Estimating buy price - Part 2

Hi Folks,

I'm starting a new thread for the second exercise because the first thread is already long enough and besides the method for calculating the value of a commercial property investment is different to that of a residential property chiefly, I think, because the risks are greater. (I just gave you a clue.) Perhaps that may be a point of discussion later in this thread but first have a go at this exercise.

How to calculate the rent and value of a shop.

An investor is looking to purchase a shop in a prime retail street location and wants to calculate what the rental income should be and how much the shop is worth. The investor finds a suitable shop (Shop D) which is to be sold at auction shortly. Having researched previous sales in the area the investor chooses three shops (A, B, C) to compare which have sold in the same street in the last month. The following comparisons are noted:

1. All 4 properties are in identical positions; are held on identical leases; and have been maintained in good order. (Point of clarification: Take "identical leases" to mean identical length of term. Shop D which is the target shop is being sold without a sitting tenant. But the investor is simplifying the adjustments by choosing the same lease term as the other shops have.)

2. No adjustment is needed to compare: position; date of the transaction; differences in tenure; and condition.

3. However, the shops are different in size and the quality of the covenants of the tenants varies. ("Quality of tenant covenants" could be a point for discussion, however, for the purposes of this exercise I'm happy to simplify this to mean quality tenants. You will have to exercise your own judgement on what constitutes a quality tenant.)

Shop A:

Floor area is 74 sq metres;
Rent is $16,000;
Tenant is a National franchisee;
It sold subject to the tenancy for $232,000


Shop B:

Floor area is 102 sq metres;
Rent is $23,000;
Tenant is a popular local baker;
It sold for $255,000

Shop C:

Floor area is 140 sq metres;
Rent is $32,000;
Tenant is unknown and of doubtful quality; (Perhaps is an independent retailer of second-hand books with no profile.)
It sold for $228,500.

Shop D:

To be sold at auction shortly
Floor area is 116 sq metres;
It is in good repair.
Not currently let so rent is unknown.
Price: ?????????

Please answer the following questions:

What rent can be expected for Shop D?

How much is it worth?

When determining the worth of the shop I'd like you to take into consideration the fact that you have found a tenant who will move in within 6 months if you purchase the property. The tenant is a local retailer who has a chain of 12 shops.

Good luck, hope you get the property at a reasonable price.

Regards, Mile

PS: The link to Estimating buy price - Part 1 is: http://www.somersoft.com/forums/showthread.php?s=&postid=1147#post1147
 
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This is a bit of a new world for me, so I'd just be guessing...

Rental per square metre seems to be fairly constant (between $216 and $228). If I took a figure of $220 per square metre, I'd guess rent would be around $25,520 pa.

Rental returns appear to be based on risk. Return is 6.9% for the franchise, 9% for the baker, and 14% for the dodgy shop.

I don't know if I have to factor in 6 months vacancy into the equation before the tenant moves in. It may be worth a higher price to negotiate a longer settlement- I'd end up paying less if I could settle just before the tenant moved in.

I guess I'd be putting the new tenant into the same risk factor as the baker- that's more stabbing in the dark for me. If that were the case, a 9% return would indicate a price of around $283,500.
 
Actually, thinking about that...

$283K?

I could offer $20K above purchase price to the owner of shop C (Making $248K), and make a cash offer to Mr Dodgy Tenant (whose business is probably in trouble anyway) of say $10K- and be way ahead on the deal. Mr Dodgy would have 6 months to vacate. Even offer Mr Dodgy 6 months rent free- which is what you would have been forgoing on the other shop anyway.

You'd be able to get a good idea of the viability of the business with some observation, which could give you some negotiation power.
 
Anybody else out there?

I've been thinking about this (most strange)...

I've probably diddled myself big time in my price estimate. I'm estimating the price based on a tenant who I have arranged. The place is being sold as untenanted. And I'm buying it with a price which is dependant on the reliability of the tenant I'm arranging. So IF the price is dependant on a tenant's reliability, and it's empty, I have no comparable figures- so can't really estimate, I don't know what an empty place is worth on figures given. But certainly a lot less than my estimate.
 
