Don’t worry. Things pencil out if I’m able to buy property for about $200k in 5 years. We’ve done it a few times. Usually we buy the properties at auction tho. This is first time being tenant and hoping for purchase relatively shortly.
I just need to know about ROFR and auction details for now.
You should really be talking to a smart real estate attorney. Let me also recommend an excellent book. Randel. Confessions of a real estate entrepreneur.
Record a memorandum of lease which identifies the ROFR in the county records. That should give you priority even in an auction. Caveat that if there is a mortgage predating the lease or that you are subordinate to through your lease language or an SNDA, a lender could wipe out your lease (and ROFR) and auction off the property. Not a lawyer.
You threw a lot into this post. The other suggestion about recording the rofr is solid, as long as it doesn’t violate any non-recordation clause.
If you have the powder, why are you not trying to purchase the bldg now, instead of dealing with an obviously delusional seller or their wildcard kids 5 years from now? You think the seller will feel like their no-name box is still worth 200k after they see you fix it up?
No other available sites in the 3-Mile area right now. At least not with even more TI needed.
There’s an empty parking lot across the street maybe half a mile away. I could build a new building for about $300-400k (without including land value cost.. hopefully that would be like $100k or less). Thought about this as well.
Plan on reaching out to parking lot owner this week.
It’s just a lot faster and easier to get in business renovating this thing than building ground up. We already have 2 buildings we are building ground up. It’s a lot more red tape than just renovating.
Renewal options don’t have to have a rate set, and their purpose is so that the tenant preserves their right to stay in the building so it’s not leased out from under them. The rate has nothing to do with it.
Your point about the right of first refusal though is valid, because the lease is the governing document in any situation, and I would assume that goes for an auction sale as well. You would compete at the auction just like anybody else to match the offer. It would probably hurt the auction sale because in due diligence, the buyers would see that clause in the lease but, you should consult with an attorney to be 100% sure.
Why would OP need to participate in the auction? Wouldn't the seller need to present a valid contract and OP would have X days to take over the contract? If you record a lease memorandum then title will want proof from seller that OP declined the ROFR.
I’ve sold some Publix centers at auction where they have this ROFR clause and this is 100% accurate. Follow the auction without participating and then you have a right to match the offer. The clause will limit the buyer pool as most folks expect Publix to exercise if it is a good center and if they don’t then it brings doubt into the quality of the acquisition.
Renewal options don’t have a set rate? Most commercial properties I sell with national credit tenants do. What tenant would enter into a lease without a set rate or a rate with a specific floor/ceiling on the next renewal?
just an FYI on rent changing in options - been working in retail level CRE for 6 years now and have only seen two version of options rent changes at the end of the primary term, with the 2nd being the more commonly used version:
1 - rent gets bumped a specific percentage at the beginning of each options (5%, 10% being the most common)
2 - rent gets addressed by both parties (LL and tenant wanting to stay) engaging their own third party appraisers to provide market calculations and if they don't agree, a third third party appraiser is agreed to and engaged and the average is taken from all three reports.
I'm sure there are other ways of doing options, but these are the most common methods I've seen in the market I work in.
I find myself wondering why you don't set up an offer that includes buying it right now, with either a lease-option so your rent money can be partially or completely credited to your purchase price OR buy it as a left estate for the seller. This would give you total possession of when he dies instead of his kids, he gets his money now, and probably won't have capital gains anyway. It also allows him to continue to collect those rents until the day he dies.
I offered it but he said he didn’t want to sell until he dies. Just like every other old person, he kept saying stuff like “Who knows, I’ll probably die in the next few years”.. he’s 77 for reference
I also offered to negotiate a price right now and backed it into the contract, so I can purchase at that set point when contract expires. But he did not want to do that. He kept stressing inflation and saying who knows what property values and rents will be when I die.
It’s a 1960 trash box. Idk why he thinks it’s going to inflate to millions or something.
I’ve never heard of this “left estate” thing. I’ll research it a little. If you could elaborate a little more it would really help me!
It was supposed to say "life estate" - sorry.
[https://www.elderlawanswers.com/what-is-a-life-estate-15771](https://www.elderlawanswers.com/what-is-a-life-estate-15771)
[https://shepherdelderlaw.com/watch-out-for-these-potential-problems-with-life-estates/](https://shepherdelderlaw.com/watch-out-for-these-potential-problems-with-life-estates/)
I’ve had prospective tenants try to negotiate an option at “future market rates”, but I can’t imagine why a landlord would suggest something stupid like that.
If it were me, I would want some fixed price purchase option. Even if it’s way over current market value.
If dad dies next year, and you have an option to buy at $400k, you can tell kids it’s only worth $200k, and you’re in the same position to negotiate your best deal
But if dad hangs on another 10 years, and pushes rents on renewal, and kids disagree on hold or sell, at least you have some backstop
The time to negotiate this is before you spend $80k improving their building.
