I came across an offer to sell a property in a country town with a 3 X 3 leaseback. The property has three existing buildings, of which one is a house occupied by an employee of the business, one could be converted for residence without much trouble, and one is purpose built for the business. There appears to be room for more buildings or for subdivision, though I haven’t checked on council requirements. Zoning is light industrial.
I think capital growth is problematic and I can’t judge how saleable the business might be in 3 or more years time, which means I can’t judge how likely it is that someone would take over the lease. I can envisage ways to use the land myself, but they’d probably need me to live in the town and I have no idea how possible or likely that will be when the time comes.
So, what level of return do you think might make this a workable deal?
Thanks
Ghoti
Looks like I’m asking a really, REALLY stupid question this time, but I still don’t know if there’s an answer. Can I try breaking it into two parts:
1. Would anyone here consider buying property with a leaseback, or do you think they’re inherently unattractive? For instance, I think I’ve seen someone here posting about “my bank”. Was that a leaseback deal on a closing branch? Would you do such a deal again (if there were any bank branches left to close that is)?
2. In the particular case I was looking at (vendor runs an established business in a regional town), I think the first three years of the lease are solid.. Beyond that, who knows. I think the vendor is genuine about expecting to stay for a further six. I also see a reasonable prospect that the business would sell as a going concern, but if it doesn’t I think I’d have to be actively involved in other uses for the land. I don’t see a prospect of high capital growth. So I think the return in the first three years needs to be higher than average commercial rates to cover the higher than average risk. Is that reasonable? How do I decide how much higher?
Thanks guys?
Ghoti
This is a tough one Ghoti. If the property has other potential uses and users then with a strong return the deal may be worthwhile. But if it is purpose fitted to a singular type of business (such as a bank building, and btw banks are notrious for selling branches on a 3×3 and leaving after the first lease period after getting top dollar for the building) it may be difficult to justify unless returns are fantastic.
Do your numbers and remember that traditionally commercial property should pay higher returns than residential.
Take into account the ages of the owners and whether they still have primary school age children. Many country kids go to cities for high school and follow on to higher education never to return and the parents quite often follow. If it is a butcher shop, forget it. Post Offices and Supermarkets as well as mechanics, auto electricians, panel beaters, welding etc wouwld all be saleable.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
