What should I offer my Landlord to Buy my Commercial Space TODAY

3 Replies

Meeting landlord today to sign new lease.
I'm considering offering to buy this retail property instead of rent.  She said we would consider owner carry, but that she did not want to sell yet, sounded 5 or 10 years out on that.  They are a younger couple, late 30's so it makes sense for them to control the property and they have other income.  I'm interested to own the property because it would simplify and secure my future, and leave me with a valuable asset to sell after 

I believe she got a very good deal from a mentor who owned the building and is carrying mortgage. So there should be good profit for her if she does sell.

When we spoke some time ago, she said she would need to get at least $1M for the building, as a high figure. She said she would need to cash out previous owner, not just transfer loan to me.  It's 1700 square feet, prime downtown tourist location, approx 5 million annual visitors to the town.  Stores like this location profit between $60k to $250k+ per year.  I'm on the far low end because I'm new and learning the market, etc.  

I pay Rent of $60k/yr to her.   Her prop. taxes are  $10k/yr.   

Discussing Covid, she said she needed at least $3k/m to cover her expenses.  

So depending on if that includes prop tax, her expenses are either $36k/yr or $46k/yr, mainly mortgage and taxes. No upkeep, and I pay all utils.  

So she currently profits $14k/year or $24k/yr on my lease (depending if taxes were considered).

Let's assume she plans to hold for 10 years, then sell for $1M.  

What could I offer her now that would make sense?

I'm considering offering $6,500/m to pay it off sooner (vs rent currently $5k/m), and a down payment.  I'd like to show a calculation that shows she's better off selling to me and investing the down payment at 6% or 7% a year.  

If you use a simple cap rate on the $60k/yr rent, then without expenses considered (tax, insurance, etc) a $1M valuation would give a 6% cap rate. Correct me if I'm wrong. $900k = 6.67%, $800k = 7.5%, 700k= 8.6% cap rate.

Currently I'm running through figures of $150k down, $200k down, $250k down just to see what those numbers flush out to, in order to present an argument that that amount invested would be a fair trade off over 10 years or 15 years.  I think I could borrow those amounts based on relationships, not income.  

For comparison, a $1M prop with $250k down. 10 yr mortgage at 3.03% is $7800/m.   At 6% it's $9,000/m.

My guess is she bought the property 12 years ago, owner carry, for $400k to $500k

From her side, it's a guaranteed occupancy in a prime area, with a simple, zero maintenance building (Brick, new roof,etc), so she really does not have a reason to sell. They have their own successful business also, so I believe her plan is to let the building appreciate, and continue making profit on the lease. I understand there are unknowns like how much does she owe, etc. I think she bought about 12 years ago. The idea is not to sign a deal today, but to begin a conversation about it that would interest her. I'll add some pics of calcs as I work through some numbers. Thanks!

I do understand that using 1% rule, or GRM of 8.3, valuation is $5k x 100 = $500k, and that $1M gives GRM of 16.67, and that implies building is worth more like $500k to $650 range. But a T-shirt or souvenir shop here (not me) could possibly profit $200k/year. A good identifier is $300k gross sales are proven here by a prior businesses. So profit may be 40% to 50% of that, not including rent expense.

For my own valuation, what multiplier of annual profit (before rent is taken out) is a good target range?

i.e. if I make $120k profit, minus $60k rent, leaving me with $60k profit normally, then what multiplier of that $120k pre-rent profit figure would be reasonable to purchase?  I'm using an arbitrary figure here for an example.  5x? more?  Again, the goal is to have a valuable asset to sell or rent as a retirement plan in 10 yrs to 15 yrs perhaps, not much else in line for that currently.