Creative Financing

9 Replies

I have the opportunity to purchase a 100 unit apartment complex. The owner had recently taken out a CMBS loan that offers no ability to prepay without a significant penalty. We would need to assume the loan at a relatively unfavorable rate and put $1.2mm down for a $3.4 - 3.8mm property. I am trying to think of another way to acquire the property without assuming the loan and having to put out 30%+ for a down payment. Possibly a Master Lease. Anyone have a good strategy for this?

Thanks

Greg

@Greg Gallucci does the property have significant upside? If so a master lease may work really well. The first thing you have to account for, does the property support the loan. If so then a master lease would be a great starting point.

Hi @Greg Gallucci.  Whoa!  I was expecting this to be about a house or small plex!  At $38k per door, I assume this is a value-add?  Do you plan on making significant improvements to the structure/units?  Master lease options are great ways to control property, but I don't think I would use that method if I were going to be investing significant time and $ into a place.  If I do that, I need to own it!     

Did you ask the lender's permission on this? Sometimes forgiveness is better. Is the 33% requirement a down payment to assume the loan or is that the equity the owner will realize?  If it's the lender down payment requirement I would show the improvements to their collateral I was going to do.  Give them the security they seek.  If it's the owner's equity, I would restructure with them to be paid over time, obviously.   

The largest properties I've purchased are only 10 and 7 families.  Perhaps large unit pros like Serge or the Cohen brothers will chime in to help.  Good luck! 

Oh look at that, @John Cohen already chimed in.  And said exactly the OPPOSITE of what I said.  Shows what I know!

@Steve Vaughan Master Leases always seem like good ideas in concept, I personally am skeptical and have never done one. Finding an owner that will give you the control needed for you to make the improvements and pay the mortgage (with his name on the line) is hard to find. If there is proven upside a master lease would be great. I do agree with @Steve Vaughan if I am going to make improvements like that I want to own it. I do know that if you execute the lease you will own it, but I want it in my name if I am putting that much work into it.

Give it a shot you never know!

Originally posted by @Greg Gallucci:

I have the opportunity to purchase a 100 unit apartment complex. The owner had recently taken out a CMBS loan that offers no ability to prepay without a significant penalty. We would need to assume the loan at a relatively unfavorable rate and put $1.2mm down for a $3.4 - 3.8mm property. I am trying to think of another way to acquire the property without assuming the loan and having to put out 30%+ for a down payment. Possibly a Master Lease. Anyone have a good strategy for this?

Thanks

Greg

 You didn't specify the upside nor speak of a value add play in the deal so it's a little difficult to speculate how to best structure a creative financing package.

Assuming it's a value add play with good risk adjusted gains at the end of the process then maybe the safest route is to negotiate a wrap transaction with the seller, and if your are concerned about a due on sale clause make it contingent on the lenders approval.

The seller will confront these same financing scenario issues with all other buyers so if they want to sell the property then they can either deal with the issue with a reset and able buyer, you, or kick the can down the line looking for another buyer who maybe willing to assume a less than stellar financing package.

As the buyer though your only concern should be the financing package that delivers you title, assuming you plan on making extensive improvements to the property, and allows you to earn what you determine is a reasonable cash flow from the project.

Options aren't bankable. There are too many potential pit falls that can happen prior to your exercise of the option. You cannot refinance the option later should you need or want to maximize cash flow or pull out equity. Yes, you can exercise the option but that also brings up my original point on options, to many other potential issues can prevent you from acquiring title e.g. seller bankruptcy, liens, additional borrowings, etc., and yes you have legal recourse to mitigate these issues but that doesn't necessarily mean the financial means will be available to cure whatever the issues are that may arise.

My suggestion would be to seriously consider an acquisition of this magnitude where you acquire fee simple title. Anything else means you are relying on others to perform as prescribed. Bad things happen to good people so even if it's not intentional should the property or the seller become engulfed in an unavoidable situation without title it'll subject your capital to additional risks and have the potential to make an otherwise stellar investment one of ruinous concequences.

Look at a Master Lease Option

What is the NOI?

If you think about it, whatever you do besides a straight purchase, you'll be "assuming" that loan one way or another. I doubt the seller will subsidize the payments for you. 

At this scale, you need legal assistance, this can be done with a master lease arrangement and you can also secure your interest as a future advanced note/obligation agreement to cover additional money invested on repairs. You can use a lien position behind the existing loan. 

This deal is not going to be accomplished safely as most approach an option to purchase, your agreement could well be 100 pages or more, addressing terms of sale, how liens for advances are applied toward the purchase, your interests acquired prior to other liens filed, insurance assignments, that's not counting lease assignments, attachments of lease terms and conditions, maintenance agreements and schedules, authorization to encumber the property and to pay liens. This ain't no house deal!

You're looking at a long term purchase and management agreement. It might be better for you to purchase the owning entity instead of looking at it as just a real estate transaction, move into that owner's position at the entity level. The seller(s) may have personal guarantees on the loan, I don't know, but those should be addressed to indemnify the seller. As a seller, I'd want a performance bond as well, that is reasonable.

Multi-million dollar commercial transactions are above the pay grade of 99 % of the members on BP, maybe 99.9%, see your attorney and begin with a letter of intent. 

First, identify the upside, what can you do better than current management? 

If you have good enough reasons why you should do the deal, the how can be made to happen. Good luck :)  

Thanks @Bill Gulley, @Christopher Telles and @Brian Gibbons.

These are all very helpful suggestions. Do any of you have suggestion as to where I can read up on various vas to structure commerical deals? I need to have a better understanding of this before I go speak with my attorney.

There is pontential to upgrade the units and increase the rent. The units without any upgrades are already going throught a rent increase given the increase in market activity.

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