Will this work? - Posted by Elena

Posted by Elena on October 18, 2007 at 21:05:25:

I suppose it is still empty because he wants too much money. My option is if I cannot prelease it I can get out of the contract. Now after my original LOI he has made some changes, and I am not happy with it. Instead of $7000/month rent he wants $7500.He wants the purchase price at $900,000. Instead of the option to buy for 3 years, he wants the right to sell it after the first year if he gets a better offer, giving me the right of first refusal. He also wants to have a 2% rent increase the first two years, and a 5% increase after that.He does not want any portion of the rent going to the purchase price, nor will he allow any improvements I make to go to the purchase price. He originally told me he would put up a wall, or take one down, and about 2000 sq ft of the space is totally unfinished: no sheetrock, flooring, ceilings, AC or plumbing. He offered to do all the buildout but at an increase of $2000/month rent. As I am a subcontractor I can do all for probably under $15,000 and would be foolish to pay $72,000 for the same job. I am tempted now to tell him to take the building and shove it as he has not met a single request I have made.

Will this work? - Posted by Elena

Posted by Elena on October 04, 2007 at 19:57:17:

I have made an offer on a commercial property that has been for sale for about 18 months now. It has been vacant since the owner relocated and he is paying taxes, insurance and utilities each month with nothing coming in. Originally he was asking $1.2 million, then it was under contract at $893,000 last spring but it fell through. He says it was appraised at $925,000 though comps show it may be closer to $700,000.
I offered him a lease with option to buy at $800,000 within 3 years, then a renewable lease for another 3 year period with a 2% rent increase.I offered a yearly lease price of $81,100 for the entire property,or about $6758 per month.The building consists of about 8040 sq ft of space that can be used for retail, studio or office space, and is already divided but can be further divided easily to create smaller amounts of usable space. I should be able to easily rent for $15-$18 a sq ft all the space as it is in a very desirable location that stays nearly 100% occupied, and rents go for about $18-$20 per sq ft.I requested that 10% of the monthly rents go towards the purchase price, and that everything is contingent upon me being able to pre-lease the space within 90 days.
He countered with an offer of monthly rent at $8000, a purchase price of $925,000 and should he do any buildout then the rent would be increased by $2000 per month. One area of the building needs heat and air, plumbing, sheetrock, paint and floor treatments, but I can have all that done for far less than $2000 a month, as I have been in the construction business for 10 years. He only wants a renewable lease for 1 year and a rent increase at 5% then.
I plan to put up a sign that says “Now pre-leasing, call Elena etc…” as this weekend there will be a lot of traffic by there with a fall festival taking place. I also plan to go to the festival and hand out my cards to the exhibitors and see about getting people lined up as possible tenants. I already have possible tenants who may lease about 1/4 of the total space, and I could use about 1/4 as my own studio and office space which I would get free, plus clear a profit of a few thousand a month, more should I not occupy any space.
I then made a counter offer of rent at $7000 per month, purchase price of $825,000. I refuse to pay another $2000/month in rent and can do the buildout myself so I am not considering his offer for buildout. I don’t want this negotiating to continue forever, as I want to get busy so possible tenants can take advantage of the upcoming holiday shopping season.
I think it is a great opportunity as property values in that neighborhood are rising rapidly. I have been working with the city planner who knows what plans the city has and values can only continue to increase. He has told me that I can obtain a low interest loan from the state for about 50% of the purchase price up to $250,000 and the owner said he would be willing to do some owner financing should I go ahead and purchase the property. I have never done any real estate transactions, other than buying my home,and I have about $53,000 in equity in that. However, my credit score is not good and I have no savings with which to use as a down payment. I welcome all advice here.

Re: Will this work? - Posted by PeteNc

Posted by PeteNc on October 17, 2007 at 21:54:48:

I love the idea tried to do a few myself but you need a motivated seller or someone will to share the profit and I’m not sure this guy is willing to do this at least yet.

So where area is this located in?

PS you’re negotiating don’t get tired and look at other stuff just in case and to give yourself leverage to say , I’ve got a better deal etc.

Good luck

lease types and capital - Posted by Penny

Posted by Penny on October 07, 2007 at 15:32:55:

A few questions are in order.

Is your master lease net or gross?
Who is responsible for the property expenses and maintenance activities, you or the seller?
Are the market lease rates you mentioned NNN or gross?
Do you have the cash (or can you get it from somewhere) to fund the repairs needed to fully lease the property?
Do you have cash reserves to cover tenant incentives such as rent reductions or build out allowances that are common for businesses getting ready to open shop or leasing commissions if an agent brings you a tenant?
Do you have cash reserves to cover expenses if leasing takes longer than you expect (it usually does)?
Do you have a plan for how you would acquire the money for closing costs in addition to a possible down payment?
Do you have a business plan for the master lease and subsequent purchase that projects expenses as well as income?

The most important question:
What is your exit strategy?

Assuming a 40% expense load, if you are responsible for expenses in addition to your rent, then you would need 100% leased at $17.42 psf gross lease to break even each month. So please be careful, lest you find yourself in the red on a lease.

Re: Will this work? - Posted by john

Posted by john on October 05, 2007 at 16:28:49:

does the 7,000 in rents go toward 100% of the purchase price over the next 3 years? How much rent do you think you can personally collect above the 7,000? How certain are you that in 3 years you will have the money to buy it? If you are collecting rents at 84,000 a year with a purchase price of $825,000 then that puts you at a cap rate of 10.18% …not bad. Our the leases triple net with the tenants?

Re: Will this work? - Posted by Elena

Posted by Elena on October 18, 2007 at 21:10:15:

Now he is saying none of the rent will go towards the purchase price.I could collect about $4000 a month over the rent I must pay him if it is 100% occupied. I am not certain of anything, but if I can build up the place and have it fully occupied, it would be very desirable for a buyer, and I could then exercise my option to buy, and turn around and sell it with a simultaneous closing, couldn’t I? The prices he wants now are $90,000 a year rent and $900,000 purchase price. I do not understand your last question.

why hasn’t the current landlord rented it out? - Posted by Brian

Posted by Brian on October 08, 2007 at 04:36:37:

You said it is in a very desirable location, easy to rent… yet it has been empty for 18 months?

This may be a bigger fish than you want to fry on your first jump into the commercial world.

Yet I like your lease option approach to mimimize risk… yet what is your strategy if you can not prelease… pay the rents yourself?

Re: Will this work? - Posted by Penny

Posted by Penny on October 29, 2007 at 17:46:51:

Commercial leases can have gross, net, and revenue components. Ignoring the business revenue part, fully gross means the rent includes the tenant’s share of maintenance, taxes and property insurance. If costs go up, then the landlord had better have rent increases in the lease or they’re stuck with the expense eating into profit.

Triple net, a.k.a. NNN, means the tenant has a base rent plus an expense component usually referred to as CAM, or common area management and this includes the management, taxes and insurance. Hence, net-net-net. It’s a nice way to go because the CAM is reconciled each year, so your expenses are indexed for inflation. In a true NNN scenario, the tenant is fully responsible for everything and is often a single tenant property, such as a Walgreens, CVS, etc. In a multi-tenant property, this would be a disaster, so the landlord collects CAM and coordinates this function.

That is why you have been asked questions about the market rent numbers you’ve posted. If they are gross versus net, it makes a BIG difference in your projected profits. See my earlier post and compare with your market rent numbers.

From your subsequent posts, it doesn’t sound like the seller is very motivated.