Nobody else is out here geoffw...

we are hiding under rocks amazed at your effort... :D

Actually, I have been trying to get to doing the math all day...

I think you have done it the way I would have (really!!) :p

The only other factor I can think of is location within the strip, ie, closeness to corner, proximity to major stores (next door to K-Mart for example) , availability of street signage, proximity to parking, etc.

Mike, you said:
All 4 properties are in identical positions
Interesting.

Is there such a thing as 'identical positions'?

I understand what you meant, that the position should not be a determining factor in the price consideration, but it begs a discussion, I thought. I don't believe there is such a thing as identical positions. Even two houses next door to each other, will have a favouritism for different ppl depending on their wonts.

This would be the same for retail property.

Imagine that there are two stores, each 100m2, next door to each other, with the same dimensions, and the same style of facade. Why would a retailer choose one over the other,assuming all costing factors were identical?

I believe that the factors I mentioned above would come into play.

Is one closer (or maybe backing onto!) car parking?
Is one closer to the corner, and therefore more visable to oncoming traffic?
Is one directly in front of the bus stop? (this can be good- ppl getting on and off the bus must look at your facade or bad- the bus stop may obscure your signage).
Is the local Target store next door to one of them?

Interesting, this property game, isn't it??

Maybe that's why I love it so much!!!!

asy :D

(I am still trying to get to that math!!! :p )
 
Hi Asy,

Good post. This is the kind of thoughtful discussion I hoped would be raised in this thread. It would be pointless to make it just an exercise in maths. It's all about learning so if anybody has any real-life experiences, please share it with us so we can all learn something.

However, for the sake of simplicity, take "identical positions" to mean that no shop is advantaged more than the others as far as passing trade or parking restrictions is concerned. As Asy rightfully concluded these factors would have to be considered in the worth of any commercial property.

Regards, Mike

PS: Don't be put off by Geoff's bid. The temptation may be to put in a higher bid to get the property. That's real life. But the purpose of this exercise is to get an accurate estimation of the property value. After all the bids are in then will we see that some people were prepared to pay more than others. It could eventuate that all the bids are below the answer that I have which means somebody got the property for a good deal. Or, it could turn out that everyone bid above the answer which means the highest bidder overpaid. Some people may think my answer is wrong or unrealistic. Well, I'm hoping some good discussion will come from it, anyway, which is the point of this thread.
 
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G'day GeoffW,

Your thoughts certainly struck a chord with me - reminded me of a Dolf de Roos story wherein he bought a funeral parlour - he only bought it because he ALREADY had a renter. And it was For Sale CHEAP because nobody else had found a tenant !!!!!

And your thought of involving Mr Dodgy in a deal sounds to me like a smart way of thinking!! I might use some of these ideas to come up with a purchase offer.

A bit more ruminating time required .....

Thanks for your thoughts - you hadn't patented them, I hope ;)
 
Hi Geoff,

I applaud you for being first up. The exercise is not easy because you have to make a guesstimate on the quality of the tenant which translates into a yield figure. If you use yield to get the property value then it's obvious that a correct determination of what constitutes a quality tenant needs to be addressed. It is obviously not just about what term they are prepared to lease for. In our example, we assume that all shops have identical lease terms, yet, the quality of the tenants are different and this seems to have an effect on the value of the property.

Reading Warren Buffet's ideas on buying good businesses might help in this regard. One of the more obvious factors that determines a good business is, "How long is it going to stay around?" Seems like a popular baker is going to do good business and make good profits because people understand his products. The baker is less likely to need expensive marketing campaigns or to re-invest profits in plant upgrades. Some franchises, however, may have slimmer profit margins because the nature of the business requires higher capitalisation.

