Structuring Commercial Lease Option??
In need of a little guidance here:
The company I work for currently rents our office space, and we are interesting in purchasing the building we currently occupy. I'm exploring options, and think that a lease with option to purchase in the next 3-5 years may be the best bet, but I'd love some other opinions here. A little background:
Goals of purchasing:
1) Build equity. Any cash flow is icing on the cake, but not the reason for the purchase.
2) Purchase with the lowest down payment possible.
Building details:
Built in 2007, two story class A building. 2 units total - downstairs is 4,800 sqft and currently rented at $5,768/month. Upstairs is 7,500 sqft, and currently occupied by the owners company. We believe market rent for the upstairs is ballpark $10,000/month.
Based on these rent figures and expenses, the current NOI is roughly $125,000 annually.
At a cap rate of 7.75%, purchase price would fall close to $1.6mm.
Seller would like to sell, but is not ultra motivated and won't accept lowball here.
Structuring the deal:
We can likely use an SBA loan here and do a 10% down payment (160k). Additionally, the seller would likely carry a 2nd...but i'm concerned we'd run into issues with debt coverage at that point. (would like feedback on this if i'm wrong here!)
That's what brought me to the lease option - If we can structure a lease in which a good portion (or all!) of our rent check each month goes towards down payment, that would be ideal. I've just never done this before, and i'm not sure where to start.
Thanks for your help!
A few questions:
1. Is the property NNN or gross?
2. Does the current owners company have a lease in place and if so, do they pay rent?
3. If he sold the building would he continue to have his company occupy the space and sign a 5 year lease at market rent.
4. What are current operating expenses? I estimated $7.50/SF. ($92,250/ year)
5. Are there any capital improvements needed, if so, what are they?
Assuming the current owner would continue to occupy the building minimally at your current rental rate of $14.42/SF, the upstairs space would bring in an additional $9,373/month making the total annual income for the building $181,692.
Income: $181,692
OpEx: $92,250
NOI: $89,442
Cap Rate: 7.75
Value: $1,154,090.32
Of course these are assumptions without knowing anything about the subject property. If you can provide some additional details we can probably help you with the best play.
Hey @Mike Giudici ,
1. Is the property NNN or gross? gross
2. Does the current owners company have a lease in place and if so, do they pay rent? yes, though he pays himself an above market rent currently (apparently this helped with his loan initially)
3. If he sold the building would he continue to have his company occupy the space and sign a 5 year lease at market rent. yes
4. What are current operating expenses? I estimated $7.50/SF. ($92,250/ year) not exactly sure, but i was estimating $5.75/SF per the recommendation of a local broker.
5. Are there any capital improvements needed, if so, what are they? no.
Regardless of purchase price, I'm interested in the best way to structure this so that a good chunk of our rent check goes towards a future down payment. Any insight into that?
Thanks!
You could structure the lease around a 2-3 year rent to own scenario, but be prepared for a hefty rental increase so there is extra money coming in for the owner to set aside for your down payment.
If it were up to me, I would just sign a new lease with a right of first refusal to purchase the building clause so you get the first opportunity at buying the building over any other potential buyers and talk to your companies CFO about coming up with a plan to fund the down payment in 2-3 years.