S.E.C. Real Estate Observer

• Tweet

• Tweet

Build-to-Suit with Lease Option

We found an attractive parcel of land, ideal for our buyer client’s latest commercial venture. However, coming to terms on the price for the property turned out to be a battle of wills between a well-heeled and non-motivated seller and our buyer. The seller knew the property’s location and growing positive demographics would one day reap him the inflated number. The buyer, on the other hand, knew the future was good for his business, but could not justify the seller’s price at that specific time.

All along in the negotiations, the seller knew about the financial strength and integrity of the buyer. Through this growing relationship, we negotiated a transaction whereby the seller advanced substantial money to the buyer so he could construct a brand-new facility. In exchange, the buyer and seller entered into a long-term lease, with the buyer having an option to purchase the property over a period of time.

My buyer, once his business was “proven up,” exercised his option to purchase.

The seller received a solid net income stream for a number of years, had pride of ownership over this period, and ultimately did receive his land asking price through the larger exercised option.

The buyer took advantage of an excellent location, expanded the business, and was able to exercise his option through well over 100% bank financing based on the appraisals completed at the time of the option being exercised.

We took this formula to yet another location in another city, with similar success. There are various additional interesting creative opportunities for sellers and buyers alike via leasing real estate with options to purchase. The buyer will realize benefits of property ownership (including appreciation) without the potential early financial need.

Split the Land and Building

Another potential solution for price point challenges may see multiple seller and buyer benefits accruing from a seldom-used but viable alternative of selling property improvements and leasing the land with an option to purchase at a future date. Variations with lease (priority/subordinating, etc.) are part of seeking both the seller’s and buyer’s needs.

Head Lease the Vacant Space with Option to Buy

Also, every jurisdiction has various multi-tenant and/or single-tenant buildings with occupancy levels that are currently low and challenged. There is ample opportunity to create well-structured head lease/option transactions through vehicles for entire buildings. Benefits to the existing owner include a rental that will assist getting out of management and negative cash flow and/or potentially needed structural and/or leasehold improvement capital expenditures. Benefits to the experienced buyer include upside cash flow from a releasing program plus the ability to complete an ultimate timely purchase at favorable price after repositioning and proving up the income. Various forms of additional security are available to existing owners though negotiation.

Home Land Lease with Option to Buy

This is an attractive form of home ownership popular in many North American jurisdictions, while it’s not yet well known on a mass scale in others. Needless to say, it offers very distinct advantages for potential attainable housing solutions. We will be offering a future article on this specific topic that will greatly assist in the ongoing challenge of family housing affordability while offering passive investors a sound, safe reliable return via land lease for a predetermined period of time. Stand by.