Fair price for commercial property

kevster1977 · 15-10-2012 12:41pm #1

I have recently been approached by the bank to buy the property I currently rent and run my business from. I took on the lease in 2008 and have 6 yrs to run on it. I pay a colossal rent on the property of €2000 per calendar mth. The lease has an all repairing clause in it and I have already had to pump loads of my own money into the building. There is also an upwardly only rent review clause in place after year 5.
The owner is in financial difficulty with sustantial owings to the bank and they are looking to sell of the property quickly. The bank instructed their own valuation which came in at €150,000. I felt this was a ridiculous price to pay and so instructed two independent agents to do a valuation. Both these came in at a more realistic €75,000 with both agents suggesting I should maybe offer a little more as a special interest purchaser to secure the premises. I also instructed a survey report on the building and it showed that over the next 5-10 yrs the building will need €20,000 worth of repairs.
I initially offered €80,000 which has been declined and then went to €85,00 and finally €90,000. The bank wont budge of €100,000 at this stage. They said they had it revalued by another agent (who didnt even come out to view the building) and they can expect to acheive €100,000 on the open market. They feel confident they will secure an offer given the high rent I pay and the potential return that this would give an investor. Other agents say they are bluffing and such a deal would be extremely risky for an investor. They feel the only person to ever be likely to be interested in buying the building is me.
I am reluctant to pay too high a price for this building. The price of €90,000 is some 15K over market value already so Im reluctant to go any higher. The bank have cited that given the rent I pay they can expect to get €140-150,000 anyway from me over 6 yrs and that even at €100,000 I will still be saving but I dont think this is a basis for them to be selling the building to me as a heavily inflated price. They seeem to be intent on squeezing every last cent of me to recoup for the risky borrowings that they sanctioned to my landlord.
My dilemma is should I hold out at €90,000 and tell them to stick their €100,000 or should I pay it. I would be really concerned that my lease traps me for 6 yrs and I could pay a lot more than €100,000 in rent over the 6 yrs and be left with nothing at the end.
I would be grateful for any advice.

tricky D · 15-10-2012 12:53pm

Make an offer back down at €80k or less and don't budge. Every time you budge it shows weakness on your part and it's a buyer's market (with some caveats).

PCPhoto · 15-10-2012 12:55pm

I would suggest you hold tight ... in the current economic environment its less likely that they would find a buyer - simply because once your lease is up you can move and find a cheaper place or re-negotiate a better deal....and this is simply too much of a risk for an investor.

if they sell the property ...is your lease null and void ? your contract is with the current owner ?

if the bank sells - will any new owner simply let the rental income come in - with such a narrow window (only a few years)
- in terms of a short-term investment - if - hypothetically - a new owner purchases and you maintain rent - by the time your lease is up the property value will have (most likely) dropped further, hence the rental income will have dropped significantly - so any purchaser would try to offload close to the end of your lease to maximise profit - which is fairly unlikely to happen as they would make a loss on the value of property versus the rental income .... do I make sense or am I rambling ??

I would suggest you hold tight - if business is continuing to go well...then dont upset the applecart, if the bank sells then you can assess if you have a contract or not with the new owner, I would say that the bank will be willing to do a deal in another few months - maybe 75K .... or in 12months offer 70K or even 65K - as long as you do not have financial problems and can make the rent its the bank that want to make the sale....and they want to maximise their money so as to minimise their losses.

kevster1977 · 15-10-2012 12:56pm

Thanks for that. Its just the potential money I could pay in rent over the next few years that bugs me. I'm usually fairly ruthless when it comes to money and business but in this case I dont want to cut of my nose to spite my face

kevster1977 · 15-10-2012 1:03pm

PCPhoto wrote: »

I would suggest you hold tight ... in the current economic environment its less likely that they would find a buyer - simply because once your lease is up you can move and find a cheaper place or re-negotiate a better deal....and this is simply too much of a risk for an investor.

if they sell the property ...is your lease null and void ? your contract is with the current owner ?

if the bank sells - will any new owner simply let the rental income come in - with such a narrow window (only a few years)
- in terms of a short-term investment - if - hypothetically - a new owner purchases and you maintain rent - by the time your lease is up the property value will have (most likely) dropped further, hence the rental income will have dropped significantly - so any purchaser would try to offload close to the end of your lease to maximise profit - which is fairly unlikely to happen as they would make a loss on the value of property versus the rental income .... do I make sense or am I rambling ??

