Would you invest in a commerical property with a business included? - Posted by Thurman

Real Estate Investing Triple Net Leases
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Posted by Thurman on January 20, 2000 at 19:46:22:

buying the real estate with a business deal with the idea looking at the real estate as being the main reason for considering investing in a particular deal. And, also, keeping your risk to a minimum by making certain that a real estate property can have other business uses other than the existing business.
That was the very same reason I was thinking about when I mention I would not buy a grain elevator (what other type of business would a person use a grain elevator for except as a grain elevator?).

Ray, concerning this particular deal and if the numbers checked out ok, I was going to sell the restaurant business to a qualified buyer (cash or on terms with secured collateral) and rent the real estate. If the buyer/renter ever decide to leave; I can alway resell the business to a new qualified buyer and rerent the real estate. This concept is alot like a “Lonnie deal” except instead of selling a mobile home and renting the lot, I’m selling a turnkey business and renting the building and land!

Again, Ray, thanks for your response to my questions.

Your friend,

Thurman

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Would you invest in a commerical property with a business included? - Posted by Thurman

Posted by Thurman on January 19, 2000 at 10:19:04:

Hi fellow investors!

Yesterday, I received my first direct response to my magnetic signs posted on my car doors. As I was filling my car tank with gas at a out of town gas station, a man ask me if I would be interested in buying a cafe located in a small town; lock, stock, and barrel (business, inventory, and real estate). Normally, I’m not interested in buying a business, however, since real estate was included with the deal and not wanting to miss a potential opportunity to make some money, I told him that I would talk to him in a few days as I was booked up with other potential deals in another county at the present time.

This business consists of being a small restaurant, with seating capacity of about 30 people, located on a state highway in a very small town of about 600 people. I have eaten there once and the food was good. It is the only restaurant or cafe in town and is popular with the town people (on Friday evening, fish dinner night, there are people standing outside waiting to get inside). The owner told me that his wife was getting tired of the long hours and wanted out. They have had a couple of people interested, but couldn’t get financing. The asking price is $40,000 (that is what he said he paid and so he just wants to get back his investment) and he said he would consider carrying financing with a large down payment. At the present time, this is all I know about the property. I will do “due diligence” on the property next week.

Now to the point of this post; disregarding this particular deal, generally speaking, what are the advantages and disadvantages to buying real estate with a existing business. Let me say in conclusion that are some real estate with existing businesses I would not touch with a “ten foot pole” such as: service station, dry cleaner, oil and gas distributor, or a grain elevator.

Thank you for your time and consideration on my question.

Your friend,

Thurman

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Thank you for your replies, however, I may not have made myself clear. - Posted by Thurman

Posted by Thurman on January 20, 2000 at 24:21:54:

I’m not interested in buying a business and especially a restaurant because that would be investing money to buy a JOB! The point I was trying to make was, as a real estate investor, to determine if there was a opportunity to make money by buying the real estate property (land and building) plus the existing business (restaurant) and turn around and resell the business for cash and/or with seller financing and rent the real estate to buyer of the business.

And since I have a great deal of respect for many of my fellow investors and value your opinions, I was wanting to know what were the advantages and disadvantages of buying real estate with an existing business, not just this particular business but with any existing business.

Again, thank you for your replies to my post.

Your friend,

Thurman

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Re: Would you invest in a commerical property with a business included? - Posted by Ray (NJ)

Posted by Ray (NJ) on January 19, 2000 at 13:11:54:

Actually, my main “business” is businesses, not real estate (actually just getting started in REI).

Unless you’ve successfully run a business “absentee” before, or plan on devoting FULL time to the business, don’t buy it. UNLESS, the real estate alone is worth the value, and you can sell/rent the business.

I’m not saying that you won’t be successful, many people do it all the time. Just realize it is not like anything else you’ve ever done. It requires a lot of time and energy. If you’re main business is REI, or something else (dreaded J.O.B.), I can guarantee they’ll suffer, because your attention WILL be diverted. Having said all that, if your dream is to own a cafe, go to it. There is nothing like owning your own business (that’s meant both good AND bad). ; )

Oddly, the businesses you mentioned you wouldn’t touch: service station, dry cleaner, fuel distributor are some of the absolutely, unequivocably, undoubtedly BEST businesses in terms of cash flow, income and net worth. However, they are some of the hardest and dirtiest and deserve 120% attention.

ray@lcorn has it right, though. I, personally, wouldn’t touch restaurants with a 10’ pole. WAY too much risk, huge capitol outlay, way too much reliance on employees, etc.

Best of luck!

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Add restaurants to your list - Posted by ray@lcorn

Posted by ray@lcorn on January 19, 2000 at 12:05:27:

Thurman,

I wouldn’t touch the deal, but as anyone here will tell you I have a real sore spot for restaurants. I hate them. To me there is just nothing good about them. If you own it be prepared for long hours, unreliable help, slim profit margins, little to no barriers to entry for competition, a hundred ways to lose and few to gain. To top it off, everybody that walks in the door, including your employees, are experts on what you are doing wrong. My policy is that I don’t want to hear the word restaurant and my name in the same sentence.

