basic question about lease in Commercial Property

E

Edmond Dantes

easy one:

- A buyer purchases a commercial ip in the CBD. let's say it's an entire floor in a building
- The current tennant is a big bank
- the lease ends in 5 years with possible extension of 5 years

What happens if after 5 years the bank decides not to renew the lease and you end up having your commercial IP vacant for a while? How does an owner manage to cover the loss of rent during that period?

For residential IP is relatively easy: an emergency fund. But how big should an emergency fund be to cover such a big investment?

thanks :)
 
aegcp said:
What happens if after 5 years the bank decides not to renew the lease and you end up having your commercial IP vacant for a while? How does an owner manage to cover the loss of rent during that period?

For residential IP is relatively easy: an emergency fund. But how big should an emergency fund be to cover such a big investment?
Click to expand...
See what the big LPTs do to manage risk.

  • Diversify tenants
  • Diversify lease expiry dates
  • Diversify into different properties, in different sectors, in different cities, in different countries
  • Pay cash for it
  • Pay down principle with excess cashflow
  • Have an emergency fund to cover at least 15 months outgoings (inc stuff the tenant would normally pay - land tax, rates, etc)

Holding a single mortgaged comm property with a single tenant is a risky proposition, diversification reduces the risks considerably.
 
Ridin-High said:
Great post Keithj, whats LPT?
Click to expand...

Cheers mate....

According to the ASX....

A-REITs or Real Estate Investment Trusts formerly known as LPTs are part of a family known as listed managed investments (LMIs) available to investors through ASX.
Click to expand...

Until recently LPTs were Listed Property Trusts.... I suppose we should all start calling them A-REITs now.
 
Hi aegcp,
Have a real good look at similar properties to see how long they've been for lease. This will give you an idea of how long to budget for down time. Obviously the market in 5 years may be differnt to now however it's a start.
 
aegcp said:
What happens if after 5 years the bank decides not to renew the lease and you end up having your commercial IP vacant for a while?
Click to expand...

What happens is the whole commercial strategy nose-dives into oblivion and spectacularly crashes and burns. You go home with no assets and a great big debt. Scary huh !!


aegcp said:
How does an owner manage to cover the loss of rent during that period?
Click to expand...

Seeing as though the loss is about 4x what you can earn in your job, doing a bit of overtime won't exactly help. Basically - your pooch is screwed.

Now the yields don't seem so great compared to that house. For your sanity and SANF, I'd give these ridiculous things a very wide berth. No good can ever come from it. :)
 
TPFKAD you are definitely a smart dude, can you please stop posting useless crap as above? Before i enjoy reading your posts but latly it has just been junk.

Aeg, i was thinking you could use equity if you have it avaliable to cover the interest and i'd presume if you purchased it, it would be cash flow postitive by a good amount, maybe a good idea not to spend that and put it back into the loan or something so you can redraw out to pay interest until u get a tenant.

Also another way to help minimise is to check the lease for the lead time that the tenant has to give for not renewing so you can start advertising (could be 1yr in advance or something)
 
hi aegcp
Ridin-High is correct what you do is have built into the lease
that at the end the out going tennant must give notice of intent
at say 6 months before the end of the lease if they are renewing or not
also the outgoing pays for the refit to take the property back to the state when they started the lease
this gives you basically a new refit
most tennant just want out of the old lease and leave you to do that so you can get income from this.
next you need to look at property that is not specific if you can
so not purpose built
harder to release
if the tenants got a 35 year lease then purpose built is fine
say a mac-er's or something like that.
single tennant is fine if you have a product that one tennant can leave and a new come in within say 1 month
as for the fund 6 months is the norm for me
if i don't have someone in 6 months its sell as vacant space and move on
if its not going to lease in that time
sell to a owner occupier and find a property thats easy to roll.
for me a whole floor is not the issue but if you want to start in comm a 1/2 or 1/4 is a better way to go
the returns are not alot different in this market
whole floor are in the 2 mil mark so at those numbers its not to be played with.
anything less and you are looking at regional and then its different again as its even harder to release whole floor at the numbers you want.
comm is not the same as resi
the main three things with comm are
1. the lease and the structure of the lease
2.capacity to sell vacant and capacity to release
3. cap returns
anything else is the iceing not the cake.
you can give heaps of fancy excel sheets and the rest but at the end of the day it comes down to these three things and if they meet your requirements then go for it for me.
hope this helps
not sure about this comment
can you please stop posting useless crap as above?
why
because this is a open forum and just because you don't like a post thats fine but for me the more posts the better.
I don't like alot of posts but I think I am old enough to decide myself.
and for one would not ask anyone not to post
I suppose a few would ask me not to post.
it doesn't change the fact I will and for one would like any person to post but thats just me.
it does get in between my teeth when people ask others not to do something that I think its a fundermental right in a relatively free society.
as some one once said have not got a clue who said it.
freedom dies when people stop protecting it.
 
