What are the benefits for the buyer and seller, when entering into a purchase option for commercial property?
Recently screened a deal between two family offices/boutique investment firms that agreed upon a purchase option for a mixed-use property in Soho in 2014 and are now moving forward with the deal because the option period expires in a few months.
Has anyone participated in a similar deal? What are the strengths and risks for both parties?
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If the price value rises significantly during the lease its great
The most obvious benefit of using an option is to give the buyer the opportunity to eliminate zoning/entitlement risk by obtaining approvals during the option period. We structure all of our deals like this. Post a deposit to get skin in the game; deferred escrow with a certain amount of time to secure entitlements; closing at earlier of secured entitlements or escrow window.
Ancillary benefit is that it minimizes your capitalized carry costs during that period. Nobody wants to hold a development asset on the books and incur property tax and interest carry for 2 years, then be under construction for 2 years, before you see any cash flow.
What are some typical costs to get a purchase option? Is it generally structured as a percentage of the purchase price? Do you normally have a certain number of extension options? Is the purpose solely to limit costs before legally being able to execute your business plan? Do payments for the option go towards the purchase price, or is it on top of the purchase price?
Very helpful, thank you.
we usually structure it as a percentage of the purchase price. Market is usually 3-5%, could be higher for a longer period. We use it to limit entitlement risk so no major monies go hard before we know we can proceed with a development. Payment go towards PP.
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