Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
Let’s first review what an Option to Purchase is…
An option to purchase real estate is a legally-binding contract that allows a prospective buyer to enter into an agreement with a seller, in which the buyer is given the exclusive option to purchase the property for a period of time and for a certain price.
Should you give your tenant an Option to Purchase?
Generally speaking, giving a tenant an Option to Purchase is a bad idea. First, during the option period the seller cannot transact with any other parties interested in purchasing the property. Not good. Also, the tenants who negotiate an Option to Purchase into their lease generally do so at no additional cost. That means the landlord is giving away a very important right (and limiting his or her ability to sell the property) in exchange for no added benefit.
What does an Option to Purchase look like?
The option clause in a commercial lease might look something like this:
“Purchaser [Tenant] has the exclusive right and option to purchase the real property described on the attached Exhibit A during the term of this Agreement [Lease] for the price of $________.”
In most cases, the purchase price is fixed—a price that the potential buyer and property owner have agreed to in advance.
That said, there are some instances when the option to purchase real estate includes a variable price. These situations could include:
When a lease agreement extends out over a period of years, the purchase price may be adjusted for inflation and/or determined based on a new appraisal at that time.
If the purchase price is going to be determined on something other fair market value, such as gross or net income, cap rates, etc.
Sometimes, options are used in sale-leaseback or build-to-suit arrangements when the seller is unable to obtain the financing necessary to improve the property.
For example, a business that owner-occupies a property may need to make significant investments in the business. Say the company has a major capital need, such as the need to purchase new, expensive equipment.
Using an option is a way to enter into a valuable sale-leaseback situation in which the business ultimately sells the property but then signs a lease to continue operating out of the space under new ownership. Once their business normalizes…they can execute their option and be the building owners again.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com