Posted by Les on September 02, 2006 at 12:00:57:
Without a doubt, get a good Real Estate Attorney to discuss your legal choices. There may be a crack in the old contract you are not aware of.
Commercial RE lease dilemna - Posted by Eric
Posted by Eric on September 01, 2006 at 18:57:33:
My father and his three siblings inherited a shopping plaza (containing a Post Office, drug store, and liquor store) in the heart of a mid-sized town in MA. The person who leased the property from my grandfather sublet to the current businesses and used to own the liquor store (which he sold prior to his death). The dilemna is that back in the early 1960s my grandfather, with a 9th grade education, leased it to the current lessee for $800/MO without an annual adjustment for inflation! The lease is in force for another fourteen or so years. The lessee is responsible for all aspects of the property and upkeep. My dad and his siblings are in their 60s and want to sell the property to generate retirment income, but given the property’s revenue, they have an obvious dilemna. The current lessee offered them ridiculous terms.
Any ideas?!
Thanks,
Eric
Re: Commercial RE lease dilemna - Posted by Brian (NoCA)
Posted by Brian (NoCA) on September 05, 2006 at 09:44:57:
The owners of the property have a “leased fee” interest in the property, i.e. subject to the existing leases, no matter how much above or below market they are. Your father is stuck with the current rental rate and the tenant would be crazy to give up such a large leasehold interest.
You mention that the property is subleased. Read the originally lease carfully; some leases have sublet clauses which entitle the owner to receive a portion of the sublease payment. If not, any buyer would base their purchase price upon that low income stream for the next 14 years. Good news is that right now demand for retail investments is generally good nationwide if they do decide to sell.
And yes, the current sublessee can again sublease the property. Or sell the leasehold interest. Unless of course the original lease does not permit it. Good luck.
A few more thoughts … - Posted by Frank Chin
Posted by Frank Chin on September 05, 2006 at 07:38:05:
Eric:
Want to pass along a few more thoughts, as I knew an investor way back that dabble in these, especially in situations with anxious heirs like your dad, but with leaseholds that got some years to go.
First off, the propery interests are now divided into two, your dad and his siblings, restricted to the $800.00/month, but own the building and land, and the NNN leasehold, and by now, for argumemnts sake, collecting $8,000/month. This guy is legally, and rightfully making over $7,000/month, before maintenance, and probably smart enough the have HIS TENANTS pay the taxes.
Your dad has these choices:
- Buy out the leasehold at ridiculous terms, as he found out…
- Sell the fee position to someone who understands he only collect $800/month now, but in 14 years, it’ll be MORE than what it is today. This is almost like getting an annuity settlement, and you’re looking for someone to pay you a lump sum up front!!
Remember the guy buying the fee position can be more generous than the lessee, but not as generous as if he can collect market rent, for obvious reasons.
And what does the guy buying these situations look for?? First, subtenants leaseholds may come up for renewal, and depending on how the master lease is written, MAY require the FEE owners approval although the phraseology for these usually are “approval may not be unreasonably withheld”.
For instance, the investor I know bought out a fee simple owner with the intent of taking over a leasehold KNOWING the subtenant is selling out, and need the approval for the new tenant. In this case, it was a bar, and he found every new tenant “not qualified”, and in the meantime the NNN leaseholder has to pay the rent, and when the bar finally closed, because of the inabilty to get a new lease, the leaseholder folded up.
Now the dynamics, and your lease might be done differently. The biig difference here being even if you held up one lease, the lessee is still collecting considerable rent on the others. But at least, it’s a plan of attack that might be considered. It is possible with your dad’s age, he might be willing to sell out to a younger investor more able to play the needed cat and mouse game.
Frank Chin
Re: Commercial RE lease dilemna - Posted by Linda - CA
Posted by Linda - CA on September 04, 2006 at 13:22:12:
I was just even wondering if someone could offer to sublease it from the guy. He must be making a killing now.
Re: Commercial RE lease dilemna - Posted by Frank Chin
Posted by Frank Chin on September 04, 2006 at 06:09:02:
Eric:
What you have is an NNN lease of about 50 years with another 14 to go. Your dad and his siblings has a “fee simple” position that he is free to sell to any investor willing to collect $800/year, and much more beyond that.
I want to look at it from the standpoint of the lessee (the guy who leased it).
First, since my dad bought his commercial property in the 1960’s store rentals run $200/store/month down here. Secondly, inflation was NOT a big expectation in the 1960s’, so your grandpa was not an idiot for his time.
Third, FOR A NNN INVESTOR going into the deal, usually he makes a down payment of sorts, then in the beginning collects enough rent just to make the payments. Looks like from the rental you describe, this guy collects $800/month in the beginning, pay your grandpa, pays the taxes, then the maintenance, with little if anything left.