You also said:
I don't know what an empty place is worth on figures given. But certainly a lot less than my estimate.
You haven't given a final bid price, then, if you are correct that the value should be discounted because there is no sitting tenant on a long-term lease. You seem unsure whether to discount or not because you have a good tenant lined up but there is a possibility that they won't start a lease for 6 months or they might change their mind and not lease at all. Should we discount the value based on all this uncertainty?

On a different point of discussion: Is there anything wrong with using 'Price per Square Metres' as a way to calculate value?

Shop A: Price = $232,000; Floor area = 74 sqm; therefore, PpSM = $3135

Shop B: Price = $255,000; Floor area = 102 sqm; therefore, PpSM = $2500

Shop C: Price = $228,500; Floor area = 140 sqm; therefore, PpSM = $1632

Total value = $715,500
Total Floor area = 316 sqm
Avg PpSM = $2264.24 per square metre.

Shop D has a floor area of 116 sqm, therefore, 116 X 2264.24 = $262,652

To confuse matters, is the above method for calculating Avg PpSM correct? Or is it better to calculate individual averages first, then get the average of the 3 averages?

Shop A: $232,000 / 74 sqm = $3135 PpSM

Shop B: $255,000 / 102 sqm = $2500 PpSM

Shop C: $228,500 / 140 sqm = $1632 PpSM

Total PpSM = $7267
Avg PpSM = $7267 / 3 = $2422

Shop D has a floor area of 116 sqm, therefore, 116 X 2422 = $280,952.

The second calculation is $18,000 higher simply due to the way I calculated the average price per square metre. One of these methods must be adding a margin of error into it. Can anybody tell me which method is better?

I'm not saying this method is right but it does average out known factors such as Prices, Floor Area, and even the Quality of the tenants as reflected in the Prices. Of course, the price here is based on shops with tenants. A discount factor may still apply to Shop D because it has no tenant, yet. Any comments?

Mike

PS: If it's any consolation, my head hurts, too. :(

PSS: Is Lotana going to have a crack at this one?
 
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Hang in there, Lissy - it gets interesting (with thanks to Geoffw for the "out-of-the square" ideas....)

Shop D has no tenant - thus "hi-risk" - thus return should be 14% or better. i.e. offer no more than $183000. Given that my prospective tenant will move in within 6 months, paying $220/sqm, this re-values the shop at $319k at 8% - so $100k+ gain (less costs) on $55k (30% deposit). Of course, I need to pay a mortgage for 6 months of the year with no income (allow a further $10k for that - 8% interest). Still, $100k gain (equity) on $65k investment is not too shabby. Use JV, or vendor to put up some/all of the deposit? Wouldn't THAT be nice.

Interesting ideas that "popped up" while considering this (some of these are BOOMERS - thanks for posting this. Mike):-

1. The rate of return has NOTHING to do with the tenant - they are paying a standard $/sqm rate - your rate of return is SOLELY based on the purchase price!!! This is so important - as, if you buy well, add value (a tenant !!), then the equity jump is ENORMOUS.

2. Going on from the above, a change in $/sqm makes a minimal difference - so negotiating a deal to get your new tenant in by putting the $/sqm down somewhat makes little difference to them, or your income, but can make a huge difference to the VALUE of the property. e.g. the value jumped from $183k to $319k SIMPLY by putting in a long-term, low-risk tenant.

3. And going on from THERE, I'll post an alternative, geoffw inspired, out-of-the-square option.

To summarise this one, offer $183k. If I get it for this price, I'd be very happy. Depending on my findings after my NEXT post, (i.e. if the scenario didn't work out), I might come back to re-adjust this offer.
 
Les #2 offer

(Bring a packed lunch - this could become "War and Peace") ;)

Summary:-

Shop A:
74 sq m, Rent $16,000 ($216/sqm), franchisee, sold for $232000

Shop B:
102 sq m, Rent $23,000 ($225/sqm), baker, sold for $255000

Shop C:
140 sq m, Rent $32,000 ($228/sqm), Mr Dodgy, sold for $228500

Shop D:

To be sold at auction shortly
116 sq metres; Price: ?????????

