Film-Tech Forum ARCHIVE: Lease Purchase for Theatre Property?

This is topic Lease Purchase for Theatre Property? in forum Ground Level at Film-Tech Forum ARCHIVE.

To visit this topic, use this URL:
https://ft-forum.com/ft/cgi-bin/ubb/ultimatebb.cgi?ubb=get_topic;f=5;t=000431

Posted by Barry Floyd (Member # 385) on 01-29-2002, 09:21 AM:

Has anyone ever dealth with a "Lease/Purchase Contract" regarding commercial real estate?

I've found an old drive-in site that could be reopened very easily, but the owner wants to "lease" us the property as opposed to sell it to us. If we entered into a lease, I would want the option to purchase the property at the end, or have a portion of our payments applied to a fixed purchase price.

I've searched around for some information on "lease/purchase" contracts, and they seem like a very large "rent-to-own" deal.
Am I far off in the "rent-to-own" comparison?

As I understand it... The existing owner still "owns" the property, I would have control of the property with a smaller payment than an outright purchase, he (the existing owner)still makes a monthly income, and at the end of the lease, I would own the property.

What am I missing?

------------------
Barry Floyd
Floyd Entertainment Group
Nashville, Tennessee
(Drive-In Theatre - Start-Up)

Posted by Richard Fowler (Member # 893) on 01-29-2002, 10:54 AM:

You are missing a lawyer who knows real estate..........lease purchase contract can be written to favor the seller or buyer / tenant.
Richard Fowler
TVP-Theatre & Video Products Inc. www.tvpmiami.com

Posted by Jerry Chase (Member # 660) on 01-29-2002, 11:44 AM:

Even a lawyer who deals in real estate may not know enough to put together a satisfactory deal. I did a wrap mortgage on an old home of mine and the attorney used a standard form that didn't have provisions for late payment penalties other than foreclosure. I've since hired another attorney to sort out the mess.

It pays to ask questions up front and never take anything for granted. In real estate what goes on the document is usually the last word. Since this type of document is public record, you may be able to read samples at a county courthouse to get an overview of what is customary.

If an owner wants to lease rather than sell, he probably wants to build equity and sell the property himself at the end of the lease when the values go up. You may not be able to make a deal unless you share in profits when you resell the land.

Posted by Josh Mitoska (Member # 1086) on 01-29-2002, 11:45 AM:

I bought a theatre that way once before, I had a tripple net least. That meant, I was responsible for paying all the upkeep, all the insurance, taxes and everything else. And I still made the monthly payment. The option to buy at the end of the lease is for the original purcahse price. Let's say the drive in is $100,000 and you pay $2500 a month for a year. At the end of the first year lease, you have paid the owner $30,000 for using his property for a year, and if you want to buy the property at that time the price is still $100,000. I'd recomend getting a 5 year lease that is renewable every year for five years, with the option to buy at any time. This was if ater the first year, you have not made a profit, or lost money, you can simply disvolve the lease and go on your merry way with out having to worry about making any more payments or having to sell the property. One word of warning, any upgrades you do to the property while you lease it stay with the property if you leave. So if you sink $50,000 into new equipment, you most likely will not be able to take it with you when you leave. Deffinatley get a lawyer though-

Posted by Barry Floyd (Member # 385) on 01-29-2002, 01:00 PM:

OK, here's what I've been able to achieve so far.

The existing drive-in property, in it's current state resembles a small junk yard. About 20-30 old junk cars scattered across the property, and other assorted scrap metal & junk. The concessions/projection building is still standing, but is in a very bad state of disrepair. The existing box office/ticket booth has fallen down and it's remains are overgrown in a thicket of vines and weeds. All of the parking ramps are still in place, as are some of the old speaker poles. The screen tower is gone, but the foundations are still in place. The septic system for the drive-in is currently shared with a 3 bedroom rental house (which was once the owners residence)and more than likely I would need to install a new separate system.

We already have all of our concessions/projection equipment, and will only need to replace the AW-1 platter to get up and running. The AW-1 still works, but I'm not willing to bet a full field of paying patrons on it.

The existing owner is willing to offer us a 25 year "lease" on the property. I would more than likely have to replace both the ticket booth and the concessions/projection buildings and erect a new screen at my own cost, and hope to recover the expenses during the life of the lease. I've checked the county tax assesors office, and the land for the drive-in is valued at $39,000.00 (that's what the current owner pays taxes on).

