Landlord selling my leased property
Discussion
I have been advised that my landlord is selling the office I currently rent. It is the end unit of a block of three on a business park.
I am seeking thoughts from others of the best way to go. I know most will say, own, own own, but I have never been particularly driven by that desire. I sort of feel trapped with ownership, not sure why, and not overly happy that a bank would be constantly looking into my business.
Anyway ....
I guess the options are to try to buy it or to continue as a tenant.
I have just about enough cash in the bank to fund the 30% deposit and costs, and would need a 70% mortgage from my bank. Over 12 years, which takes me to my State Pension Age, the initial repayments are about double what the rent currently is but that is easily affordable. I accept some is interest and some is capital.
I have three years remaining on my current Lease, with no rent reviews. I have security protection of the L&TA 1954. I expect my rent to go up in three years time, possibly by 50% as it's a damn good deal at the moment. The biggest risk with staying as a tenant is that the new owner could be purchasing to use themselves at some time in the future and I would be evicted. However, I believe they have to own the property for five years to do that and I would be entitled to compensation equivalent to the rateable value (£25,000).
Deep down I would like to buy it but the financial commitment worries me.
Fire away guys.
I am seeking thoughts from others of the best way to go. I know most will say, own, own own, but I have never been particularly driven by that desire. I sort of feel trapped with ownership, not sure why, and not overly happy that a bank would be constantly looking into my business.
Anyway ....
I guess the options are to try to buy it or to continue as a tenant.
I have just about enough cash in the bank to fund the 30% deposit and costs, and would need a 70% mortgage from my bank. Over 12 years, which takes me to my State Pension Age, the initial repayments are about double what the rent currently is but that is easily affordable. I accept some is interest and some is capital.
I have three years remaining on my current Lease, with no rent reviews. I have security protection of the L&TA 1954. I expect my rent to go up in three years time, possibly by 50% as it's a damn good deal at the moment. The biggest risk with staying as a tenant is that the new owner could be purchasing to use themselves at some time in the future and I would be evicted. However, I believe they have to own the property for five years to do that and I would be entitled to compensation equivalent to the rateable value (£25,000).
Deep down I would like to buy it but the financial commitment worries me.
Fire away guys.
Edited by PurpleMoonlight on Wednesday 23 March 06:27
Presumably the owner of the property has no privilege to kick you out until the end of the lease at a minimum so I would be thinking where I want to have an office in 3 years time. It might just make more sense to accept the uncertainty until you're a few months away from the end of the lease and find another (perhaps more advantageous) office somewhere else depending on what property is like in your area.
In theory the change of ownership is a bit of a red herring, as your lease will continue on the same terms, just paying someone new. So all things being equal, just carry on with your plans as before.
The landlord of the premises we are in went bankrupt 18 months ago and we are now owned by the bank and managed by an agent. The old landlord was a useless shyster, the new managing agent is only useless, so it's an improvement I guess.
I'd sit tight, see what the new landlord offers. With 3 years left you're not in any rush.
The landlord of the premises we are in went bankrupt 18 months ago and we are now owned by the bank and managed by an agent. The old landlord was a useless shyster, the new managing agent is only useless, so it's an improvement I guess.
I'd sit tight, see what the new landlord offers. With 3 years left you're not in any rush.
Edited by warp9 on Wednesday 23 March 09:12
If I was in that position, had the deposit, could afford the payments and didn't want to move office, I'd probably speak to the landlord direct and negotiate a deal with them outside of agents. You'll get it for less, pay little to no fees on the sale and get to deal with the owner direct.
It's quite a good scenario as you know exactly what's for sale, exactly how it all works at the place and there won't be any hidden surprises in the future. You're also building capital in an asset that you can sell/rent out come retirement if you wanted too.
I know you could stay and pay the new landlord but as you and others have said, they might be shady and underhand and force you out. You never know!
It's quite a good scenario as you know exactly what's for sale, exactly how it all works at the place and there won't be any hidden surprises in the future. You're also building capital in an asset that you can sell/rent out come retirement if you wanted too.
I know you could stay and pay the new landlord but as you and others have said, they might be shady and underhand and force you out. You never know!
ashleyman said:
If I was in that position, had the deposit, could afford the payments and didn't want to move office, I'd probably speak to the landlord direct and negotiate a deal with them outside of agents. You'll get it for less, pay little to no fees on the sale and get to deal with the owner direct.
