my first commercial [Archive] - Somersoft Property Investment Forums

splade

22-01-2007, 03:50 PM

not sure how good or bad my offer is. was hoping some people with the experience could give me an idea.

background: deli and house under main roof. zoned residential. large country town, not in cbd but good location, own car park. owner wants to stay on for 10 months under a lease aggrement.

the deal I offered: $235 purchase price covers property and all shop equipment i.e fridges, cookers. lease is $550 pw paid upfront this covers house and shop. shop covers all its own outgoings. go halves in any expenses that are not seperated. i.e the rates are shared with the house.

any thoughts and ideas are welcome. I really dont know what im doing at the moment, just jumping in and hope ill swim :)

thanks all

grossreal

22-01-2007, 04:56 PM

hi
for me no but if you find another tennant that will lease with all the out goings and you have annual 5% increases then it may become a reasonable project.
you are getting a 12% return but then you have to take out the out going which i don't know what they are.
I try to get about a 8% as a rule with increases so by the time they are at the first renewal I am at a 10% return or around that.
I would need to have alook at the site to give a better over view but outer cbd must be around the 11% and have 5 x 5 leases in place and there are alot of those I try to keep my business and my tennant very separate so mixing inyou pay this and I pay that makes the water messy.
I like you pay all.
my .002

splade

22-01-2007, 05:35 PM

thanks, yeah i like 'you pay all' also but becuase its residential isnt the landlord supposed to pay the rates and water etc? I thought it was law, but maybe its just the norm and no reason i cant change it to make them pay all?

JIT

22-01-2007, 06:26 PM

If it is zoned residential, are you allowed to run a business in the house?

As grossreal suggests, you are buying the property here plus business/equipment - so, at the end of the 10mth leaseback arrangement, the business/equipment may be worthless to you?

GSJ

splade

07-02-2007, 05:46 PM

The contract was signed on friday. in the end I changed the conditions to tennant pays all outgoings (thanks grossreal). The property is zoned residential for commercial use so it is perfectly legal to run a business from it. My plan is to try and get someone to manage the shop for me when the current owner moves out, rent the house out seperately and add another business premisis or one bedroom unit. the shop is grossing about 4.2k so i should be able to cover wages and still be way ahead. I plan to pay the manager commision based on what the shop is making, to help keep them honest and motivated.

The house frontage used to be a dinner bit of the deli which the current owners sectioned off to give more room in the house, but the house is now HUGE, with a door into what they are using as their bedroom. im going to split it through the bedroom to give a new sizeable office/shop/one bedroom unit area whilst still maintaining a sizeable 3 bedroom home with large backyard.

Thats my plan anyway.

grossreal

07-02-2007, 06:41 PM

hi splade
hope you do well.
look at changing the lease to 5 or 6% increases per year the business should be able to do this and it gives you a growing asset even if only on paper.
all mine are 5% or above increases anually.
all the best

splade

14-02-2007, 05:42 PM

so it isnt going all that well.... two major problems

first there is a clause in the contract declaring that GST is not applicble to the purchase, but now after checking with my conveyancer she has advised me that the vendor is registered for GST and so GST would definitely apply. worst case is 23.5 k extra to my expected purchase price but probably be around 10K once you take the residential portion from it.

Secondly we have discovered that the vendor has no trade waste permit, not sure exactly how much they are but my conveyancer thinks it could cost up to 30K if for example a pit is required to be built to store the cooking fat etc.

sooo seriously considering walking away from this one. Im not paying anymore than I offered. The vendor will have to drop their price to absorb the gst they said wouldnt apply. also if they dont get a trade waste permit I dont want to proceed either. Do i have grounds to rip up this contract if they dont meet these requirements?

ok180

15-02-2007, 05:03 PM

JoannaK

16-02-2007, 08:34 AM

if it's sold as a going concern (ie with an existing tenant) then there is not gst applicable to the commercial portion of the building.

