Commercial property ?
Discussion
A commercial property has caught my eye and I wondered if there are any downsides.
Its a shop and a flat above and its quite near to where I live. The shop is on a 10 year lease with a review in 4 years from now and the flat is rented for a further 6 months. Net income is 21k from both and the property will be around the 200k mark.
obviously you are in the world of commercial loans and i'd need to look very seriously at the credentials and stability of the current tennant of the shop (and also at rental demand in the area). But are there any other pitfalls I should be aware of ? (I have no experience of commercial property)
Its a shop and a flat above and its quite near to where I live. The shop is on a 10 year lease with a review in 4 years from now and the flat is rented for a further 6 months. Net income is 21k from both and the property will be around the 200k mark.
obviously you are in the world of commercial loans and i'd need to look very seriously at the credentials and stability of the current tennant of the shop (and also at rental demand in the area). But are there any other pitfalls I should be aware of ? (I have no experience of commercial property)
I'll have a quick look at the details for you if you like. Primarily you'll want to check to the repairing obligations of the lease. Bare in mind that if the shop is leased on a full repairing and insuring basis this will only cover you for a proportion of the building and the first floor flat will also need to accept a proportion of the repairs, and of course with the residential flat you'll be responsible for building insurance, gas/electric checks etc.
TC
TC
Also consider rent review provisions - in a few years could the rent rise? Unlikely in the current climate but who can predict what the next 5 years will bring.
Risk vs Reward - your return could be screwed by unforessen works or tenant default.
Can you sell the flat in the future to recoup some of the capital outlay?
Risk vs Reward - your return could be screwed by unforessen works or tenant default.
Can you sell the flat in the future to recoup some of the capital outlay?
guys, thanks
here are the details
not sure i like the look of the business, not exactly CC proof
http://auctions.strettons.co.uk/detail.asp?Lot=342...
here are the details
not sure i like the look of the business, not exactly CC proof
http://auctions.strettons.co.uk/detail.asp?Lot=342...
OK sweeping assumption time here, tanning shops are IME of acting for commercial landlords all pretty dodgy, they are the sort of businesses that shut down and start up again in different names fairly reguarly taking with them any ability for you to go after them for outstanding rent. I'm sure some are good businesses but the cost of equipping them is enormous I understand and that makes them problematic to run.
The details mention the former woolies store so you've already got a void on the street. You might want an idea of the plans for that - is that going to be broken into smaller units that would compete with yours in terms of letting or is it likely to be a draw shop like Iceland or one of the poundshops? How much other empty space is there around?
As far as the commercial letting goes, is there a guarantor? Who is the tenant - an individual that might have assets (if you can trace him?) or a limited co that might be folded. A ten year lease isn't much use if the tenant can't pay. You can go after them for payment but it will cost you a fortune in legal fees.
There is a five year tenant break so you only have certainty for another three years (assuming the tenant doesn't go pop). You also get a break at the five year point if you're planning to redevelope.
Negotiating a new lease is likely to cost you in the region of £5k perhaps more depending on the deal you get from your lawyer. Our bulk client's pay just under £5k but that reflects a volume discount. So you'd have to factor that in if you lose the tenant mid-term or at the end of the term when you'll need to renew the lease.
You also need to factor in empty rates - check whether the exemption applies or whether you'd have to pay if the shop is empty.
The details mention the former woolies store so you've already got a void on the street. You might want an idea of the plans for that - is that going to be broken into smaller units that would compete with yours in terms of letting or is it likely to be a draw shop like Iceland or one of the poundshops? How much other empty space is there around?
As far as the commercial letting goes, is there a guarantor? Who is the tenant - an individual that might have assets (if you can trace him?) or a limited co that might be folded. A ten year lease isn't much use if the tenant can't pay. You can go after them for payment but it will cost you a fortune in legal fees.
There is a five year tenant break so you only have certainty for another three years (assuming the tenant doesn't go pop). You also get a break at the five year point if you're planning to redevelope.
Negotiating a new lease is likely to cost you in the region of £5k perhaps more depending on the deal you get from your lawyer. Our bulk client's pay just under £5k but that reflects a volume discount. So you'd have to factor that in if you lose the tenant mid-term or at the end of the term when you'll need to renew the lease.
You also need to factor in empty rates - check whether the exemption applies or whether you'd have to pay if the shop is empty.
Piglet said:
Negotiating a new lease is likely to cost you in the region of £5k perhaps more depending on the deal you get from your lawyer. Our bulk client's pay just under £5k but that reflects a volume discount. So you'd have to factor that in if you lose the tenant mid-term or at the end of the term when you'll need to renew the lease.
£5k? The last lease I paid to have drawn up cost me under £2k. In the City of London. In considerable detail. £5k seems very high for a simple shop lease.Piglet said:
You also need to factor in empty rates - check whether the exemption applies or whether you'd have to pay if the shop is empty.
You only need to let it out for 40 or so days every 6 months to avoid those...skwdenyer said:
Piglet said:
Negotiating a new lease is likely to cost you in the region of £5k perhaps more depending on the deal you get from your lawyer. Our bulk client's pay just under £5k but that reflects a volume discount. So you'd have to factor that in if you lose the tenant mid-term or at the end of the term when you'll need to renew the lease.
