Commercial Lending and Partnership Questions

[Garrett H.]

Hi All, 

I appreciate any answers and guidance in advance. A group of us 4 investors are looking to form a partnership to purchase a property for commercial purposes and have a few questions about if we are going about this in the most efficient way. 

Property is in San Diego County and consists of about 40 acres. Seller wants $1.75 million total. Seller says they will accept $300,000 down (non-refundable) with lease payments of $4,500/ month (doesn't count towards principal) for 3 years in which we would have to pay the remaining $1.45 million at that point (title stays in seller's name until then and also pays the property taxes). We would then seek to get a commercial loan to pay the remaining amount. The thinking was that the limited lease payments of $4.5k a month would provide some additional time to establish the business revenue. 

The business: Short-term rental on two houses (One is turn-key, the other needs a little improvement then can be rented out). Estimated short term rental annual revenue estimated conservatively at $60k/year ish. Pumpkin patch and apple orchards (+ some ag tourism related activities) would be the other initial business pursuits. Estimate pumpkin patch revenue estimated at $100k for first year then by year 3 around $250k. Apple orchard takes much longer to establish and revenue wouldn't be realized until year 5 or longer but can net as much as $100k/acre for U-pick operations (+ cider making, etc). 

The problem: Although we are all business owners of our own entities separately, none of us actually have any experience with commercial lending. 

The questions: Initially, does structuring a deal like that up front with purchasing in a few years make sense or dumb? If so, we aren't positive on the commercial lending part when year 3 is up. Would we need to put an additional 20% down on a commerical loan at that point to qualify, and what flexibility is there in establishing income minimums to even meet a criteria for commercial lending? It is my understanding that it isn't like traditional loans like mortgages based on personal debt to income ratios but more about the properties income potential? We have a few more questions but wanted to see if anyone there can shoot holes in this plan and help educate a bit more on the process. Thank you again for anytime spent reviewing and responding. 

-Garrett

[Rob K.]

Seems to me you might be better off structuring this as a purchase immediately with immediate transfer of title with a 300K down payment. Have the seller carry back 1.45 million with an interest only note all due and payable in three years instead of lease option payments. Seller still gets his price. If the note was at 4% your interest only payments would be $4,833.33 a month and you would be responsible for property tax, and other incidents of ownership but receive depreciation of existing structures and interest expense as tax deductions. As owner of the property you would have a lot more options than just hoping you could exercise an option three years down the line. Assuming your plan worked, all you would need to do is refinance him out in three years. You might have bigger payments then, but you would anyway if you structured it as a lease option.

Depending on how motivated the seller is, you might be able to negotiate even better terms such as lower interest rate or deferring some of the interest owed the seller until you refinance, option(s) to extend loan payoff, etc. Obviously you need to do a lot of due diligence on the property either way.