When this old drive-in closed back in the 70's, all of the highway road frontage was sold off to another business, and I would have to aquire a minimum of 50 feet of highway road frontage to get proper zoning in place. I have met with the owner of the business currently on the edge of the highway, and he said he is willing to sell me the necessary road frontage I need to get the place open.

The current owner is in his late 70's, and has several grown kids. One of his daughter's is hospitalized and he was hoping to use the income off the lease to pay for her care after he is gone. My worst fear is that once he is gone, his kids could sell the property out from under us, leaving us with the debt of the improvements and nothing to show for it. He's afraid of the capital gains taxes if he sells it out right. If I owned it, I'd rather sell it, pay the small amount of taxes on the profits, and invest the dividends and live off the interest.

We are heading to Orlando/Kissimee, Florida this Sunday to spend a week at the "United Drive-In Theatre Owners Association 2002 Conference" and will be speaking with other owners and operators from around the country. We hope to gain some knowledge from the other owners, and get their input on this situation as well.

------------------
Barry Floyd
Floyd Entertainment Group
Nashville, Tennessee
(Drive-In Theatre - Start-Up)

Posted by Mark Gulbrandsen (Member # 72) on 01-29-2002, 01:41 PM:

Barry, With that many junk cars and who knows what else, I'd certainly get the EPA out there to do an inspection and see about contaminated soil, groundwater. If you bought the place and it was found after the fact it could turn into a big mess(pun intended!)And you might not be able to make use of the land at all till you did a very expensive clean up. Junk yards are notorious for destroying the integrity of a given plot of land.
Mark@ GTS

Posted by Barry Floyd (Member # 385) on 01-29-2002, 01:50 PM:

Mark, I thought of that too. When I spoke with the owner, I specifically asked about "undeground storage tanks, soil contamination, etc.". Most of the junk that's out there is hospital equipment. The current owner is a pack rat and never throws anything away. He's the type that's always looking to make a deal. He said he and a buddy of his went to a VA Hospital surplus equipment auction and bought most of the stuff to sell off the scrap stainless steel. Once he bought it, he never did anything with it. If anybody out there needs 150 +/- broken wheel chairs, I know where you can get some. The cars on the lot are just sitting there. There not parted-out or anything, it looks as if he just drove them out there, parked them and walked away.

------------------
Barry Floyd
Floyd Entertainment Group
Nashville, Tennessee
(Drive-In Theatre - Start-Up)

Posted by Ian Price (Member # 14) on 01-29-2002, 02:16 PM:

First get a lawyer, but we paid our lawyer as much as your property is worth just to help us negociate our lease.

Second, how about offering the present owner twice what the property is worth if the owner will self finace at todays ridiculouslylow interest rates? In this way he would get a regular income without the big on-time hit on capital gains.

Posted by Dave Bird (Member # 490) on 01-29-2002, 04:53 PM:

Yep, Ian's got it! Have the vendor hold the mortgage, lock in at low rate with option to purchase outright after 5 years, or renew for 5 X 5 (30 years total). Or stand firm, and let him know you're willing to look elsewhere at which point his land is worthless. This guy stands to make more invested than he does on holding a mortgage though, what are they at down there, 5-6%? It's his last chance to sell it, how many people are building drive-ins? Your gut is right, don't lease without at least an option to buy.

Posted by Jonathan M. Crist (Member # 413) on 01-29-2002, 08:25 PM:

The owner's concern of capital gains taxes is either exaggerated or misunderstood. There are ways to structure a deal to minimize capital gains taxes.

First of all, based on what you are saying the value of the property is basically in the land, not the buildings. Land is not depreciable so that the owner has at least some tax basis in the land. Capital gains are computed on the difference between the owner's tax basis for the asset and the sales price. In the sales contract you would then allocate the majority value to the land. You take a deed (would require some down money e.g. 10 or 20%) with the owner holding the mortgage. Each payment would comprise some interest and a payment of princple. Under the installment sales rules for capital gains taxes, each year the owner only recognizes that portion of the gain as the amount of the principal payments bears to the total principle purchase price. By speading the payments out for ten to fifteen years, the capital gains tax bite is minimized.

Dont do a lease if you have to significantly improve the property.

