commercial

Hi all,

Just needing some advice about a commercial property I bought 6 years ago for $1.2M.

I bought it with a current 10 year lease with a multi national, the current lease has 2.5 years to go before it expires. Current rent is $98K.

The current market rent is 65K without this tenant due to a decrease in demand. I spoke to the agent and he said i would able to sell it for $1M.
Now my dilemma is do i keep the property and sustain a decrease in rental return in two years or do i sell nowand sustain a loss of 200K.

Thanks Michael
 
For what it's worth, I think that in 2 years the landscape will be vastly different in terms of the credit crunch, commercial property market etc etc.
To sell now could well have you regretting it in a big way in 2 years time.
Selling now or holding out are both risky options.
The again, so is crossing the road ...
Also, there's no assurance that you will get $1m for it now, anyway.
 
Last edited:
Hiya MJV

Its clear u dont want to sell ?

Sooooo what are we looking at it ?

Need to sell or want to reinvest to get a better rtn ?

Might be able to get a work around ?
ta
rolf
 
Hi all,

Just needing some advice about a commercial property I bought 6 years ago for $1.2M.

I bought it with a current 10 year lease with a multi national, the current lease has 2.5 years to go before it expires. Current rent is $98K.

The current market rent is 65K without this tenant due to a decrease in demand. I spoke to the agent and he said i would able to sell it for $1M.
Now my dilemma is do i keep the property and sustain a decrease in rental return in two years or do i sell nowand sustain a loss of 200K.

Thanks Michael
You would have to balance it all out in money terms,if 6 years ago you paid 1.2 mill,rent down from98k-65k,that within itself tells you something and value is what people perceive it to be,and nothing more,but i would never be hammered with a loss of 200k,better just playing the waiting game,unless it becomes vacant longterm,that's when you would have different problems..imho..willair..
 
Yup What Willair said.

I would also be thinking that it may be hard to sell even at $1m, if demand has dropped and this type of property is traded thinly at the moment.

Like Rob W said, I predict an improvement in demand and rents in 2 years or so.

Don't forget that banks are hard to tap right now and a commercial building can only usually be financed at 70% LVR.
That makes it hard for a potential purchaser.
Maybe you should wait till the floors in the banks are awash with money again:)
 
Yup What Willair said.

I would also be thinking that it may be hard to sell even at $1m, if demand has dropped and this type of property is traded thinly at the moment.

Like Rob W said, I predict an improvement in demand and rents in 2 years or so.

Don't forget that banks are hard to tap right now and a commercial building can only usually be financed at 70% LVR.
That makes it hard for a potential purchaser.
Maybe you should wait till the floors in the banks are awash with money again:)

I would think that the property may be worth less than $1m.. on a market rent of $65k that is just a 6.5% yield - seems like it is a bit low - depending on the property - (Considering that when you bought the property it was on an 8.1% yield) .. add to the fact that the lease has only 2.5 years to run.

I would go talk to the tenant and see if they are interested in staying when their lease expires. If so consider dropping the rent now and locking them into a 10 year lease with a market review after 3 or 5 years and a ratchet clause.

It'll be a lot easier to sell with a multinational tenant on a 10 year lease than with only a 2.5 year lease or worse a vacant property in a couple of years time.

It's a tough call, and one that only you can make.

good luck,

RightValue
 
Last edited:
More questions

Hi ya Michael,

It will take some six years of rental losses (not allowing for rises/reviews. etc) for you to buffer a now 200 K loss if you sell (assuming it sells for that much). You need to answer this question for yourself.....can your pockets afford that reduction assuming you have a loan and/or can your overall portfolio position afford that reduction in rental income? :confused:

Also be mindful (assuming you have a loan and it was fixed for the term of the lease), the bank may (probably) play funny buggers with you if you come off fixed and may wish to revalue or see evidence of new/renewed leases.

So according to the agent, it will sell at a prospective (circa) 6.5 % yield. What are cap rates currently for your typew of asset in that area?

Also as others have indicated, things may turn more favourably in two years. So you may not be looking at that magnitude of loss anyway.

