Putting an Offer In

[locutus]

To continue my previous thread about town centre rents. I contact the agent that is dealing with the shop with £60,000 in rent - something I could not afford by any means. Realistically, I think the place is worth around £25,000-£30,000 a year. My business model would be comfortable around the £12,000 a year mark, so half of what I think the realistic price is.

The agent said the previous tenant was paying that (it was William Hill, so of course they can afford to pay that).

I said to the agent that "I will not be in a position to pay that, now, or ever. If their client would prefer to have an existing and established business in there, and willing to take a much lower rent, then I would be interested in taking this further. But if your client is not willing to consider substantially less in rent, then I would say we would not be able to come to an agreement, and would not be worth continuing the conversation. "

They came back to me, and said "What are you thinking of offering?".

How do I proceed with the next stage? I've never done anything like this before. Do I write an overview of concessions that I would like?

Thank you.

 

[PhantomWeb]

In this situation, just be honest with what you can afford and go from there. They may take the opportunity to just get it let out with COVID or they may say no. No point wasting each other’s time if you are never going to be able to meet on cost.

 

[locutus]

Thanks @PhantomWeb - appreciated, good advice. Following that, I put an offer in, a fraction of what they are asking for. It was what I could afford, and gave a business plan of what I would do to the space. Hopefully, they will tell this is a very serious, and well thought out offer, despite the low offer!

I won't hold my breath though, as I'm asking for a lot.

But the more I think about that space, the more I think it would be great for the business. Who knows!

 

[MikeJ]

GET A SOLICITOR

GET A BREAK CLAUSE.

 

[locutus]

GET A SOLICITOR

GET A BREAK CLAUSE.

No need to use caps, but yes, I will get a solicitor involved with the lease, if they decide to accept my offer, if. Big if.

 

[Aniela]

If William Hill were paying £60,000 a year, then that amount is roughly a realistic price for them to be asking. Just because a business leaves the premises and it's currently empty, it does not mean the realistic price is halved. That includes if it's been empty for 6 months.

The issue you have is that the main 'value' of a commercial property like this is based on the tenant (length/size of business etc) along with rental price.

If they go from accepting £60,000 a year (from a big company) to £12,000 a year (from a little company) they're vastly devaluing the property and would in nearly all cases, be better off not renting it to you; unfortunately. It's extremely likely they would be worse off renting to you, than keeping it empty.

It's just a bad side-effect of how it all works and why you see a lot of shops empty for long periods of time.

 

[locutus]

If they go from accepting £60,000 a year (from a big company) to £12,000 a year (from a little company) they're vastly devaluing the property and would in nearly all cases, be better off not renting it to you; unfortunately. It's extremely likely they would be worse off renting to you, than keeping it empty.

It's just a bad side-effect of how it all works and why you see a lot of shops empty for long periods of time.

Edit: I just heard back from the agent, they said no, not surprisingly.

I agree. Some people are willing to just let their property sit for a while if they don't get their price.

I know someone who has a small residential property portfolio, he rents houses rather than flats, and I know sometimes he will leave the place empty for a couple of years until he gets the right person. He doesn't need the money, so can afford to sit on for a couple of years.

There is a person on YouTube who talks about commercial real estate in New York, and he recently posted a video explaining why landlords are willing to let their buildings go empty for so long:

 

[Maxwell83]

The result was not surprising, but I commend you for trying - if you don't ask, you don't get as they say.

If they rented to you for 1/5 of what the previous tenant paid, it would take them 5 years to get the rent that the previous tenant paid in 1 year. That would be worse than having the property sit empty for 2+ years and having a tenant come in after that at say £55k p/a for a couple of years.

There is also the implications to value by accepting such a low rent; Rent review comparables and also if they ever wanted to mortgage/re-mortgage the building.

 

[Chris Ashdown]

The shop is a asset to the owner and based upon the rent value times a set period. If they drop the rent a large amount then they are having to readjust their assets value, which combined with other shops they own could cause them greater problems with their borrowing powers

 

[locutus]

The shop is a asset to the owner and based upon the rent value times a set period. If they drop the rent a large amount then they are having to readjust their assets value, which combined with other shops they own could cause them greater problems with their borrowing powers

Sure, but an empty shop brings in no money, and in fact costs them money. They have to pay around £16k a year in rates.

