Assitance and Advice about CIP funding and lease renewals

[Sanzy]

Hello All,

I am curerntly working on my first CIP deal, I have a number of resi investments but looking to move into the Commercial market.

As such it is currently a fairly steep learning curve. At present I have not actually commitied to anything I am doing the DD and have encountered a few questions i was hoping that some of thepeople who have been there done that may be able to help with.

1. The property currently has around 2.5 years left on its present lease. The bank have indicated they will extend a loan for the length of the lease minus 1 year. is this normal for them to fund for the lease term minus 1 year rather than for the whole of the lease term?

2. At what point would a new lease generally be negotiated? would you be looking to sign them up for a new lease with 1 year remaining? Or would you normally be workingout a new lease with around 6 months left of the current lease?

I am approched the selling agent asking if the tenant would be open to signing a new lease and they have said that with 2.5 years left no they are not. So I am just trying to figure out if the bank are just being a pain or if this situation is fairly normal and a new lease would normally be signed around the 1 year mark anyway.

Oh and the tenant is a long standing well established business in the area that I am confident would resign a lease when it was due but I am worried if I will have an issue with the timing of when the loan may need to be renewed verse when the tenant may resign a lease.

Thank you for your help in this.

Sanzy

 

[Dazz]

The property currently has around 2.5 years left on its present lease. The bank have indicated they will extend a loan for the length of the lease minus 1 year. is this normal for them to fund for the lease term minus 1 year rather than for the whole of the lease term?

Yes quite normal. It reduces the Bank's risk. But alas, when they do that, it - by definition - increases the risk for the other party to the mortgage contract.....and guess who that is ??

At what point would a new lease generally be negotiated? would you be looking to sign them up for a new lease with 1 year remaining? Or would you normally be workingout a new lease with around 6 months left of the current lease?

Read the current Lease stipulations. Most have something like the Tenant must advise the Landlord no more than 6 and no less than 3 months prior to the end of the Term if they wish to take up an option. If no option exists and it is simply the end of the Term.....then all bets are off, and they don't need to tell you a jot until the very end.

I am just trying to figure out if the bank are just being a pain or if this situation is fairly normal

Yes on both counts, but then it depends which hat you are wearing. If you are wearing a "Bank shareholder hat", then no, they are being cautious and prudent with their shareholders funds. If you are wearing a "dodgy first time investor trying my luck hat"....then yes, they are being a pain.

 

[Sanzy]

Thanks for the feed back Dazz,

You have pritty much confirmed what I was thinking already.

The lease is due to end after the 2.5 years. So would be an interesting time.

Now I just need to work out if I will be able to sleep at night if i take this on as an investment as I can see good long term income from it but I would need to be able to hold it thru the creation of a new lease as I can not see the tenant wanting to have to move from where they are.

New question does anyone have the details of a good Commercial broker who I caould speak to (I am happy to work with somebody either face to face or thru calls/email) as I would like to see if they may be able to offer better terms that would help bridge the lease renewal.

Again thank you for the feed back.

 

[Ridin-High]

Hey Sanzy,

I'll shoot you a private msg, check ur inbox top right hand side of the screen

Regards,

RH

 

[dammit]

For the renewal you can play it two ways, if it has an option period and they exercise their option correctly, etc then all would continue as normal. sometimes it pays as the landlord to wait until the last minute before reminding the tenant their lease is about to expire, it stops them from having a chance of shopping around and if they only have 6 weeks to get a full make good done, move and fitout a new place and they don't have time it puts you in a good position of power. if you start asking them to renew 12 months before expiry they could detect and put you weaker in negotiations.

but generally speaking I would say that its unusual to have a new lease executed and in place any earlier than 6 months ahead of time. 3-4mths would more likely be the figure if your lucky. (this is in the QLD market may be different down there though)

 

[Sanzy]

Thank you for the input Dammit.

The deal is moving ahead. waiting for contracts to be drawn up for signing now.

Shold be a good steeping stone forward.

 

[jacbmw]

so the question is still slightly unanswered:

If finance is pulled 1 year from end of current lease option, further finance from this point will be harder to get (ie. shorter period of tenancy remaining)???

How is this overcome? How is your position in gaining further finance strengthen in this passing of time?

 

[Dazz]

It's overcome by having a track record that the Bank can look back on.

At the start you are an unknown quantity. What you say doesn't count.


As time progressess, the Bank can see that you have honoured your loan commitments, they can usually see the cashflow patterns, they can see the valuations usually increasing, they can see the increasing rents.....and that is what counts with them....verifiable track record.


We thought the whole world would come to an end when we hit our first one of these.....OMG, the lease is still going but the finance has run out.....whatever will we do ??


Simple, Bank says "wow, you've had a good run over the years. We would appreciate the opportunity to extend your finance facility, and here is a proposal." Great, they are now touting your business, instead of you having to suck up to them.

 

[jacbmw]

Ahhhh, loyalty coming back the other way!!! Never thought i would see the day