I would suggest you hold tight - if business is continuing to go well...then dont upset the applecart, if the bank sells then you can assess if you have a contract or not with the new owner, I would say that the bank will be willing to do a deal in another few months - maybe 75K .... or in 12months offer 70K or even 65K - as long as you do not have financial problems and can make the rent its the bank that want to make the sale....and they want to maximise their money so as to minimise their losses.

My lease would continue with a third party owner as it stands and thats were in the problem lies. You are right though that in another year or two or three they would probably get a lot less for it.
Business is good and I am able to pay the rent Ok. The building itself offers little room for expansion of the business and it was never my intention to stay longer than my ten year lease anyway. Its just the reduced monthly outgoing in mortgaging as opposed to renting thats attractive to me now.
I feel though I am being totally squeezed to the max so the bank are able to recoup as much of their risking lendings as they can.
I also believe the landlord has one or two other properties that the bank are looking to dispose of, not just the building I rent.

ResearchWill · 15-10-2012 1:20pm

OP you are paying 24k a year, for the next 6 years that's 144k plus what ever repairs you have to do. If you can buy for 100k and can arrange the funding go for it over next years its a huge saving. The risk you face is if the bank put it on the market, you risk a guy with cash jumping in and becoming your landlord. In six years your lease is finished, you have paid his purchase price plus repaired the building and he is laughing.

borderlinemeath · 15-10-2012 1:42pm

ResearchWill wrote: »

OP you are paying 24k a year, for the next 6 years that's 144k plus what ever repairs you have to do. If you can buy for 100k and can arrange the funding go for it over next years its a huge saving. The risk you face is if the bank put it on the market, you risk a guy with cash jumping in and becoming your landlord. In six years your lease is finished, you have paid his purchase price plus repaired the building and he is laughing.

Not necessarily, only if the OP is a cash buyer. I would assume he's borrowing a certain percentage by stating this:

Its just the reduced monthly outgoing in mortgaging as opposed to renting thats attractive to me now.

OP what is the situation with the purchase? Are the bank offering to lend to you to purchase? And at what rate? ie if you pay €100k purchase price what is the interest accrued on the commercial loan?

ResearchWill · 15-10-2012 2:17pm

borderlinemeath wrote: »

Not necessarily, only if the OP is a cash buyer. I would assume he's borrowing a certain percentage by stating this:

OP what is the situation with the purchase? Are the bank offering to lend to you to purchase? And at what rate? ie if you pay €100k purchase price what is the interest accrued on the commercial loan?

Even if the OP is getting a bank loan for the full 100k his repayments would be in or around 1.5k a month repaying over six years. Maybe 1.8k on a fixed rate for 5 years. Still cheaper than 2k a month.

djimi · 15-10-2012 3:03pm

I suppose the way to look at it is that you are paying €2000 a month for the next 6 years as it stands regardless of whether you buy it or someone else does. You buy it off the bank, even at an inflated rate, then you are going to end up paying less than you otherwise would be, plus at the end of the 6 years you own the place (ie no rent). Someone else buys it then you continue paying €2000. By the sounds of it you are not going to get the place for the price that you feel its worth, but seeing as how you are tied into a lease its not like you have the option of buying somewhere else for €75000 either. Your choice is to rent and pay €2000 for next 6 years (plus more rent/mortgage afterwards), or buy and spend less for next 6 years with no rent/mortgage afterwards.

The bank are taking the mickey but they have a point; right now as it stands the place is worth €144000 to them over the next 6 years. Regardless of the market value of the property to sell, that is what they will get from the place if they were to hang onto it. So why would they sell it to you for €75000, which is give or take half what they get for it should they hold onto it?

kevster1977 · 15-10-2012 3:34pm

Buying at €90,000 would be 15K over the market value. At €100,000 I would be 25K over the market value. From the day of signing contracts I am literally going to be 25K in negative equity. This 25K along with €20,000 in essential repairs coupled with purchase price of €100,000 brings me to €145,000, the same therefore if I was renting. The deal doesnt seem as atrtractive when put like that.
I do have the building after the 6 years but as it stands its not the best building and offers no potential for expansion.
I'm not the type however to look a gift horse in the mouth either.
Jurys still out but I will make a decision in the next day or two.
Thanks for all the responses

ResearchWill · 15-10-2012 3:41pm

kevster1977 wrote: »