If only it was that simple and that's why experienced vendors and purchasers both get independent advice when buying commercial property. I'm not an agent, but I do value commercial property and I can guarantee that in 95% of cases when I think an agreed purchase price is wrong it's where one of the parties has not been represented, usually a purchaser. By the time that happens everyone's racked up considerable fees - finance, legal and my fees, only for the deal to fall apart. And I can assure you that most commercial landlords will engage far sharper practices than an agent ever will. ashleyman said:
It's quite a good scenario as you know exactly what's for sale, exactly how it all works at the place and there won't be any hidden surprises in the future. You're also building capital in an asset that you can sell/rent out come retirement if you wanted too.
But he doesn't know what he's getting, and is trap the inexperienced often fall into. The vendor is selling an investment and he's buying a vacant building, they are two completely different entities usually with totally different values. If it's anything like the north west, with 3 years left to small company, the vacant possession value will be higher than the investment value, but it might not be. Without knowing accurately what those 2 values are it makes negotiating a good deal very difficult. An a Insurancejon points out the asking price will provide absolutely no indication of the actual value. The asking prices on some investments are comical.ashleyman said:
I know you could stay and pay the new landlord but as you and others have said, they might be shady and underhand and force you out. You never know!
He can't be forced out, he has security of tenure. Similarly the landlord can't massively inflate the rent because both the rent review clause and the lease renewal provisions will require Market Rent to be agreed.OP - if you do think you want to buy it, then get some advice from a local surveyor and let them guide you through the process. You need to understand the difference in value between what the vendor is selling and what you would be buying (they will likely be very different). Values in many markets are back to pre-recession levels, so where will capital value growth come from? Also bear in mind than on average commercial property values dropped 44% during the last bump so don't assume it's a guaranteed investment. Commercial property can be great investment with lots of opportunities, but the pitfalls are far greater and completely different to those in the residential sector, so you need to enter with eyes wide open. Good luck.
PurpleMoonlight said:
My landlord owns and is selling all three of the units. All are tenanted and are indeed being sold as an investment opportunity. However, the current combined yield is only 4% against the asking price so I think they will struggle to find a buyer of the whole lot.
Unless your office is in the West End, I would agree he may struggle somewhat. It also complicates matters, as you would actually be buying an investment property, but some banks would discount the income from your company as the lease would no longer serve any meaningful purpose, so the yield would be even worse with you buying it. Ultimately to hold any meaningful negotiation you need to know what it's actually worth and that's where expert opinion is required. Chipping 25% of the price means nothing if it's 100% over-valued by the vendor.If you want to save money and you know what bank you would likely use, you could always ask them for their list of local valuers and approach one of them to give you a desktop opinion of value on the promise of the instruction if it comes off. But don't instruct the valuer, if you pay them any fees they will then be conflicted to provide the bank with advice - the bank must be their client.
Effectively the purchaser is buying the right to the income from the 3 properties. Broadly speaking you are valuing the benefit of the income stream, so current rents up to lease renewal, rent review and market value from that date.
From the point of view of the OP he would be buying the right to no longer pay rent and potentially a surce of income once he retires.
From the point of view of the OP he would be buying the right to no longer pay rent and potentially a surce of income once he retires.
OP with only three years remaining the yield on your portion on rent is affected.
If it suits you may want to suggest signing a new longer lease at a rent that suits, which will gain more security, hopefully a lower rent and the LL a higher return on the income
If the LL is clued up he will spot the devil in my detail. If not it may work out for you....
If it suits you may want to suggest signing a new longer lease at a rent that suits, which will gain more security, hopefully a lower rent and the LL a higher return on the income
If the LL is clued up he will spot the devil in my detail. If not it may work out for you....
PurpleMoonlight said:
I don't follow that?
I appreciate my rent may increase in thee years time, but the worst case would be to market rate. Market rate currently is about 50% more than I am paying, so not the end of the world.
And if a tenant doesn't come along? Business Rates could be in the region of 10k pa, possibly turning the yield negative.I appreciate my rent may increase in thee years time, but the worst case would be to market rate. Market rate currently is about 50% more than I am paying, so not the end of the world.
PurpleMoonlight said:
I don't follow that?
I appreciate my rent may increase in thee years time, but the worst case would be to market rate. Market rate currently is about 50% more than I am paying, so not the end of the world.
You're quite right, it wouldn't work and the landlord wouldn't do it. They might do it if your company was called Apple or IBM and the lease was being extended to 25 years, but for a small company (apologies I'm making an assumption) such a yield play when you're already paying a rent significantly below market value wouldn't actually result in an uplift in value for the Landlord.I appreciate my rent may increase in thee years time, but the worst case would be to market rate. Market rate currently is about 50% more than I am paying, so not the end of the world.