As a pro-active measure, what can you do to the property to improve, enhance, add to it to encourage the sitting tenant to remain (copping market review at that time which may not be as bleak as now), or to entice a new tenant and minimise vacant downtime?

I've posed more questions for you, however that would be my line of thinking if it were me.

Hope that helps. :)
 
Thank you for all your input on this matter.

I am looking at being proactive with my property, I am mindful of a vacant property in 2 years and the prospect of a decrease in rental income is not attractive. The other concern is banks forcing me to sell in two years due to no rental income.

I've just come off a fixed interest rate and am in the process of deciding whether to fix and keep the property or leave it varible and sell.

As you all have explained its my call and thank you for your comments and advice, it has certainly helped with my thought process.

Take care,
Michael
 
I would go talk to the tenant and see if they are interested in staying when their lease expires.
Absolutely - sound out the tenant. If they want to stay, they may not even be aware that rents have dropped, and may be completely happy to sign again at the same rent. OK, it's not likely, but it's possible. Even if they are aware, if they have a big investment in the site (ie would be expensive and/or very inconvenient to move), then they might be willing to pay a bit above the odds to stay anyway. So you may be worrying about nothing.

As others have said, the market rental in 2 years could be quite different to what it is now, anyway. If it's not, as RV suggested, sign another lease with a market review after 3 years and hopefully at that time things will be looking up.

I certainly wouldn't be selling and being guaranteed to take a bath, as opposed to "waiting and seeing" and having 1) a small chance of taking a slightly larger bath, or 2) a healthier chance of doing the same or better in 2 years' time.
 
Absolutely - sound out the tenant. If they want to stay, they may not even be aware that rents have dropped, and may be completely happy to sign again at the same rent. OK, it's not likely, but it's possible.

Assuming they are idiots is probably not a good negotiation technique imo.
And while I'm sure most tenants would pay a little more not to move, the question is how much is their "little more"?
This depends on what the tenant does, how much time & $$ have been invested in the location etc.
If their are other vacancies near by or on the same street, then that "little more" becomes a little less.
If they are managed or (for sale) by your RE firm, then it's much better.
But If I was a PM and had a similar vacant property next door, across the road or even close, I'd be in there poaching him.
 
Assuming they are idiots is probably not a good negotiation technique imo.
If they're making a motzah in their business, there's no reason why they'd necessarily be keeping an eye on market rents, especially 2 years out from their lease ending. That doesn't make them idiots. Most people aren't as interested in market movements of rents as we are. :)

And I far from said they should *assume* that the tenant won't be aware; I suggested they *may* not be aware. :rolleyes:
 
hi mjv
couple of question
did they pay for the fitout
what does the lease say with regards to putting the property back to what it was when they moved in.
and do they wish to stay
you can get them to sign a new lease now and cancell the current lease and you can give a discount for the signing a new lease
these are negotiation and they are a bit specialist as you maywell know
but lets get back to your dilemma
what about reval ont he current or projected income
at 98k at 8% is 1.225k
now what you can do is use the equity out of that to buy into another property in a growing market.
fix the loan for say 5 years with the current tennant.
and if the above was not done in the current lease then can you pay the current debt with the drop in income to say 65k
the tennant can move out and a new tennant can come in on the 65k cover the debt costs and you are still using the property as security for the other site.
leveraging with comm is a bit different to resi as you can have set amount of indebtness and can cross with say time periods.
selling comm in this market is not very good but buying comm is alot better
so the question for me is what available equity have you got at the 98k and whats the val now.
you have 2years to go
thats a long time
you have 4 to 5 months to buy comm now at this turn in the market and even then I think its less
when cashflow is tight
then two things are in demand
cash and or equity
one thing I have found to be successfull is to sell the property to the tennant and increase the price by 5% or 9% or betwen and then vendor finance the sale for 12 months so they have to get 60% (which they can do) and then the other 40% in 12 mo9nths from cash flow or even refiannce but thats there problem.
so in your case with the numbers above
it would be 98 /8%(cap rate)( I take the 98k as net)=1.225 plus5% thats 1.286
60% they come up with 60% 775.75 and come up with 514k in 12 months and pay 10% interest on the 514k
and if they have an issue they keep paying the 10%
as you were going to get 850
you have a drop of 75k and you have sold it but you have 514k up in the air waiting to be paid
registered second mortgage behind there 775k first
now the question is would a tennant take this deal.
well they have 100% finance
they have not moved.
and you are out if you wish
which would I do
the equity in this market as it can work alot better
knowing you and your risk profil
check the numbers on the tennant version
and just ask
there are so many ways to skin this cat
this is just two
but I can give you another three just off the top of my head
add AAA....,,, as needed
and this is not advice thou thats not alot of point at the moment
 
Thanks for all the feedback.