Buying at €90,000 would be 15K over the market value. At €100,000 I would be 25K over the market value. From the day of signing contracts I am literally going to be 25K in negative equity. This 25K along with €20,000 in essential repairs coupled with purchase price of €100,000 brings me to €145,000, the same therefore if I was renting. The deal doesnt seem as atrtractive when put like that.
I do have the building after the 6 years but as it stands its not the best building and offers no potential for expansion.
I'm not the type however to look a gift horse in the mouth either.
Jurys still out but I will make a decision in the next day or two.
Thanks for all the responses

Market value is what anyone is willing to pay. If I knew where this building was with a siting tennant paying 24K a year, upward only rent reviews, and repairing clause I would offer the bank 100K straight away. Its a great deal, you will have to give me 144K over the next six years. Im up 44K on the deal that 44% over 6 years. Plus I still own the building.

You are looking at this all wrong, in effect you are still looking at property the old way what does a guy in suit say its worth. A good way to value property is the 10 by or at a push the 15 by multiple. Rent X 10 years equals value. A lot of property went to 30 and 40 times rent, thats just as mad as 4 times rent.

If you plan on staying in the property for the next six years then buy. If you sit back I guarantee a clever guy will swoop in and buy with a sitting tennant.

Also in your maths you have made a few mistakes you are adding negitave equity to 100K giving 125K, thats just bad maths, you are also adding the repairing costs but you have to pay that anyway. The real figures are purchase 100K plus interest plus repairing, interest will be about 10K and repairing will be 20K so total investment to buy 130K less value of property say 65K if you want to sell cost 65K. (Or 130K but you have property). To Rent 144K plus repairing 20K giving total cost of rental 164K.

djimi · 15-10-2012 4:07pm

kevster1977 wrote: »

Buying at €90,000 would be 15K over the market value. At €100,000 I would be 25K over the market value. From the day of signing contracts I am literally going to be 25K in negative equity. This 25K along with €20,000 in essential repairs coupled with purchase price of €100,000 brings me to €145,000, the same therefore if I was renting. The deal doesnt seem as atrtractive when put like that.
I do have the building after the 6 years but as it stands its not the best building and offers no potential for expansion.
I'm not the type however to look a gift horse in the mouth either.
Jurys still out but I will make a decision in the next day or two.
Thanks for all the responses

Im not sure why you are adding the €25k to the €100k; the €25k is part of the €100k so assuming the place needs €20k worth of repairs then its going to set you back €120k to buy, which is the guts of €25k less than it will cost you to rent it as things stand.

Or to put it another way, you are saving yourself a years rent by buying the place!

Assuming you intend to honor your lease and remain there for the next 6 years then it breaks down as follows: you can stay renting and pay €144k for the next 6 years, or you can buy and pay €120k for the next 6 years.

Assuming you keep the repayments roughly the same as your rent is now, you will have the place paid off within that 6 years, and even if you chose to bulldoze it after the 6 years you are still going to be better off than if you continue renting. Realistically you can sell it, and even if you want a quick sale and are prepared to take €40k-€50k for it after the 6 years, that is money that is going straight into your pocket.

Assuming you intend to remain there for the duration of the lease then to me its a no brainer. Negative equity doesnt come into it; by the time the 6 year period is done there is no mortgage and how much the initial NE was is totally irrelevant.

borderlinemeath · 15-10-2012 4:09pm

ResearchWill wrote: »

Even if the OP is getting a bank loan for the full 100k his repayments would be in or around 1.5k a month repaying over six years. Maybe 1.8k on a fixed rate for 5 years. Still cheaper than 2k a month.

Per month perhaps, but over the term of the loan add in interest paid onto the principle sum and it might not look so attractive. It's where you say:

If you can buy for 100k and can arrange the funding go for it over next years its a huge saving.

You make it sound so black and white - pay €144k rent or purchase for €100k, make a huge saving with purchasing, not taking into account interest paid on any money borrowed or interest rates considered.

Brian2850 · 15-10-2012 4:10pm

Try to ignore your personal ties to the building as much as possible and look at it as a pure investment in real estate. The key questions you should ask yourself about the building (from an investment point of view) are:
What is the fair rent for the property?
How likely is it that the tenant will be able to pay the rent for the remainder of the term?
How long will the unit remain vacant if the current tenant was to vacate?

Obviously you will be better placed than some to answer any of the above but that doesnt mean you should let your involvement cloud your judgement. Ultimately if comes down to the return you are being offered and how comfortable you are owning real estate as an asset class......From looking at the figures you have posted, this building looks cheap at €100,000. Also worth remembering that there is currently CGT relief if you buy and hold for 7 years....

