Commercial Lending and Partnership Questions

San Diego, California
Goals, Business Plans & Entities
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Commercial Lending and Partnership Questions

Garrett H.
Julian, CA · Member since 2020 · 24 posts · 7 votes

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

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Rob K.
Encinitas, CA · Member since 2011 · 192 posts · 252 votes
1y

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.

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  • Jaycee GreenePro Member
    Real Estate Consultant · St. Louis MSA · Member since 2024 · 3k+ posts · 727 votes
    1y
    Quote from @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

    @Garrett H. Is it really worth it to pay $462k for basically a call option to buy the property for $1.45M in 3 years versus waiting until you have a solid business plan in place to execute? 


    On the lending side, this will probably be viewed as a startup. You might be able to do something via the USDA and/or SBA 7a, which has lower down payment requirements.

    Have you put together a proforma yet?

    [email protected]
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  • Rob K.
    Encinitas, CA · Member since 2011 · 192 posts · 252 votes
    1y

    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.

    1Reply
  • Garrett H.
    OP
    Julian, CA · Member since 2020 · 24 posts · 7 votes
    1y

    Hey Rob,

    Thank you for the response and that actually makes a lot more sense than our initial proposed plan. Having the Title of course would relieve a lot of concern. What type of stipulations would we have to lay out for the seller if for any reason we couldn’t secure financing to make that balloon payment after year 3? Would we have to write it up to where they could reclaim the property, or try to convince them to continue the interest only payments for another year or two?


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    • Chris SeveneyBusiness Member
      Moderator
      Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
      1y
      Quote from @Garrett H.:

      Hey Rob,

      Thank you for the response and that actually makes a lot more sense than our initial proposed plan. Having the Title of course would relieve a lot of concern. What type of stipulations would we have to lay out for the seller if for any reason we couldn’t secure financing to make that balloon payment after year 3? Would we have to write it up to where they could reclaim the property, or try to convince them to continue the interest only payments for another year or two?



      Whatever you do, the refinancing is still going to be very challenging, as it seems like this is real estate and an operating business. Have you spoken to any lenders who would even touch this and what their requirements would be? It seems like to make the numbers work you need both income from the STR and the operating business. Also many lenders are getting out of the STR business because of potential for jurisdictions to ban them, and for those that allow it they are very keen on making sure proper permits are in place.

      Overall this seems like a tough deal to finance and might be better raising capital for the deal with more investors. 

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  • Garrett H.
    OP
    Julian, CA · Member since 2020 · 24 posts · 7 votes
    1y

    Rob,

    Also in the event that they have a mortgage on the property, they would still be able to transfer title? Or would this only work if they had it completely paid off? 

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  • Garrett H.
    OP
    Julian, CA · Member since 2020 · 24 posts · 7 votes
    1y

    Hi Jaycee,

    We were hoping to secure the property with creative financing now since we don’t have enough capital to outright purchase it with a loan, while keeping our monthly payments lower than a mtg. I agree that the down payment and monthly doesn’t feel like the best route, hence my inquiry on here to get better suggestions. Rob proposed an alternative here that definitely seems like a better approach than what we put forth. 

    Thank you for the suggestions on the USDA and SBA 7a for lending.

    We have not organized a formal proforma yet, just discussed various revenue projections and expenses. Would this be most beneficial to present to lenders when trying to qualify, or are you stating that it would just be good for all of us to have all the number crunching written down?

    1Reply
    • Jaycee GreenePro Member
      Real Estate Consultant · St. Louis MSA · Member since 2024 · 3k+ posts · 727 votes
      1y
      Quote from @Garrett H.:

      Hi Jaycee,

      We were hoping to secure the property with creative financing now since we don’t have enough capital to outright purchase it with a loan, while keeping our monthly payments lower than a mtg. I agree that the down payment and monthly doesn’t feel like the best route, hence my inquiry on here to get better suggestions. Rob proposed an alternative here that definitely seems like a better approach than what we put forth. 

      Thank you for the suggestions on the USDA and SBA 7a for lending.

      We have not organized a formal proforma yet, just discussed various revenue projections and expenses. Would this be most beneficial to present to lenders when trying to qualify, or are you stating that it would just be good for all of us to have all the number crunching written down?

      @Garrett H. The proforma would be beneficial for both, the investors and a prospectively lender.

      [email protected]
      0Reply
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