Most businesses given a chance would prefer to own their building one day rather than continuing to lease from another. Even if you have strong cash flow to support a conventional loan with more favorable terms, having to come up with a down payment of 20% - 30% of the purchase price could prove to being a stumbling block stopping the application progress.
If you still wanted to buy a building and without a conventional loan, you would need to turn to other options such as, Alternative Lenders, Hard Money Loans, Private Lenders where all are short term, higher interest rates with interest only loans with a balloon payment for the full mortgage amount due at the end of the loan that just may not work for you as it could place your business in greater jeopardy to fulfill that short term obligation.
Without having the monies for a down payment to get a conventional loan and the alternative options proving to be too risky and to avoid sitting on the sidelines letting opportunities and tax benefits from slipping away, what are your options?
This Is Where The Master Lease Comes Into Play: A Master Lease brings together many of the opportunities and benefits of both ownership and leasing under one agreement:
Imagine the opportunity to enter into a lease agreement with the exclusive right to use the building in a manner similar to ownership with the right to control and operate the building during the lease term without debt on your balance sheet and without involving banks or lenders or an appraisal. Within the lease term the Lessee will exercise their right to purchase the building.
Equitable Title will be established that refers to the actual exclusive use and enjoyment of a given property without real, absolute ownership. Equitable title ensures that you will have future access to the property after fulfilling your end of the agreement and in this case, exercising the option to purchase the building and transferring title. After fulfilling your end of the agreement, you will gain the rights that come with the legal title.
Sometimes you need just a little more time to get your down payment together and a Master Lease provides both the opportunity and the time needed to generate equity buildup and to get your cash together that will be required for an eventual purchase of the building with your new loan. During the agreed upon lease term the sale price will be pre-determined no matter how much the property value has increased.
A security deposit will be required and like a down payment will be credited against the purchase price.
Difference Between A Typical Lease And A Master Lease:
Under a typical lease agreement, as long as you pay the rent on time you have the right to use the leased premises without participating or benefiting from the equity buildup and property appreciation of the building during the lease term that you helped to create.
Under a Master Lease things are different. During the lease term the Lessee benefits from value appreciation and equity buildup from the time the lease begins until the time the lease ends when exercising the right to purchase.
Master Lease With The Rights Of An Owner:
The right to sub-lease the building at your own discretion and keep all rental income in excess of the agreed upon rental payments.
Maintain 100% control over the operating expenses and how the building is operated.
Maintain control of the building image and appearance.
Rental payments are 100% tax deductible as they are under a standard lease.
With a master lease any Leasehold Improvements can depreciated over the lease term whereas if you owned the building, you would have to depreciate over your commercial property's 39-year life where this ability to accelerate depreciation significantly increases your tax deductions. This will allow for the Lessee to depreciate all of the leasehold improvements prior to taking over ownership. Note: Consult your tax advisor for all benefits applicable to your own intended operation.
As The New Building Owner:
Once you exercise your right to purchase and legal title transfers,you will start to receive the benefits of ownership related to taxes and other business deductions.
Master Lease Opportunity For A Canal Waterfront Building: Available Now and because it is a lease agreement first leading to a sale, any deal reached can be concluded fairly quickly
Building size: 21,120 gross sq. ft.
BUILDING CLASS B
Zoning: B-1 General Retail Office District. The zoning is flexible allowing in addition to retail and office uses for multiple other uses from a bar and restaurant, entertainment, motion picture and theatrical playhouse, food sales including supermarket, medical and other health services, dance studio and school, child and adult day care center, preparation and processing of food and drink to be retailed on premises including bakery, delicatessen, meat market, confectionery, restaurant, ice cream parlor, soda fountain and more allowing for greater use diversity and opportunities.
Note: The following are a few of the Conditional Permitted Uses: Rented apartments above businesses (This has been approved as the owners live in the building as their primary residence), Bed and Breakfast Inn and a Hotel. Currently the City Zoning Department is looking at changing the zoning over to Mixed Use that in addition to the existing uses it will allow for the development of Multifamily and other residential uses.
Security Deposit:Representing 6 months of rental based upon the last year of the lease term that will be credited towards the purchase price at the time the right to purchase is exercised. If a 3 year lease term = $45,000 and a 5 year lease term = $51,000.00.