I’ve also had the experience of owning the facility and leasing out the business. Another loser. My rent became subject to the ups and downs of the restaurants cash flow, and whether the guy paid his child support that month. At the end I was collecting rent by the week, and the guy still couldn’t keep up. I chose to evict him rather than go to daily collections.

Ask Ed Garcia how I feel about restaurants. He made the mistake of offering to buy me lunch at a franchised restaurant of the same type I lost $386T on. And we built that deal from the ground up. I think I ruined his lunchtime nostalgia as well.

I would possibly consider a restaurant as an investment if I owned only the real estate and leased it to a national chain with a strong balance sheet on a triple net basis. But even then I want a premium return for my investment because it’s a special use building, and most chains can’t meet those terms. I just recently refused an offer from Ruby Tuesday’s that wanted a ground lease on one of our properties. We were fifty thousand dollars apart on the annual rent. That’s a pretty significant difference.

Give me the dry cleaners or the service station anyday. I can get indemnification from the tenant on those risks. And if you are really aware of environmental issues, ask the restaurant guy what he’s doing with his grease. If it goes into a tank out back, you’ll have to pump it and monitor it just like any other.

Whew, I get the shivers just talking about a restaurant.

ray

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Re: Thank you for your replies, however, I may not have made myself clear. - Posted by ray@lcorn

Posted by ray@lcorn on January 20, 2000 at 13:41:23:

Thurman,

Sorry I missed your point. You got the Pavlovian response imbedded in my brain with the trigger word of restaurant. I’ve calmed down now (Look Nurse Ratchit, I’m being nice) and will try to answer your question!

In so far as a real estate deal makes sense as a real estate deal, a business that sits on it can be looked at as something that produces a stream of cash flow. As with any income property. the value of the real estate/business is determined by the risk and effort required to maintain the income stream. The higher the risk and/or effort, the higher the expected return should be, and the lower the price. That is the basic thinking that goes into determining an appropriate cap rate.

In the case of a piece of real estate with a business on it, the value then is determined by how many ways that building can produce income other than the way it is producing it now. In short, the more specialized the use, the higher the cost of adapting the building to some other use, therefore the higher the risk and effort to maintain the cash flow, and hence the higher the price. Certain factors, like the credit of the tenant, can mitigate the risk/effort involved. That will decrease the amount of return necessary to justify the investment, and produce a higher price.

On an average commercial property (e.g. convenience store, laundromat, beauty shop, tanning parlor, etc.), I look at the property in terms of what other kind of business could be successful there if my present tenant fails. the more different kinds of businesses that could utilize the location, the more that location is worth, just as a real estate deal. A site that was useful to a number of different businesses will command a higher rental rate than others, and since our value is a function of the income, a high demand site is worth more. Make any sense? (I get the feeling I am not explaining this very well.)

In the case of whether or not it is profitable to attempt to also sell the business, I would think it would be a matter of particular circumstances. I certainly would not want to be in the position of having to run the business if the buyer failed. I would set the deal up to make sense as a real estate investment first. Surprise, surprise. I would want to sell the business in such a way that any financing carried would be otherwise secured. Beyond that I would just have to evaluate on a case by case basis.

Hope this helps.

ray

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Ray, ONCE AGAIN…right on target - Posted by Dirk Roach

Posted by Dirk Roach on January 19, 2000 at 18:24:38:

Hi Ray,
One of my earlier PI (Pre-intelligence) business was a small coffee house. This was back in the day before the whole starbuck thing had kicked off.
Thing is I am not a fan of either coffee or teenagers. So what was I thinking??? I have no idea.
I swear I learned more about “real-world” city politics etc. From that entire affair.
Zoning Variances, city depts., health depts., and even the state handicap folks gave me a such a fun, fun time.
Oh yeah, I had a partner in that whole thing too, more and more lessons.
Employee theft etc. It was like quicksand. It just kept pulling me down.
On the service, one would think that we were doing fairly okay, the place was always packed, but looking at the numbers and balance sheets, I just kept scratching my head. Again these were PI (pre-intelligence) days.
After taking a loss of about 75% of what I begged, barrowed etc. to get the thing going, I cashed out and went home. Vowing never, never to be in the food service business again.
So I agree ONCE AGAIN with a Ray Alcorn perspective.
Can’t wait to hear you speak at the Convention in Atlanta.
Everyone needs to bring a separate pad of paper to take notes because you always have a ton of great info/advice.
Dirk

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Re: Thank you for your replies, however, I may not have made myself clear. - Posted by Jim Holmes

Posted by Jim Holmes on January 21, 2000 at 24:05:44:

Ray,

Thanks for your comments. I’ve got deals coming out of my ears in my location. Today a close realtor friend of mine proposed a partnership with an individual starting a business. I’m still gathering (always gathering) facts to analyze the deal. I was concentrating on cash flow and timelines to get in, take profit and get out. Thanks to your post, I see the bigger better picture. I think now I will structure my investment to capture the physical property and possibly take a smaller portion of the cash flow to secure it. If the business goes South, then I’ll control and own the store, not the highly depreicable (undepreicable tax-wise) merchandise.