Advice on a Rent to Own Commercial Property

[Michelle P Stafford]

Hello all,

I'd like some advice from the group of experienced investors. Here's my situation in short details:

Bought a commercial property for $699K in 2019 through a 1031 exchange which cash flowed beautifully until late 2022 when the tenant bankrupted and moved out. 

Property has been on the market to sell or lease every since (and clearly bleeding cash!)

Now: Interested tenant  who would like to purchase the building but unable to come up with a loan. Last month they stated they had secured an SBA loan but that fell through. Would like me to carry the loan which I would be open to but my bank is not ok with this (I owe approx. $300K as I put a hefty amount down through that 1031 exchange).

Current offer on the table proposed by my broker:

$600K Purchase price

7 year lease with option to purchase within 3 years for an amount equal to $600K less what they would have otherwise paid in principal under under a 7% loan for the same period). 

They pay monthly rent that’s equal to a 25 year loan of the entire $600K at 7%. ($4,241)

No money down. 

According to him the Market Rent = $19.43 NNN and after 3 years if they do not purchase I could sell it.

Thoughts? Ideas? Is this crazy or a good idea considering it's been on the market for a year with only a couple nibbles? All responses appreciated!
TIA

[Melanie P.]

I would offer them a lease and invite them to make an offer on the property anytime in the future when they are actually in a position to buy it. Make sure you carefully evaluate the credit quality of this tenant prior to leasing to them. I'm feeling red flags here.

[John McKee]

I agree with Melanie.  Just lease it up and maybe give them first right of a refusal when you feel like selling it.  You may not get the same rent as you did with the prior owner but at least you can stabilize the property in the short term, pay down the mortgage and reassess in 5 years.   I've been in your shoes!  

[Dave Foster]

@Michelle P Stafford, Any type of calculation of rent that includes a consideration of what principle they would have paid if they bought it, or corresponds to a payment amount of a loan could be considered an equitable interest in the real estate.  And in a tenant friendly state that can turn an eviction into a foreclosure.  

[Nick Maugeri]

Quote from @Michelle P Stafford:

Hello all,

I'd like some advice from the group of experienced investors. Here's my situation in short details:

Bought a commercial property for $699K in 2019 through a 1031 exchange which cash flowed beautifully until late 2022 when the tenant bankrupted and moved out. 

Property has been on the market to sell or lease every since (and clearly bleeding cash!)

Now: Interested tenant  who would like to purchase the building but unable to come up with a loan. Last month they stated they had secured an SBA loan but that fell through. Would like me to carry the loan which I would be open to but my bank is not ok with this (I owe approx. $300K as I put a hefty amount down through that 1031 exchange).

Current offer on the table proposed by my broker:

$600K Purchase price

7 year lease with option to purchase within 3 years for an amount equal to $600K less what they would have otherwise paid in principal under under a 7% loan for the same period). 

They pay monthly rent that’s equal to a 25 year loan of the entire $600K at 7%. ($4,241)

No money down. 

According to him the Market Rent = $19.43 NNN and after 3 years if they do not purchase I could sell it.

Thoughts? Ideas? Is this crazy or a good idea considering it's been on the market for a year with only a couple nibbles? All responses appreciated!
TIA

Doesn't seem worth forfeiting your autonomy. A lease with the option to purchase at market rates makes sense for right of first refusal if they have money to deposit. If they don't, it likely makes more sense to lease it and then have them purchase it when they are able to. If they are not able to purchase, you should still sell it with the lease in place to someone else - so ensure that rate is not discounted.

[Melanie P.]

The problem with offering a ROFR is it makes the property more difficult to market because most buyers don't want to negotiate a good deal on behalf someone else. My husband used to demand ROFR on adjoining space in office buildings. Almost always that space remained vacant until he was ready to expand into it. 

[Michelle P Stafford]

Thanks for everyone's advice here!

Update: In a more favorable market I would have waited before committing to this deal which I agree has some yellow/red flags. However, being that it's been unoccupied and just bleeding cash for over a year now I decided to pursue it. The rent will more than cover my bank loan and with the NNN lease the tenants will be covering all the other expenses.

Fingers crossed it all works out. Lawyer approved!