My landlord sucks...should I buy him out?

Question

Hello BP,

So this here is a bit of a complicated question so I thought the best thing to do was to bring it to the forum... Little bit of a back story is in order I think. I operate a brick and mortar business which was opened in January 2016, the building consists of a 3000 sq ft bar and (2) 1000 sq ft retail store fronts in which my business occupies 1 of the 1000 sq ft spaces. My landlord reached out to the tenants approximately 6 months ago expressing an interest in selling the building. He ran the bar for years and years which is why he bought the building and then burnt himself out and shut the bar down so now the bar is just leased to another tenant. The other 1000 sq ft retail space is also leased out so the building has tenants that want to stay where they are but my landlord has no interest in running the building effectively... the roof leaks and no maintenance is ever done on his part. Anyways, I was the only 1 who responded to his inquiry about selling the building and he does not have it listed nor is he actively working with an agent on selling it. Anyways I did have a serious conversation about buying him out so I was able to get further info from him on the deal however I told him that I wouldn't be able to make a serious offer until January 2018 because I wouldn't be able to show 2 years of income from my business until then.

Anyhow, long story short I have 1 residential rental unit so my experience is limited and no commercial experience at all. He has offered the building to me for $450K, he owes $230K on the building so if I am able to finance $230K he is willing to carry the balance at 4% for 8 years.

Current monthly rental income: Bar $3000 ( currently under 3 year lease with 2 lease options taking it out to 9 years), retail units $1000 each ( both under 1 year leases) $5000 total

Taxes: $12,500 annual

All my other expenses are estimated:

Water $200

Trash $100

Insurance $300

The building is in need of some repairs but all the tenants are good long term tenants that would be more than happy to stay if some kind of upkeep on the building was happening so I don't really think a huge chunk of money needs to be dropped into the property right on acquisition but the CAPEX and maintenance fees are definitely going to be high.

$450K seems high to me even with the owner financing at 4% but on the flip side if I am looking at 10 or 12% for commercial financing then maybe my expectations are unrealistic not his...

Additionally I am also assuming that I would be looking at around $57K (25% of $230K) down at closing and around $10-$12K in closing costs.

HELP!!!....Any help, information or advice would be greatly appreciated.

Larry Turowski · Answer

@Michael Spittler Separate the two issues, your business and buying the building, as much as possible. I always like to know I could sell a place immediately if needed and not lose any money even after paying closing costs on both ends, realtors commission, etc.

If you wouldn't consider this a good investment by itself, there had better be a REALLY good reason to do it.

Joel Owens · Answer

What is market rent? What are the other tenants paying? Are they on gross leases or NNN? Do they have corporate and personal guarantees on the lease? Are they required to disclose monthly ongoing sales per the lease and also updated personal financials for liquidity and net worth positions?

A roof if it just needs an overlay is one thing put if insulation and down to decking needs to be redone it can cost 2 to 3 times higher. Some roofing companies will take video,fill out a report, and do some core sampling for a few hundred dollars or more ( at least in GA). You have to call around some.

What year was the property built? You could have galvanize plumbing, asbestos, knob and tube wiring,termites, roof leaks, water main or sewer issues going from building to street, undersized electrical panels,etc. A/C and heating units could be on the last leg, tree roots can cause foundation issues, water drainage issues.

You might not want to own this property.

Jeff Kehl · Answer

@Michael Spittler just high level numbers that does not sound like a great deal to me. I'd suggest a couple things to investigate further.

One, how does it compare to other similar commercial deals in your area. If I were you I would not be in any particular hurry to do this deal just because you are one of the tenants. If a similar building across down was available for $400k why not buy it instead?

Two, you need to get crisp on what the actual expenses are. As an occupant it should be very easy for you to find out what the real costs are. Also if I were looking at that as an investment I would want to know exactly what the capex was going to cost and get that rolled into the deal. At a minimum it sounds like you need a new roof. Call a roofer and get an estimate. You're much better off to get a credit to fix that at closing rather than trying to come up with $15k out of pocket right after closing.