Posted by Richard Fowler (Member # 893) on 01-29-2002, 09:09 PM:

Major improvements to a property which is not portable ( such as equipment you supply that is not held in lien or embargo by the lease contract ) many lease givers love. I had a client in the early 1970's who specialized in ownership of cinema properties ( over 200 situations ) in which the real value he received was in the "failures" of his leaseholders in improving his properties...I am reminded of him every day ( long dead...very, very rich ) by passing by one of his former properties, held in a family trust, on the route to my office.
Richard Fowler
TVP-Theatre & Video Products Inc. www.tvpmiami.com

Posted by Frank Rapisardi (Member # 435) on 01-30-2002, 07:36 AM:

Try to purchase the drive-in outright. Leases in my judgement are usually a pain.Who's to say that somewhere down the road;that they might sell the property.If you do lease it get a good laywer and have a legal contract drawn up that would state how long the property would be least to you.The longer the better!Also make shure that the owner of the land does not want a percentage of what you take in.In some cases with leases the more you make the more they want! Leases are sometimes based on this premise.Be careful.Afer all you don't want a situation where you are in reality working for the landloard!

------------------

Posted by Barry Floyd (Member # 385) on 01-30-2002, 08:55 AM:

All very good replies.

The closer this thing comes to reality, the bigger the lump in my stomach becomes. My wife and I know the risks involved, and are willing to take them to get the theatre open. My family (parents & sisters) are already preparing for us to be in bankruptcy court.

Everything we would do involving this property would be highly contingent upon several issues.

1.) Traffic & Zoning Approval
2.) Acquiring the necessary road frontage from the other business owner.
3.) Bank financing approval
4.) Septic System approval

My family says there no market for drive-in's anymore, but I feel much differently. The area we're looking to open this theatre in is very underserved for any type of entertainment. There is a small run-down indoor theatre on the other side of town and is hardly ever busy.
They do no advertising whatsoever, and from the looks of the theatre no maintenance either. We would be the closest drive-in theatre to the greater metropolitan Nashville area.

------------------
Barry Floyd
Floyd Entertainment Group
Nashville, Tennessee
(Drive-In Theatre - Start-Up)

Posted by Barry Floyd (Member # 385) on 02-22-2002, 01:49 PM:

We met with the owner of the old drive-in I've mentioned in the above post last night and tried to work out some numbers on a lease for the theatre property.

The existing buildings have no value per say, as they are crumbling and falling to the ground. The only benefit his land has to offer us is the fact that the ramps are already in place, and maybe a few of the locals know there was a drive-in theatre there at one time.

Our dilema is.... how much of a lease are we willing to pay just to gain his existing ramping? The county has the lot (9 acres) apparaised at $39,000.00 - the market value of the lot is closer to $60,000.00. We've repeatedly asked to buy the property, but he is not willing to budge. We have been advised by an attorney, that if we do deside and go with a straight lease to form an "Limited Liability Corporation" and enter the lease agreement and pay the lease payments through the protection of the corporate veil.

He asked me to throw out a number of what we'd be willing to pay "per month" for the lease of the land -and we offered somewhere between $500 - $600 a month. He counter-offered with $1,000.00 a month. Then he offered to take a percentage (25%-30%) of the net profits as payment for the lease. I wasn't really interested in the percentage offer and have pretty much dismissed it as an option. We would possibly consider $700 - 750.00 a month, but no more. Keep in mind, we will have to pay for the improvements to the property from our own pockets.

If we go with the lease/lease purchase, I want to do it on a fixed 10 year lease with 3 five year renewable options like someone else mentioned earlier.

Would we be better off to go ahead and proceed with the negotiations with him, or look elsewhere and build our own ramping?

------------------
Barry Floyd
Floyd Entertainment Group
Nashville, Tennessee
(Drive-In Theatre - Start-Up)

Posted by Ian Price (Member # 14) on 02-22-2002, 02:29 PM:

$1,000 per month lease in 10 years is going to look like such a bargain.

Posted by Dave Bird (Member # 490) on 02-22-2002, 09:29 PM:

Is the municipality open to re-zoning other parcels for use? If open farmland can be used, a couple days with a grader will get you ramps, considering there's nothing else there for you, and you'll have to build it, I think you want to own this land. Plus, this fellow may soon buckle once he knows you're prepared to go elsewhere.