But I suppose that brings up another point, if the rent is less than the rates, then there isn't much incentive to take the offer up.

 

[Maxwell83]

Sure, but an empty shop brings in no money, and in fact costs them money. They have to pay around £16k a year in rates.

But I suppose that brings up another point, if the rent is less than the rates, then there isn't much incentive to take the offer up.

Having a high value asset which is bringing no income temporarily can be better than devaluing the same asset, to collect a relatively paltry income.

Long term thinking v short term thinking.

 

[Aniela]

Sure, but an empty shop brings in no money, and in fact costs them money. They have to pay around £16k a year in rates.

But I suppose that brings up another point, if the rent is less than the rates, then there isn't much incentive to take the offer up.

It's just a strange way of how it works but having a small business in there that is very likely to leave within 12 months, costs them more than leaving it empty.

That's even if you paid just enough to cover the rates.

There is a devaluation of the property for starters. Which could affect raising further funds for other projects. Although you would think a tenant adds more value than no tenant, it doesn't as empty vacancies are built into the business model.

Massive opportunity cost to the landlord. Large Company LTD comes along looking for places in the area, offering 4-5x what you pay, per year. That shop is now off limits for a period of time. Landlord has been unable to make 5 years revenue in the same 12 month period, because they've been nice and let it rent out for cheap.

Average rental price lowered. If you start accepting lower rents, that starts to become accepted as the 'average rental rate' and going forward could lose them tens if not hundreds of thousands of pounds over the decades.

Bit of a hard sell to a new large company coming into the space. So the last tenant paid £12,000 a year but you want to charge us £50,000 a year?

 

[Alison Moore]

I guess you could offer a lower amount for a short term tenancy, say 6 or 12 months, if your business model allows you to move premises without massive upheaval. They'll probably say no again, but if they're only committing to a short term they might prefer to get someone in there rather than leave it empty. It's tricky as what they want to charge in rent, and what your average independent company can afford is often vastly different.

 

[Paul Norman]

Respect for asking. You never know.

I am not surprised about their response, but if you had rocked up here saying they accepted it we would all have been lifting our hats in respect!

 

[locutus]

To give people an update. I contacted the agents on Wednesday to reaffirm my interest in the space. I didn't hear anything back. So today, I phoned the agent dealing with this.

His response was a total bs answer as I expected. He said he put the offer to the client, the client said no (no surprise), but then said he didn't think my offer was a serious offer... It was seriously low, at least!

I said of course it was a serious offer, I did a business plan, showing you what I want to, I told you that I wasn't going to offer anything near the rent your client wants.

The agent said that they are in "serious discussions" with other people regarding the space, around the 40-50k mark. I said to him, no disrespect here, I gave you a serious offer, I'm willing to negotiate if your client is willing to negotiate. I also said, they're talking, I'm offering, I'm ready to proceed with this space.

He just said that now he knows I'm serious, he will speak to his client 'again', but will keep me informed if the current talks don't go anywhere... I won't hold my breath.

I just repeated this is a serious offer, and thanked him.

 

[Maxwell83]

What did he mean by "serious"? Did he think that even if the landlord agreed to £12k, you still might not want it?

The seriousness is largely irrelevant if the landlord won't take less than £40k, and you won't pay more than £12k mind.

 

[locutus]

No idea, what he meant by serious. I told him at the very start when I offered the £12k, that it was deadly serious offer.

But I'm not going to waste too much more time on this, I understand my offer was low, but I wanted to come across that I wasn't tyre kicking, and really wanted that space. Maybe he thought I was tyre kicking, and use them to play off against my current landlord.

I said in my previous e-mail to him, we have been at our current location for 20 years, we need a space that can last us another 10-20 years!

It's a shame, as that space is perfect for my needs. I know if my business moved there, it would be a success.

