Advise from Commercial investor request

3 Replies

Hey Folks

I have a commercial property with cash flow, that is being sought after by a developer looking to develop an adjacent property, he would like to acquire mine along with it, as it would offer a direct drive to feed his development.

My property has 2 long term tenants, but also has room to develop additional structures.

I do not want to sell and have to take any capitol gains at this time, nor do I want to try to switch properties (1031) right now.

My thought was leasing the entire property long term, say 25 to 50 or so years.

Do developers frown on long term leasing?

Any other thought on how else to approach this?

@Steve P. offer to do a JV and take pay chunks so you split up the gain over a few years. Not an accountant but I have seen this done, and developers like because they dont have to tie up so much cash, + you get your cash flow for as long as possible.

I think you lease option would need to be a lot longer than 20 years for a developer to be interested. The issue is they building and can sell it, but anyone buying it knows that the lease eventually comes due and you end up owning the building. This makes selling it in the future very difficult (CAP Rates go WAY up). If you do an 50+ year ground lease it is more attractive in general. Selling the ground lease is not necessarily difficult for you, but I would imagine you will have a hard time getting a developer to bite.

I think finding a more creative solution like @Jeremy Tillotson  mentions is prob a better approach! 

Remember any type of JV you are "getting in bed" with that developer for the good or the bad.

You have to really vet that developer to see if they are a big developer nationally, small developer but established locally in the area they want to do a project in.

In some cases depending on size of the project you will have a small developer locally, a big developer backing them, and a consultant driving the project and keeping everyone working together.

You have to make sure the developer has a track record in the asset class they are building. For instance if the total project is 100,000 sq ft retail and they have completed 10 projects like this before that can be a plus. If they have only completed a 10,000 sq ft or they have completed 100,000 sq ft but for industrial then it's different.

So you have to take a ton of metrics and analyze to see if a JV makes sense. I have seen some work out and others turn into a mess with the seller saying they will never to do that with one of their properties again.