Floating Rate for Commercial Deal Advice
I have this good opportunity buying a complex. Seller offer private financing for 10 years @ 5% interest rate. Cap rate is 10% @ $2.2m ($400k DP) and I'm calculating approx. 33% annual profit at these rates. All units in the complex are currently rented and under contract for the next 3-4 years. The area have potential as it's a growing area. Seller will sell as an S. Corp to avoid high taxes on the property.
Seller could extend financing after 10 years but I'm not counting on that. My concern is adjustable rates after the 10 years, but the rates above are just too tempting.
What should I do?
It sounds too good to be true, which means that it probably is.
The seller offering you a 5% rate fixed for 10 years is unbelievable. Why are they willing to loan you such a large amount at such a low rate? And fixed for such a long time? Is this a friend or family member?
Ignoring the financing for a second, you didn't say much about the deal itself. How strong is the location? What is the tenant mix? Sounds like you're describing a retail strip mall? What is the quality of the tenants? How are the demographics in this area? What do you forecast the population growth to be in this area over the next 5-10 years? Etc.
If the deal itself checks out, I'd take this financing offer for sure. You're not going to get terms anywhere close to this from a bank.
It is a friend, yes. He want cash now to built an off-grid house and home school his kids out of the country. He just want to get rid of the business but he did a ton of work on it (New AC, roof, plumbing, etc).
This is in a growing area near Tampa, Fl, so I'd consider a very strong location indeed. Without giving too many details, it's a similar to a strip mall just one big building with different suits in it. Tenant mix and quality seems to be strong and committed to stay in this growing area for the long run. The service that this type of business provides is also extremally relatable to the demographic.
Should I have any concerns about the refi in 10 years? I know we can't tell what the rates will be then but seeing what's going on now with CMBS is making me a little nervous.
You’re over thinking it. If everyone worried about what rates are going to be in ten years, no one would ever buy anything. That information is literally impossible to know.
You have a sweetheart deal on your hands. If it’s not too good to be true, then take it. You’ll have so much equity built up after 10 years that the difference in interest rate when you refinance will be inconsequential.
Plan on refinancing with a fixed instead of floating rate when the time comes if you’re still worried about it.
Are you saying he will sell the "S" corp to you, versus the asset? Then you will keep it in the "S" corp?
To Avoid high taxes. Do you mean for him to avoid high taxes? Or for you to avoid higher Property Tax valuation?
I would discuss with your Tax accountant and have them explain the nuances of property in an "S" corporation. Also talk with your banker if you plan to Cross Collateralize anytime.
Also read the "S" corporation articles and any operating agreements.
Sounds like you have the numbers analyzed. Just recommend the above as your next step.