How to Buy When My Rent is Cheap

Question

I run a profitable restaurant in a two-story commercial building. (The second story is another commercial space but is unoccupied.)

I have been approached by the mortgagee (a private lender) to suggest a deal that would enable me to acquire the building. The current owner is extremely delinquent and interested in selling the building. The mortgagee is also putting pressure on the owner to sell.

With no tenant upstairs, and that I have a transferable (if it sells) lease on the building for $1,000 / month for the next four years, I'm struggling to find a deal that works for me and the others.

That said, the building is in need of some serious repairs which puts my business in some risk. Also, if the building was to sell to a competitor, they could force me out. So circumstances may force me to pay more.

The building needs about 20-40k in repairs. Roof and masonry work.

The building is probably worth, 135-150k depending on the extent of repairs done to it. The outstanding mortgage with interest is $175,000.

I have been considering offering 100-125k for the building, but without a tenant upstairs, this only increases my costs --- at least for the next four years. (But at this purchase price, I think the mortgagee would release the lien.)

There is (a small) chance the mortgagee would foreclose and could evict me. I believe this is doubtful, but it is possible. Very doubtful in our situation.

Can anyone suggest a creative buying strategy that might satisfy all parties? Or is the answer, my costs are going just simply going to go up if I want to remain in that space. (The location is ideal. It would be difficult to find something better.)

Michael Gansberg · Answer

Pretty interesting, @Corey Switzer. I can't speak to everything you wrote about, but if I were you, the first thing I'd think about is your potential to expand. Are you full at breakfast/lunch/dinner? If you had a second floor, could you seat more diners? Or could you use it to start another business which is synergistic with your current business? Or could you rent it to another business which would drive customers to your restaurant? (The first thing that occurs to me is an "herbal" dispensary, but that's just because I have an unusual sense of humor.)

If the answer to any of those questions is "yes," then the value of the real estate is higher to you than it is to a third party who cannot do any of those things. If you're only considering fixing the space and renting it to some other business which doesn't have any synergies, then this should be evaluated as a pure investment of capital, and you should weigh that investment vs. an investment in your business, which would yield higher returns.

Also interesting is that you have very intimate knowledge about the distressed state of the seller, which most people will not have, and also pretty good knowledge about the building, as you've been there awhile. This is quite a competitive advantage over other buyers. Good luck with this one.

Matt Motil · Answer

You need to talk to the mortgagee to find a win-win situation where they are happy and you are happy. You shouldn't purchase the building for more than it's worth.

It sounds like the lender is going to have to cut their losses on the existing owner and foreclose on them or do a short-sale type transaction where you purchase it, but at a value less than what the lender owes. The lender would then have the option to pursue the original seller for the deficiency if they chose to.

From what you are saying, the location and situation might make it worth you working things out to stay and mitigate your risks. Ideally though, you need to make sure the deferred maintenance is covered somehow so it doesn't bite you in the a$$ later.

How to Buy When My Rent is Cheap

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