Anyone out there with experience in Commercial Real Estate?

Question

Hi guys, I've been studying real estate investment for the better part of a year with an eye toward investment in residences, but something funny happened yesterday.

I am expanding a brick and mortar nonprofit business (they exist) and the place we were looking to rent is also offering an option to sell. What pops out of my mouth as we're walking away with a tenant application is . . . do you think the owner's open to a seller finance sale?

The answer is yes.

This is not a cheap sale. Rent on the place is about $8500 a month. It's a $1.2 million dollar sale. The business we're expanding is able to make rent and expenses independent of what happens at the new location (yay cashflow!), so renting it, or us buying it as individuals and then getting rent from our business to pay the mortgage is a pretty solid deal all around.

We ourselves can't back a $1.2 million dollar sale - as an executive director of the non profit moving in there, I make about $70k a year and that's it. We don't have assets equal to the purchase, though I'm closing escrow on my first home (to live in) in two weeks, but even that is only $350k. But, like I said, we're bringing the business we run and I'm 100% confident that if the arrangement works out we'll be able to consistently pay a mortgage out as well as show the seller that to confidence.

But, well, it's not like I've been studying how commercial real estate works. Advice, thoughts? We're either going to lease or buy the place, so help making my offer attractive would be awesome.

Kristin Horowitz · Answer

See, that's what's killing me  . . . I can't get any numbers from anyone on what's typical for GRM - I know about rentals and costs in the area and the $.65NNN they're asking for with the lease is there but I can't figure out their pricing other that being verbally told it was $1.2 million. No terms on the lease with step ups or length has been offered - it's insane. This is a commercial development firm and I can't understand why it's so hard. Thanks for the idea of the buy lunch and upfront, that's what I've wanted to do but I can't figure out if I'm not getting this info because of MY agent, or the other agent. Thank you. I'll keep trying to get to the bottom of it. I'm glad that my instincts that I need this info to move forward are right.

Account Closed · Answer

What is the typical GRM ?  Higher-lower?  A very estimated cap rate is 8-9%.  Is that market?  How long is the lease and are there step ups?  How long will you use the building?  As a non profit the prop 13 is only good if you rent it out.  What is your expectations on rent increases and appreciation? Go to a commercial broker and ask what they could find for you.  Be upfront on your other possible deal.  Offer to buy lunch.  The owner finance could make this worthwhile but I wouldn't overpay.

Kristin Horowitz · Answer

It's NNN. And no, it's not typical - which I thought was interesting about this. Unfortunately, when we started this, we took on an agent who is a complete novice because I have extensive experience renting these places. When it turned to selling, things got really murky. I asked him to get me an OM and the seller, or his agent, wouldn't supply me with anything. All I know is asking price and square footage. That's partly why it's frustrating. I'm about to walk away from it.

Account Closed · Answer

Is the rent of $8, 500 FSG or NNN?  If FSG you have to think of the expenses you'll have to cover as owners.  Your agent should be able to give you an idea of market value.  At $1.2 that's about a 11.75 GRM.  Is that typical?

Kristin Horowitz · Answer

Thanks for the thoughts, guys. My NP would take up the whole space (it's a climbing gym), so that's a non-issue.

It's a little frustrating right now, I can't tell if it's my novice real estate agent or the owners but I cannot get any good information on the space. They told me to just submit an offer. Seems pretty shady, but we'll see.

J. Martin · Answer

Arlen, I really like your play to rent to tech startups, and take equity instead of cash (maybe for at least a portion?) Reminds me of something creative @Al Williamson might do..