Trade waste permits and greasetraps are only necessary if cooking is done on site. Trade waste permits cost nothing to apply for, and only a small monthly charge, plus monthly or quarterly charges for the emptying of them and processing the the waste...but it could be expensive to install a greasetrap and necessary plumbing if not already there.

splade

16-02-2007, 12:26 PM

The vendor's solicitor is preparing a formal document to preclude anyone from seeking GST from me for the buying of this property at settlement and into the future. so that is good enough for me. The vendor was advised by their accontant that the property doesnt have GST applied to it becuase it is their residence... my conveyancer believes that they have been advised incorrectly, so we will see.

in regards to the waste. they are cooking on site. they make chips and other deep fried goodies. We found out yesterday that they are putting the fat into 44 gallon drums atm and then.... well who knows. they verified that they dont have an official permit, so they are contacting the authorities on that and getting it sorted...

tried to get a loan through ING. they knocked me back yesterday afternoon. saying that they wouldnt accept the property as security, the location didnt meet their lending criteria, wish they had told me that a week ago when I first went to them. trying ANZ today.

splade

16-02-2007, 12:28 PM

if it's sold as a going concern (ie with an existing tenant) then there is not gst applicable to the commercial portion of the building.
?? really??

anything happen when the tennant vacates and someone else comes in? what sort of lease term does the tennant have to have so that GST is avoided?

JoannaK

16-02-2007, 12:41 PM

yes really, i have purchased a few as going concerns...but only applies to commercial properties. as far as I know there isn't a set lease length time required....

you'll need to speak to an accountant to get specifics.

splade

16-02-2007, 05:07 PM

thanks JoannaK :)

splade

22-02-2007, 06:13 PM

the vendors solicitor has not drawn up any documentation to give me indemnity from the GST in the case that the vendor was indeed advised wrong about the GST obligations, they have not gotten a permit for trade waste, I have an out of this contract, ING refused to give me money, but i just dont know what to do...

should I walk away. I thought it was a really good deal so I should do everything in my power to try and get it through, get them to get the permit and get the letter of indemnity, but was i just dreaming and it really isnt that good of a deal that I should persue it any longer... if its a good deal i dont want to just give up, on the other hand if its only ok then i should run now, while i can. I dont know, i just dont know.

help please.

JoannaK

23-02-2007, 08:45 AM

hi Splade,

I have re-read the thread...what is going to happen after 10 months when the vendor vacates the property, or is the vendor selling his business as a separate concern? Sounds to me like you've also purchased a business as well...have you done your DD on the business side of things as well as the property side of things?

What is this town like that you're considering....does it have growth prospects or is it just a cashflow opportunity?

And I still don't understand how a property can be zoned both commercial and residential....but I guess that's neither here nor there as there would appear to be some sort of existing use rights in operation here anyway.

Based on your first post, your yield will be around the 12% mark, but this is not certain beyond that 10 months that the vendor has agreed to stay on for....which is a real problem in my opinion. When commercial property is vacant, it can stay vacant for quite some time....and, what are your thoughts about all the fridges and other equipment that you're also purchasing as part of the property? If you re-lease the premises to a new tenant and they don't want it all, then you've done your dough.

If you employ a manager to run the business on your behalf, you're liable for all outgoings associated with the property..

Also, if they haven't got the tradewaste permit and the correct greasetrap, this could end up being costly...there are big fines imposed if the water authority find out that cooking waste is not being disposed of and treated properly, or worse still, getting in to the water system.

You also need to look at why you're having difficulty in obtaining finance....sometimes banks say No not based on your own circumstances, but because of the security (or lack of) the property being purchased....

It's up to you whether or not to pursue this deal, but if it were me I wouldn't be doing it....if i buy commercial property it's set and forget, I expect my tenants to pay their rent and outgoings and I do not get involved in the business side of things; afterall, property investing is a business in itself is it not?

this is an excellent case study for you when you move on to the next one (if that's what you choose to do)

Just my thoughts..

APerry

23-02-2007, 10:03 AM

Hi Splade,

I'd be interested to know the basis on which ING knocked back your application?

Regards
Alistair

splade

23-02-2007, 11:35 AM

the property was not in an area that they would accept it as security. even thought the town has >20000 people in it and is only 3 hours from a major cities cbd. i was surprised. I think we just took too long to get all the information to them, it was a complicated loan so they thought stuff it.

also, ive given my conveyancer the go ahead to terminate the contract...