Look at the other major items, hvac, sewer, plumbing, parking lot, electrical, foundation. If you're not able to do it, it would probably be well worth the cost to get an inspection/PCR done now.

Three, have you talked to any commercial bankers? Many of them will want you to have 25% of the total price $450k not just the part they are financing. Plus they will want to see liquidity after close.

You don't mention if you have the money for the down payment and closing costs. Is that part of your question? If not you could look at a partner but they are going to want all of the financials nailed down so they can have some idea of what return they will make.

Four, after you've done some of the legwork above put the numbers into one of the many calculators available and see what your cash-on-cash and total returns would be.

If they are higher than any other investment opportunity than you have then I'd say go for it.

Michael Spittler · Answer

@Jeff Kehl that's a lot of great information there and I really appreciate your input. Going through all the facts here on the forum as definitely helped me take the emotion out of counting on this deal to work. Thanks again

Jeff Kehl · Answer

@Michael Spittler the fact that you are a licensed contractor I think is a big plus. Makes me feel that you have a good idea of what the repairs actually are on a building that old and that you'll be able to keep costs down. Keep in mind that he will have a lot of trouble selling a building like that if it's in rough shape.

If I were interested in it, I would put it under contract, get an inspection done and then ask him to fix everything that is wrong or credit me an amount at closing so I could make the repairs.

You could maybe do a combination of offering a lower price now plus negotiating down after it's under contract.

Also keep in mind that you offer an inherent advantage in that if he sells to you he doesn't have to pay a broker commission so you're saving him money right off the bat.

In terms of down-payment, I think you can do it with the cash you have on hand as long as you know or can find a decent commercial banker.

I would send him a letter of intent saying you'll use inspection and financing contingencies and that you'll get a commercial loan for 70%, expect him to hold a second for 20% and you'll put 10% down. Or you could even start with him holding a larger note and negotiate to 20%. Also, make his note for 20 years at 2% interest and then you can negotiate on that as well.

I think if the area is good and growing it will be a good investment for you. I have switched to looking at small retail and office properties because it is so out of favor right now compared to multi-family properties.

There are some good deals out there, no one is building it, the main-stream media has convinced everyone that no one will ever shop in a store or work in an office again and the tenants are a lot easier to work with than residential.

Michael Spittler · Answer

@Joel Owens So I definitely appreciate the opportunity to chat with a commercial broker... so I thank you for jumping in here.... The market rent for the area is approx. $12/sq ft per year. My original lease was $1200 per month as was the other retail tenants until I approached the other tenant and we some what unionized and got the landlord to lower the rents to $1000 per month because he was not keeping up on the repairs. We are both small retail business' with a handful of employees each ( I own a tattoo studio and next to me is a vape shop). I originally signed a 1 year lease which has expired in January and the vape shop guys had originally signed a 2 year lease but they have been there longer than me so they are outside of their lease as well. The leases that we did have were generic commercial leases ( the basic 7 page example you would find on google.... I am assuming is probably where he got them from). The larger unit which is a 3000sq ft bar with a 700 sq ft patio that overlooks the river and they currently have a 3 year lease with 2 additional 3 year lease options, I was able to go over that lease and based on the complexity of it I am assuming that the owners of the bar presented that idea to him (seemed a bit to complex for his normal dealings). So with that there is pretty much no involvement from him besides stopping by and picking up a check once a month, so the answer is no.... no disclosures, no guarantees, no updated financials, definitely no triple net leases either, Usually I can't even get him down there for a few days if theres a leak or something. I am also a licensed general contractor so the rehab stuff is more up my alley, see the current landlord was a bartender who ended up buying the property because he ran the bar but then shut the bar down and leased it out. He refuses ( or just flat out doesnt have the money) to hire out any repairs and constantly attempts to take on roofing repairs and everything else himself. The building was built in the year 1800 so it is quite old but the structure is solid. mechanicals in the bar are about 5 years old and the other units have newer electric heat. There is definitely some work to do on the electrical, plumbing, etc. but I definitely feel as if the building is mismanaged and could be dealt with better under my ownership. I have determined that the repair costs are going to be around $50k to $70K which places my highest offer around $375K I think to make the numbers work. I am assuming that I will need 25% down for the conventional portion of the loan and about $10K-$12K for closing ( I think) or in your experience do you think I will need to come up with a percentage of the entire purchase price vice the conventionally financed portion ? ( in case you missed it above, he has offered to carry a portion if I can secure financing for $230K to cash out his existing financing. Thanks for any input you have.

