How do I buy a million dollar building?

26 Replies

Hi guys, here's my story: when I was in my early twenties, my husband and I started a non-profit climbing gym club that's flourished. We decided to expand to a new location and I have spent a year or so reading the forums, doing research, etc, and thought that it would be a good move to BUY the next property instead of lease (as someone with a non-profit, we lose everything if we walk away). We found a property with the help of a friend who is a commercial real estate investor, but the pressure was on to secure the lease rather than work out a deal. After nine months . . . we're finally on the cusp of opening it and the thought of buying it keeps coming up.

Thing is, we JUST bought our first house around the same time. We have no assets. We DO however have some friends who have assets that could help us buy this property (and the next one, too, we're looking to expand in five years to another location), but I feel like the key is in the ask.

What I'd need is the down payment - and while one way to do that would be to sell our house (it's appreciated $100,000k since we moved in thanks to our improvements), but I don't think either of us is ready to make that big step. The mortgage would come from what we're already paying in rent. The business is solid and it's a physical wall so it's not going anywhere. A good investment, but I don't know the best way to approach a potential co-investor or loaner or what have you with a deal that's worth pursuing. One of my mentors has said she'd loan me money to flip houses (because of how well we did with this house), but that's a lot of work and a lot of risk to try to get the money in this particular market. 

I've also never held property before - we just got the house and that's been an education, but commercial can be it's own thing, I'm sure. Benefit there is I've been renting commercial properties for ten years so I think I understand what's needed to keep costs low and profit up . . . but any thoughts you have would be MUCH appreciated.

We've got a 401k and IRA going to take care of us in our old age, but I'd much rather have properties when we retire rather than nothing, you know? We've got solid businesses, why not capitalize on it a la McDonalds?

Without partners who have cash, you don't. Good luck.

@Kristin Horowitz . I don't own any commercial properties but I have inquired about loans for them. A local credit union in my town told me I need 20% down on any commercial. That will likely be your biggest hurdle in acquiring this property. A money partner could work and you can potentially refinance the property or take a HELOC in a couple years to cash them out?

it sounds like you have already decided on your next location, and to be  fair having the best location for the business is more important than finding a good deal.

That said some/most motivated commercial sellers will carry back a 2nd. Why? Their smarter than the average residential owner, they understand money better, and they understand how limited the buyer pool is in commercial. 

How profitable is your business? What if that location does not perform like your others? How specific are your needs? (I mean material, height, size etc. i know nothing of your business) 

SBA now has commercial loans for small businesses because they realized the need for them wasn't being met by Banks. Seeing how you are already in non-profit you are accustomed to the paperwork. They will require a detailed business plan, inspections, yadda yadda. 

Best of luck. 

Hi guys,

I do have cash partners to help with money down, but I don't know how to approach them with something that makes sense. Two people have offered me money but I don't even know how that would work to both our benefit - shared deal because I found the deal and maintain the business that funds the mortgage??

Originally posted by @Bud Leiser :

How profitable is your business? What if that location does not perform like your others? How specific are your needs? (I mean material, height, size etc. i know nothing of your business) 

Well, it's a nonprofit, so it's not cash in pocket for anyone, hence me wanting to buy the properties it's located in. The business itself is incredibly stable. I have zero problems making rent or bills in general, we've got substantial money in investments for rainy days, and we're getting pretty good salaries as the people that run it while expanding services and the facility itself. It's a very stable proposition for a potential partner. Specific needs are pretty basic - big huge commercial warehouse (location not super important within the communities we choose, but rent has to be reasonable) with the right zoning. This current place we're in we needed a conditional use permit for and had to do about $300,000 in TIs, but we made it work.

This next location might have to be a ground up build, though. Nothing in the area matches it. They're doing development in a specific location that might be perfect if I know I can sell a developer on the idea.

Originally posted by @Kristin Horowitz :
Hi guys,

I do have cash partners to help with money down, but I don't know how to approach them with something that makes sense. Two people have offered me money but I don't even know how that would work to both our benefit - shared deal because I found the deal and maintain the business that funds the mortgage??

Originally posted by @Bud Leiser:

How profitable is your business? What if that location does not perform like your others? How specific are your needs? (I mean material, height, size etc. i know nothing of your business) 

Well, it's a nonprofit, so it's not cash in pocket for anyone, hence me wanting to buy the properties it's located in. The business itself is incredibly stable. I have zero problems making rent or bills in general, we've got substantial money in investments for rainy days, and we're getting pretty good salaries as the people that run it while expanding services and the facility itself. It's a very stable proposition for a potential partner. Specific needs are pretty basic - big huge commercial warehouse (location not super important within the communities we choose, but rent has to be reasonable) with the right zoning. This current place we're in we needed a conditional use permit for and had to do about $300,000 in TIs, but we made it work.