Is he then doing it for his health??
The whole idea is, years later, rents would go up, but his payment to your grandpa didn’t. It’s the exact same idea as someone getting a FIXED RATE mortgage, where there’s no cash flow in the beginning, but much mush more at the end. Would you do a rental where as soon as you raise the rents, the mortgage payment goes up the same??
Most NNN investors even today wouldn’t be dumb enough to put in rent adjustments so rents to grandpa would increase the same rate as the store rents. It’s like investing in a SFH, and be stuck in YEAR ONE for the next 50 years.
As the lessee, and I felt I paid my dues, made all the payments all of these 30 some odd years, and then have the heirs come by, and say it’s “TOO LITTLE”. My answer to this is, “a deal is a deal”.
And I feel somewhat strong about this from family experience.
My grandpa, worked hard at his business here in the USA, invested in real estate in China early the last century, almost his life’s savings. Then the communist revolution came, all land was confiscated, and owners were arrested as capitalist exploiters and put to death. Fortuantely he passed away by then, but his heirs were not as fortunate. The fact that the owner put in his hard earned money has nothing to do with it.
The whole issue with the communists is that the rents are UNFAIR, and the landowners didn’t work for it, and not entitled to inflation".
In your situation, the lessee is even fully entitled to get a mortgage on this place. Suppose he did that , and by some miracle your dad prevails, you tell the lessee and his banker with the mortgage, “sorry, you capitalist exploiters are out of here. How dare you cheat my grandpa”.
If your dad wins on ths, it’ll upend all the logic of investing into NNN deals, or most RE investing for that matter, where you make little in the beginning, but expect to make money on the out years.
Frank Chin
Re: Commercial RE lease dilemna - Posted by rdla
Posted by rdla on September 03, 2006 at 21:42:48:
How about fraud? In some contracts
and some states if there is severe advantage
of party A over party B because party A
took advantage of Party B due to party B’s
experience or lack of know how or education.
This is better argued specially if
party A who took advantage of party B
is the one who prepared or responsible
preparing the one sided contract.
As every body knows the law is fair and
more fair to somebody who was taken advantage of.
Lawyer you will talk to will be very trilled to represent your family.
Sorry I am not a lawyer just my 2 cents.
I came accross something like this before and that
is how the lawyer explained it to me. Contract
should be fair and if you prepared the
contract you are resposible for the shortage
the agrieved party did not get. I’m curious
to know what the result will be.
What do you think?
Re: Commercial RE lease dilemna - Posted by BTI
Posted by BTI on September 02, 2006 at 13:01:04:
Eric
Off the cuff it appears your stuck for the next fourteen years. First check the laws of your state, is a lease of that length permited or does statute limit it to a shorter time period, find out, it is probably ok but your looking for outs.
Second who has the origiaal master lease (I hope you have it and read every single word ten times), and is the present lease owner one of the current business owners? I have purchased the remaing lease on a building many times for many reasons. The owner of the master lease has a sweet deal at the moment, but what is his situation? You said the original lessee died, how many heirs, are there now several owners of the master lease? Also, inspect the property, current taxes, insurance coverage and any items a lessee getting to the end of the lease may start letting go to save money, they may breach the lease and you have your out. You want the building in good shape when you do get it back.
In any case I would send a letter reminding them that the official date for the lease to end is such and such and that you do not intend to renew or extend it, and send a copy to each of the subleases stating if they intend to stay after that date they will need to contact you, yes I know it’s 14 years but I’m sure you don’t have the foggiest idea of what they are paying and what their lease terms are. Info you want to know. Plus this master lease may have made a mistake and leased past the point he had the right to. Also selling the building now would probably require a very steep discount, and not worth it.
One very longshot idea, is to talk to a real estate attorney and ask if a sub-lessee in your state that becomes an owner, or is an owner, can wipe out the lease because of merged interest or some other factor. A real longshot but I’ve seen stranger things happen, and I’m grasping at straws looking for a loophole.
BTI
Re: Commercial RE lease dilemna - Posted by Dons
Posted by Dons on September 02, 2006 at 04:49:56:
Eric,
There is a commercial RE newsgroup on this Website.
That may be a better place to post your question, there are some very knowledgable commercial folks there.
Don
Re: Commercial RE lease dilemna - Posted by Frank Chin
Posted by Frank Chin on September 05, 2006 at 08:06:37:
Linda:
I was thinking that when I helped my dad bring the rent checks to the bank when he was laid up in the nursing home.
“Give me a leasehold, I’m keep half the money, and write one check to you, and you don’t have to walk to the bank at all”.
But I didn’t think he’ll go for it though!!
Frank Chin