I have just exchanged on my first CIP this week so I thought that I would take this opportunity to share some details about the process to this stage, and also the steps and developments to completion (and beyond). I have no experience in CIP previously and am actually fairly inexperienced when it comes to RIP even, so this is definitely an example of just jumping in and learning from doing. What I did have was access to some amazing stories on this forum of other people's experience, these were absolute invaluable and I can't thank those posters enough for their generosity in sharing their experience. Therefore, I thought that it's only fair if I do the same thing, plus this would be an opportunity for other more experienced posters to point out anything that may have missed/overlooked as the deal progress to completion. Additionally, I'm hoping to be able to replicate this with bigger CIP deals in the future, so documenting this first CIP deal will hopefully be a good learning experience for me as well.
Anyway enough of my ramblings, I'm sure you would rather hear about the CIP itself.
Property
- CBD of a regional town (50k population)
- Sub 500k price
- Simple building, with a reception area, offices, kitchen + bathroom facilities at the front and an old tin shed at the back
- Currently occupied by a electrician business that has been there for the past 20 years
Vendor's situation
- Currently a partner in the business but is looking to retire in 3 years
- As part of the sale, vendor has offered that the business lease back the CIP for 3 years to coincide with the vendor's retirement
Lease
There is no formal lease currently in place, therefore, the lease and lease conditions were all negotiable as part of the sale (lease to come into effect on Settlement date). After a fair bit of negotiation (more details to come), these were the terms that were agreed to.
- 3 years term with option of 3 years
- Just under 10% yield (rent is about market from talking to other agents in town)
- Tenants pay all outgoings except for land tax
- 4% fixed annual increase, with market review at option renewal (rachet clause)
- Make good if tenants vacate, including repainting and re-carpeting
- No director's guarantee but cash deposit in my bank account of 4 months rent
The good thing about this is that I was able to draft the lease myself to present to the vendor, so it was good to actually get into the nitty gritty details of a lease. Admittedly, I'm sure I won't appreciate all the finer details until an issue arises, but was definitely good experience in any case.
Negotiation
The negotiation was very painful to say the least. Mostly due to the vendor having the most incompetent lawyer I have ever come across. My understanding is that the vendor and family has used this lawyer for years, so the lawyer was definitely doing everything he can to protect the vendor's interests, however, his lack of commercial sense just made things way more difficult than it should have been.
Some examples:
- After agreeing with the vendor on paper the commercial terms (or so I thought), the solicitor tells the vendor that a cash deposit is not usual in a commercial lease and shouldn't be given. Eventually, I did get the cash deposit, but settled for 4 months rather than the 6 that I initially asked for.
- Solicitor takes 2 weeks to prepare sale contract, contract then doesn't include the subject to finance and B&P inspection that was agreed to. Reason given by solicitor was that he didn't think these conditions were reasonable (notwithstanding that the principals already agreed to them). This took 2 weeks to sort out, with net result that principals once again agreed that these conditions need to be added to contract.
- Solicitor then takes another 2 weeks to prepare revised contract, contract did fix minor points but once again didn't have these conditions. My solicitor at this stage was extremely fed up so we manually made changes to the contract, signed it and gave the vendor an ultimatum to exchange within 24 hours and to tell their solicitor to pull his head in or we would walk away
- Solicitor also refused to deal with me directly and would only liaise with my solicitor
- Solicitor does not like to operate with emails or even to get on the phone, all correspondence with my solicitor was through fax
Contract eventually settled, a month after it should have, but surprisingly, the vendor's solicitor had no issue at all with the lease that we gave them. Big plus for us as it was drafted to be quite landlord friendly.
Now I just need to get the finance organised and hopefully proceed to completion with not too many issues (knock wood). If you made it to the end, thanks for reading and I'm happy to answer any questions if people have them.
Anyway enough of my ramblings, I'm sure you would rather hear about the CIP itself.
Property
- CBD of a regional town (50k population)
- Sub 500k price
- Simple building, with a reception area, offices, kitchen + bathroom facilities at the front and an old tin shed at the back
- Currently occupied by a electrician business that has been there for the past 20 years
Vendor's situation
- Currently a partner in the business but is looking to retire in 3 years
- As part of the sale, vendor has offered that the business lease back the CIP for 3 years to coincide with the vendor's retirement
Lease
There is no formal lease currently in place, therefore, the lease and lease conditions were all negotiable as part of the sale (lease to come into effect on Settlement date). After a fair bit of negotiation (more details to come), these were the terms that were agreed to.
- 3 years term with option of 3 years
- Just under 10% yield (rent is about market from talking to other agents in town)
- Tenants pay all outgoings except for land tax
- 4% fixed annual increase, with market review at option renewal (rachet clause)
- Make good if tenants vacate, including repainting and re-carpeting
- No director's guarantee but cash deposit in my bank account of 4 months rent
The good thing about this is that I was able to draft the lease myself to present to the vendor, so it was good to actually get into the nitty gritty details of a lease. Admittedly, I'm sure I won't appreciate all the finer details until an issue arises, but was definitely good experience in any case.
Negotiation
The negotiation was very painful to say the least. Mostly due to the vendor having the most incompetent lawyer I have ever come across. My understanding is that the vendor and family has used this lawyer for years, so the lawyer was definitely doing everything he can to protect the vendor's interests, however, his lack of commercial sense just made things way more difficult than it should have been.
Some examples:
- After agreeing with the vendor on paper the commercial terms (or so I thought), the solicitor tells the vendor that a cash deposit is not usual in a commercial lease and shouldn't be given. Eventually, I did get the cash deposit, but settled for 4 months rather than the 6 that I initially asked for.
- Solicitor takes 2 weeks to prepare sale contract, contract then doesn't include the subject to finance and B&P inspection that was agreed to. Reason given by solicitor was that he didn't think these conditions were reasonable (notwithstanding that the principals already agreed to them). This took 2 weeks to sort out, with net result that principals once again agreed that these conditions need to be added to contract.
- Solicitor then takes another 2 weeks to prepare revised contract, contract did fix minor points but once again didn't have these conditions. My solicitor at this stage was extremely fed up so we manually made changes to the contract, signed it and gave the vendor an ultimatum to exchange within 24 hours and to tell their solicitor to pull his head in or we would walk away
- Solicitor also refused to deal with me directly and would only liaise with my solicitor
- Solicitor does not like to operate with emails or even to get on the phone, all correspondence with my solicitor was through fax
Contract eventually settled, a month after it should have, but surprisingly, the vendor's solicitor had no issue at all with the lease that we gave them. Big plus for us as it was drafted to be quite landlord friendly.
Now I just need to get the finance organised and hopefully proceed to completion with not too many issues (knock wood). If you made it to the end, thanks for reading and I'm happy to answer any questions if people have them.