Ridin-High said:
TPFKAD you are definitely a smart dude, can you please stop posting useless crap as above? Before i enjoy reading your posts but latly it has just been junk.
Click to expand...
Lighten up! Because I know Dazz, I can hear the tone in which he's saying this, and trust me - it's hilarious. :D

Having said that, Dazz, maybe you could add some serious advice or suggestions?

I would think that grossreal's advice is apt: you need a space that's suitable for a variety of uses, and in an area in which demand for commercial space is likely to remain strong.

Also consider how much the tenant has invested in their current location. If it's a head office or a branch, then it's a major pain to them to move, because lots of people visit that location, and there's heaps of stationary to re-print, etc. If it's a relatively autonomous department, such as a data entry centre or something like that, then obviously they could relocate relatively easily.

If they've spent a lot of money on an expensive re-fit, that also makes them less likely to move soon. If they've already been there for 20 years, and the space is still working for them, then it also seems likely they'll stay there.

Part of your due diligence should be finding out from the tenant whether the space is working for them, and whether they have any expansion/re-fit plans etc.

There are no guarantees as to what will happen in 5 years, but there are clues.
 
ozperp said:
Lighten up! Because I know Dazz, I can hear the tone in which he's saying this, and trust me - it's hilarious. :D
Click to expand...


Well all I can hear is some one who is very abrasive and sarcastic, who rarely has any positive input into any debates or answers to questions and thinks that their S#$t don't stink..........let me tell you this, it reeks. Sounds like some one who needs an attitude readjustment if ask me, but then again, no ones asking?..or are they?

Big Tone
 
lol, it's just the risk of doing business.
There are many properties vacant for12mths and more.
Every time I drive down shopping strips I see many vacant shops.
I tried to lease one 2 yrs ago, told'em to shuv it as it was way too expensive
and now after 2 years it's still vacant (and the one next to it).
Thats just the game your playing.
 
AEG i remember reading a post from grossreal, it was a good saying, something along the lines of a bunch of small streams make a river and a bunch of rivers turn into a sea. I was getting caught up thinking, how are these dudes buying this multi million dollar property and how can i get in on it now...

I'll keep plugging away with my steams for now working towards a river.

Little sayings like that really help me get my mind straight
 
hi Ridin-High
this is not to high jack the thread but
here is a couple more
richdad poordad have a look at that as well for income streams.
I have not yet read his book but I hear its very good

network21
this will if you get involved will give you the whole ideas of income streams and its a training package
barter
commercial
comm brokerage
bank bonds

not sure if you will get the river idea out of any book as it came out of my head and as a sanguine not sure where it came from.
and
I was getting caught up thinking, how are these dudes buying this multi million dollar property
well for me read
I do not in any shape or form high the fact that I group people
if you get to understand the above way of income streams
you will see from all of them are networking, group people, leverageing and structuring
so in answer to your question its simple
its in the text of alot of my posts.
now as with anything its not going to be easy to understand my posts.
but its there
and
and how can i get in on it now...
is simple again start to learn.
I give my time free and my posts and alot of people join with me as I do the structuring which is a very important part of gaining income streams. with any part of advice comes a little bit of sweetner and also a bit of sour
and you need to read personality plus book to understand personalities. and you also need to understand that this is a free board.
and one thing when doing anything and my mum tought me this at a very young age
if you can say something gound about some one just don't say it and that what I try to do
this is not to say you don't post YOUR OPINION I just don't post mine
and if you are doing to aim at getting those income streams you need to work with people you might not like (Big Tone) but its the same as working for some company just because you hate the person in delivery as the accountant do you throw in your job for me the aim is to grab as much info as possible
so for me and it may just be me.
you need to bite the bottom lip.
constructive critisim is good
critisism on its own for me is not
I read, setup and organise comm leases but its in a team
and as you will hear from alot of coachs there is no I in team
I am not an I man
I try to be a team player because for me that the best way to move ahead
one reason I don't worry about my post that much is simple
team is what its about and to be a team player you need to adjust to people within your team
and people that can't or don't wish to adjust even to reading a post are not for me a team player they wish someone to change to what they wish something to be.
I understand this thread is not about this but when a question is asked or statement is said about something I have posted or said I like to answer where or how that comes about.
as for vacant shops there are reasons for that and thats not for this post but some times they are moth balled and can be for very good reason.
 
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