Single Tenant Commercial--newbie, What Should I Do?
Free standing, commercial property.
Restaurant tenant signed a 15 year lease (lease personally guaranteed by 4 separate individuals) 11 years remaining on lease.
NNN-tenant responsible for all expenses assoc. with property
annual base rent is $128,546 (not including sales tax or CAM payment.) The base rent increases each year in accordance with the CPI index. There are two (5) year options to renew the lease at market rates, (but no less than the previous rate) modified annually by the CPI index.
Current net Operating income: $128,546
Cap rate: 9.2%
price: 1,400,000
building built in 1985, 6300 square feet of net rentable area. has a phase I inspection report done in 2000
agent says Owner will not carry, he thinks he paid about $900,000 about 5 years ago.
When I asked for tax returns, lease agreements, or profit loss statements the agent just laughed and said that no one EVER gives out tax returns, and profit loss statements and lease agreements wouldn't be shown until well into a contract on the deal.
Is this a deal? what should be in a letter of intent? The property appears in decent shape, asphalt looks okay, can't really tell what the roof or AC looks like, any suggestions?
thanks
Put in everything you asked the agent for in your letter of intent.
It is your money. Would you buy something without knowing all the details?(If so I have a nice palace in Iraq I want to sell you.(Bad joke. Sorry no offense is meant.)
You have the right to know the Net Operating Income. ie Income less all expenses, and you need to have your accountant verify these figures.
How can they do this without getting these from the seller?
Go back to the Agents Manager and explain what you need and that the prat of an agent needs to smarten up his act!!
Thanks Kiwiinus!
What kind of offer can I give in a letter of intent if I can't verify anything? I haven't contacted a commercial RE agent to see what the commercial comps usually are, but from the numbers, the tenant seems like they're getting taken to the cleaners.
The skeptic in me is thinking that the owner won't carry because:
A) The tenant is not so great and wants out before I find out
B) The owner needs the cash now, and in that case this should be more of a fire sale.
(hey, is this analysis paralysis and me making excuses for myself?) *sigh*
[ Edited by keymtn on Date 04/08/2004 ]
NNN is the way to go on commercial properties. I do not know your financial situation,put 10% of the asking price in escrow to prove you are a serious buyer. Nothing shows seriousness like cash. When you show them the money they should become much more cooperative. And you may have paralysis by analysis.
Actually it looks like a pretty solid deal to me. Not a home run but there is room in the game for doubles too.
You say you think the tenant is being taken to the cleaners. How come? This would worry me more than anything else, if the resturant is rented higher than comparable properties there is a chance that in the event of a failure you'll have to take a loss to re-rent.
Exactly right Commercialking! I think the tenant is paying too much per sq. ft.. The owners agent won't let me see the lease, and laughed at me when I requested previous years' tax returns. Unless there's a letter of intent, he won't let me see anything in writing (profit/loss statements, lease agreement). How can I even come up with an offer? How can I perform my due diligence? I have an agent on my end who is going to see if he can find some kind of credit history on the tenant.
It looks like the owner owns this property in an LLC for the past 3 years, should I try to purchase the LLC instead? Are there multiple offer scenarios that I should pose to the seller?
I don't know why the owner's, selling....possibly 1031...His agent wouldn't say (I asked). It sounds like a single individual owning this, but not knowing the sellers' needs also makes it difficult for me to come up with an offer.
How can this deal turn from a fair investment into a great investment?
Thanks to all for your input.
[ Edited by keymtn on Date 04/10/2004 ][ Edited by keymtn on Date 04/10/2004 ]
i had a friend who was in a ten year lease, but it had a clause in it, it was to be renegotiated at 5 years, somthing in original lease, gave him an opption of backing out, and he did they could not see eye to eye on new rent.
any way, you need to get a copy of the lease and have an attorney go over it, as mentioned, you will have to show your seriouness to the owner. tryint to re-rent the building could take consciderable time if they back out at the renegotiation time.
Thank you j_owley,
My agent said that it is not unusual for the seller to withhold the lease agreement information until some kind of earnest money is put down. I have yet to be convinced that this property is worth an offer.
If you decide to make an offer, I would include contingencies for upfront due diligence period, as well as seller producing all the docs (tax returns, P&L's, lease, etc.). And use a purchase contract instead of a letter of intent as L/I aren't worth the paper they're written on.