£5k? The last lease I paid to have drawn up cost me under £2k. In the City of London. In considerable detail. £5k seems very high for a simple shop lease. Piglet said:
skwdenyer said:
Piglet said:
Negotiating a new lease is likely to cost you in the region of £5k perhaps more depending on the deal you get from your lawyer. Our bulk client's pay just under £5k but that reflects a volume discount. So you'd have to factor that in if you lose the tenant mid-term or at the end of the term when you'll need to renew the lease.
£5k? The last lease I paid to have drawn up cost me under £2k. In the City of London. In considerable detail. £5k seems very high for a simple shop lease. People seem to assume that solicitors' PI insurance will protect them in this case; it won't.
skwdenyer said:
Piglet said:
skwdenyer said:
Piglet said:
Negotiating a new lease is likely to cost you in the region of £5k perhaps more depending on the deal you get from your lawyer. Our bulk client's pay just under £5k but that reflects a volume discount. So you'd have to factor that in if you lose the tenant mid-term or at the end of the term when you'll need to renew the lease.
£5k? The last lease I paid to have drawn up cost me under £2k. In the City of London. In considerable detail. £5k seems very high for a simple shop lease. People seem to assume that solicitors' PI insurance will protect them in this case; it won't.
The commercial terms are mainly agreed at Heads of Terms stage, the lawyers then negotiate the lease wording and ensure that the HoT provisions are reflected correctly in the drafting - at basic levels that includes the "reasonable and propers" in relation to costs etc.; the detail of any break, alienation, rent review, service charge clauses etc. etc. We do get some tenant's solicitors who make no amendments to our leases and that always amazes me, our leases aren't unfair per se but they are obviously landlord friendly.
If you're just instructing a lawyer to act as a postbox then you could probably do the deal without one.
Piglet said:
skwdenyer said:
Piglet said:
skwdenyer said:
Piglet said:
Negotiating a new lease is likely to cost you in the region of £5k perhaps more depending on the deal you get from your lawyer. Our bulk client's pay just under £5k but that reflects a volume discount. So you'd have to factor that in if you lose the tenant mid-term or at the end of the term when you'll need to renew the lease.
£5k? The last lease I paid to have drawn up cost me under £2k. In the City of London. In considerable detail. £5k seems very high for a simple shop lease. People seem to assume that solicitors' PI insurance will protect them in this case; it won't.
The commercial terms are mainly agreed at Heads of Terms stage, the lawyers then negotiate the lease wording and ensure that the HoT provisions are reflected correctly in the drafting - at basic levels that includes the "reasonable and propers" in relation to costs etc.; the detail of any break, alienation, rent review, service charge clauses etc. etc. We do get some tenant's solicitors who make no amendments to our leases and that always amazes me, our leases aren't unfair per se but they are obviously landlord friendly.
If you're just instructing a lawyer to act as a postbox then you could probably do the deal without one.
But in the general sense, no, I pay the solicitor to write the contract, ensuring that the terms of the contract as written match up with the terms of the contract that I want, modified by whatever I've agreed to concede to the other side.But I don't pay the solicitor to negotiate the terms of the contract on my behalf, since in my experience they are mostly far too conservative as regards what is "common practice", and because at the end of the day I have to understand every last provision before I will sign it. The idea that solicitors negotiate between themselves, then send it to me for approval, then I send it back because I'm not happy with what they've negotiated, and so on is just a monumental waste of time and money.
No PII insurance is going to pay out because the solicitor bunged in a few "standard phrases" that the client didn't understand but which then bit him/her later.
A little like the due dilligence thread elsewhere, I'm staggered how many people sign contracts that they don't understand in complete detail.
skwdenyer said:
aThe idea that solicitors negotiate between themselves, then send it to me for approval, then I send it back because I'm not happy with what they've negotiated, and so on is just a monumental waste of time and money.
I'm not sure where you get that suggestion from? I (and my colleagues) work closely with our clients and take instructions and discuss points as we go along. You clearly have a way of working that works for you. I've not come across many commercial clients who work in this way in leasing though but every client is different and what matters is the relationship you have with your lawyer.
Edited by Piglet on Saturday 7th February 16:08
Piglet said:
skwdenyer said:
aThe idea that solicitors negotiate between themselves, then send it to me for approval, then I send it back because I'm not happy with what they've negotiated, and so on is just a monumental waste of time and money.
I'm not sure where you get that suggestion from? I (and my colleagues) work closely with our clients and take instructions and discuss points as we go along. You clearly have a way of working that works for you. I've not come across many commercial clients who work in this way in leasing though but every client is different and what matters is the relationship you have with your lawyer.
Edited by Piglet on Saturday 7th February 16:08
I'm also continually staggered by the number of people I meet who routinely sign contracts which they admit they don't fully understand (not least because they incorporate such nasty legal terms such as "best" which they don't recognise as being different to everyday language) on the basis that "my solicitor said it was OK". As I say, one's solicitor's PII won't cover you for signing something you don't understand.
I'm sure there are solicitors who don't behave like this, but I haven't found one yet, and recommendations IMHO are pretty worthless, for the reasons in paragraph 2 above. Sadly one doesn't really know until one has worked with one and, err, incurred fees.
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