APerry

23-02-2007, 02:22 PM

Hi Splade,

If that happens in future try Bank West, they don't generally care about location if they can get comparable sales, they're cheaper than ING too.

Regards
Alistair

splade

23-02-2007, 05:00 PM

Thanks. we had actually gotten figures from bank west but didnt put in the app becuase all this other stuff happened (GST and Trade waste permit etc). I'm pretty sure they would have dont it. figures were comparable, but redraw cost $100 per redraw. ouch... ANZ wanted $780 per year in ongoing fees, with no redraw. oh my.

splade

16-04-2007, 05:52 PM

This has still not been resolved and i thought it might be good to update the thread about where im at so others can learn from my horrible mistakes :D

I wanted to terminate this contract because of three issues.

1/ no trade waste permit,

2/ was advised that GST applied, would be another 20k or so, on top of the asking price

3/ was advised that the vendor was not allowed to pay me rent in advance on a commercial property.

I tried to sort these issues out with the vendor but found i was just hitting a brick wall with the vendor simply saying that these things are not an issue. So from my conveyancers advice I tried to terminate this contract based on the finance clause.

The vendors were real mad and have gone to a lawyer and are trying to force me to settle. I in turn have taken my contract and all correspondence re the 3 issues stated above to my lawyer. well after 6 weeks (gosh lawyers are slow)

my lawyer has said that GST can be inclusive of the price i.e I pay less for the property + GST on that lesser amount which then equals the contract price.

He has said that the legislation that my conveyancer was refering to in her advice that they couldn't give me rent in advance doesn't apply here because it doesn't apply where the occupancy arises under an agreement for the sale of purchase of premises... which is my case.

so it seems that the only issue left is the trade waste. I rang the trade waste people today and they are going to call the vendors to establish exactly what is required and then give me a clear definite answer about what they really need to do. I feel pretty bad getting the water people involved if they are doing the wrong thing as they might get into trouble but i couldn't think of any other way to be sure that i wouldn't need to install a grease trap etc when i take it over...

so anyway. if the trade waste can be sorted it looks like this might go ahead after all. If so im hoping they wont hold a grudge.

so it seems that so far 2/3 of my issues really were not issues and i have done the wrong thing by this vendor ( unknown to me of course).

Bargain Hunter

16-04-2007, 08:47 PM

so it seems that so far 2/3 of my issues really were not issues and i have done the wrong thing by this vendor ( unknown to me of course).

Splade,

At the end of the day the only thing that has gone wrong (if that's the correct term) is that you signed the contract without knowing the full situation.

Almost anything can be included within the terms of the contract and as the purchaser you generally have the upperhand so if you were aware of any issues they could have been included in the contract prior to signing. Atleast this experience puts you in a better position for your next deal.

Don't know if you can break the contract without penalty (subject to finance is fairly thin) but wish you well.

Personally I have no experience with commercial (apart from leasing) and therefor applaud your courage in giving it a go.

Interested in knowing if you have had much experience in the residential side of property.

Hope everything turns out as you desire.

Regards

Andrew

splade

17-04-2007, 01:30 PM

It was not 'issues' left out of the contract that was the problem, it was things that where included in the contract, that i thought were ok, but my conveyancer and said where not. turns out she was actually wrong and it is really her fault it all went so pear shaped. and yes what i should have done was taken the contract to my solicitor to have a look over before I signed. it was a very poorly and confusing contract and my lawyer cant beleive the mess the REA has made of it. i.e a residential contract for a property which is actually part commercial.

No i dont have much experience in residential either, but the numbers added up so I was prepared to give it a go.

Dazzling

17-04-2007, 03:42 PM

a residential contract for a property which is actually part commercial.

Good onya splade for havin' a crack at it. keep chipping away, the detailed lessons you are learning right now are way beyond what you'll ever get out of a book or a forum. The nitty gritty gets brushed over too much...doesn't it ??

In terms of a ressy contract for a comm. prop, I have no clue what you mean ?? Every industrial and comm. contract I have signed has been on a bog standard transfer of Land O&A document.