Ronald Rohde · Answer

That sounds like a solid, well thought out plan. You also can expand your business to occupy more space.

200 years old, is it a historical building?

Michael Spittler · Answer

@Jeff Kehl thanks for the input... I kind of had a long winded post to the last bit of input that I was helped out with... If you would be so kind as to read that above I would definitely appreciate your input there. I have definitely been able to broaden my own horizons on this whole thing just by being able to write about all of this... BP is awesome for that. But anyways I think the only thing I didn't expand on was my down payment.... I have been doing a ton of work to get myself into a position to make an investment purchase and without getting into it too deeply into my own financial I am projecting that I will have somewhere in the ballpark of $60K to put down around the beginning of next year.... now I am not sure how close that will put me to getting this deal done, but If that isn't sufficient my plan is to hold my position until I am have the capital... at least as far as the home for that business is concerned. I have done by best to analyse my landlords current position and figure out what helps his position and it seems to me that cashing out of the deal is not his main concern, it is getting the managing of the property off his plate. I do know that he paid $400K for the property about 7 years ago but no major improvements and no maintenance have been done, it has just been 1 bandaid over another so my opinion is that he has probably actually decreased the value a bit instead of increased it. I appreciate your input and I think I am sticking with an offer of $380K unless he wants to carry the $450k for a period that would equate to $70K in interest for 0%... what do you think?

Austin Fruechting · Answer

Small business commercial is tough. If something goes vacant it can be vacant for a very long time. There has to be someone looking for exactly that type of space in that area at that time. Make sure there is the demand as well as having the ability to weather a long vacancy.

Michael Spittler · Answer

@Ronald Rohde I actually went back through the numbers and scribbled through them all until I found a "ah ha" moment. Heres the cap rate I came up with.... 6.3% which actually from my limited experience falls right on the nose with the area average. The big opportunity that I see here are a full house of tenants that are willing to stay with just a little bit better property management in place. The location is great and i really feel that as a long term investment the vacancy rate will be overall below average for commercial property in this area not to mention I get a long term home for my business. That point mixed with the owner carrying a large portion at a low rate makes the (potential) deal seem very enticing. The huge concern that I have and the reason why I am hesitant is that I don't see the property as being sustainable in the current condition. I don't feel as if it is a straight $450K property with a monthly gross of $5K. Although in black and white that is what the numbers say I am in constant communication with both of the other tenants and no one there is happy with the state of the building, the location is what keeps us there. The building is 200 years old and has many bandaids, roofing, plumbing, electrical, etc. It is a constant struggle to get anything fixed with the landlord and it amazes me that he has such good tenants in there for the amount of attention he puts back into the building. It just doesn't seem sustainable on the path it is going. I have already approached him with the creative solution of us signing a contract in which we nail down the sales price of $450K and in the meantime until I get my financing in order that I act as property superintendant (normally this might not make sense but I also own a general contracting business) to take the burden off since clearly his short comings are in the repair department. Anyways my estimate of the repairs needed on the building are between $50K - $70K which my general contracting business is able to float and absorb on the back end... Additionally If the repairs are made the other tenants have agreed to a 20% increase in their rent because like I said we all want to stay there. (This is a seperate conversation that I have had regarding the rental increase with the other tenants ) Anyways the reason this is so long winded is because the more I type the more I answer my own question.... Offer $450K minus the reasonable repair costs and keep my business' rent at a nominal rent for a comparable rental so I don't paint myself into a corner or wait for the next opportunity

So that gets me to my highest bid price of $380K regardless of what he is willing to carry.

what do you think?

So that gets me to my highest bid price of $380K regardless of what he is willing to carry.

what do you think?

My landlord sucks...should I buy him out?

My landlord sucks...should I buy him out?

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