This next location might have to be a ground up build, though. Nothing in the area matches it. They're doing development in a specific location that might be perfect if I know I can sell a developer on the idea.

 Well, since we don't have a lot of details, I'll throw out a big picture idea, why not roll your 401k into a self directed vehicle, and use it purchase the next building?  Your 401k then owns real assets and your non-profit then rents the space from your 401k? Of course this puts all your eggs in the same basket and a Financial Planner might have a fit if you suggested the strategy to them.

Of course there really is no reason why your non-profit can't purchase the building, especially if there are multiple tenants, it increases the amount that you are able to pass along through you endeavors.

@Bill Gulley probably has a lot of insight on strategies that you might be able to deploy. 

Medium logo640x400Troy Fisher, Lanika Home Inspections | [email protected] | http://www.lanikahis.com

Some other possibilities:

Peer-to-peer lending - just listened to podcast 29 or 30 (?) and the limit was 30-35k. I dont know if that is still accurate.

B2R financing (or any asset based lender) - an asset based lender may be able to fund this if you were to show all the business plan stuff

Kickstarter or more likely Kickfurther - Kickfurther is something like a phase-2 crowd-funding. A lot of companies request money of varying amounts on here to take their business to the next level. Returns for investors are 6-12% for 3-12 months. This is a pretty short time-frame, so I'm not sure how that would work for what you need.

Kiva - They do give out loans for Americans.

Apply for a grant since you are a non-profit. Either through the government or a NGO. Expand your target audience to qualify for more money. 

Ask your current landlord for a loan.

Partner with a good burrito restaurant. Burritos + climbing = goldmine!

I like @Troy Fisher 's idea of the self-directed 401k: gives you equity in an asset.

I wouldn't worry about pitching the idea of a gym. How many gyms does Boulder, CO have per capita? People love climbing in a good gym. 

I'd be interested to learn how you started up your first gym. PM me if you feel up for sharing.

Such generalizations makes giving suggestions pretty hard, Matt hit on several areas for N/P, Troy's idea is good, although I'd think using your retirement fund and leasing will disqualify you if you're a director getting a salary. 

Until Matt mentioned a gym, I couldn't find it mentioned. Questions were asked above and not addressed.

I assume this is a second location, being in the business and now going under another lease. My first question is to the viability of a second location, is it in the same town?

Why is this unknown business so unique that location doesn't matter, if it's in the same city it sure will matter, your existing clients will have an option of which location to go to, that can bleed the original operation and you're not really picking up new clients. Location always matters. 

I'd suggest you speak to an experienced grant writer to solicit funds from grants, public donations and mixed financing conduits as a N/P.   :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

What you need to do is take the time to create the details of a deal that buys the building in a partnership or joint venture with you. This includes the cost of the building, how much of a down payment is necessary, is there bank or sba or investor financing available. Next consider the rent that the business will pay and determine if that number will support the debt service, expenses and a sufficient profit to entice investors to want to be owners. Even if you own some portion of the building it should be beneficial to you to receive back your ownership portion of the buildings proceeds. The advantages of owning the real estate are there but you also need to consider that if your intended five year expansion might take you out of this building entirely than you need to consider the risks of having to find a new tenant or selling the building.

@Kristin Horowitz , I own a self-directed 401K, and one of the rules is that I cannot be personally involved in any investment made through my 401K. So if you purchase a building with the funds from your 401K, your business would be restricted from leasing it.

I'm not sure if the same applies to a self-directed IRA, though I suspect it does, but @Dmitriy Fomichenko would be able to answer that question.

Randy Johnston, Summa Real Estate Group | [email protected] | 503‑956‑7375 | OR Agent # 201207851

Be sure to do your homework and know the ins and outs of owning a building vs leasing a space for your business. Are you going to be occupying the entire space or are there other units that you will need to lease? Be sure to set aside funds for acquisition costs, closing costs, TILC, and capital expenditures. What are your tenant acquisition costs? How much build out will you be responsible for, is any?

On another note, you should be able to get good financing being an owner-operator. I would try to first offer creative financing to the seller to avoid lenders all together, or at least have the seller hold a second to reduce your down payment. If you bring on a money partner to buy the building, they'll just own a percentage of the building. Your business and your building will be two separate entities where the business pays rent to the building, so they will have nothing to do with each other.

