Current deal just took a strange turn

[Joseph Parker]

Went under contract on a 5-unit office/retail property this past week. Was on the market for a year, few offers made but none good enough for seller to accept.

Was able to talk seller into a lease with option (seller financing) at a good price and very low interest rate that banks can’t touch.

This is a turnkey property, all five units occupied but two leases expiring soon. I was told both of those tenants intend to renew so I’d be taking ownership fully leased.

Today, out of nowhere the broker is telling me one of those tenants does not intend to renew and another is probably leaving as well (both expire end of April). Also informed me they received a cash offer that the seller is very interested in and kind of what he wanted all along versus seller financing due to his age and health. They are asking for a mutual release from the contract so he can take the cash offer.

Obviously it’s up to me to decide what to do since we’re under contract. Seems that they’re trying hard to get me to back out of the deal. I hate the thought of taking ownership with two vacancies but I can also get new, longer leases in there at market rates. Just always a risk not knowing how long I’ll have to float those vacancies.

Really wasn’t expecting any of this and kind of blindsided today, expecting to close around April 13th.  I know it’s my decision ultimately, but I guess I’m just looking for advice or opinions...? 

This is my first commercial office/retail deal, in a great location and I don’t want to screw it up. I liked the idea of a fully leased property, and the idea of two vacancies from the start are kind of scaring me a little.

[Mike Dymski]

The biggest issue is not the tenants leaving or the all cash offer...it's that your future business partner no longer wants to be your partner.  Tough way to start a relationship.  

Not sure how long the seller has had this asset and if they have a large capital gain and/or depreciation recapture or what they plan to do with the proceeds with an all cash offer.

I'd recommend moving forward with the deal if the numbers still meet your criteria.  And see if you can strengthen the relationship with the seller (your partner) by having open professional conversations and trying to solve any problems he has (taxes, access to cash, reinvestment of the proceeds, etc.).  Good luck.