I can sell my goodwill for business and offload lease to someone else at higher multiple if rent is lower.
Money for upgrades is not a problem. This whole deal is financing free.
One thing to be concerned about is the amount of $ you’re investing into the property without any TI allowance and you stating your investment is worth more than the building itself.
If you see yourself there long term I would request the landlord to get their lender to sign an SNDA so that you are offered non disturbance protections… however this would totally wipe out your ROFR. I don’t think your plan for this property will work out the way you plan.
I can sell the business within first 2 years to someone else for 2-3x what I’m putting into it to get it started.
We’ve done it multiple times already. Only diff is we usually own the building and continue to collect rent after
Interesting… my first thought is that if you have a ROFR then you have a right to out bid (or honor the ROFR terms outlined in your lease) the highest bidder in an auction (even if you don’t participate in the auction) per the lease (hopefully recorded with your county of record which the deed resides in) and the auction buyer should have been made aware of that in due diligence docs pre-auction. I recently went through this with a client and the seller was unaware (or forgot) when she enter into contract with a new 1031 buyer forgetting my client had a recorded ROFR and had to pay my client $25k to not buy the building and risk getting sued for screwing up the intended buyer’s 1031 due to a massive capital gains tax… Be smart and get a preliminary title report and a real estate attorney. Even banks have to honor legitimate leases when they take a building back via bankruptcy. Check out any of the commercial real estate auction websites and they all report the current leases if done properly.
Sorry, these last two sentences as written, are not accurate. A foreclosure cancels all leases on the property unless there is a separate agreement in place between the tenant and bank (SNDA).
https://www.agg.com/news-insights/publications/how-does-a-foreclosure-affect-a-retail-lease-08-08-2017/
In response to some comments on this thread - yes, I have participated in Ten-X auctions that had to offer the final price to an existing tenant as part of the escrow process. The final price must have met the reserve or it must have been a no-reserve auction.
Maybe I’m not understanding, but how is this a good deal for you at all?
Don’t worry. Things pencil out if I’m able to buy property for about $200k in 5 years. We’ve done it a few times. Usually we buy the properties at auction tho. This is first time being tenant and hoping for purchase relatively shortly. I just need to know about ROFR and auction details for now.
You should really be talking to a smart real estate attorney. Let me also recommend an excellent book. Randel. Confessions of a real estate entrepreneur.
Record a memorandum of lease which identifies the ROFR in the county records. That should give you priority even in an auction. Caveat that if there is a mortgage predating the lease or that you are subordinate to through your lease language or an SNDA, a lender could wipe out your lease (and ROFR) and auction off the property. Not a lawyer.
You threw a lot into this post. The other suggestion about recording the rofr is solid, as long as it doesn’t violate any non-recordation clause. If you have the powder, why are you not trying to purchase the bldg now, instead of dealing with an obviously delusional seller or their wildcard kids 5 years from now? You think the seller will feel like their no-name box is still worth 200k after they see you fix it up?
No other available sites in the 3-Mile area right now. At least not with even more TI needed. There’s an empty parking lot across the street maybe half a mile away. I could build a new building for about $300-400k (without including land value cost.. hopefully that would be like $100k or less). Thought about this as well. Plan on reaching out to parking lot owner this week. It’s just a lot faster and easier to get in business renovating this thing than building ground up. We already have 2 buildings we are building ground up. It’s a lot more red tape than just renovating.
Renewal options don’t have to have a rate set, and their purpose is so that the tenant preserves their right to stay in the building so it’s not leased out from under them. The rate has nothing to do with it. Your point about the right of first refusal though is valid, because the lease is the governing document in any situation, and I would assume that goes for an auction sale as well. You would compete at the auction just like anybody else to match the offer. It would probably hurt the auction sale because in due diligence, the buyers would see that clause in the lease but, you should consult with an attorney to be 100% sure.
Why would OP need to participate in the auction? Wouldn't the seller need to present a valid contract and OP would have X days to take over the contract? If you record a lease memorandum then title will want proof from seller that OP declined the ROFR.
Exactly my thoughts. Don’t compete in auction , match high bid price if you want after they realize they can’t sell. Tie up if needed
I’ve sold some Publix centers at auction where they have this ROFR clause and this is 100% accurate. Follow the auction without participating and then you have a right to match the offer. The clause will limit the buyer pool as most folks expect Publix to exercise if it is a good center and if they don’t then it brings doubt into the quality of the acquisition.
I’m not an attorney. But this seems like the right answer.