ResearchWill · 15-10-2012 4:14pm

borderlinemeath wrote: »

Per month perhaps, but over the term of the loan add in interest paid onto the principle sum and it might not look so attractive. It's where you say:

You make it sound so black and white - pay €144k rent or purchase for €100k, make a huge saving with purchasing, not taking into account interest paid on any money borrowed or interest rates considered.

I based the 1.8k per month on a five year fixed rate over a five year loan. So as the rate would be fixed there is no flucations. I based the repayments on a fixed rate of 4% over 5 years. BTW interest would be a maxium of 10K over the 5 to 6 years. Prob better to do it over 5 years. If you look back over my posts I included interest in all calculations, except where I said a cash sale.

ResearchWill · 15-10-2012 4:22pm

As an aside between the years 2004 and 2008 I begged people to not buy property as the figures did not add up. I remember having rows with people even being laughed at, by those who knew better.

For the past few months I find myself in almost the opposite situation. This in my view based on the facts presented by the OP, is a slam dunk case to support buying. At worst case he will spend 130K over the next 6 years buying, paying interest and repairing the building and then own it he can then give it away for free and still be up on renting it for 6 years 144K plus repairing 20 164K in fact if he buys it then gives it to charity he will have saved 34K over the six years thats a bloody nice car if he went out and spent the savings. And that saving is based on him giving the building away free after the six years if he on the other hand sells it even for 50K the savings are a massive 84K.

BTW I have ignored TAX treatment of rent v buying, but even if taken into account I still think buying is the best option.

ResearchWill · 15-10-2012 4:30pm

Brian2850 wrote: »

Try to ignore your personal ties to the building as much as possible and look at it as a pure investment in real estate. The key questions you should ask yourself about the building (from an investment point of view) are:
What is the fair rent for the property?
How likely is it that the tenant will be able to pay the rent for the remainder of the term?
How long will the unit remain vacant if the current tenant was to vacate?

Obviously you will be better placed than some to answer any of the above but that doesnt mean you should let your involvement cloud your judgement. Ultimately if comes down to the return you are being offered and how comfortable you are owning real estate as an asset class......From looking at the figures you have posted, this building looks cheap at €100,000. Also worth remembering that there is currently CGT relief if you buy and hold for 7 years....

I agree totally with your view on market rent etc. this case is complicated by the fact the OP is tied into a lease for the next 6 years at a rent of 24K a year. I assume as he has not stated there is no break clause, I assume the business is trading well, so its not just a situation that he can walk away from the lease, so the market rent is what he is paying 24K a year.

stedabee · 15-10-2012 6:01pm

Hi im a investor and have being recently going to alot of allsop auctions looking to buy industrial and office units, at the last auction i was bidding at a unit in Ballymount which had a tenant in till next nov with rent of €15000 per annum went for €95,000, unit was 2,500 sq ft. Another ground floor office in town with 5 big enough office rooms went for 122,500 i think and that had rent of 18k per annum and a lease for another two years. They were also on FRI lease terms which you are too if im correct.

Basically what im trying to say is if i was you id really think seriously about buying this property. If this unit was up in the next auction with a reserve of 100k i chop there hand off especially because ur in there for another 6 years.
If your lease is FRI terms its a no brainer for either myself to buy as a investment or yourself to save money.

Brian2850 · 16-10-2012 8:27am

ResearchWill wrote: »

I agree totally with your view on market rent etc. this case is complicated by the fact the OP is tied into a lease for the next 6 years at a rent of 24K a year. I assume as he has not stated there is no break clause, I assume the business is trading well, so its not just a situation that he can walk away from the lease, so the market rent is what he is paying 24K a year.

It's not complicated at all by the OP's occupation. He cant walk away from the lease but as has been the case in many instances around the country, the tenant could go bust or seek a reduction in rent and hence my question about how likely the tenant is to be able to service the rent for the next 6 years.

I disagree completely with your last point re market rent. The market rent of the building is what can be achieved for it were it to be offered to the market today. Anything that is being achieved over that (in current rent) should be treated as a temporary profit that will disappear on lease break or expirey. Therefore it should be capitalised at a lower multiplier...

djimi · 16-10-2012 8:37am

Brian2850 wrote: »

It's not complicated at all by the OP's occupation. He cant walk away from the lease but as has been the case in many instances around the country, the tenant could go bust or seek a reduction in rent and hence my question about how likely the tenant is to be able to service the rent for the next 6 years.

