Need Input re: Feasibility of Transaction - Posted by Rich King

import · December 28, 2006, 2:41pm

Posted by Gary-Oregon on December 29, 2006 at 24:47:24:

I sure like the down payment and the owner carry terms. Honestly, there is really only one thing I would consider at this point.

Did your option lock in the price that you can buy it for in 2008? If so was it based on the value when you initiated the option or another factor?

If the option price was locked in at a price that you believe is substantially lower than the actual price would be in 2008, you would be better off waiting until 2008 to buy and take advantage of the price escalation. If, on the other hand you failed to lock in a nice future price, AND you can negotiate a much better cap. rate, the small down payment, coupled with nice NNN leases and the seller carry back terms, could well make this a very good deal. Much will depend on your ability to control expenses.

Cap rates can vary so much from area to area and between property conditions in a given area. It is difficult to judge an acceptable cap. rate for your area, but I would definately negotiate a higher cap reate as a buyer.

LOL

import · December 28, 2006, 2:41pm

Need Input re: Feasibility of Transaction - Posted by Rich King

Posted by Rich King on December 28, 2006 at 15:41:17:

Thanks in advance for any input/advice that?s provided from those
experienced in the art of these types of deals. Here are the details of the deal
that I?m considering:

Price - $2,150,000.00
Bldg. Type ? Office/Retail
SF ? 12,800
Occupancy ? 100%
Gross Rents ? (2006 ? $163,566; 2007 ? $171,744)
CAM - $4,001.79
Taxes - $18,072.45
Triple Net Leases
Bldg. Built in 2003
1.75 ac. of land

Some more detail ? I have a business (medical services) that occupies approx.
60% of the building with three other tenants making up the remaining 40%
(nail salon, specialty grocery store, pub/restaurant). Due to the nature of my
business and the amount of capital that I laid out in leasehold improvements,
I asked for an option to buy the building in 2008. The seller recently made it
known that he wished to sell sooner so I accelerated my plans a bit.

The seller is willing to finance 100% of the price for 60 mos. at 6.5% I/O with
a downpayment $5,000 (no-that?s not a typo) with a balloon after month 60.
No prepayment penalty and no transfer of the deed until it?s refinanced. The
seller based the price on a general per square foot sales price in the area of
$170 and a CAP rate of 7% (too low based upon several conversations with
commercial appraisers and other developers). Using a more realistic CAP
rate of 8-9% yields a price b/w $2.14MM to $1.9MM.

The first lease term comes up in May of 2008 (mine) with the next to follow in
January of 2009. Each lease contains a renewal option with a rent increase of
3-5%.

My question is this: am I crazy for thinking that this is a good deal? What am
I missing here? Thanks again for your help.

import · December 29, 2006, 7:16pm

Re: Need Input re: Feasibility of Transaction - Posted by Rich King

Posted by Rich King on December 29, 2006 at 20:16:54:

Thanks for the input. Further due diligence turned up a few serious red
flags today so attractive as it may be, this deal may be DOA for now.
Thanks again for the info.

import · December 29, 2006, 3:05pm

Re: Need Input re: Feasibility of Transaction - Posted by ray@lcorn

Posted by ray@lcorn on December 29, 2006 at 16:05:14:

Rich,

Two thoughts…

First, I wonder if you realize that you control the value of the property? It’s no surprise the owner would like to sell now. And once the lease has less than one year left, the value drops significantly.

With your lease for 60% of the space you are the major tenant, and the future of the income stream (and hence the major component of the property’s value) depends on your decision about whether to renew in 2008. That’s the first thing any third party who may be interested in buying the property would want to know. As long as the answer to that question is unknown, the uncertainty of the income stream will immediately increase the buyer’s valuation cap by two to three points.

I assume that your lease provides some window of time in which you must notify the landlord of your intent? Typical terms would require you to notify no more than six months and no less than three months prior to the lease-end date. As the major tenant with an interest in purchasing the property, it would be in your best interests to wait as long as possible in giving notice to renew in order to derive maximum benefit from that control. At the very least I would drag my feet until entering the window for notice before agreeing to a price.

Further, since you didn’t mention a firm option price I suspect what you?re calling an option is really a ?right of refusal??also known as a last-look provision?that gives you the right to match any bona-fide third-party offer within a given amount of time from being notified and supplied a copy of the sales contract.

That gives you even more leverage. Any outside buyer will know that no matter how they structure the deal, you have the right to match the terms. That means they may go to a lot of trouble for nothing. A savvy buyer may even offer to buy your rights, maybe paired with more favorable lease renewal terms, or any other incentive that made the deal work.

Second thought is about the seller?s terms. Very attractive?but I?d never agree to the deed not transferring on the date of sale. I would make it very clear that the point is not negotiable, what I call a dealbreaker, and not even up for discussion. Too many downsides to leaving title in the seller?s name (e.g. exposure of the property to claims against the seller; higher cost and less-favorable terms for insurance; lack of tax benefits to you from depreciation; etc.), and no benefit to you whatsoever.

So time is on your side? use it to its maximum benefit… and remember the cardinal rule of dealmaking?he who wants least, wins.

ray