It doesn't matter what the prop. is zoned, it's all either Torrens or Strata titled Land.

Maybe different in SA, but I'd be surprised if it was.

grossreal

19-04-2007, 02:19 AM

hi all
dazzling in nsw there is a big difference between the contract for sale of resi to comm
for a start to buy comm you don't need a contract to purchase thats after you have done the deal in nsw.
but thats a different issue.
spade with regards to comm when purchasing its the same as a commercial agreement
and yes you can neg on rent before you buy and thats the norm
if you don't want to pay gst as you are buying as a going concern so no gst.
gst is not a major issue as you can re claim it if you are on a bas with gst claim monthly.
this is a learning curve and you seem to be learning
and one thing you must learn is nobody knows everything as if some one makes a mistake thats fine just fix it.
go to the vendor and tell them that there has been a stuff up and you still want to buy if thats the case.
remember one time
they want to sell and you want to buy thats the main thing that should be in the front your head it will be in theirs.
and any stuff ups along the way are humps that need to get over.
and don't feel sorry for a vendor, they don't feel sorry for you
if you are buying comm you are buying on return or potential profit and this is business,
you do what is required to gain a project within a frame of your view of what is fair (do unto others as your would want them to do to you)( may sound like preaching but a very good rule to work by).
the rest is as dazzling would say is s--t or I would say is not important.
remember we all make mistakes and the chinese say its not how may times you get knock down that is the issue is how many times you get up.
if you are at the helm, you need to go back if you want the property and have a meeting with the vendor and tell them the current position and if you want the property they will work with you to secue it.
I fight with vendors but when the deal is done and you have got an agreement, they are your best align as they are on your side
as you are both aiming for the same goal.
and for cost ask there solicitor for his advice on the contract
he will see it as a conflict
but he will give you his view and may give you an answer that your guy has not seen.( and his cost are charged to the vendor so the info is free, you don't have to take it but its a view)
I had some one once tell me a very true piece of information

get 10 accounts and 10 solicitors in a room and ask for advice on an issue and you will come out with 20 different views and 20 different reasons why the other account is wrong or the other solicitor is wrong.
your job is to throw it in the air mix it up and come out with a solution.
welcome to the world of business.

splade

19-04-2007, 11:36 AM

yeah thanks grossreal. my conveyancer was just so confident when she said that the rent in advance couldnt be done and we should terminate that I believed her. we told the vendors solicitor that we believed the rent in advance was illegal and their response was just 'its fine' they should have sent us documentation to prove it was fine. What i really wanted to do was contact the vendor directly but was told i wasnt allowed. which made it really hard to get a clear picture of what we could do. my current solicitor has said yes it is fine and here is the legislation that proves it. that was enough for me. As soon as the trade waste person gets back to me with a clear answer about the trade waste I will move forward. and make a trip to visit the vendor. appologise for the stuff up and hopefully try and move forward.

aef

19-04-2007, 02:54 PM

Hi Splade,

GST on property/business transfers is definitely tricky and not left to chance.

I have heard of cases where the ATO have either demanded GST that wasn't charged correctly or knocked back cases where GST was assumed to be charged. Some of the tax accountants on the forum may be able to support or refute this.

Make sure all documentation clearly states the GST treatment and get a tax invoice. Once you have documentation that clearly states the GST treatment - get this checked by your accountant.

Good luck which ever way it goes.

Regards
A

splade

19-04-2007, 06:22 PM

Hello everyone,

The Trade waste person has contacted the vendor and discussed their setup and has advised me that they do not need a grease trap or a permit. I have re-read the contract and the new letter from the lawyer and where it originally said that GST did not apply the vendor is now accepting that GST will be inclusive of the asking price. so We were right about that one but wrong about the rent in advance and trade waste issues. although I'm still not 100% that they are not cooking chicken or hamburgers...

My lawyer has now gone on leave so i have to wait until Monday before i can work out how the GST gets paid. i.e does the contract need to be amended to say how much GST is being paid exactly in the purchase price. is that what you mean by the documentation aef?

aef

20-04-2007, 12:13 AM

. i.e does the contract need to be amended to say how much GST is being paid exactly in the purchase price. is that what you mean by the documentation aef?