 

[Darren_Ssc]

It's a shame, as that space is perfect for my needs. I know if my business moved there, it would be a success.

When I was looking for new office space 3 months ago there wasn't much on the market. I mentioned to a local associate and within a few days he had a list of 4 that were going to become available because he knows what's going on locally. As it happened, I found my ideal place on gumtree but the 4 he came up with were all contenders.

In short, ask around because not every available option will be advertised.

 

[clould]

I can see why the agent isn't biting your hand off tbh

 

[Socio South West]

@locutus Some inside information... A friend of mine rents a shop unit to William Hill.

They approached her recently and told her basically that she could accept 30% of the rent that was on the lease agreement... or nothing at all.... with about 2 years of the lease to run.

Like everyone else on the High Street, they are feeling the pinch - although already well established in the online stakes unlike many.

 

[Chris Ashdown]

Whilst the big chains are seeming to have the landlords over the barrel at this time, no doubt it will come back to haunt them in the future as landlords will find away to safeguard their lease terms, probably with some form of insurance that the lease will be paid in full at more cost to the leaser at the start of the lease

It's surprising how fast somewhat sleepy businesses can change when their livelihood is at stake

 

[Financial-Modeller]

Another aspect that may not have been mentioned already is that if the owner has borrowed against the asset, there may be lending covenants, including Loan-to-Value, and debt cover ratios.

In this case, even if the landlord wanted to accept a low offer, they would immediately breach the conditions of the loan, requiring refinancing one way or another, which is something that they will want to avoid at this point.

 

[MOIC]

If you think they'll not achieve their valued asking rent (£50k +), submit an offer for the following:

A 3 months license (at 'your' rent), renewable every 3 months, with a 4 week notice period that the landlord can give you to vacate.

This will be ideal for the landlord (in most cases).

It's unlikely that the landlord will achieve the full asking price in the next 1-2 years.

If you don't ask . . . . . .

 

[locutus]

@MY OFFICE IN CHINA

That is a good idea, however, I plan to spend a bit of money to get the shop up to a standard I need.

It needs flooring, electrics, water, toilets, etc. It's one grade above barren the shop. But if I were to just make it a normal shop, it wouldn't be that expensive to do. Just redo the walls, and floors, but some units in, and that's it.

The shop next to mine has been empty for a year, and it's nothing but a shell, no floor, no walls, no ceiling, etc. I thought it might be suitable for me, but requires so much work to do.

I have a meeting with the agents tomorrow, and we're going to discuss the above shop. They seem more willing to negotiate.

 

[MOIC]

Given the above shop condition, you can probably negotiate a one year free period on a 3 year lease. That reduces 'their' rent by a third, which is still too much for you.

Do you need the whole shop? Can you partition and let half (with landlord's permission)?

Next 12 months will be (very) difficult for B&M shops.

Maybe start with a smaller shop that's within your rent 'comfort zone', then expand after 2 years.

That's the prudent thing to do. (If you are convinced you need a B&M shop).

In any event, good luck.

 

[locutus]

I really need the whole shop. The reason I want that shop is because I know we can do what we are/were doing, better. The potential shop, as it is, has slightly less floor space than the current shop. We can make more money from that place, than the current place.

But there is a smaller shop near me, a vape shop that opened up in January/February, that can work for me - it's part of a small chain. They just spent a bit of money refurbishing the store - they did it quite well, and I wouldn't have to do a lot to bring it up to my standard. The reason I mention the vape shop is because since they opened, they didn't have many customers, and since Covid, they have less customers, and don't seem to be open much. There are too many vape shops in town.

However, I really like that shop that we've been talking about. So much potential. I will chase up in a few days and see if they have changed their mind (which I doubt), now they know it was a "serious offer". I would imagine I'm being a borderline nuisance to the agent.

I don't understand B&M I'm afraid.

 

[MOIC]

Bricks & Mortar

 

[Chris Ashdown]

Do not underestimate the high costs of changing a empty shell into a shop and the costs will be very high, and dont think of it as a asset as you cannot take it with you at the end of the lease or sell it back to the landlord