Posted by ray@lcorn on July 04, 2011 at 11:56:28:
Bob,
I don’t like either option. You don’t say if the property is well-located (probably not), or how long and what it will cost to lease the vacant space (longer and more than you think), market supply/demand factors, or why you’d want to pay the owner for your work (options B & C).
If the seller is truly desperate, you’ve got much more leverage than you realize. Vacant properties are everywhere. There is no financing available for turnarounds other than owner-financing, and little incentive for a buyer to take on the risk. Unless there is some compelling reason not given I would not consider a partnership at all.
In my market properties like this are valued at 50 to 60 cents on the dollar of replacement cost, assuming it has potential to justify replacement. Retail costs about $75 psf (shell) to $125 psf (vanilla box) to build, plus land value.
I don’t have enough information here to speculate on the value, but I can tell you how I would approach it from general impressions.
Since it’s mentioned twice (B & C) my guess is the $150,000 figure is the existing debt? I might offer $10,000 or so over the loan amount, contingent on buying the property subject to the existing loan (with lender’s knowledge and approval) restructured for a worst-case break-even.
Something like $150,000 at 5% interest only for three years would work. If it is a bank loan I’d also hit them up for a credit line to do tenant improvements (TI).
Use your cash to take care of deferred maintenance, marketing expenses, small TI expenses, and reserves for carry cost.
At that you’re not getting a return until you lease more space, but you’ve limited the downside.
I’d need more details to comment further.
ray