Posted by Zach on May 22, 2006 at 20:56:49:
I would say your better off taking the property down. I don’t think lenders will be as likely to lend you development/construction costs, if they will at all, on land you do not own or that they do not have as security to back up their loan. Sent you an email with further details…
Commercial Land Leasing vs Buying - Posted by Steveb
Posted by Steveb on May 21, 2006 at 19:04:13:
I am working on buying a piece of property to build a mixed use retail/condo project. During negotiations the sellers mentioned that they would consider leasing the property and allowing me to develop on top of it. I have never considered this before but if I could save capital and use it to push the development through that would be great. What would be a good lease agreement if the property would sell for 1.3m? Should I even consider something like this or just take the property down?
Re: Commercial Land Leasing vs Buying - Posted by ray@lcorn
Posted by ray@lcorn on May 25, 2006 at 12:29:19:
Steve,
Those deals are done all the time, but the sticking point is usually over the terms.
The buyer (you) will need a subordinated ground lease, which allows the construction lender to be in first position, and not subject to the terms of the lease.
Most sellers want an unsubordinated position, and the lender won’t accept being behind the lease because if you default on the ground lease payments they have to assume the obligations to protect their loan.
However, it sounds like you have a seller who will accept payments rather than all cash. That’s something to work with, whether in a lease or installment sale. The selling point for any subordinate position is that the priority position for the loan is being used to improve the property, hence enhancing the value of the collateral and their position. Often you can work around this by agreeing to a defined exit strategy, such as a balloon payment five or so years out.
Just remember, no one sits down at a closing table unless they think they will be better off when they get up from the table. Your job is to devise a “can’t lose” structure that addresses that.
ray
p.s. For more on structuring deals, see Terry Vaughan’s article titled “The 60-second Real Estate Course” at http://www.creonline.com/articles/art-040.html