Scenario #2:- (Line up the ducks ....)

1. Have coffee with Mr. Dodgy's landlord to see if he would be interested in selling Shop C. Sound him out - if interested, then...

2. Check whether my prospective tenant would like to occupy a larger premises (140 sqm rather than 116 sqm). Yes, then...

3. Visit Mr. Dodgy in shop C - check out his operation, and discuss whether his operation could operate in Shop D (with rental gain - to him - of around $100/week). Do I want him as a tenant? Will a rent decrease improve his operation enough to bring his "risk factor" down to (say) 11% ? Is he interested? Yes, then...

4. Shop C - returning 14% to dodgy landlord - nett gain to him after mortgage of $20k per year - offer $40k above his purchase price ($268500). Take option on Shop C for 9 months.

5. Back to retailer - get a "Letter of Intent" - with an "out" clause in case I can't buy Shop D - have him take Shop C in that instance.

5. Purchase Shop D at auction - up to purchase price of $200000

6. If unsuccessful at auction, I have 6 months to buy Shop C, move Mr. Dodgy on, and make ready for my retailer.

7. If SUCCESSFUL at auction, Dodgy moves into D within 3 months, and I arrange to buy Shop C for $268k. Dodgy's rent drops from $615/wk to $515/wk and is paying $230/sqm. A rental hiatus (6 weeks? or $3000) would help him to cover his moving his costs, and allow him to settle in. On assumption that his viability has increased to make the risk 11%, this revalues Shop D at $242k.

8. I buy Shop C for $268k, and it revalues at $385k after retailer moves in. Costs, of course, come off any gain.


There are a lot of ducks to line up in this scenario - and Murphy would undoubtably step in and muck things up somewhere along the line. So, in reality, the risk factor may be even greater than just buying Shop D (thus offered price at Auction, should maybe be LESS).

But, whatever, it was an interesting scenario to consider - let's see how the Auction goes!! :)

I'd also be very interested in forum comments re the above scenario (+ve or -ve, no probs).
 
This post is a reply to Les' post #10. Unfortunately, Les got in too quickly and didn't see it before he posted #11.

Thanks Geoff and Les for having a go. Here is a summary of your views to date. (Trying to minimise any more sore heads)

Geoff:

Says quality of potential tenant for Shop D is similar to baker in Shop B, therefore, comparable yield is 9%

Les:

Says quality of potential tenant for Shop D is comparable to yield of 8% which is somewhere between the excellent National franchise tenant and the fair Baker tenant.

Although 1% difference might seem small it means that because the yield can't be manipulated by increasing the rent Les' estimation of the value of Shop D with a good quality tenant is going to be higher than Geoff's estimation. So if the tenant was already established in Shop D Les would be prepared to bid up to $319,000 whereas Geoff thought $283,500 was about right.

However, this is where it gets interesting. It seems Geoff is very confident that the tenant will fulfill the agreement and lease the shop within 6 months and so Geoff hasn't factored in any holding losses to discount the bid price with.

On the other hand, Les is saying the risk of buying the shop untenanted is comparable to the same yield as Shop C is getting with a dodgy tenant ie 14%. So the risk amounts to $135,000. Les is prepared to discount the tenanted value of $319,000 by a whopping 42.3% to get the bid figure of $183,000.

This is very interesting indeed because if Geoff has some kind of surety or legally binding agreement with the tenant that they must enter into a lease upon the successful purchase of the property, then Geoff will purchase the shop with his higher bid.

Les, may I suggest you and everyone else who may put in an offer base the offer on having secured the lease already with rent payments to start no later than 6 months after the property is purchased. I take your point that people who haven't secured a tenant prior to buying will not be in the race for Shop D when their offer will be so much lower than people with tenants lined up.

So, to level the playing field, somewhat, take it that you have secured the tenant. Now that is sorted out Les, are you going to offer $319,000 or will you still apply a discount?

