To fix and retenant or sell untenanted

[cdchi1]

Hi,

I am more used to residential property, but my elderly mother has a commercial property from my deceased dad's estate that she has been leasing to same tenant for quite some time.

It has again come time to release but the tenant has requested the flooring be fixed.

Up until now it has been self managed, ie I have looked after the rent receipts, expenses and organised anything that needed fixing. However I have engaged Knight Frank who have been extremely helpful to release and manage the property going forward.

As part of this, they have obtained a quote (another one awaited) for the flooring.

The quote has come back as $44k for timber and $55k for concrete.

The property is a relatively small retail type property.

From my experience with residential property, this quotation seems extreme but perhaps I am missing something with regards to commercial property, ie rates are generally more for some reason or other. And of course there could be more serious underlying issues as the reason for the quote amount.

Unfortunately that amount is way to much for my mother, particularly given the additional rent free period that would exist during the works, and the fact that to date the property has been leased at rental rate well below market rate, so unless the other quote comes in substantially less, I may have to look at selling it.

However as it is up for release, the property is effectively untenanted if sold.

Given the condition of the flooring and the prospect of selling untenanted, wondering if it is better to perhaps get a loan (me personally), fix the floor, retenant and sell, or to just sell as is untenanted?

Normally with residential, have no issue selling untenanted, but I suspect with commercial it's a completely different ballgame.

Cdchi1

 

[Scott No Mates]

Several points to address (in no particular order):

• Get a few more quotes
• Commercial builders do cost more, they are businesses with greater expenses/on-costs ie PL, WC, PI insurances, award rate labour charges, super, RDOs, office premises, office staff/overheads etc
• They need to comply with OHS&R legislation, staff training
• Need to meet certain requirements to be engaged by Knight Frank
• What does each quote include?
• Will a slab affect other elements of the building?
• How many years have you let the floor go without doing any maintenance?
• What has been the cause of the flooring failure?
• Have the bearers/joists failed or has a pier fallen over?
• How has the scope of works been determined?
• What sort of timber flooring is being proposed eg polished boards?
• Can the flooring be replaced with yellow tongue or fibre cement sheeting?
• Have they presented any offers yet?
• On what terms?
• Is there a fitout contribution?
• How much rent free are they asking?
• How does this balance against the lease term?
• What is the vacancy rate?
• How long has the tenant been in the shop?

 

[beachgurl]

A tenanted property is generally worth more than one vacant. If you can I would fix the property and re tenant at a higher figure. The sale price will be higher as a result. Good luck with it.

 

[D.T.]

A tenanted property is generally worth more than one vacant. If you can I would fix the property and re tenant at a higher figure. The sale price will be higher as a result. Good luck with it.

If you can do this, may as we'll keep?

 

[westminster]

Have you spoken to the tenant and advised that the property was being rented under market rent due to it's condition. If you fix the floor their new rent will be $xxx.
They may choose to stay with it as it is.

However I think it's a poor thing to keep going with a floor that requires that much work. What is wrong with it?

Really you need to get it back to goo condition and rent it out at market rates. Did Knight Frank say how much it would rent for if it was bought back to condition?

 

[AJ14]

1. how many sqm is the property?
2. when you say timber, is this solid timber?
3. when you say concrete, is this polished concrete?
4. is the work required to be done after hours?
5. was the wear and tear from the current tenant?
6. what is the net lease?
7. what is the term of the lease?
8. what is the market rate of the lease?

Without the above answers, it seems like you may have been taken for a ride by Knight Frank... agent wants his leasing commission...

 

[DaveM]

First and foremost... whats wrong with the floor that needs fixing?

Secondly, what does the lease say about responsibilties for repairs, maintenance and upgrades to the premises

 

[cdchi1]

Hi all

Thanks for all the replies and sorry to take a while to respond.

Firstly, I'd like to point out that Knight Frank have definitelynot taken me for a ride. They ahve been extremely helpful given the situation, ie such a small low value commercial property...in fact they provided an extremely low commission rate given my mothers situation, ie that she is elderly and relies primarily on the rent from this property. TBH I'm not sure why they are even bothering with it.

