Industrial income property, sale, leaseback, and more!

lendaddy · 03:21 PM

Our neighbor has a need for our building and land and has made a cash offer. He has purchased a couple other adjacent pieces but ours is the best building and the best location for visibility from the four-lane. (this is an industrial property and his needs are not immediate, he wants our location for future expansion)

His offer is 740k and he will lease the building back to us at 6k a month for a 5 year lease with our option for 5 more. We would still cover all taxes and utilities, etc..

This guy is killing right now and I think he needs to spend some money to avoid a massive tax bill.

I know he will pay more and I've told him that that $ won't get it done. I told him he would have to pay a premium and cover our eventual moving costs, etc.. I need to get him an informal counter offer in the next few days. I have met with our CPA and the tax situation would be ugly unless we role the $ into another investment property. My plan is to do that then take a cash out loan to invest into our business as we do need the influx and this really is a god-send that he approached us (as in my opinion we'll never get more "above market value" for the property than in this situation)

We owe about $500k now and his $740k would be a "fairish" to "lowish" offer based on the market. What kind of premium should I shoot for? What pitfalls await me? Any advice is welcome.

nota · 10-26-2006, 03:51 PM

6k a month = 72k a year
so at the end of ten years =720k
so he paid 20k for the land and building
and you pay the taxes??
take a long view and thats a bad deal

wrecktech · 10-26-2006, 03:51 PM

I had a similar situation occur to me this spring. My situation would have been a cash purchase and 90 days to vacate. I looked at comparable property and the costs to move and the hassle. Location, location, location, is what dictates the price. Find out what a comparable rental would be if you had to move and decide what your place is worth a month without the location premium. I came up with $20 to $25k to move in 90 days from an 11,000 square foot auto shop and warehouse. If he is cash flush now would be the best time for both of you. I would ask at least a 25% premium on value of the property.

lendaddy · 04:33 PM

Quote:

Originally posted by wrecktech
I would ask at least a 25% premium on value of the property.

Thanks, I was thinking $950k and feel him out. I mean what's the worst thing that could happen?

I've been playing opossum for about three months since he approached me and I think he knows/thinks he's not dealing with someone that "wants" to sell. His original verbal offer was more like $800k - $850k, but that was just in conversation and assumed us vacating and not leasing.

nostatic · nostatic's Garage

Quote:

Originally posted by lendaddy
Thanks, I was thinking $950k and feel him out. I mean what's the worst thing that could happen?

You get busted by vice?

lendaddy · 10-26-2006, 04:38 PM

Quote:

Originally posted by nostatic
You get busted by vice?

Industrial property, not industrial powder

nostatic · nostatic's Garage

You said $950K and feeling him out. Seems like a pretty expensive hand job to me. Just make sure he isn't a cop before money changes hands...

lendaddy · 10-26-2006, 04:56 PM

Quote:

Originally posted by nostatic
You said $950K and feeling him out. Seems like a pretty expensive hand job to me. Just make sure he isn't a cop before money changes hands...

Out, not up.

Dantilla · 10-26-2006, 04:58 PM

Quote:

Originally posted by lendaddy
what's the worst thing that could happen?

He could say you are too far apart on price, and start looking elsewhere. If you need the cash infusion, don't get too greedy and lose the opportunity.

If you can bring some comparable sales that justify your price you are in a much stronger bargaining position.

lendaddy · 10-26-2006, 05:02 PM

Quote:

Originally posted by Dantilla
He could say you are too far apart on price, and start looking elsewhere. If you need the cash infusion, don't get too greedy and lose the opportunity.

If you can bring some comparable sales that justify your price you are in a much stronger bargaining position.

Yes that's a good point, and I got that same advice form a friend here. The highest comp approach I could (already have ) proved gets me to $820k-$840k. After that we are talking premiums. Would you call $950k greedy with those numbers? I honestly don't know.

rammstein · 05:07 PM

Quote:

Originally posted by nota
6k a month = 72k a year
so at the end of ten years =720k
so he paid 20k for the land and building
and you pay the taxes??
take a long view and thats a bad deal

We don't have NEARLY enough information to make a determination like this.

Lendaddy's primary business is not real-estate investing. He owns real estate to run his business out of. Most always, the return on money invested into one's business is far in excess of the returns that the real estate itself generates. The time and expertise of the business owner generally means more like a 30% return on money invested into the business. Unless you are doing some seriously sophisticated stuff, you won't get a 30% return on your real estate $. It is very possible (actually likely) that Len could profit handsomely from this. But... he needs to run all of the numbers that we don't have.

