40 units with a Land Lease

[Matt66]

We are looking at a 40 unit complex that you lease the land it sits on. Does anyone have any experience in this type of deal? Has 80 years left on a 99 year lease. In my opinion, the property would be worth less as the lease drags on, but I dont know how these work.
I am guessing hard to finance too, but the seller is willing to hold the note.
Thanks, Matt

[Rich_in_CT]

If the owner will hold the note and it cashflows at the purchase price I don't see why it would be a problem.  When its time for resale I think most buyers that can afford a 40 unit building are sophisticated enough to understand a land lease and won't be frightened away by not understanding.  I don't understand why you think the land would be worth less as the lease drags on, the gross rents would continue to go up and the lease is 80 years away from expiration (any buyer will long be dead before that point).

[Matt66]

It is the renewal of the lease that would concern me. It is not that the land would be worth less, but the buildings would be. While me and my kids will be long gone, any buyer would have to be concerned with what cash you put into it as the lease ticks down.
If it were a no money down deal I would not be to concerned. Any potential buyer at any point in the future would have some sort of skin in this deal, including us.
The Panama Canal had a 99 year lease too.
Matt

[Rich_in_CT]

Even if the lease expired and your heirs were stuck with a non-renewed lease you would have paid the building off 10 times over in received rents and made a handsome profit.  You could have also built up a good chunk of cash that you can use to make an offer on the land.  Is the land owner open to the thought of you purchasing the land in the future or is he happiest with his monthly cashflow?  What about renegotiating some sort of lease option deal that allows you to build credit towards buying it in 10 yrs or so?  If you make an offer to renegotiate the lease to be a lease option I would offer him something like 25% over what you are paying now (this answers the what's in it for him to renegotiate question) with 50% or so rent credit.  Ex-  Monthly payment now $1000, offer him $1250 a month but with a $625 a month credit towards future purchase.  Right now the $1000 a month is going away never to come back, if you pay $250 a month extra you are getting $625 back so you're still more than doubling extra you're kicking in.  If you took that $250/mo and put it in the bank could you get a  250% return in 10 years?

[Matt66]

You are actually quite right. I was thinking I need to look at it as buying a business on leased property, instead of buying real estate, because that is basically what it would be. Most stores whether it be Walmart or a Starbucks are on triple net leased ground. They dont seem to be too concerned about the lease.
Still, its a different concept to someone who likes to own the dirt.
Thanks, Matt

[Rich_in_CT]

Never forget that any term is negotiable....