Selling a commercial property & lease back?
Discussion
I currently own a commercial property that has been recently valued at £330k. The commercial surveyor told if I put it up for sale it would sell very quickly as its surrounded by a bank, greggs etc and is directly facing a supermarket.
I have been looking at the idea of selling the unit to release the capital (and pay of off old debt) then rent the unit on a normal lease. I have done a search online but it seems to only bring up these “quick sale” schemes that offer crap deals.
Does anyone know of any companies who would look at this kind of deal and pay a fair market value?
I have been looking at the idea of selling the unit to release the capital (and pay of off old debt) then rent the unit on a normal lease. I have done a search online but it seems to only bring up these “quick sale” schemes that offer crap deals.
Does anyone know of any companies who would look at this kind of deal and pay a fair market value?
This is a normal transaction in the commercial field - called sale and leaseback. Several large companies have done this on a big scale including most of the banks and firstquench (there is a pattern).
Yield likely to be anything between 7.5% and 10% depending on where the property is, how long a lease, how secure a tenant you are and most importantly the rent.
Market Value in this circumstance has nothing to with the value of the building (within reason) and more to do with the amount of rent that you pay. The cowboys who operate in the resi world would not normally get involved.
As an example (I'm going to cheat and use 10% as a Yield)
Rent = £20,000 - x YP 10 = £200,000
Rent = £30,000 - x YP 10 = £300,000
This is very simplified - there are costs to take account of that will affect the final outcome.
The best person to approach is probably a local commercial agent, preferably one who is chartered. Look at www.rics.org. Try and find one who deals with investment property's - it's very likely that they will know of someone who would be interested.
Expect to be tied into a lease for ten years, and take account of the restrictions that not owning the property would cause.
Yield likely to be anything between 7.5% and 10% depending on where the property is, how long a lease, how secure a tenant you are and most importantly the rent.
Market Value in this circumstance has nothing to with the value of the building (within reason) and more to do with the amount of rent that you pay. The cowboys who operate in the resi world would not normally get involved.
As an example (I'm going to cheat and use 10% as a Yield)
Rent = £20,000 - x YP 10 = £200,000
Rent = £30,000 - x YP 10 = £300,000
This is very simplified - there are costs to take account of that will affect the final outcome.
The best person to approach is probably a local commercial agent, preferably one who is chartered. Look at www.rics.org. Try and find one who deals with investment property's - it's very likely that they will know of someone who would be interested.
Expect to be tied into a lease for ten years, and take account of the restrictions that not owning the property would cause.
Speak to a surveyor to gauge a rent and lease terms, the one who will eventually sell it. Get a lawyer to draft a lease. Pop it on the market. If your business is reputable and established you might be able to raise a little extra cash by putting a longer term on the lease / increasing the rent - this is what a number of firms like First Quench did with the their off licences, and then they went bust. There is no typical buyer at this end of the market but the selling agent (surveyor) will have a phone book full of them. Or find out from people in the street if there is a dominant landlord and speak to them. It is a case of good old fashioned horse dealing rather than there being much science. Setting up a lease is pretty cheap (£500) and selling agent will charge 1% of proceeds. Just some rambling thoughts...
Do also consider whether you'd be better taking out a mortgage on the property to raise capital rather than sale ane leaseback. In Davids example above you'll see that after 10 years you'll have spent all the capital received on rent payments.
However its worse than that as his example doesn't take into account rental growth. If we assume rental growth at 5% an a review after 5 years on a 10 year lease the details will be as follows: -
Rent £20,000 Capital Value £200,000
Rent payments yrs 1-5 £20,000 pa total £100,000
Rent payments yrs 5-10 £25,500 pa total £127,500
Total rent payments £227,500
In reality you'll probably get more than 10 times the rent for the freehold but you can do the sums.
As the rent goes up so does the capital value, could create a nice pension fund if you keep it!
However its worse than that as his example doesn't take into account rental growth. If we assume rental growth at 5% an a review after 5 years on a 10 year lease the details will be as follows: -
Rent £20,000 Capital Value £200,000
Rent payments yrs 1-5 £20,000 pa total £100,000
Rent payments yrs 5-10 £25,500 pa total £127,500
Total rent payments £227,500
In reality you'll probably get more than 10 times the rent for the freehold but you can do the sums.
As the rent goes up so does the capital value, could create a nice pension fund if you keep it!
I would have thought at this end of the market the idea of a S&L is too sophisticated ? Isn't it just an investment property. Bigger market than no lease in place, "do it once terms agreed guv ?" type. Just a thought. If I was speaking to someone in this position I would undervalue as you know they are exposing themselves to a more limited market than a standard investment property. How would you market it - "you choose the terms of the lease" - not going to happen. You would rather be in the driving seat with fixed terms in a signed lease I would have thought?