Lease Terms 3-5 Years:
Monthly Rental: The monthly minimum payment per each consecutive month for both a 3 year and a 5 year lease term are as follows:
Year #1: $7,000 minimum payment per each consecutive month
Year #2: $7,000 minimum payment per each consecutive month
Year #3: $7500 minimum payment per each consecutive month
Year #4: $8,000 minimum payment per each consecutive month
Year #5: $8500 minimum payment per each consecutive month
Note: Taking into consideration that this Master Lease agreement is entered into by and between the parties with the express conditional understanding and expectation that Lessee will exercise their right to purchase the building, there will be a credit of 100% of the lease payments amount that will be applied towards the purchase price. EX: For illustration purposes only, with a 100% credit given, each monthly lease payment in the amount of $7,000 per month in year #1 equals $84,000 over the 12 month period and if the right to purchase is exercised and the title to the building is transferred to Lessee at the end of that time frame, the purchase price of $1,275,000 will be reduced by $84,000. This format will continue with each applicable lease payment in each specific year. Any and all payments made in excess of the monthly minimum amount will also receive the full credit to be applied towards the purchase price. By applying 100% of the lease payments to the purchase price, buyer is essentially making payments towards the purchase of the building interest free where all payments go directly to the purchase price.
Even though you do notOWN the building, you CONTROL it. You are now working for yourself directly benefiting from any upside in both cash flow and appreciation. Whether you are an investor taking the steps to maximize your investment or you will be an owner occupied building, the lease payments are now going towards benefiting your investment while both occupying and using the building through the date title transfers to you.
Building Sale Price: The current sale price as of November 21, 2018 is $1,275,000 or $60.37 sq. ft. that will be adjusted in each subsequent year by 2.5% over the previous year total.
Year #1: $1,275,000 = $60.37 sq. ft.
Year #2: $1,275,000 X 2.5% = $1,306,875 = $61.88 sq. ft.
Year #3: $1,306,875 X 2.5% = $1,339,547 = $63.43 sq. ft.
Year #4: $1,339,547 X 2.5% = $1,373,035 = $65.01 sq. ft.
Year #5: $1,373,035 X 2.5% = $1,407,361 = $66.64 sq. ft.
The Right to Purchase:
During the lease term Lessee will have the right to purchase the building and the Master Lease agreement is entered into by and between Lessor and Lessee with the express understanding and condition that Lessee at sometime during the lease term will exercise their right to purchase and that title to the building will be transferred to Lessee within the term of the lease. Lessee can provide a written notice at any time during the lease term exercising their right to purchase with the exception that within the final lease year that the written notice must be given no later than at least six (6) months prior to the ending of that final year and title shall be transferred prior to the last day of the lease term.
In the event Lessee does not exercise their right to purchase the building and title to the building does not transfer to Lessee during the term of the lease, that will constitute a breach of the agreement and in addition to remedies available to Lessor, the credits applied to the purchase price from any and all monthly rental payments made shall become null and void and the security deposit shall be forfeited in it's entirety without off-set in favor of the Lessor.
Real Estate Taxes, Building Insurance and all Operating Costs: With the exclusive occupancy and use of the building, any and all expenses related to the use, operation, maintenance and repairs including required capital expenditures shall be incurred and paid for by the Lessee from the commencement of the lease term through the date the legal title is transferred to Lessee by exercising their right to purchase.
The building is currently being operated by the owners where they both live in the building and operate live entertainment venues from an Escape Room, Team Building among others. Based upon these operations the following are the operating expenses, real estate taxes and building insurance on an annual basis:
Real Estate Taxes -$4773.00 or $.23 sq. ft.
Building Insurance -$2603.00 or $.12 sq. ft.
Trash service -$228.00 or $.01 sq. ft.
Elevator Inspections/permits -$1285.00 or $.06 sq. ft. Includes $360.00 that is budgeted each year towards the required every 5 years live load test.
Repairs and maintenance -$2400.00 or $.11 sq. ft. Note: Almost all repairs and maintenance items are performed by the owners and those that need to be performed by others are bartered exchanging the use of the building in lieu of making a monetary payments. The number is what an estimated cost would be.
Electrical Usage-$3600.00 or $.17 sq. ft.
Gas Usage-$1440.00 or $.07 sq. ft.
City Water and Sewer - $720.00 or $.03 sq. ft.
Total - $ 17,049.00 divided by 21,120 sq. ft. = $.81sq. ft.
According to CoStar the nation’s #1 commercial real estate research organization they looked at the net effective leasing base rates for both office and retail spaces over the previous 3 year period 7-1-2015 TO 8-8-2018 within Stark County, Ohio (Market) where all deals were included regardless of size from the lowest to the highest that resulted in the averages.
Office Space:Average leasing cost for the past 3 years = $ 11.08 sq. ft.
