Management W/purchase Option
In commercial properties, how common (or uncommon) are managment with purchase option deals? I'm specifically looking at a business that I'd like to buy. Don't have the dp. Owner wants out desperately (very bad management so wasn't profitable). If I could operate the business for a year, I could turn it around and have the dp to close on the purchase. I've done all the due diligence and am extremely confident that it could be turned around.
The owners other option is to sell to a developer that'll bulldoze it. How can I convince him to let me run the place instead????
I don't know how common or uncommon these options but I am sure it is possible. Convince the owner that you know what you are doing and that you can turn the property around. You are willing to help him out but in exchange you want the option to buy the business at a predetermined price or a predetermined formula to come up with the price at the time of signing.
I did one deal like this. Only I got a three year option. Owner got tired of waiting and sold it over my option. I sued. They sued. We settled. they paid me $250K. Its not very common and may even be a violation of certain ethics provisions if you are a licensed RE broker. But if you're not its legal and it will survive a court challenge. As to how to convince the seller its a good idea, I guess I need more info regarding the seller's motivation,etc.
I'm not a RE, and I know of a couple deals like this in other locations that are industry specific to this one. I'm moving forward with an offer.
Could anybody recommend a specific lease type? I was thinking NNN as I've got it in the budget to pay taxes, etc. (but know very little about that type of lease). We'll be upgrading the facilities which may increase taxes so it'd be fairer for us to take the tax burden. Also, there should be a way for our improvements to be incorporated as part of the dp shouldn't there? I realize most aren't fans of spending money on property that you don't own yet, but in this case it makes financial sense as we'd be reaping the benefits during the leased year to more than offset the investment.
Or is there a better structure? I'd anticipate buying the place within a year, although might say 18 months to give some cushion.
Thanks for the replies! I appreciate all the input.
Well if you are asking for a better structure I'd at least consider doing this deal on a land contract. When you get ready to get a conventional mortgage it is much easier to do that with a land contract. Lenders consider refinancing of a land contract to be a refinancing-- and therefore do not look at your downstroke only the value of the property. With a Lease/option they consider this a purchase and will only finance 80% of your acquisition price.
Even if you are absolutely certain you can turn this around in a year I'd ask for a 5 year balloon. You never know about market conditions. A year from now we could be in a tight money market and you could have a hard time refinancing. I did a deal on a three year balloon once-- it was the shortest three years of my life.
Thanks for the suggestion. I am open to any ideas as to what the best structure would be. I searched here on land trusts as I wasn't familiar with them. Most of the posts were about using it as a privacy shield or to hide to keep from getting a DOS clause activated. While I wouldn't want it for either of those reasons, I'm assuming it offers other benefits such as what you mentioned about the refinancing.
Let me back up and restate the problem so that maybe a solution will be clearer. I found commercial property with an existing business. I want to take it over. I don't have enough cash to purchase it (not enough for DP), for extenuating circumstances the owner would not be able to finance it. Although i do have a VC group interested in the deal, I'm hesitant to go that route initially as it would be time consuming and difficult to obtain historical P&L, etc. This is a deal worth more than 30 mil which also should be considered (conservatively 27% ROI annualized over 4 years).
I want to get in ASAP. So, my first guess was a lease/option deal. I could get in and turn it around ... I do have the capital to do that via private investors and very strong management team ... and accumulate both the DP AND proven business model. I should be able to get the DP within 12 months. There would be improvements that I made to the property over that time as well. It would be great if that was factored into LTV or something too. There would be other benefits to prolong closing as more time for due diligence, expansion planning, etc. This is a really unique situation and even if I had the cash would probably take a while to close anyway.
As I said, I'm willing to consider all suggestions. I kinda have a grip on the benefit that the land trust would help with the improvements and LTV issues. Essentially, when I'm ready to purchase, it would be treated as a refinance situation where appraised value is what's used, not purchase price, right? That'd be wonderful. Are there any downsides to this? How would it be structured to protect both me and the current owners? (i.e. who's trustee, who's beneficiary?) I don't want to make it too easy for the owners to sell it out from under me. What benefits would it have for the owners (so I know how to pitch it)?
Any other suggested vehicles?
THANKS!!!
A land contract is not the same thing as a land trust.
Tell me about "for extenuating circumstances the owner would not be able to finance it." What do you think he is doing on your lease/option?
I would definately get a longer term, you never know what can happen.
I'm not sure why I read land trust when commercialking clearly said land contract. At any rate, after more due diligence, I've decided to pass on the deal. If I had more time, it would still have been very lucrative. However, the sellers want to sell quick and I think they're going to accept any lowball offer as long as they can get out fast (long long story, obviously profit/losses don't have much to do with their decision). There's just too many unknowns with underground utilities, etc., that I'd have to research and I know they'd rather take a quick safe offer (someone that just wants to bulldoze it all).
Thanks for all the help! I'm pursuing the development anyway as I've found another piece of property down the road where the seller may be willing to partner on the project. Thus, I'm about to post several other questions
Thanks for the update. I did recently enter into a management agreement with the option to buy on a small apartment complex. In Iowa you must be a licensed real estate broker to manage other people's rental properties. This option gives me "marketable title" which allows me to manage the property and even better to sell it. I have it on the market now at $525k and my option is at $500k. I told the seller my intentions up front with selling.