Chris mentions Pension fund - something which I am a bit wary of. It's a great way to build up a fund in a tax efficient way, but they do have their disadvantages as the flexibility to do what you wish with the property evaporates - all transactions must be at market value - and you do have to back that up. It's an option, but you need to have your eyes wide open.
Chris also points out that sale and leaseback can be a shortsighted route and he is right. If your going to do it then you should have a strategy in place to ensure that you can deal with the rental growth and replacing the opportunity cost.
If you do one of these deals - at £330k value that is plenty big enough for sale and leaseback. You obviously will not get a large pension fund, more likely a local player in the property market.
You takes your money in terms of negotiation. But ultimately the Capital Value comes from a simple equation of rent and yield. No investor is going to give give you £330k on your terms, unless you load the deal in their favour straight off. Would not recommend doing that though.
Chris also points out that sale and leaseback can be a shortsighted route and he is right. If your going to do it then you should have a strategy in place to ensure that you can deal with the rental growth and replacing the opportunity cost.
If you do one of these deals - at £330k value that is plenty big enough for sale and leaseback. You obviously will not get a large pension fund, more likely a local player in the property market.
You takes your money in terms of negotiation. But ultimately the Capital Value comes from a simple equation of rent and yield. No investor is going to give give you £330k on your terms, unless you load the deal in their favour straight off. Would not recommend doing that though.
Please be aware of what you a signing yourself up to. You are going to have to sign a lease of 10 to 15 years (to make it attractive) where you will be responsible for the rent, rates and maintenance of the building. If you decide you've had enough, assigning your interest may not be as easy as you think. It can take years, and if rents drop you'll have to pay someone to take your lease. You lose all flexibility.
In the current market, you're unlikely to add that much value to the property by signing a 10yr lease to yourself, over what you'd achieve if you sold it vacant to an owner occupier. You've said yourself that you need the cash to pay debts, so I'm taking it your accounts don't look that healthy - investors and banks will want to fully investigate your co.'s future. So you may achieve a small premium (if any) but at a significant cost - 10yrs liability. S&L's were very popular in the boom as investors only saw the upside, people are now alot more wary.
Alternatives:
1. Take a mortgage to cover the debt - Santander, Barclays, and Handelsbanken are all in the market at the moment.
2. Sell the property vacant and move. You could possibly negotiate a 5yr lease, with 3yr break and 6to9 months rent free in the current market in an alternative property. However, no doubt the cost and disruption to your business would be prohibitive.
In the current market, you're unlikely to add that much value to the property by signing a 10yr lease to yourself, over what you'd achieve if you sold it vacant to an owner occupier. You've said yourself that you need the cash to pay debts, so I'm taking it your accounts don't look that healthy - investors and banks will want to fully investigate your co.'s future. So you may achieve a small premium (if any) but at a significant cost - 10yrs liability. S&L's were very popular in the boom as investors only saw the upside, people are now alot more wary.
Alternatives:
1. Take a mortgage to cover the debt - Santander, Barclays, and Handelsbanken are all in the market at the moment.
2. Sell the property vacant and move. You could possibly negotiate a 5yr lease, with 3yr break and 6to9 months rent free in the current market in an alternative property. However, no doubt the cost and disruption to your business would be prohibitive.
The reason I am looking to raise funds is to pay off a couple off term loans which were taken out by my brother 3 years ago. He has since stopped paying the loan repayments which means I need to pay over £1500 a week as they have a charge on my building.
I did ask the bank to transfer the full debt to me, switch it to a commercial mortgage and let me reduce repayments to something more manageable but it seemed to fall on deaf dears as they kept telling me it would be put into review.
Before all this began my credit rating was fine but due to this it has now been pretty badly affected with a couple of CCJs (satisfied) and a number of defaults on small things like car and phone payments (again all satisfied)
I would be far better off in the position of paying a £20k a year rent as opposed to the 72k the bank want from me.
Thanks for all the feedback once again!
I did ask the bank to transfer the full debt to me, switch it to a commercial mortgage and let me reduce repayments to something more manageable but it seemed to fall on deaf dears as they kept telling me it would be put into review.
Before all this began my credit rating was fine but due to this it has now been pretty badly affected with a couple of CCJs (satisfied) and a number of defaults on small things like car and phone payments (again all satisfied)
I would be far better off in the position of paying a £20k a year rent as opposed to the 72k the bank want from me.
Thanks for all the feedback once again!
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