Expert: Terrence Cullen - 1/27/2009

Question
Hello Terrence,
I am grateful for your attention and value the objective and educated opinion you can lend. I face a decision to move my office, having been renting for better than 20 years, in fact being the first tenant in the building. As such, I have no lease obligations, and am motivated now, more than any time before by the floor beneath me being rented to the County for the main probation offices; as well as the now glaring indifference to my long loyalty and dependability as a early paying, non demanding, not problematic tenant. This indifference I mention is seen in sudden and effecting changes to policy, maint., parking rights and most offensive , the changes to the overall look, feel, safety, and impression that came to be with the installation of the less than desirable neighbor 1 floor below. This turn is more significant than it may read, and I am not looking down to anyone despite how this may paint me to be.
This said, I am trying to decide whether to find a new renal, or to make an investment in one of the home/office conversions that dot the downtown area where I currently rent. The area is very desirable, is ideal in its location for my needs and I am thinking that the market is favorable for a buy, given that i do not have anything that I must sell prior to making any buy. This choice is clouded however by the pinch felt in researching options for finance, given the current state of the credit markets. Factors that would traditionally serve one well in the past, ie: excellent credit, significant assets and operational stability on record, both personal and the business.; these mean little if the banks have little interest in any new loans or if they would, it is offered at terms and in ways that seem outrageous to me.... seemingly counteracting any gains represented by a buyers market. Fast forward to now, I have identified a property that will work for me, offers some degree of flexibility for room to grow, and in the location I spoke of, that promises at some time, eventually, to be a gem given its proximity to high end developments and being central to the downtown central biz district. A point I cant ignore is that it sits at the end of its block, roads on three sides, which tells me at some point when the block is redeveloped to highrise buildings like those that surround it now, this spot will serve as the drive way for such a building, as I said,... eventually.
I have tendered an offer and have found the option for a lease, with option to buy, with owner finance for 5 years, at 6%, 30 year amortize. Also, the option will call for 10K non refundable deposit at lease inception, and 1000/month to accrue in escrow account for lease term, giving the opportunity to accumulate some of the future amount required at option exercise. When exercised I will pay an additional 15K, making my total down at 61K, on a property secured now at 550K... and I'll not have to seek traditional finance for at least 8years, (3year lease+5yr owner fin.)
My question finally, is how can I judge these facts, as well as how can I best approach such issues as seller/vs/buyer or landlord/tenant obligations to repairs, during the time that I am technically a renter, albeit with every intention to exercise the option to buy?
What basis can I start from to know what is reasonable to ask for, what is to be expected and when or if I am paying too much or am not getting what the current market suggests I could? An important note here is that apparently the owner has no mortgage so seemingly has no motivation to bend too much as a result of this position.

I apologize for the lengthy explanation, perhaps follow up details will be needed, which I will be happy to provide. This hopefully can paint the picture in general, and may hold enough info for you to offer some level of guidance. I have asked others whom I have respect for their opinion and who have relevant experience to offer advice, yet I have concerns at times that some of the advise offered has built in, some notion of bias and a slant to serve some of their other motives.
Again, thanks for the time taken to read this far, and many thanks for any perspective you can lend.


Answer
Steve,
  The terms you describe for an owner occupied space are very appealing (option for a lease, with option to buy, with owner finance for 5 years, at 6%, 30 year amortize). You need to clarify whether the 10k is interest or capital reserve or a down payment. Ideally, you would like it to be an interest or capital reserve that will be escrowed at a prevailing interest rates until the lease purchase option is exercised.
Also, at the end of three years you would like to be able to opt out with any remaining monies of the initial $10,000 to go to interest payments.

   You need to establish the value of the property? What is the current  
proforma and the current market rent? Where is it located? What is the square footage? etc.

  Overall, the rates are more than fair, but you need to establish whether the value is correct and if you can get an out after a couple of years without losing the 10k.

 Just because the owner doesn't have a mortgage, doesn't mean he isn't anxious to make a deal. With the current market conditions, cash is king.

Good Luck,
TC