You said you are prepared to discount the interest payments of $10,000 which brings the offer down to $309,000. Anything else?

Mike
 
OK here goes nothin....

1. I assess potential rent on D at $26,300 pa (giving $226.7 per SqMtr). This is a linear interpolation between B and C using SqMtrs and Rentals. That is...

RentD = [(32000-23000)/(140-102)] * (116-102) + 23000

2. My rent prospect is a popular local business - same as the baker. If they could move in the day after the auction I would be prepared to pay $292,200 ($26,300/9%) for the premises.

3. If my tenant prospect is a certainty (this means no risk) to take up a lease in 6 months, I need to subtract 6 months holding costs (and add back any income from temporary use of the premises etc.) to come up with my final offer price -- so that in 6 months time I'm making 9% rental return on my total costs. Let's say interest, insurance, rates etc. comes to 7.5%pa on the purchase price. That means I subtract $20,400 to get my offer price of $271,800.

In 6 months time my circumstances will be exactly the same as the baker's landlord, except my place is 14% larger! (Baker's place is $255k * 114% = $290.7k for my joint --- interesting!)

The whole point I guess is to evaluate the transaction on a 'risk equivalent' basis. My offer price will beat anyone that factors in a longer vacancy period or higher risk tenant (or higher holding costs or indeed different "qualitative" factors such as passing traffic, parking etc.) ---- assuming I am satisfied with the 'market' return of 9%.

So Geoff would outbid me and I would walk away ---- thinking he had secured a national brand for a tenant. ;-)

regards, Andrew.
 
Hi Les,

This is a reply to Post #11 which is your second offer.

Interesting plan but it seems flawed.

Point 5 suggests your intent is to purchase Shop D and install Good Retailer there. You say that if you don't get Shop D then the backup plan is to buy Shop C, boot Mr Dodgy out and put Good Retailer in there.

However, Point 7 suggests that, in the event you get Shop D, you want to move Good Retailer into Shop C anyway. In that case Mr Dodgy moves across to Shop D. Point 5 and 7 seem somewhat contradictory.

In any event, I think Mr Dodgy will not leave Shop C without Shop D to go to. How much will you pay him to leave a certain future for an uncertain future? If he doesn't go I assume you won't exercise the option on Shop C. Not only have you forfeited the option fee but you will leave Good Retailer high and dry without a shop. Therefore, you MUST buy Shop D. However, I think you will not get it if you limit your offer to $200,000. This figure is not much more than the untenanted value of the shop which you said was $183,000. If other bidders also have tenants lined up they will undoubtedly bid nearer the tenanted value.

Let's assume you have to bid $284,000 to beat Geoff's bid of $283,500. You won't be able to move Mr Dodgy into Shop D because the value will be reduced to $242,000 which leaves you in a negative equity situation and probably unable to secure a loan unless you came up with a sizable deposit. The deposit you require is $114,600 because a 70% loan on $242,000 is $169,400.

You need a further $80,550 deposit to buy Shop C. Total cash outlay is $114,600 + $80,550 = $195,150. However, equity gain on Shop C is $117,000 which still leaves $78,150 tied up in the deal. Compare this with a deposit of $85,200 to just buy Shop D and a possible revalue to $319,000 with Good Retailer as tenant and your net cash in the deal is only $50,200. So, the bottom line is that if you can get Shop D for under $242,000 then also buy Shop C but if the bidding goes above $242,000 then only buy Shop D and put Good Retailer into it.

Regards, Mike
 
"On the other hand, Les is saying the risk of buying the shop untenanted is comparable to the same yield as Shop C is getting with a dodgy tenant ie 14%. So the risk amounts to $135,000. Les is prepared to discount the tenanted value of $319,000 by a whopping 42.3% to get the bid figure of $183,000."

G'day Mike,

I guess what I'm looking at here is the relative perspectives of buyer and seller. As in my Dolf de Roos story, if a seller has no tenant in place, then the risk to be the buyer is obviously going to be higher than with a good quality tenant in place. So, the seller will have to sell at a discount.