Retail Space: Average leasing cost for the past 3 years = $ 10.93 sq. ft.
Cap Rate average for Retail sales over a 3 year period = 7.36% Cap Rate average for Office sales over a 3 year period = 8.45%
Building Gross sq. ft. = 21,120 sq. ft.
Leaseable area = 18,880 sq. ft. As identified by the Stark County Auditors office where the difference of an additional 2240 sq. ft. can be added to the total Leaseable sq. ft. with some modifications.
Based upon $10.93 sq. ft. base rental rates and 18,880 sq. ft. leasable area.
Potential Retail Income: $206361.00
Vacancy Factor 5% - $10,318.00
Actual Expenses = $ 17,049.00
Net operating income = $178,994.00
If the 7.36% average cap rate of Retail sold over a 3 year period was used, the price of the building based upon the Net Operating Income= $2,431,984.00.
If the 8.45% average cap rate of Office sold over a 3 year period was used, the price of the building based upon the Net Operating Income= $2,118,272.00.
In the following pro-forma the Operating Expenses have been grossed up to 30% representing 3.63 times more costs than actual to fit more traditionally operated property scenarios for comparison:
Based upon $10.93 sq. ft. retail average.
Potential Retail Income: $206361.00
Vacancy Factor 5% - $10,318.00
Expenses at 30% =$61,908.00
Net operating income = $134,135.00
Cap Rate -10.52% based upon sale price of $1,275,000
Note:If the 7.36% average cap rate of Retail sold over a 3 year period was used = $1,822,486 and the average cap rate of Office sold over a 3 year period was used =$1,587,396 or using the 10.52% against the proforma using the actual operating expense numbers the price of the building would be = $1,701,464. Even by grossing up the operating expense figures and using a cap rate somewhere between 7.36% or 8.45% and 10.52 % places the value of the building far above the current sales price of $1,275,000 representing the upside potential.
Existing inventory and Equipment: Within the building are tables and chairs, kitchen equipment, walk in refrigeration, walk in freezer and other items that can be made available under a separate purchase agreement.
Location: The building is located along the Ohio & Erie Canal in the downtown Historic District of Canal Fulton, Ohio. The backyard is the Ohio & Erie Canal and the Stark County Park District where the Canal Towpath extends 110 miles from downtown Cleveland to New Philadelphia attracting an estimated 2.5 million visitors where an estimated 1.3 million or 52% visit the Stark County section behind the building. The Canal Towpath and the Tuscarawas River both run through the downtown attracting those who want to walk, jog, bike, fish, boating, nature watching and photography and much more where the community’s branding identity is OHIO’S GATEWAY TO OUTDOOR RECREATION. The community is known for hosting major foot and bike races from local to national. The Canal Towpath is in the process of being designated as a national bike route in addition to the city and county working together with the intention of designating and creating both bike and pedestrian friendly lanes to move around within the city.
For the first time the Convention & Visitor Bureaus and the County Park Districts from Cuyahoga, Summit, Stark and Tuscarawas Counties will be working together along with the two canal groups where one area of focus is the Ohio & Erie Canal as the canal attracts outdoor recreation that attracts Millennials. As a result of these efforts a new canal business niche will be created that will make this community a destination location with the opportunity of being in a position to control this market niche and this building is in the heart of it.
Historic Tax Credits Available: The Ohio Historic Preservation Tax Credit provides a state tax credit up to 25 percent of qualified rehabilitation expenditures or QREs and the Federal program provides 20% where they can be stacked for up to 45%. In general, a dollar of tax credit reduces the amount of tax owed by one dollar with a maximum $5 million in Ohio state tax credits. EX: $100,000 spent on approved QREs x 45% = $45,000 or $1 million spent on approved QREs x 45% = $450,000 in tax credits, etc.
High Speed Fiber Optics: High speed internet connectivity is becoming a major factor in where a business will decide to either lease or purchase and this fiber optic internet connectivity is available to being brought into the building.
Building Expansion: At the south side of the building is an existing garden area that opens up from the lower level of the building. Currently it is being used as a garden area whereas in the past our previous liquor and food licenses extended providing an outdoor setting for food, drink and entertainment. This area has direct access to the Ohio & Erie Canal waters and abutting to the property is an adjacent Conservation Buffer Zone to encourage species diversity that is part of the Canal Lands that is owned by the county. The garden area could be converted to an expansion building of approximately 12,000 sq. ft. with the views looking West over looking the canal waters.
If you are interested in the building you can find additional information and photos on both the building and the community by clicking below. If you have any questions you can email me or leave the message at the contact information below.