Advice on Deal

[Mav Larson]

Hey guys, I’d like to ask your opinion on a potential deal. I’m going back and forth on this one and would like some opinions from people who have some more experience than I do.

Some background: 

I am a small business owner that needed an office, so in 2012 I started searching for properties that would be less expensive now but more desirable at a future date. In 2012, I found and purchased a one acre property with a 2 unit, 3,500 square foot building on it, between a major university and the city’s downtown. I knew that the university was pouring money into the area around their end, and the city was pouring money into the downtown area on the other end. I had a good idea that eventually they would meet in the middle which is where my 1 acre property is located.

There is a dilapidated 1 acre, 5 unit, 6,000 square foot building next door. In 2014 I asked the owner if he’d sell it to me and he did. I now own 2 acres, 7 units, and a vacant lot between the university and downtown. In 2012 I had a good idea that redevelopment would eventually reach my properties. Now I know it will.

I’ve already started rehabbing the strip malls, I reached out and got a couple awesome tenants to take a chance and move in, but I still have a ways to go to get these properties the way I’d like them.

Several weeks ago, a developer asked me if I'd be interested in selling the properties. He asked for my rents and NOI. My current NOI is $60,636/year. I know that within three years, with the renovations and reaching out that I'm doing, I know that I could get NOI up to $79,200.

Property Fact: Zoning on the 2 acres allows for about 100 residential and 50,000 of commercial space.

So if I were to set a price and sell this, does anyone have any insight into pricing this based upon them approaching me, current NOI, NOI in three years, and knowing it's highest and best use?

FYI: my original exit plan for the property was to sell it to a developer, but not now, in about 10+ years. I'm not in a hurry to sell. If I did sell the property, I would eventually reinvest in real estate.

Any comments would be greatly appreciated. Thanks!

[Joel Owens]

That is a very high density for 2 acres.

Your current NOI really has nothing to do with future value.

The developer is going to take the rents they can get with new development upon completion and their hard and soft costs and work backwards. That will help them arrive at a cost they can pay for the land with a maximum price and an optimal price. Optimal is the target they will try to buy from you and maximum is where if it goes above that the deal is no longer viable to pursue.

Now since you have a business there you can negotiate as part of the sale that the developer finish out you a space and gift it to you where you do not pay rent or a reduced rent. What can be done depends on if the developer is doing a condo retail type development selling the spaces off to businesses or keeping it NNN leases with cam reimbursement and owning the spaces. You can also JV with the developer for an upside stake in the new property plus get so much for the land.

You need to know if this is a new or experienced developer for this deal size and if they will be partnering with a national company that is a larger developer if they are local. You need to look at your existing leases with the tenants to see if you can break at anytime. Sounds like the area is turning around and booming. The time to sell might be now and 1031 your proceeds tax deferred into something else.