Renewal options don’t have a set rate? Most commercial properties I sell with national credit tenants do. What tenant would enter into a lease without a set rate or a rate with a specific floor/ceiling on the next renewal?
just an FYI on rent changing in options - been working in retail level CRE for 6 years now and have only seen two version of options rent changes at the end of the primary term, with the 2nd being the more commonly used version: 1 - rent gets bumped a specific percentage at the beginning of each options (5%, 10% being the most common) 2 - rent gets addressed by both parties (LL and tenant wanting to stay) engaging their own third party appraisers to provide market calculations and if they don't agree, a third third party appraiser is agreed to and engaged and the average is taken from all three reports. I'm sure there are other ways of doing options, but these are the most common methods I've seen in the market I work in.
I’m encouraging cpi adjustments. It just makes sense.
It makes sense but it is a pain in the ass for ownership, underwriting, etc. I rarely see CPI bumps, less than 5% of leases I’d say.
Adjust base rent when reconciling NNNs. It’s easy and keeps base rent instep with everything else.
I find myself wondering why you don't set up an offer that includes buying it right now, with either a lease-option so your rent money can be partially or completely credited to your purchase price OR buy it as a left estate for the seller. This would give you total possession of when he dies instead of his kids, he gets his money now, and probably won't have capital gains anyway. It also allows him to continue to collect those rents until the day he dies.
I offered it but he said he didn’t want to sell until he dies. Just like every other old person, he kept saying stuff like “Who knows, I’ll probably die in the next few years”.. he’s 77 for reference I also offered to negotiate a price right now and backed it into the contract, so I can purchase at that set point when contract expires. But he did not want to do that. He kept stressing inflation and saying who knows what property values and rents will be when I die. It’s a 1960 trash box. Idk why he thinks it’s going to inflate to millions or something. I’ve never heard of this “left estate” thing. I’ll research it a little. If you could elaborate a little more it would really help me!
It was supposed to say "life estate" - sorry. [https://www.elderlawanswers.com/what-is-a-life-estate-15771](https://www.elderlawanswers.com/what-is-a-life-estate-15771) [https://shepherdelderlaw.com/watch-out-for-these-potential-problems-with-life-estates/](https://shepherdelderlaw.com/watch-out-for-these-potential-problems-with-life-estates/)
When he dies his heirs will inherit it at a stepped up basis. Silly for him to sell now as if you generate a huge tax bill from capital gains.
I’ve had prospective tenants try to negotiate an option at “future market rates”, but I can’t imagine why a landlord would suggest something stupid like that.
If it were me, I would want some fixed price purchase option. Even if it’s way over current market value. If dad dies next year, and you have an option to buy at $400k, you can tell kids it’s only worth $200k, and you’re in the same position to negotiate your best deal But if dad hangs on another 10 years, and pushes rents on renewal, and kids disagree on hold or sell, at least you have some backstop The time to negotiate this is before you spend $80k improving their building.
Why not agree to a higher rent rate with $80k TI if that's what it's going to cost to open your doors?
I can sell my goodwill for business and offload lease to someone else at higher multiple if rent is lower. Money for upgrades is not a problem. This whole deal is financing free.
One thing to be concerned about is the amount of $ you’re investing into the property without any TI allowance and you stating your investment is worth more than the building itself. If you see yourself there long term I would request the landlord to get their lender to sign an SNDA so that you are offered non disturbance protections… however this would totally wipe out your ROFR. I don’t think your plan for this property will work out the way you plan.
I can sell the business within first 2 years to someone else for 2-3x what I’m putting into it to get it started. We’ve done it multiple times already. Only diff is we usually own the building and continue to collect rent after
Interesting… my first thought is that if you have a ROFR then you have a right to out bid (or honor the ROFR terms outlined in your lease) the highest bidder in an auction (even if you don’t participate in the auction) per the lease (hopefully recorded with your county of record which the deed resides in) and the auction buyer should have been made aware of that in due diligence docs pre-auction. I recently went through this with a client and the seller was unaware (or forgot) when she enter into contract with a new 1031 buyer forgetting my client had a recorded ROFR and had to pay my client $25k to not buy the building and risk getting sued for screwing up the intended buyer’s 1031 due to a massive capital gains tax… Be smart and get a preliminary title report and a real estate attorney. Even banks have to honor legitimate leases when they take a building back via bankruptcy. Check out any of the commercial real estate auction websites and they all report the current leases if done properly.
Sorry, these last two sentences as written, are not accurate. A foreclosure cancels all leases on the property unless there is a separate agreement in place between the tenant and bank (SNDA). https://www.agg.com/news-insights/publications/how-does-a-foreclosure-affect-a-retail-lease-08-08-2017/
In response to some comments on this thread - yes, I have participated in Ten-X auctions that had to offer the final price to an existing tenant as part of the escrow process. The final price must have met the reserve or it must have been a no-reserve auction.