Secondly, I probably phrased the OP badly in implying that perhaps I Was asking whether the quote was legitimate...obviously can't expect anyone to answer that without knowing much more information...the OP was more regarding the selling choice re tenanted/untenanted.

But I will try and provide some info about the property. To be honest I don't really know much about it. It's my mothers that she inherited from my father when he passed away. Dad used to run his own retail biz from it when I was a kid so my recollections of it are fairly dim. I've only visited it once since.

It's double story, though upstairs can only really be used for storage (there is surprisingly a conveyor belt system). But with regard to the flooring size, its quite small...looking at google maps, I'd guess the dimensions at around 25m long (the interior length shop area would be about 20m) and 7m wide.

The location is I believe quite good in Smith St Collingwood. For a while Smith St was struggling but it seems to be undergoing a bit of a "cafe chop" renaissance.

The current tenant is a church owned Opp shop and they have been good tenants though the recent effort to release to them has been a bit of a headache. I would guess the current market rental rate in this location to be around $50K gross pa...for the release we asked about $42K gross. This was agreed to (after some haggling), but then the issue of the floor was brought up by the tenant as a condition to releasing, ie that we needed to get it fixed.

The quote did not provide much detail on condition of the floor, and I don't expect going to have a look at it myself will tell my untrained eye much at all. However I believe it is 'soft' in some spots. From memory the floor is tiled and there could be an asbestos issue though this needs to be checked and rectified which is an additional amount not included in quote).

Whilst I know it is a lot of work, it just seems extreme that such a small area could cost so much even if its a complete reflooring. I Suspect therefore there must be sub structural issues.

Regarding fixing it and renting it at market rates, I am not even sure fixing it would give me market rates...I assume a lot more work would need to be done to achieve that. For example the roof probably needs to be reconditioned. I suspect in total could cost in excess of $100K to get it to a 'market rent' status and that's based on my residential experience...given how much the flooring quote was, I could be massively underestimating the cost. In the end, this kind of cost imo doesn't seem to be worth it. My mother doesn't have that kind of money, and I would have to take a loan personally, but with no interest in the property, the interest will not be deductible. KF stated that perhaps the tenant would be willing to decrease the rent payable in return for the flooring cost but I do not think that is feasible...mum's income would nnot be sufficient.

Since the rent agreed to in the lease subsequently had the provision of having the floor fixed, I would have to renegotiate if I wanted to obtain a higher rent if the floor was fixed and given who the tenant is (as referred to above), I doubt they would agree to it...so then a new tenant would have to be sought...cost and time of finding a new tenant.

So in the end, it comes down to choosing between one of the following choices:

1. Fix and sell tenanted
2. Fix and sell untenanted
3. Sell as is without tenants
4. Fix (floor only) and retenant at agreed to rent which is below market and retain the property - remembering that I'd have to take a loan out personally, so interest not deductible as its not my property

Option 4 is more of a personal circumstances choice that I have to decide if it is feasible, but should I not choose that I need to choose between the first 3. As stated in OP, I have experience to make the above choice with residential, but not with commercial. With residential, depending on the property, generally I'd lean towards option 2 since tenanting is not a huge issue there due to short term leases and fact owner occupiers more frequent.

Wit commercial 2 I suspect option 1 is usually the optimal approach but am wondering whether this would be the case here given the significant cost of fixing the floor.

 

[wylie]

What if you let the current tenant go, fixed any issues and tried for a new tenant? What does KF say you would get with a refurbished floor and freshen up of the rest of the place?

If the location is undergoing some "cafe strip" changes, perhaps you might get a better rent?

If your mother relies on this rent, could she not mortgage it to raise say $100K (asset loan?) in order to bring in better rent that would cover the loan to refurbish it?

(Sorry if you have already answered this.)

Edit: If spending $100K is worth doing to get enough extra rent to be feasible, and your mother cannot get a loan, could you arrange a private mortgage to protect yourself (not against your mother of course, but from anyone else who may have an interest in the place) and lend her the $100K, assuming of course, that the rent would give your mother what she has always got from this property PLUS enough to make payments on the loan you have provided?