Structuring Lease-Option Contract for Commercial Auto/Body Shop?
Hello BP community!
I have been in R.E. since 2009, but commercial is out of my realm. My family's auto body shop closed down roughly 1.5 years ago. We've been trying to sell on our own the last 6 months. We have a Lease-Option buyer lined up. We will be meeting with an attorney who specializes in R.E., but I wanted to see if there was any feedback on here as well.
The old business, property, and new business:
Formerly an auto frame/body shop, 7,800 sq/ft, 17 bay/door openings, office with bathroom, locker room, storage above office, and lot is on 3/4 of an acre, paved asphalt.
The new business will eventually be an auto body shop, but will start as window tinting.
The new interested party has a 2-3 car/bay shop, not big enough to take on all the business they are getting. They will also get more business once they have more room.
The negative to our shop and why we couldn't find buyers is because it is not in an industrial area, nor right off of a highway. This did not affect our business, as it was not contingent upon street traffic or walk-in business.
The great thing about the interested party is that neither is their business! We are really excited about this opportunity, as finding a buyer has been very difficult.
I apologize for the back story, but it is needed regarding my questions.
We really wanted to sell the shop outright. The interested party does not want to get a commercial loan until his business grows. They are currently paying $1,500 / mo. We told them we would charge $2,000 a month.
The shop is owned free and clear. Insurance costs us roughly $4,000 / yr, and taxes are $15,000 / yr - yes, I WILL be appealing these July 2016 - my family did not know you could do this, and I already talked to someone who does this, and they are confident they can be reduced to 7-8k per year. To be conservative, if taxes are 10k + 4k in insurance, at 2k a mo rent, we would be positive 10k. While we must keep our insurance, the potential tenant will carry their own as well.
The sales price is $295,000.
How much should we ask down? I already asked how much the interested party had saved up, and it was not much (7k). This worries me, a little.
I have managed 150 single family rental properties, and was never a big fan of Lease-Options, as many did not convert. While I believe in being a stern and strict landlord, I have a lot of confidence in this buyer's intent, as well as ability to purchase. They are essentially employed by car dealerships. Only 3% of their business is walk-in / referral , they are currently paying a rental amount that will not drastically change, and their business will only grow once they get to a bigger facility.
Would you incentivize, or use negatives for purchase in the future? I.e., incentivize by saying the purchase price will be $285,000 if they exercise their option on or before 2 years, or negative reinforcement by having set rental increases if they do not exercise the option by x date? I'm all about doing whatever it takes, that works for both parties, to get to the finish line. The interested buyer is excited, likes the place, it works, and wants to be in it as in yesterday. They also have an established business that will increase in revenue once they get to a larger location. I don't want to kill a deal being a miser or having strict penalties that do not make sense, even though they may make sense on paper or what you might read in an investment book.
One last thing - the shop has old radiated heat in the floor. The interested buyer has talked about putting in a forced heating system, which would cost roughly 10-15k. This could be structured into the deal, as it would definitely put "skin into the game".
While it really wouldn't help to sell the shop per se, as it doesn't add value to the detriment of the area and lack of foot traffic, it is a better and efficient system than the radiated heat.
Any thoughts, even anything outside of what I said, is GREATLY appreciated!