The buyer then assumes the risk of finding a tenant (if he already has one signed up, this does NOT imply that he should share the knowledge with the seller - or the profit). So the buyer stand to make a nice profit.

Then, again, if the buyer is needing to bid against others who have the same advantages he does (e.g. this topic), then he maybe needs to lift his offer to "beat the others", or go running of to find another deal where the number of buyers are less. The seller does better than he perhaps should in the current scenario.

One other thought is this:- Is an empty shop of LESS value than a dodgy tenant? By having it empty, there would be no dramas with tenants vacating, access for inspections are no problem, and timelines for new tenant are unlimited. So, by valuing the empty shop as equivalent to a dodgy tenant, I might be mis-reading the situation......


As you said earlier, Mike, this one is certainly not just a "mathematical puzzle" - there are a truckload of variables to consider.

Decision time:- :(

Anyway, without re-typing a bunch of stuff, I'm gonna bid at auction up to $210000. If I miss that, I will recheck with my retailer to see whether his needs have been suited by another landlord (the SUCCESSFUL bidder for Shop D, perhaps?) If retailer is still looking, I have maybe 3 months to negotiate with owner of Shop C to take over his interest, throw out Mr. Dodgy, and put my retailer into Shop C (all the while mumbling about "emotional" bidders at auctions that cause all this extra work for me ;) )

With Shop C, I can buy for up to $285k (if the current landlord is hard-nosed, wanting three years profit upfront) and still gain near $100k in equity once my retailer is safely ensconced therein.

Failing all that, I go find another group of shops and try to keep well clear of that Somers mob who bid too high at auctions !!!


A few clarifications:-
I've tended to value the retailer as being less of a risk than a baker. Major reason is because he has 12 shops already, so is obviously very successful at what he does. The baker, on the other hand, is a "one man band" with all eggs in one basket. Not necessarily bad, but slightly more risk than the retailer, IMO.


Mike> "So if the tenant was already established in Shop D Les would be prepared to bid up to $319,000 whereas Geoff thought $283,500 was about right."

Les> Not this vertically challenged, pigmentally differentiated, seasonally endangered waterfowl !!! (little, black duck!! ;)) I'm not wanting to pay "market price" If I've found the tenant, I want the reward for doing so. So I'm certainly not going to give the seller the profit for doing what he should have done (i.e. find a tenant).

True, though - my offer could lift somewhat and I would still make a nice profit..... I'll be at the auction, but keep my hand down and just watch the fireworks. If things stall at any time prior to (say) $250k, I might be tempted to come in at that figure as a final bid. So, change my bid on that basis, Mike.


In closing, I like that first "boomer" thought that struck me (posted a little while back) - it was worth doing this exercise just to have that thought hit home!!

The rate of return has NOTHING to do with the tenant - they are paying a standard $/sqm rate - your rate of return is SOLELY based on the purchase price!!! This is so important - as, if you buy well, add value (a tenant !!), then the equity jump is ENORMOUS.

Another thought-provoker, Mike - thanks !!!
 
Oops

I made a slight arithmetic error at step 3.
The deduction should have been $10,560 (only a half year of holding costs) making my final offer price $281,640.

cheers.
 
Hi Folks,

Thanks everyone for your bids so far. The discussion has been most illuminating. Please get your final bids in by 9pm EAST because I'd like to post the answer and some final thoughts.

Mike
 
Hi

A good thread, I like the concept of discussion.

Some NON mathematical leasing comments first.

Shop A is let for $216 psmpa (per square metre per annum) to a National Franchisee. These types of lessees typical screw the owner down to the lowest rent possible which is evidenced by the return on investment of 6.8%. Owner loses.

Shop B is let for $225 psmpa and yields 9.0% to a popular local baker and this seems OK to me.. Win / win situation.

