Is demolishing a good idea to win a long term lease?
I own a plaza with 4 units that pays $7500 a month from rent. I recently received an offer from my neighbor (a car wash) to lease my property with a long term lease of 20 years with option to renew. The only issue I am having is the he wants to demolish my 5500sq ft building and expand his car wash. My question is what is a good offer and is it a good idea to demolish? My building was built in 1981 and has been maintained and in good condition.
[{"id": "idah1pt", "text": "Consult a CRE broker who has the experience and resources to advise you. Many variables to consider some of which are local, others predictive.", "replies": [{"id": "idbx059", "text": "I will be doing that after I receive an official offer, I have a meeting with them today and I will update with more info.\nThank you", "replies": [], "depth": 2}], "depth": 1}, {"id": "idb9ilw", "text": "Might be better to sell at that point.  You seem to have a motivated buyer, likely willing to pay  more than income based buyer.\n\nTalk to appraisers and commercial broker in your area to get an idea of values.\n\nDo your leases have demolition clauses or are month to month?", "replies": [{"id": "idbtxfy", "text": "Selling might be the route. If his business buckles, which can happen as early as the construction phase, OP is left with a (partial) car wash and no real leasable units. It\u2019s a big risk on OP\u2019s part.", "replies": [{"id": "idbwqes", "text": "He said he is willing to put guarantees either by an escrow account or by a bank guarantee.\nTheir is a risk but this company is on the top 10 Carwash business in the US.", "replies": [], "depth": 3}], "depth": 2}, {"id": "idbxfwx", "text": "He is not wanting to pay what I\u2019m asking, I know I\u2019m asking for more than it\u2019s worth for the time being but I am in the fastest growing are in the state and I know with minor remodeling and a new appraisal I can get much closer to my asking price. \nAll leases are going to expire by the end of the year except one which I\u2019m pretty sure I can convince to void lease by compensation. \nI have a meeting today with the car wash owner and his realtor, I will update with his offer\nThank you", "replies": [], "depth": 2}, {"id": "idm80x1", "text": "I had a meeting with the real estate agent representing them and they offered 1 million to buy or 5k absolutely triple net for 20 years with option to renew, I believe I can ask for more the way he was talking but what is a better option? If I sell, I will be reinvesting in another property and will avoid the capital gain taxes.", "replies": [{"id": "idmmr1g", "text": "If you do go with them as tenant and keep it, ask for annual increases based on your local inflation or CPI index over the length of the lease.\n\nAnd is that $5000 a month more than you currently net from the property or less? (You mentioned $7500 per month initially but not clear if that was before or after building expenses).\nKeep in mind that after 20 years with them you would not have a building, just bare land, where as if you sell and buy another building (or keep the current building) you have an income property for the next 20 years that is likely to be worth more than vacant land as in most cases, land with a building is worth more than land and no building.\nAlso Depends on your personal situation as well, are you at a point in your life where cashing a $5000 check per month with no headaches sound nicer than managing a property with 4 tenants or more?", "replies": [{"id": "idmqaep", "text": "The $7500 without expenses like insurance, property taxes and maintenance. Insurance and maintenance are about $1500. I will put a final offer of $7500 plus cpi % increase or 1.1 million and buy another. You have been very helpful", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iddcx9h", "text": "If you want to hold as opposed to sell, it's perfectly fine, so long as you get a nonrefundable deposit for 135% of the amount it will take to rebuild (according to current codes) and then adjust that deposit every 5 years to then current values.", "replies": [{"id": "iddfu3k", "text": "That is my idea of an escrow account as a guarantee for my current mortgagee. But my issue is I have a short term mortgage with a balloon payment due in 5 years. Let\u2019s say by that time I don\u2019t have enough cash in hand and want to refinance, that will effect my appraisal value and might make it harder. On the other hand, I have a proof of a long term lease as a guarantee for the new mortgage so it\u2019s a give and take kinda situation.", "replies": [{"id": "idec3uk", "text": "Financing is easy.\n\nThere are a lot of resources here in Reddit that can and will help you on that.\n\nOne of them is a moderator here.", "replies": [], "depth": 3}], "depth": 2}, {"id": "idm8dna", "text": "I had a meeting with the them today and they offered 1 million to buy or 5k absolute triple net for 20 years with option to renew. Do you think 5k is fair for a 1 mil property?", "replies": [{"id": "idmmnu0", "text": "I couldn't say without seeing the terms of the deal but on cursory....no.\n\nBesides, it's not my call to make.  It's yours.\n\n*Edited to add:* Most investors would be thrilled with a return of 6% net of all expenses at the moment but my base is 10% and I regularly achieve 12 and 15%, so my take on things is different than most.", "replies": [{"id": "idmqiyl", "text": "That makes sense, thank you", "replies": [], "depth": 4}], "depth": 3}, {"id": "idntbj3", "text": "To answer that you need a financial model in Excel and some market knowledge. Assessing the opportunities and risks of the different scenarios and making a decision.\n\nRegarding the refinancing - don't forget that when your balloon is due, hadn't you sold by then, you must refinance. Nobody knows what interest rates will be in 5 years, but we're done with low rates for now. When rates go up, there's pressure on the cap rate, so property values might stagnate or go down depending on location, property type, market and so on. Another thing to consider is, as mentioned already before, you get 20-years of rent and then barrow land. You don't know if you do this letting deal how the market will value that state of the property. You have a multi-let (residential?) now and will have a commercial single tenant after with special use (car wash). And the latter generally means more risk and a higher cap rate (lower valuation for each euro of rent (NOI) you are receiving. That is because you'll be fully exposed to the credit rating of this car wash and 20 years + extension is a long time. I wouldn't be able to tell you if Apple won't be bust by then.\n\nI'd suggest either you get an above-market rent triple net lease with an yearly CPI indexation and get the lease terms to protect you as much as possible. Alternatively, sell for above-market selling price. Go ask a commercial broker what properties sold for recently. Don't forget the car wash should be willing to pay a premium since it's neighboring - they don't have 100 neighbors they can expand to. And make the decision fast, within a few months, because in the current economy the expectation and risk is that real estate prices will crash. Maybe won't happen but the risk is high.\n\nGood luck", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]