Re: More Details, Please - Posted by Frank Chin
Posted by Frank Chin on March 31, 2005 at 03:31:59:
The way the class was conducted, students would ask general or specific questions, and he would bring a deal in to illustrate a general question, or answer specific questions on a particular deal.
Now, the points you raised would make good questions for some of the deals involved, and some of them were asked and answered in some fashion.
>I’ve been told that when dealing with elderly sellers, it’s a good idea to make sure they have their own counsel (you don’t want their estate suing you). Did he do that?
A> I don’t recall that question in particular. But my dad uses an attorney just to do the commercial leases with tenants, and as I also rent commercial property myself, I find that such leases can only be done with the assistance of an attorney. They are far more complicated than residential leases, and is more specific to the property and the type of business involved.
My dad uses a RE attorney just to draw up and review the leases, and so does my landlord.
In fact, being a city slicker, and deal with expensive city properties, I’m rather surprised that many on this RE board DO NOT use or bother with attornies at all.
>I imagine he got a lot of “way past my time” objections. How did he overcome them? Was he usually able to negotiate very soft or no rent escalators?
A>I don’t recall if the above was asked or answered as stated. But I own a rental next to another rental whose owner is in his 80’s who bought the place in the 1960’s. I also mentioned my dad bought his property in 1965.
If was interesting that during my dad’s stay in the nursing home, his tenant decided he was going to skip paying the rent, and we went ahead with eviction proceedings. The guy paid. My neighbor the landlord had maintenance problems with his rental while he was quite sick, and his grown children cannot help.
So its not “its way past my time”, but what do you do in the meantime, if you’re old and sick, and you don’t want to sell?? A NNN lease would solve some of the problems.
>Replace the shoe store with an office tenant, or turn the apartments into office space rather than dead storage and keep the store?
He mentioned in particular, in the case of the shoe store, there was a basement, but only a less than six foot in height. What he did was he got a contractor to dig down a foot or two to increase the ceiling height, got the shoe store to rent the basement instead, and freed up the upper floor.
>What amount of money did he typically give for the option, and for what length of time? Were there typically escalators in the option? Where does the option money usually come from? For that matter, how about the renovation money?
A> I don’t recall a specific formula. I do recall him making deals based on the needs of the particular seller. He mentioned that often sellers need a few dollars to take care of a particular need, and he’ll tailor the deal to meet this need.
How he structures it also depends on the lease or leases involved, the rents, how many more years to go etc.
>Is “sublessor” the current tenant, and “current lessor” the current owner? Are you talking about acquiring a master lease without an option? What up front money does he need if he isn’t getting an option to buy from the owner?
A> He mentioned in some cases, he would find or know someone interested in the location as a user. For instance, a travel agency who may be interested in having an office above the shoestore, and who can front the money to dig a basement storage area, and also come up with the option money.
>I thought he already had an option. Did he negotiate an even better deal with the heirs (“Make me a deal and I’ll buy now, or I’ll wait another 20 years for my option to mature”), or are you describing a straight lease/no option situation?
A> Yes, he got the option, and that’s what he did. Basically, he’ll approach the heirs and say “I have an option to buy by the year 2025, and pay you rent in the meantime, but can I offer you X dollars to buy the place today”??
Now picture this. Some guy has five heirs that can split $2.5mmm today 5 ways, each walking away with $500,000. Or do they want to split a few thousand dollars each month five ways for the next 20 years??
This is a decision only the heirs can make. But he mentioned that often, heirs that came into such situations usually needs money for something, such as a bigger house, medical bills, kids going to college etc, right NOW.
>Why does the fact that a tire center is hard to lease or sell make it easier to construct a brand new one?
A> Let me explain the hows and whys in more detail.
-His thought was that there’s a lot of areas zoned for commercial use, but located on secondary roads, that is hard to rent or sell. If you can find businesses where it is cost effective to locate in such locations, then you’ll match a “supply” to a “demand”. So its not a matter of hard to sell or lease for the seller, its a matter of not knowing what to do with such a property.
-He then did some market studies as to where tire centers can be located, and where the land is available to be developed. He said that large companies often hired staff to do such studies, and they were quite pleased that he in fact did such market studies for free.
-He goes further. If the large tire company would commit to a lease, he can sell the leasehold, use the funds to construct the facility, without the tire company investing any funds in it.
-If you were the tire company, would you go for it??
-Bottom line here, he identified a need for the seller, and a supply of such places for a users. Isn’t this the whole essence of commercial RE??