Rob, I agree with you, I think the commercial landscape will be better in 2 years time. Rolf, yeah you are right I don't want to sell because by nature I am a accumulator, but commercial property is all about cahflow and if I am going to get less income than why keep it.

Giddo, I am hearing you. RightValue- I have already talked to the tenant, I offered 80K for a 5 year lease but they didnt bite, they came back to me with 60K and I said I am not into playing games- that was six months ago.

Player- thanks for the feedback, I've got 400K in a redraw facility so if trouble does brew from the banks I can dance to their tune to match their LVR calculations.
Ozperp, they are very aware of current rents and have been trying to sub-lease the property.

grossreal, Yes they did pay for the fitout but the lease was signed before I was involved, I bought the property with the current lease intact and I am not very familar with these sort of deals. The lease says that they are responsible for putting the property back to original condition and i dont think they want to stay. I like your idea about buying another property with the equity but thats above my comfort zone- I've got 6 residential properties and another small commercial property in Newcastle, so for now I just want the equity to grow before I jump in again. I haven't thought about the vendor finance option, I'll give it some thought.

Once again, thank you all for pondering and sharing your wisdom.

Take care,

Michael
 
Thanks for all the feedback.

Giddo, I am hearing you. RightValue- I have already talked to the tenant, I offered 80K for a 5 year lease but they didnt bite, they came back to me with 60K and I said I am not into playing games- that was six months ago.

Ozperp, they are very aware of current rents and have been trying to sub-lease the property.

grossreal, Yes they did pay for the fitout but the lease was signed before I was involved, I bought the property with the current lease intact and I am not very familar with these sort of deals. The lease says that they are responsible for putting the property back to original condition and i dont think they want to stay.

Suggestions given what you say above:

1. If they are looking to sublease, jointly market the property. They'll struggle to get it away with 2.5 years remaining so you can offer a longer term.
2. If they are a multinational they will have money to throw at a surrender deal. If they have 2.5 years left on the lease they may throw say 18 months rent at you upfront plus a makegood premium. You would need a schedule of dilapidations drawn up to estimate makegood costs from a building surveyor / consultant. If the fitout is good you can then leave in the property to help you lease the property. The good aspects of such a deal are you get rent and makegood upfront now. You then have opportunity for upside if you re-lease early.

3. Combine 1 and 2. Only talk to them about a surrender when you have a suitable alternative tenant. They pay leasing agent fees, shortfall in rent for the 2.5 years up front, a makegood premium plus an additional premium to cover what will probably be the lower covenant strength of the incoming tenant and the fact that they wouldn't get the space away without your involvement due to the longer term you can offer.

Alternatively, send it to auction now and hope that there are a couple of cashed up buyers around who don't do much in the way of due diligence. Unfortunately, given the market, I think the chances of that scenario are slim.
 
hi mjv
for me get the real estate to advertise a interest free term with new fit out to there design
new tennant gives you what they want
you price the fit out
you price the outgoings costto bring it back to pre lease
and you get the out going to pay for the incoming fit out
the newe tennant gets the way they want it and you have a new tennant on a same or better lease amount.
and also get the incomming to sign to bring the building back to what they want and try for a dollar for dollar fit out
so the incoming pays 1 dollar for every dollar you pay to increase your asset and also to increase there look
they see it that you are helping there business
and then do the same as above using out going refit money.
nake sure you do the new lease correct as I have seen leases that would not sell in coles under tissues.
 
Dear Pom and grossreal,

Thanks for the options, i will gather up a proposal and see what happens.

Thanks,
Michael
 
Top