I disagree completely with your last point re market rent. The market rent of the building is what can be achieved for it were it to be offered to the market today. Anything that is being achieved over that (in current rent) should be treated as a temporary profit that will disappear on lease break or expirey. Therefore it should be capitalised at a lower multiplier...

I think most people in here are working on the assumption that the OP will honor the term of the lease and be in the building for the next 6 years regardless of whether they rent or buy it. Obviously if they were to break the lease and leave early then things change, but in reality if they break the lease then they wont be buying this property regardless.

The market rent is irrelevant; the OP has 6 years left on the lease at €24k a year and as far as they are concerned that is the only rent that matters. If they werent tied into the lease then other factors come into play, but in this case its irrelevant what the place might rent for under different circumstances.

Brian2850 · 16-10-2012 9:00am

djimi wrote: »

I think most people in here are working on the assumption that the OP will honor the term of the lease and be in the building for the next 6 years regardless of whether they rent or buy it. Obviously if they were to break the lease and leave early then things change, but in reality if they break the lease then they wont be buying this property regardless.

The market rent is irrelevant; the OP has 6 years left on the lease at €24k a year and as far as they are concerned that is the only rent that matters. If they werent tied into the lease then other factors come into play, but in this case its irrelevant what the place might rent for under different circumstances.

The market rent is hugely relevant. If you have 2 similar buildings rented to tenants for 6 years each and both 24K p.a. Do you think they are worth the same if one is 50% over-rented?

djimi · 16-10-2012 9:10am

Brian2850 wrote: »

The market rent is hugely relevant. If you have 2 similar buildings rented to tenants for 6 years each and both 24K p.a. Do you think they are worth the same if one is 50% over-rented?

But in this case, what does it matter what they are worth? The situation the OP is in is simple; as it stands they are going to be paying €144k in rent for the 6 years that remain on their lease. Take that as a given. The bank have offered to let them buy the property for €100k. Basically their choices are buy for €100k or dont buy and continue renting at a total cost of €144k. The lease that they have means that no other options are on the table and any other factor (market rent, "true" value of property etc) are irrelevant.

Brian2850 · 16-10-2012 9:33am

djimi wrote: »

But in this case, what does it matter what they are worth? The situation the OP is in is simple; as it stands they are going to be paying €144k in rent for the 6 years that remain on their lease. Take that as a given. The bank have offered to let them buy the property for €100k. Basically their choices are buy for €100k or dont buy and continue renting at a total cost of €144k. The lease that they have means that no other options are on the table and any other factor (market rent, "true" value of property etc) are irrelevant.

Because you are using that the fact that the OP is tied into a over rented lease as justification to invest in property which is flawed in my view. I prefer to know what the market will pay for any investment I have before I invest. That way, you have some form of exit strategy.

Anyway, you will see from my earlier post that I think the building looks cheap on the basis of the figures posted.

djimi · 16-10-2012 9:43am

Brian2850 wrote: »

Because you are using that the fact that the OP is tied into a over rented lease as justification to invest in property which is flawed in my view. I prefer to know what the market will pay for any investment I have before I invest. That way, you have some form of exit strategy.

Anyway, you will see from my earlier post that I think the building looks cheap on the basis of the figures posted.

But the key point is that the OP is tied into the lease. It doesnt matter what the market will pay for the investment; the only thing that matters to the OP is whether or not the deal on the table (be it overpriced or not) will leave them in a better position after the 6 year lease is up than if they continue renting. It doesnt matter if the property is worth €75k; they are not going to get it for €75k, and if they dont buy it at all then they will end up paying twice that to remain in the place.

Im not looking at it as an investment. The OP is going to spend €144k on this place regardless, and as it stands will get nothing out of it at the end of the lease. If they buy it then they could end up paying €100k (plus interest) and at the end of the same 6 year period will own the building outright to do with as they please. Its not your typical investment.

lorcan76 · 16-10-2012 10:32am

As a small business owner paying similar rent but with an option to break my lease in 10 months I think your situation is a no brainer.

If you buy @100k, mortgage is same or less than the rent(which you will pay anyway) over next 6 years at the end of which you own a commercial property which you can keep rent free or sell for at worst 50k to at best 120k+.

If you remain a tenant you spend 144k and have nothing at the end only possibility of cheaper rent, which would be 0 if you bought it.

Buy it @ 100k but bargain on the rate of mortgage.

Fair price for commercial property

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