Hi all,
Well it’s been a while, but i think i have enough equity to go again.
I have my eye on a local bank building, and as i have never done commercial before, i have a few silly questions. I will tell you a bit about it.
It’s a late 80’s building that is currently owned by the bank! they are selling off about a dozen of their buildings. Anyway the one in question is offered on a 7/5/5/5 leaseback returning $51,000 net rent. Rent is paid monthly, and lessee to pay all building and statutory outgoings. Sale by catalogue auction.Thats about all i know so far, i still have to get a valuation done etc, but i cant see the building being more than $400k. Are there any things i should we wary of with commercial other than the obvious??
If the lessee pays outgoings, what other costs to me will there be? What type’s of insurance would be needed for a commercial of this type?Thanks
Scott.
go for that one scottybe. i’ve got commercials and the only costs on what you have said are management and building insurance. depending on your state and your lease arrangements, sometimes the tenant pays that, sometimes the owner and sometimes it is split.
having a blue chip tenant (bank?) on a long long lease is fab. if the tenant is not a blue chip, make sure that you keep up to a year’s repays handy in case your tenant goes bust. this can be in a line of credit or extra repays along the way etc. i am assuming your purchase is a smaller regional from the price and business is tough in the drought. being prepared means you can be there for the long haul.
graismeIt’s actually a large bank, so i am not worried they will bust.
What i am concerned about is that the property will go for much more than it’s value due to the C/F being so good. And i don’t have the spare cash to have a large deposit? I really need 100% finance. We do have some equity but not heaps.Thanks.
Hi Scottby,
what is a 7/5/5/5 leaseback. i am also considering investing commercially instead of residential
regards michelle
A couple of unpleasant things to consider before getting too far down the track;
I read an article about investing in regional banks in Australian Property Investor mag a few years ago (you may be able to do a search on the site for the issue with the article concerned). There were pros and cons of course, and while the returns are attractive, one of the dangers was if the bank concerned decided to not renew the lease. Apparently it is common for them not to.
In your case this shouldn’t be a problem as they have suggested a long one; but remember they have the OPTION of renewing after 7 years; it doesn’t mean they will. Then you have an empty building which will probably need to be remodeled to suit another tenant.
Have you obtained loan pre-approval from your lender/s yet?
You might want to check out the situation with how much the Banks will lend you – most will only lend up to around 70% LVR on commercial properties without ‘add-ons’;
You may be able to go higher, but then you start getting into LoDoc and NoDoc loans, higher interest rates and Loan mortgage Insurance – these extra costs eat into your returns and then you have to weigh up the value if you need to go this path.
The other thing is location; some banks are reluctant to lend in smaller country towns, and especially for ‘purpose built’ properties such as banks.
For example; I looked at buying the freehold to a very profitable petrol station/general store and residence with an acre of undeveloped land in a smaller country town a few years ago. It was the only one in town, and there were no plans in council for any others to be built. it was cfp and and an absolute winner.
But… as soon as I began the search for finance the first question I was asked by the lenders when I told them of my plans was “where is it?” I could not get finance from anyone, and even the Bank of Dubai (or was it Arab Emirates? can’t remember now), which specialised in petrol station finance wouldn’t lend on it because of the location.The criteria for lending for each bank varies a lot; it may be advisable to speak to a good Mortgage Broker first.
Sorry to throw in the bad news, but you need to know the worst case scenario an if it is worth the risk for the return.
Cheers,
Marc.
[email protected]“we get sent lemons; it’s up to us to make lemonade”
Thanks LA. I will consider it. I would actually be applying to the bank that has the lease for that loan, interesting!
Michelle, as i understand the 7/5/5/5 lease means the tenant must keep the lease agreement for the first 7 years, but then can choose to either renew or not for the next 5 and so on. Once the 3 periods of 5 are up a new lease agreement must be drawn up.
Hope that is clear enough.
Good luck.Originally posted by Scottybe:I would actually be applying to the bank that has the lease for that loan, interesting!
Nope….not interesting at all….it’s called “conflict of interest”. You can’t ask your financier to support you as the Lessor when they have a major interest as the opposing party to the Lease contract.
I’d be highly surpised if any institution would allow this. Every other financier is fair game, but not the one who is going to be your tenant.
Hi all,Im pretty new on this forum, been a reader for awhile.
Something i also remember from the article la aussie refers to is banks and big corporates doing leasebacks can have some very clever “out” clauses that need checking by a lawyer.
No point paying a premium for a commercial only to find the tennant does a clever runner when you least expect it.Dazzling,
I wondered if that would be the case! Thanks.
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