Shop C is let for $228 psmpa and yields 14% to an unknown tenant of doubtful quality. From here we are now refering to him as "dodgy" - why? There is no suggestion of not paying rent, of being a bad tenant in any way and premises are said to be in similar condition to the other shops. I suggest to you that a yield of 14% for a shop is high. Owner rip off, win / lose situation.

Shop D To be determined

There is a formula used by Valuers in determining the rental value of premises which is complex but it essentially says that the rate per square metre depreciates for each metre you retreat from the shop front towards the rear of the shop and from the sides towards the centre. In other words the square metres at the front centre are the most expensive to rent and the back corners, the cheapest.

Larger premises are therefore cheaper than small kiosk type premises psmpa. Let's not get too involved.

Now the rent is also influenced by the quality of the current tenant, length of lease, position, passing traffic and all those many other good things that have been raised by others before me in this thread. I won't continue.

I do not consider a tenant "good" if we have to wait six months for them to take up occupancy. Apart from the loss of rent, there is a degrading effect on the other tenants and on the shopping centre (or strip etc) as a whole. No one wants empty tenancies.

If the tenant is considered "potentially good", then offer moving costs, break costs with current tenancy, a rent free period which is picked up later in the tenancy, assistance with fitout, maybe other features which can then be built in to the overall rental return which can be financially beneficial to the owner in the longer term. But above all KISS.

The sale value of the shop is now almost exclusively based on rent return as variations have been taken into consideration in the rent determination.

So lets strike a figure. The baker seems to me to be the one paying the "most likely" rent at $225 psmpa. So $225 X 116 M2 calculates to $26,100

For ease, $26,000 at 10% pa return gives a sale value of $260,000, at 9% the sale value is $289,000 and at 11% the sale value is $236,000.

My feeling is towards the 9%, so offer say $280,000 and be prepared to come up a bit.

But don't get too involved in mathmatics. It doesn't follow the same patterns as it does in Residential Real Estate.

Regards

Ross
 
Hi

I have been reading back over some of the other contributions to this thread and I find it a little disconcerting to see so much arithmetic in arriving at an answer. It should not be necessary.

If you buy the premises at auction, it would be great to have a tenant lined up to move in, however, if you don't have one, it will only alter the sale value marginally in your eyes but not necessarily at all in the eyes of other bidders. Look ahead, and you could find yourself in a similar position of no tenant in a year or two. There is a greater risk in commercial investments, and that is why you receive a greater yield.

Some people have decided to solve some of the problem by evicting the lessee in shop C. We are talking about leases, not tenancies, which in most states of Oz offer the lessee a considerable amount of security, perhaps more so than a tenant in a tenancy (residential).

If you wish to evict this lessee, be prepared to have to pay the lessee a LARGE slice of dollars, perhaps an amount equal to the remainder rent of the lease agreement. Now if the lessee has paid for an expensive shopfront, installation of equipment, fixtures and fittings, advertising etc., he will want compensation and you could be up for big bickies. It could be very unproductive, unless of course he breaks the lease agreement.

If it goes to Court, it is not a tenancy tribunal BUT full on Court process and that can be expensive, wigs and gowns and all that.

Think before you try and tip the lessee out.

Regards

Ross
 
G'Day all,

I wrote out a real Hans Christian Anderson last night in reply to this thread but now that I have checked....tis not there!

So as I need to get my bid in now, I will just put the figures up.

Shop is a vacant shop and therefore quality of any future tenant that is not currntly signed up, I will disregard.

Expected or anticipated rental return $25,000 - $26,500 based on comparable rentals.

As the shop is being sold vacant, there is a high risk factor here, possibly slightly higher than a shop being sold with a "Dodgy Tenant"

therefore I would be looking to buy at a price that would achieve a return of the "dodgy Tenant shop" at the very least.

Therefore my offer based on a possible return of around 14% would be in the region of $189,000, lets say $190,000 tops.

If I manage to secure a tenant, then that would be achieved through my efforts and as sure as hell I would not be paying the present owner for something that I had done.

So thats it $190,000, take it or leave it, otherwise watch me walk.

regards
 
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