Commercial Real Estate Lease - is this reasonable??

[marriedup 73]

My 83 year old dad has signed an LOI to lease some property to a developer of a Publix store and associated retail strip. The LOI appears to me to be very one sided- and I told my dad that but he signed it anyway. Details are - a suburb of Birmingham, a little over half an acre, 25 year lease starting at $4k per month and increasing 10% every 5 years. There is currently a car lot on the space. I dont know anything about commericial real estate in Alabama, but 25 years to a major project starting at $4k per month seems grossly low. He says he talked to a commerical realtor but I dont believe him - should I wait to really cause a stink when the actual lease is presented, or is this a fairish deal?

[Bevo 13,904]

1 hour ago, marriedup said:

My 83 year old dad has signed an LOI to lease some property to a developer of a Publix store and associated retail strip. The LOI appears to me to be very one sided- and I told my dad that but he signed it anyway. Details are - a suburb of Birmingham, a little over half an acre, 25 year lease starting at $4k per month and increasing 10% every 5 years. There is currently a car lot on the space. I dont know anything about commericial real estate in Alabama, but 25 years to a major project starting at $4k per month seems grossly low. He says he talked to a commerical realtor but I dont believe him - should I wait to really cause a stink when the actual lease is presented, or is this a fairish deal?

I can tell you that I was going to purchase property next to a proposed HEB off of Parmer and (maybe) 2243 and it was going to cost a fortune - like Austin prices just because of a proposed HEB. HEB didn't have to follow through build. Look it up on Loopnet, though. As for the contract terms, I am sure that your dad got screwed. 

[marriedup 73]

that is what I was thinking - seems like a senior getting taken advantage of. 25 year lease wtf - I'll be dealing with it a lot longer than he will.

[troph 25,241]

Lawyer up and consider the pain of renegotiation - the LOI isn’t enforceable by design most likely but it will be PAIN to renegotiate. Alternatively walk, or take the deal. Leverage outside the LOI is most important what are his other options, what is the tenant’s other options. But you’ve basically got to get in there and assess , figure it out and deal with it. I will say in the best light 10% increases sounds like a loss leader early and possibly market or better later. But it could just be a steal. Make sure you have terms that protect if they want to move down the street 10 years later. Classic issue is percent rent or something and no noncompete type clause and the big box builds new down the street and you've got nothing of a claim. That’s one of a dozen major issues. Not sure the details either maybe it’s a ground lease with build to suit but at the tenant’s cost? That might explain lower rents? I dunno. Absolutely need to lawyer up and negotiate a legit lease agreement. I’d go so far as to evaluate the economics and shame them for taking advantage of a senior if it made sense. Could mean the deal is gone though. 

Edited May 29 by troph

[orange dream 1,302]

Is this property that will pass to you upon his death?  If so, is it you alone or a group of siblings?  troph is obviously correct but if your old man is of sound mind and determined to "handle" this himself you are probably fairly powerless to implement any of the good advice unfortunately.

[TonyTexas 10,785]

It seems like the adequacy of the deal can’t be determined without doing comp research. Nobody here can give OP an informed opinion unless they are Birmingham real estate expert. 

[Mach 1 1,677]

17 hours ago, marriedup said:

My 83 year old dad has signed an LOI to lease some property to a developer of a Publix store and associated retail strip. The LOI appears to me to be very one sided- and I told my dad that but he signed it anyway. Details are - a suburb of Birmingham, a little over half an acre, 25 year lease starting at $4k per month and increasing 10% every 5 years. There is currently a car lot on the space. I dont know anything about commericial real estate in Alabama, but 25 years to a major project starting at $4k per month seems grossly low. He says he talked to a commerical realtor but I dont believe him - should I wait to really cause a stink when the actual lease is presented, or is this a fairish deal?

$2/sf PY sounds absurdly low, but as other have said need local comm broker to weigh in on that.

i can say the 10% every 5 is very common for a corporate real estate ground lease. Most Fortune 500 insist on it if they are on the lease (leveraging credit guarantee).  However this was before recent inflation spike so that term may have loosened up.

[Fico 1,806]

This sounds like a ground lease so the 25-year term, is actually rather short. Theoretically, they are leasing the ground and if the ground lease isn't renewed you the vertical improvements would revert back to the land owner. What kind of renewal clauses are included in the LOI?  Although half an acre is too small to support a grocer and retail center.... are they trying to acquire/lease this parcel as part of assemblage? What is the full scale of the project? Is his land going to be used just for parking?

I know nothing of land values in Alabama, but the dominate retailers and grocers are always going to drive the market. Does your dad own any other adjacent land to this tract or does this deal encompass all of his holdings? If he owns more, the value of the those parcels are sure to increase significantly with the use being proposed.

Edited May 29 by Fico

[marriedup 73]

1 hour ago, troph said:

Lawyer up and consider the pain of renegotiation - the LOI isn’t enforceable by design most likely but it will be PAIN to renegotiate. Alternatively walk, or take the deal. Leverage outside the LOI is most important what are his other options, what is the tenant’s other options. But you’ve basically got to get in there and assess , figure it out and deal with it. I will say in the best light 10% increases sounds like a loss leader early and possibly market or better later. But it could just be a steal. Make sure you have terms that protect if they want to move down the street 10 years later. Classic issue is percent rent or something and no noncompete type clause and the big box builds new down the street and you've got nothing of a claim. That’s one of a dozen major issues. Not sure the details either maybe it’s a ground lease with build to suit but at the tenant’s cost? That might explain lower rents? I dunno. Absolutely need to lawyer up and negotiate a legit lease agreement. I’d go so far as to evaluate the economics and shame them for taking advantage of a senior if it made sense. Could mean the deal is gone though. 

this is very helpful - per the LOI  it is a ground lease that gives tenant right to make improvments. tenant has renewal option every five years. 

56 minutes ago, orange dream said:

Is this property that will pass to you upon his death?  If so, is it you alone or a group of siblings?  troph is obviously correct but if your old man is of sound mind and determined to "handle" this himself you are probably fairly powerless to implement any of the good advice unfortunately.

the property is in a trust with my dad as signer. He is, in my opinon of sound mind, but was fairly defiant about signing the LOI. Both my sister and I told him to wait so we could further investiage, so he signed it the next day.

[marriedup 73]

2 minutes ago, Fico said:

This sounds like a ground lease so the 25-year term, is actually rather short. Theoretically, they are leasing the ground and if the ground lease isn't renewed you the vertical improvements would revert back to the land owner. What kind of renewal clauses are included in the LOI?  Although half an acre is too small to support a grocer and retail center.... are they trying to acquire/lease this parcel as part of assemblage. What is the full scale of the project? Is his land going to be used just for parking?

I know nothing of land values in Alabama, but the dominate retailers and grocers are always going to drive the market. Does your dad own any other adjacent land to this tract or does this deal encompass all of his holdings? If he owns more, the value of the those parcels are sure to increase significantly with the use being proposed.

this was one of my questions to my dad - is the land going to be a right of way or is it going to be developed on? I dont think he was completely sure of the answer as he just repeated Publix and retail strip. He does own some of the surrounding area with his brother, which is not in this trust, and I'm not sure if its a separate part of this deal that his brother is working on. 

[troph 25,241]

yes it makes a lot more sense now as a ground lease and I agree 25 years is short for a ground lease, they are usually longer but maybe the options give the tenant what they want. it is sounding a lot less egregious but you still need local help to confirm rates are market.  then you need to lawyer up for the lease agreement. don't get a paper pusher, get a deal lawyer with CRE experience.