Tips for Purchasing Office Building with Tenant Leases Expiring

5 Replies

Hello,

I'm planning to go under contract on my first commercial deal to purchase an office building with 3 tenants. However, the leases for 2 of the tenants will be expiring less than a month after closing. One of the tenants will most likely be vacating, but the other tenant has expressed interest in expanding into the vacated space. The tenant wishing to expand was recently acquired by a very large nationwide medical corporation.

How do you work out new leases with existing tenants, when you're not yet the property owner?

Also, I'm sure the bank is going to be concerned with the leases expiring immediately after closing.

So, what is the preferred way to get new leases according to my terms prior to closing, and keep the bank happy?

Thanks,
David

You might talk to the tenant to determine terms they're seeking. They might agree to a letter of intent upon expiration of the existing lease. Lenders don't necessarily need leases in place to make  a loan. They'll look at condition of the building, value relative to other similar properties and strength of the local market. If local lenders aren't interested, there are national commercial lenders who would probably consider this one. 

Yep, get permission from the LL to contact Tenants and see what they're interested in renewing at. Sign an LOI and plan to execute after closing.

You can make condition to buy on getting a newly executed lease in place or amending existing lease prior to closing. Any changes to tenant would have to be approved by buyer. This way seller cannot agree to terms you would not agree to.

If current rent is way below market then tenant should be motivated to sign. Expanding into other space is likely going to be more complex with more time as they will have build out and adjustments to the spaces and want TI's. Also you are going from 3 different business to 2 businesses where one is taking up more of the building and makes up a larger percentage of the cash flow. So you now need more skin in the game with guarantees of the lease,rental increases,etc. as it affects a larger portion of the building now.

No legal advice given. 

Unless if the LL is getting the lease in place, you should also not assign much value to the vacated suite. If you have to do the work to get the lease in place, you should not also be paying for it. If the lease is delivered prior to the close of escrow by the LL/you are paying for the new lease, make sure to make it a condition of close that any TIs and leasing commissions are paid by the LL. This is standard for commercial sales where you are assigning a value to a lease.