Posted by PeteH(NYS) on September 21, 2010 at 24:38:33:
Why does the landlord/parcel seller have to buy out the grocery store? If the optionor is interested in redeveloping the plaza, let THEM figure out how to pay the grocer. If the grocer is losing money, his only leverage is in holding onto his leasehold rights, which means staying in business as long as it takes the redeveloper to do DD and get all his ducks in a row. Which might never happen anyway, so the heck with him.
Advice needed - Posted by AKF
Posted by AKF on July 06, 2010 at 19:29:39:
I was hoping someone could offer some advice on a situation that I have stumbled on. We own a 10,000sf strip and a very busy traffic corner. A few months ago a developer for a major retailer aproached us an offered to buy the corner. Problem is that they don’t want to give a deposit since they feel they will be spending a lot of money on the dd. I don’t feel comfortable with that and don’t want to spend 5k on lawyers only to find out they were playing us and not all that interested. Any insights on this? Should I take a chance or walk away? They are offering good money so it is tempting.
Re: Advice needed - Posted by john
Posted by john on July 14, 2010 at 17:53:35:
If they really want the corner, then a deposit is not unreasonable. Perhaps you can lease the corner to them, until they actually purchase it, this will show their commitment. I would also market the corner lot to a similar business to drum up interest.
I am surprised that a major retailer would want to buy the property. Most retailers lease the space as they don’t want to tie up their capital in real estate. Chances are they are low balling you on the property, because once they buy it, they will turn around and sell it as a NNN lease investment. If it were my property, I would Lease the land to the retailer, and then sell the NNN Lease to an investor…This is the best way to maximize your return.
Re: Advice needed - Posted by ray@lcorn
Posted by ray@lcorn on July 08, 2010 at 14:01:57:
I assume they want to redevelop the site? If so, that’s typical of a first offer from a merchant developer.
The usual deal is for the developer to option the property. Option fees are earned by the optionor (seller) at the time of signing and non-refundable.
However in the current economic conditions there are very few retailers opening new stores. So the DD will indeed be extensive, but will be focused more on market dynamics than the property. The developer is at the mercy of the tenant as to how much market research, site engineering and third-party feasibility reports is required for approvals. A lot of deals blow up because retailers are cherry-picking markets and locations. It?s a buyer?s market and they know it. All that work is out-of-pocket for the developer. And that?s just the start. If the deal does get done he?s on the hook for construction risk and carrying cost.
It’s not uncommon for the process to take six months to a year before the lease is finalized. The tenant will drive the lease terms down as far as possible, often to the point the deal won?t happen without a reduction in the land cost. Hence what sounds like an attractive offer now may become less so when it comes time to go hard on the contract. (I?ve had this happen. There are ways to deal with it but that?s another post.)
Given the uncertainties it’s understandable that the developer is seeking to reduce upfront money at risk. I’ve seen several deals recently done with contracts with refundable earnest money deposits rather than options for exactly this reason.
That’s the buyer’s side of the equation. Your concern is to structure a deal that serves your purposes.
First principle of real estate transactions: everything is negotiable. Look at it from the standpoint of just what you’re giving up, and structure the contract to provide some recourse in case conditions change.
There is an opportunity cost incurred in signing a contract, with or without earnest money. Typically a contract provides for a DD period at the end of which the buyer has the option of walking away and the earnest money returned. This one will probably need a longer DD period than others. You might structure the contract with a minimal earnest money deposit with a clause that if you should get another offer, the buyer has X days (typically 10 business days) to match the terms and conditions of the new offer, or decline and receive a refund of the deposit.
You might also go back to the option, perhaps structuring the option consideration as monthly payments rather than lump sum.
The real risk is the effect on the property regarding the tenants. If you have lease expirations or renewals in the next year or so there will be an issue of the buyer or optionee?s approval of any new lease or renewal. There is an inherent conflict here. If they are going to redevelop the site they don?t want new long-term leases that will have to be bought out. However if they don?t close you don?t want to weaken the rent roll with expired or month-to-month leases. Be careful what you agree to.
ray
Re: Advice needed - Posted by AKF
Posted by AKF on August 01, 2010 at 17:12:39:
Thanks guys for the replies. I have worked out the deposit issue and now the bigger issue is getting a long term tenant out of his lease. He is doing very badly and leases most of the building that will be knocked down. In time I think that he will go out of business but if I wait for that to happen the deal will probably we dead. He wants A LOT of money to get bought out as he insists he invested a ton of money in the space. My question is should I pay or wait him out? I have a plaza right next door to this parcel and was wondering how much value a big box tenant such as a Walgreen would add to the rest of the plaza. Giving the broker that brought us this deal as well as this tenant will severly impact our take home money. We don’t need to sell as we are making money but were approached and are listening to see if it makes sense for us. Any advice would be appreciated. Thanks again.
Re: Advice needed - Posted by ray@lcorn
Posted by ray@lcorn on August 03, 2010 at 19:19:22:
The tenant smells dollars… as I warned in original post, have to be very careful dealing with existing tenants.
How long is the lease and how much per month? What kind of business? Any renewals? Do you have right to cancel at end of present lease term?
On the deal… how did you settle the deposit issue? how long is DD period or option term?
As to WAG value to adjacent property… there can be significant upside if access between parcels is preserved (they’re funny about this, depends much on topography, other development access, etc.).
ray
Re: Advice needed - Posted by AKF
Posted by AKF on August 04, 2010 at 12:11:42:
Hi Ray,
The lease is 15 years with two options and we have over 10 years left on the original term. It is a small 7,000sf grocery store at $5,000 per month. The owner of the store claims that they put over $600,000 into the store which I find hard to believe. So I have offered a significant amount and basically told the owner that they either take this offer or go out of business and get nothing. He wants more. It’s doesn’t pay to give the parcel away even if it means losing the current deal as it sits on a very nice corner. At some point it doesn’t make financial sense as we are already getting 20% less than market value after paying the grocer and the broker. I am hoping the tenant that will occupy the parcel will add the 20% back in value to the 40,000sf that we own right next door. And we are negotiating that an easment or some sort of right of way between the parcels is preserved. So I’m not sure what the right move is for me but if you could let me know what you would do in this situation I would appreciate it. Thanks for the help.
Re: Advice needed - Posted by ray@lcorn
Posted by ray@lcorn on August 05, 2010 at 09:14:01:
Sounds like you’re at the tenant’s mercy. He has a leasehold interest in the property, contractually granted, with significant time remaining (plus options) which increases the present value of his business.
Your buy-out offer and take-it or leave-it ultimatum is an invitation to a lawsuit, one that you will most likely lose. It is irrelevant what you believe the value of the improvements and business are. What is relevant are the contractual rights to the property, and that clearly resides with the tenant.
Please note: I am not a lawyer and don’t play one on the Internet. If you are determined to pursue this course I would strongly suggest you get one.
ray