If they really are asking 4% initial yield for the property then it's probably a non starter as it would cost you more than that to borrow the money on a commercial loan. I presume the other tenants are also paying below market levels of rent, the assumption being that at rent review the yield will jump to an acceptable level. That would then raise the question of what's wrong with the property that means you have to offer a 50% discount to get tenants in?
However, everyone is talking hypothetically and making sweeping assumptions, the reality is that it's almost impossible to give you good quality advice with detailed knowledge of the property and the locality, which is where speaking to a local surveyor would help. Could be that 4% is actually a cracking deal, but there don't tend to be many of those about. And I know I sound like a broken record, but the value of the property vacant could be considerably more than as an investment - buy the investment, keep your unit and sell the other 2 units to your neighbouring tenants for a profit - everyone's a winner.
I pay the least rent per sqft of the three tenants, but I have the largest unit so pay the most. The 4% yield is the total rents against the asking price. All leases have 3 years to run. I don't know if the other tenants have LTA protection or not.
If I used the market rent, and an 8% yield, my unit is worth about £250,000. I would estimate one of the others £125,000 and the third £185,000. So a total of £560,000.
I have today completed a purchase of a tenanted large office property in the same city, although on a slightly more prestige business park nearer the M1. The price was £750,000 with a rent of £60,000. So 8%.
It looks like the agents for mine have over valued it somewhat.
If I used the market rent, and an 8% yield, my unit is worth about £250,000. I would estimate one of the others £125,000 and the third £185,000. So a total of £560,000.
I have today completed a purchase of a tenanted large office property in the same city, although on a slightly more prestige business park nearer the M1. The price was £750,000 with a rent of £60,000. So 8%.
It looks like the agents for mine have over valued it somewhat.
PurpleMoonlight said:
I pay the least rent per sqft of the three tenants, but I have the largest unit so pay the most. The 4% yield is the total rents against the asking price. All leases have 3 years to run. I don't know if the other tenants have LTA protection or not.
If I used the market rent, and an 8% yield, my unit is worth about £250,000. I would estimate one of the others £125,000 and the third £185,000. So a total of £560,000.
I have today completed a purchase of a tenanted large office property in the same city, although on a slightly more prestige business park nearer the M1. The price was £750,000 with a rent of £60,000. So 8%.
It looks like the agents for mine have over valued it somewhat.
I'm confused, do you own lots of commercial property investments?If I used the market rent, and an 8% yield, my unit is worth about £250,000. I would estimate one of the others £125,000 and the third £185,000. So a total of £560,000.
I have today completed a purchase of a tenanted large office property in the same city, although on a slightly more prestige business park nearer the M1. The price was £750,000 with a rent of £60,000. So 8%.
It looks like the agents for mine have over valued it somewhat.
PurpleMoonlight said:
I pay the least rent per sqft of the three tenants, but I have the largest unit so pay the most. The 4% yield is the total rents against the asking price. All leases have 3 years to run. I don't know if the other tenants have LTA protection or not.
If I used the market rent, and an 8% yield, my unit is worth about £250,000. I would estimate one of the others £125,000 and the third £185,000. So a total of £560,000.
I have today completed a purchase of a tenanted large office property in the same city, although on a slightly more prestige business park nearer the M1. The price was £750,000 with a rent of £60,000. So 8%.
It looks like the agents for mine have over valued it somewhat.
Depends on growth. You've already said your paying bellow market rent so there is growth at year 3. Depending on terms of the others there may be growth with those. That would increase the yield.If I used the market rent, and an 8% yield, my unit is worth about £250,000. I would estimate one of the others £125,000 and the third £185,000. So a total of £560,000.
I have today completed a purchase of a tenanted large office property in the same city, although on a slightly more prestige business park nearer the M1. The price was £750,000 with a rent of £60,000. So 8%.
It looks like the agents for mine have over valued it somewhat.
No-one can really give good advice without proper analysis.
If you have no plans to leave when the lease expires in three years it might be a good opportunity for you to speak to your landlord to see if he would be interested in re-gearing your lease. If your lease was extended by say 5 years, giving you eight to run, at the existing rent with no further RR it would be good value for you and it would increase the investment value for the landlord. Win-win. This is theory, I recommend you speak to a surveyor who can advise you on this sort of approach.
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