Currently, we are looking into a deal in a very pretty commuter belt village. The property is a little odd in that it comprises of a whole block but it is being sold by way of a lease.
The block comprises of four residential properties all producing income and a commercial in the ground floor; with the upper floor empty and ripe for conversion.
According to the lease, the freeholder is due 14% of the open market rental. There are of course stipulations on how this is to be worked out, and the protocol in the event of a dispute.
I have never come across a lease such as this before. The reason why we are focused on this deal is because the masses only purchase plain vanilla, anything slightly outside the box is cast aside.
However, in current times there is an abundance of information. The end value of a property can be found out in minutes. You can also, wrongly – in my opinion, find out who owns a property, who the lender is and when they took out the mortgage.
In this kind of environment where information is flowing freely, it is very difficult to find the edge in terms of say a lower purchase price.
They do occur, usually with the three Ds, namely Death, Distress and Divorce; but even then, the margins are not what they used to be.
Therefore, when you come across something which is not plain vanilla, it is worth taking the time to understand the property.
You only actually know what you are buying for sure when the legals are being done. Up until then you are fed what the agent understands he or she is selling; and often their bandwidth is not very deep, therefore they are likely to not give an accurate description, especially on a property like this.
We have taken the trouble to read the lease inhouse, and had one lawyer comment on the lease. We are still not satisfied, and therefore are now getting a second lawyer to comment before we issue terms.
Our ultimate aim for this deal is to use a process known as collective enfranchisement. This allows the majority leaseholder to force the sale of the freehold.
There are stipulations and a process to be followed of course. This would then change the deal from an ‘irregular’ property deal to a ‘proper’ freehold property.
This would then trigger mainstream lending and uplift the value substantially. This can all be achieved without picking up a hammer.
We will need to understand if this is possible with the way this lease has been written, and then the quantum involved in purchasing the freehold, and the time period.
We may be able to structure the purchase terms in parallel, and therefore end up with a lot less cash or zero cash in the deal – watch this space.