Friday, November 6, 2015

Buying Commercial Real Estate - In the Future

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Owning a building is in your future, but not in your immediate future.

You have carefully considered your company's growth projections, bankability, and available cash and have determined that leasing a building makes more sense today than owning a building.

You do, however, want to reserve the opportunity to own the building you are leasing.

So what alternatives are available to you if you want to lease today and potentially own in the future?

You have one of several ways to structure future ownership into your lease agreement.

Option to Buy. An option to buy grants to you as the tenant the right to purchase the building in the future. Some options include a fixed price. Other options are based upon the market price at the time. Generally, a market option has a mechanism included on how the market price is determined. Options to buy are typically personal - meaning that they cannot be assigned to another person. Time is of the essence with an option to buy - you must declare your intention to buy (exercise the option) within a certain time frame or the option can go away. Options to buy benefit you as the tenant more than they benefit the owner. You are in control of when and if the option is exercised and the owner must oblige your desire. Sometimes, the rent you pay prior to exercising your option can be applied to your purchase price. Additionally, some owners require option consideration - a sum of money to reserve the option - which is lost if you decide not to buy the building.

Right of First Refusal. A right of first refusal gives you the right to match an offer to purchase that the owner receives. Most of the time, the owner must present a bona fide offer to you from a third party and you have a certain number of days to meet the terms of the offer. The marketplace dictates the timing of the right which is the biggest downside of a right of first refusal - you don't control when you get to buy the building - only that you get a crack if the owner decides to sell.

Right of First Offer. A right of first offer gives you the first kick at the can in the event an owner decides to sell his building. Similar to a right of first refusal, the timing of a right of first offer is dependent upon the motivation of the owner and not necessarily when you are ready willing and able to buy the building.

An unwritten agreement. The reality is that if an owner wants to unload the building and you are his tenant, he will generally approach you first to gauge your interest in buying the building. After all, you have occupied the real estate for a period of time and have your operation entrenched in the building. You are generally his best buyer.