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When creativity outweighs dollars

1 September, 2015
Categories: Commercial, Investments

The current acquisition I’m working on got me thinking about creative ways to make money without necessarily spending money. So let’s use this example to illustrate a few keys steps to creating value.

The subject property is a vanilla shape, well-maintained and in a decent location with a great tenant. But herein lies the problem… the great tenant has a short lease. With only 2 years left on the lease many buyers wouldn’t give this property a second glance because of the uncertainty in 24 months’ time.

Think again.

When most others look away, the clever guys start asking questions.

Questions like:

  • How long has the tenant been in the building?
  • What is the ideal amount of space for this tenant?
  • What is the vacancy rate in the area?
  • Are there any other proximate vacant properties of comparable size and shape?
  • How much rent are they paying and is it comparable to the market rent in the area?

When you start digging you find some interesting information… It turns out the tenant has been there for 14 years AND they have already extended their lease once. This would lead me to assume they quite like the premises.

Dig a little deeper… Having a look at the surrounding area I found there isn’t a lot of other available/suitable space of the same size, position and with the same convenient access. This would lead me to assume they haven’t got many other options to move to when/if their lease expires.

Dig deeper still… From analysis of some other properties in the area it appears they are paying a very high rent. Now is this a problem? Or an opportunity?

I prefer to see opportunities, as this information would lead me to assume the tenant would love to reduce their rent and might consider a ‘deal’.

Insert light bulb moment – Would the tenant consider extending their lease to maybe 8 or 10 years if I offer to reduce their rent?

A property with a longer lease becomes a much safer asset and there’s a good chance this might increase the value. Ask yourself, would you pay more for a building with a 10 year lease to a good tenant or a 2 year lease to a good tenant.

Then it simply becomes a question of: If I offer to reduce their rent, is the reduction in rent greater than the potential increase in value. If so, then the costs outweigh the benefit. If not, then the benefits outweigh the cost and you’re ‘in the money’.

Take a little bit of research. Add simple maths. Sprinkle some creative thinking and you might find yourself ‘in the money’.

Disclaimer to readers (because it’s better to be safe than sorry): Any reliance placed upon the information provided in this document, and the appropriateness of opinions, assumptions and qualifications used, is a matter for your own commercial judgement.  No representation or warranty is made that any projections, forecasts, values, assumptions or estimates contained in this document can or will be achieved.

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