You and two business partners are considering the purchase of the following commercial investment property:
Commercial Property:
Estimated purchase price: $600,000 (building only) Type of property: Mixed-use Units: 3 residential second floor Apts. — (A)1,500 sq. ft., (B) 1,250 sq ft and (C) 850 sq. ft. 3 retail ground floor Units, with separate entrances, 1,200 sq. ft. each. Lease Information:
Residential Apartments: All residential units are rented. Retail Units-annual rental revenues: Each Retail Unit is under a month-to-month gross (MTM) lease. Other Information:
The property is subject to a 50 years ground lease (all property interests reverts to the seller at the end of the ground lease). The property purchaser with pay the seller an annual ground lease payment of $20,000. Each investor will purchase a 1/3 interest in the investment. Provide your business partners with the following information:
What type of leasehold estate is a ground lease? How does the ground lease impact their property ownership? Besides obligation to pay the ground lease rent, are there any other expenses they would have to pay? What happens to property / investment at the end of the ground lease term? Is there an option to renew the ground lease? If not, how may it be included? Identify the characteristics of other commercial lease types that may provide greater rental income by charging common area maintenance costs (CAM) to the tenants. Provide a recommendation of a lease type that will maximize their retum on investment.
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