Your lawyer or accountant will be able to answer the question properly - if it was me I would want the price stipulated in the contract as $xxxx plus GST of $xxxx. I would also ask for a tax invoice for the sale of the property as well as the contract.

I would also check to see that the vendor is validly registered to charge GST.

The above points are the things I would do in your situation - I strongly suggest you have your lawyer and or accountant review the GST clauses in the contract.

Regards
A

kingchevy

30-04-2007, 03:45 PM

What do you plan on doing after the 10 months is releasing the property or are the same tenants going to renew there lease and if so why can't the commit to a longer lease now say 2-5 years is usaully a standard lease agrement??

splade

03-05-2007, 07:26 PM

hello,
well yes kinchevy that is the question isnt it. what am i going to do...

the current tenants are moving on in november. they have already made arangements to go and im pretty sure there is nothing stopping them now. they are leaving all the equipment behind so i was hoping to get someone in to manage it. pay them via salary + commission so they feel a sense of ownership over the place, without actually owning it.

so the question is how do i find someone to manage it. go to an employment agency? just advertise in the local paper? I doubt the current tennants will allow me to place someone in their business before they leave to train them up... but how hard can making sandwitches and cooking pies be?

anyone else taken over a small business but not actually run it yourselves? maybe i will need to take a month off of my normal job and go and oversee things myself. that is probably the best option. but how do i find someone i can trust. I guess you just have to do the checks (police check) and then have faith in people.

if that plan falls through my second plan is to try and rent it out as a commercial premisis to someone else.

my third option is to turn it into a resi 1 bed unit, but hopefully the first two will come through.

if anyone has anyother ideas i would welcome them.

XBenX

03-05-2007, 07:39 PM

Hi Spade,

Ive done similar (owning and appointing a manager) although I did not own the building.

You need to love the Food and Bev game. There was a thread about what you need to think about where I posted my thoughts. I think it was Olly's therad. Have a read.

splade

03-05-2007, 07:45 PM

I would love to read what you had to say. can you give me any more clues as to the title, how long ago it was etc so i can more easily find it. I did a search for posts by you and there was just to many to go through :)

i also did a search for posts by 'olly' and didnt find anything.

JIT

03-05-2007, 08:44 PM

Mixing resi investing, comm investing, and small business all in the one pot. Definitely not for beginners. Good luck with it though. Thanks for sharing it here.

GSJ

geoffw

03-05-2007, 11:34 PM

the current tenants are moving on in november. they have already made arangements to go and im pretty sure there is nothing stopping them now. they are leaving all the equipment behind so i was hoping to get someone in to manage it. pay them via salary + commission so they feel a sense of ownership over the place, without actually owning it.

so the question is how do i find someone to manage it. go to an employment agency? just advertise in the local paper? I doubt the current tennants will allow me to place someone in their business before they leave to train them up... but how hard can making sandwitches and cooking pies be?Splade

When I took over my Subway, my aim was for a business which would not take to much hands on to run.

MrsW would handle the small amount of admin, I'd keep my $80K pa job. Easy as, easy peasy, whatever the term is now.

2 1/2 years later. No way. I'm full time managing (full time = 361 days pa), MrsW is in a small bikkies job just to keep the family together. I'm working twice as many hours for half the money.

If you're asking these questions- sorry. Don't do it.

splade

04-05-2007, 12:43 AM

well i kinda figure the resi part will offset part of the risk of the comm bit. and i have a few contingency plans. I agree it could be a whole lot of trouble more than its worth as geoff says, but I just gotta give it a go :)

GoAnna!

04-05-2007, 12:48 AM

Hi Splade

At worst will it work numberwise is pure resi?

If its resi but operating as part commercial do you lose the right to operate as commercial should you let the commercial lapse for any period of time? Has council explained exactly how the zoning works on the property?

There is no need for you to apologise to the vendor. Apart from the fact that he is probably delighted that you bought it you were just straightening out in possible issues in the contract. Fair enough.

Good luck with your venture. I am sure that worst you will learn heaps!