Non Fixed Term Comm Leases

[SYD]

Hello,

I am looking at potentially our first comm purchase. It is a small retail place with 3 shops and has an acceptable yield.

The main problem as I see it is all the tenants are on monthly (non-fixed term) leases. This makes life difficult with finance.

The agent has asked the vendor to enter into fixed term leases but this is taking some time.

Should I try to influence the terms of the new leases even though at this stage I am only a potential buyer?

SYD

 

[chilliblue]

Why does the vendor not place them on minimum year licence agreements and where possible have the end dates staggered.

Not as or costly as a lease for both parties and will give your lender a bit more security.

 

[SYD]

Thanks chilliblue,

Could you explain what is a licence agreement and how they differ from a lease?

Do they have the same protection as a lease?

Thanks

SYD

 

[Propertunity]

Should I try to influence the terms of the new leases even though at this stage I am only a potential buyer?

I wouldn't. The vendor must be made to realise that the value of his CIP is heavily influenced by the strength of the tenants and the leases in place (which includes ratchet clauses, length of lease etc).

So far this deal looks pretty thin on the ground in this respect.

 

[HiEquity]

You can try but the vendor may be considering that an owner occupier may want all three shops to themselves and hence the abilitiy to kick out the existing tenants at a moment's notice.

And if I was the vendor and someone asked for that, I'd ask straight back what's it worth to you? And show me in writing...

If you really want the shops and everything else looks good, you always have the option of making an offer conditional on the vendor signing up their tenants for the timeframe you desire, at the rent you desire, with the lease you desire, within a reasonable period of time. On top of a finance clause of course such conditions may not be particularly attractive to a vendor, depending on how much they want / need to sell.

The likelihood of this working will also depend on how onerous you ultimately make it for the tenants. Keep in mind that your options re: term, rent and T&Cs will likely be limited by the Small Retailing Act in your respective State (it's the Retail Shops Act in WA...) - assuming these shops come under the purview of this Act in your State.

 

[bene313]

It is a small retail place with 3 shops and has an acceptable yield.

Acceptable perhaps only if there was a strong lease in place...?

Without adequate lease terms in place, the property may as well be vacant.

Hi Equity had some good points regarding making the offer "subject to..."

 

[Dazz]

I'd reckon the Seller will be looking for a cash unconditional offer.


SYD, why not go away and do some in-depth DD and come back and share some details with us ??

 

[SYD]

SYD, why not go away and do some in-depth DD and come back and share some details with us ??

This is the trick. As this is the first comm property I have looked at I have not gone through the DD stage before. I was thinking after ticking off the leases as acceptable or not the next stage is to get the premises inspected by a builder. As it is retail I would need to get the awnings checked out as well.

But there is no point paying out to get these reports if there are no fixed term leases in place.

SYD

 

[Dazz]

there is no point paying out to get these reports if there are no fixed term leases in place.

If that is your opinion SYD, then your way forward IMO is crystal clear....

Keep researching and learning...and IF...the Vendor manages to get the Tenants to sign up, then re-visit the opportunity.

If NOT...move on.

 

[DavidMc]

Would this be a good opportunity to create some capital growth?

Buy it at a low price with its poor leases, install some good leases and then re-value?

(Note - I don't know much about CIP).

 

[Indifference]

I bought my CIP under similar lease arrangement circumstances... why, because it significantly de-valued the property and I bought it cheap. It gave me the opportunity to add value via establishing leases/tenants. Be careful though, as you may end up carrying some extended holding costs.

I conducted appropriate DD first, as has been wisely recommended above. If you are not sure, get in a position to be sure, or move on, as previously stated.