-to-Own Commercial Real Estate

Brad Gregory
Pros: Tenants are likely to care for the property, improvements may increase its value, and preset prices could favor the tenant in a rising market.
Cons: If the tenant doesn’t buy, they forfeit any improvements. The owner may miss out on market appreciation if the property is undervalued by the purchase price.

Emilee Collins, CCIM
Pros: Short-term lease-to-own deals (e.g., 18 months) are less risky and more manageable.
Cons: In her experience, tenants rarely exercise the purchase option, making these agreements time-intensive with limited payoff.

Final Thoughts

Lease-to-own commercial property agreements can be a strategic solution for tenants aiming for long-term control of their space while building toward ownership. For property owners, they can help attract committed tenants and reduce vacancy risk. However, both sides must understand the terms, responsibilities, and financial implications before moving forward.

Our experienced brokers are here to help. If you’re considering a lease-to-own agreement—or exploring your next investment—reach out to our team at Pickett Sprouse Commercial Real Estate. We’ll guide you through every step.