Working on purchasing a commercial building with existing tenants. One of the tenants is the owner’s sister with extremely low rent compared to the market. In fact, the whole building has rent below market. The owner expects that a buyer would assume all the lease agreements. That would drive the cash flow negative. Anyone have ideas, solutions, or experience with this situation in the past?

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Either the sales price changes or legally increase their rent if possible? The owner should be calculating the roi for the new owner with their ridiculous price with the current rental income. Can’t ask a buyer to assume low rents while demanding highest market value

likesmart

Definitely read into your state's laws around how often and how much you can raise rents. Some don't have any restrictions, while others state that you can raise it more than x% per year.

Also, read through each lease to make sure someone in particular doesn't have a very favorable lease. Something possible would be that she has the right to renew or something fishy. Don't assume that her lease was written like everyone else's, nor legitimately; speaking from experience.

Another big thing will be the estoppel. Ensure that all security deposits and fees are accounted for. You don't want to be caught holding the bag for refunding people with funds that were never transfered over to you.

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I’m not a real estate developer, but go talk to a real estate cpa or someone else who knows real estate development financials. I used to work at the IRS. Farms and real estate have the most beneficial tax, grant, and subsidies in America. This is why you hear all those stories about real estate developers doing everything they can to show losses every year

Farmers do this thing where they trade assets and labor with each other (Eg, land in exchange for equipment) and end up building up these massive multimillion dollar farming systems yet still show losses every year

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That’s usually how it works. Leases in place must be honored. A lot of commercial leases are based on the potential of the property, not the current revenue. Many Landlords notoriously hate raising rent, but that doesn’t mean you can’t discount the offer price accordingly.

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Offer price should be where your cash flow is positive. How many units in the building?

Absolutely. It’s the way to go. It’s all managing. risk & reward.

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Only thing you can do is wait until the leases are up and then increase the rents. If you purchase the property with existing tenants you have to honor their lease agreements.

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