And as for the deal that the buyer would be getting, lets look at it. We will assume, as he is cash flush, that he will have no mortgage.
Buyer pays: $900,000
Renter pays: $72,000 + most expenses
$72000/900000 = 8% annual return. Hardly a screaming deal for the buyer, and there are other expenses that we didn't even figure in. He clearly has other plans for this property, or he would look elsewhere because this isn't the best industrial income deal in Michigan. In fact, there are plenty of 9%+ deals in Michigan right now.

I love it- keep posting about these deals, I will dissect anything you can give me. Real estate is fun!

lendaddy · 10-26-2006, 05:04 PM

I should add that the guy owns 75% of our little area and owns all but two lots (ours and a larger one). If he doesn't get ours he's locked and has said he'll sell it all and look for a huge piece somewhere else. The guy is growing like mad and needs area (parking space and facilities).

lendaddy · 10-26-2006, 05:07 PM

Thanks Rammstein, I give you any info you need. But like you said, this isn't my bag baby. My business is 0% dependant on location and I don't mind moving at all in 5-10 years. (or even right away if it makes me more $.

To expand:

This guys owns maybe 25 acres and six buildings. We have 3.5 acres and the other remaining place has 12. Our building is premium, the 12 acre lots building would likely get a visit from the dozer.

artplumber · 10-26-2006, 05:20 PM

Let him come back to you. Then be ready with the slightly higher than equivalent number and add "since you'd like us to be gone, and it is a hassle to move and all..."

Is 6K a reasonable, cheap, or expensive rent?

wrecktech · 10-26-2006, 05:33 PM

Totally off topic but worth consideration, I rebuild wrecked cars, specifically avengers, sebrings and explorers. I try to buy two and put them together. Buying a parts car the same color saves a lot of cash. In the case of red at $52 a pint a red parts car is worth at least a 25% premium. $950k is a good place to start and he isn't going to sell what he has and move he will make you a counter offer. Place yourself in his shoes and what would you do? He isn't buying property to move. If I was in your position I would start at a position that would allow me to retire if need be. $500k free and clear cash would be a nice position to be in.

lendaddy · 10-26-2006, 05:38 PM

Quote:

Originally posted by artplumber
Let him come back to you. Then be ready with the slightly higher than equivalent number and add "since you'd like us to be gone, and it is a hassle to move and all..."

Is 6K a reasonable, cheap, or expensive rent?

I have already been putting him off for a while. The other day I told him I had to mull it over more but that he's definitely not there on $ and he seemed unphased and said basically that he looked forward to my counter.

BTW, 6K is ball park $ for rent on a 20K sq' building like this.

Also, one thing I should add is that when I say "him" I mean his real estate guy, not the owner himself. His guy is one of the big swinging dicks in real estate around here so I'm not going to pull any fast ones he hasn't seen.

artplumber · 10-26-2006, 05:42 PM

Len,
Since you're the last piece of the megapuzzle the guy is trying to build there (are you? you said 75%) you should be able to get a premium. Go for a cool mil.

lendaddy · 10-26-2006, 05:45 PM

Quote:

Originally posted by artplumber
Len,
Since you're the last piece of the megapuzzle the guy is trying to build there (are you? you said 75%) you should be able to get a premium. Go for a cool mil.

No, us and one other. The other has much more land but the building is worthless. We also have the most visable spot to the four-lane which he would like.

He hinted to me that the other guys want 2mil but he didn't see that happening. They have 12 acres to our 3.5.

jorian · 10-26-2006, 09:22 PM

If your going to lease back, the sale price is not as important as the terms.

speeder · 10-27-2006, 09:19 AM

I don't have any business degrees, (or any other kind), but here is what I would do:

Cash out of the building and the business for the max possible. Hold an auction if necessary. Fly to Amsterdam during the next big seed-fest and invest in whatever wins the grand jury prize for cold weather hybrids that grow next to freeway overpasses. Plant liberally around the greater Detroit metro area, harvest what doesn't get found first by LE or a lawn mower, (budget crisis= no more mowing MI.), and get a ROI that makes Halliburton look like a social service agency. If there is one thing that MI. is going to need in the coming years, it's drugs. And weed is the opiate of the masses.

The plan needs more flushing out, but this is just off the top of my head. Think outside the box; that's the name of the game in tough times.

Best of luck, don't leave any change on the table.