Based on the vague details provided, you have many options. An SBA backed loan will have the most paperwork, but will have the lowest interest and longest term. Asset based lending/alternative lending will require less paperwork but the terms will not be as favorable. JV partners typically are easier to set up but make sure you have a lawyer help to ensure the contracts are legal and cover all your contingencies; late payments, early payoff, etc. Use equity partners as a last resort for funding. Equity partners typically get a percentage of the company profits, over time this prove to be very costly.

From the little,info provided, I would,look into an SBA loan. Once you have determined your down payment requirements, contact a JV partner, if required. Good luck.

Medium davyLoren Davy, Davy Business Capital | 432‑770‑6105 | http://www.davybusinesscapital.com

I guess I'm really confused why this is so vague for some of you? Stuff like "climbing gym not mentioned" - it was in the first sentence? I'm sorry if there's not a ton of details, but I think I'm looking at high level solutions vs concrete ones to start - get gears turning, you know? 

I'm currently occupying a space worth $1.4 million as a rental with the non-profit and I'd personally like to buy it and rent it to the nonprofit. My personal assets, as I said, are pretty limited (it took all of them to get the gym successful and running in the last ten years). The next location may be something more like a $4 million acquisition about 4 years down the line if possible so it makes sense to try to figure out a way to buy the existing building first for a few reasons.

Anyway . . . it looks like I got some really good advice. The 401k was a good idea, but as Randy says, not an option for what I'm going for. 

The crowdfunding might be a brilliant idea - a way for EVERYONE to have a personal investment in the next gym without having to worry about the non-profit aspect of it (no one "owns' a nonprofit nor can they take shares.) Since I'm looking to find a way to get an asset in this scenario, things like grants aren't going to work. 

Beyond that . . . I guess my final question would be this one: for my existing property owner with the $1.4 million dollar gym I'm renting, what encourages him to buy vs sell? It was an option but like I said, we had too much pressure to lock down the rent and get the gym going first, my investor friend was pushing me to get a purchase option in the lease but no matter how hard I push my real estate agent to get it handled, he wouldn't. Now that we're in there, I'm not sure what a creative offer to the landlord would be that would entice him. We're a stable business that won't leave for thirty years or more. He stands to make more money off us renting than selling.

PS, a lot of these questions were asked as if you were evaluating the viability of my business. That's not what I was asking for . . . unless you are personally interested in partnering with me on this, we don't need to evaluate my actual club/gym operation from my perspective, but thank you!

You can also explore the ROBS 401k which allows you to fund a real estate operating company with 401k funds. See following IRS website for more on the ROBS 401k. 

http://www.irs.gov/Retirement-Plans/Employee-Plans...

Medium mysolo 401k logoMark Nolan, My Solo 401k Financial | [email protected] | 800‑489‑7571 | https://www.mysolo401k.net/

You said non profit, but I'm guessing you can charge membership fees or use fee for the climbing gym or renting equipments etc... So with that said, you can try for a commercial loan from a lender, but be warned. If your cap rate is lower than around 10%, I don't think anyone would want to fund 1mill. 

Cashout refinance your property, get a new loan from the bank for the 1mill with the cashout as down payment (if it is enough). 

How do you plan to pay back the 1mill loan?

Hi Kristin

SBA would be great, but I don't believe they offer real estate loans for non-profits. 

I believe that the reason folks are bringing up your business model and profitability is because it's pertinent to any lender.   They will want to see business and personal tax returns and financial statements.  If business is operating at break even or a loss, it will be difficult to get a conventional loan without showing very strong income and/or assets from another source.  

For a typical commercial RE loan, you will likely need 30%+ down,show ability to repay and assets equal to or more than the amount borrowed.  Anything less than the above and you get into Alt-A, subprime, stated income or hard money loans... All of which come with a price but are potentially doable, especially if you are getting the property at below market price and have a refi strategy.  

Happy Investing

Peter

Have you done any research into grants in your city/area/state? I don't know your 990 looks like, but I have been involved with a mid-sized non profit and it was astounding the grants that were available if only you wrote the right proposal. In our case, this included a grant for matching funds for a down payment on a building, though the non-profit had to raise 50%.

If you're talking about buying the building personally, then leasing to the non-profit (great idea), you mentioned that you have some friends who do have the assets to make the down payment. Why not form a JV LLC to purchase and hold the property? Give them a 60/40 or 70/30 split, or preferred return, or whatever it takes to get the money and backing. You still get to lease the property for your non-profit, and any ownership in the JV will allow the pass-through tax benefits of leasing to a non-profit. The ask is in the numbers - build out the model for 10, 15, and 20 years. Then do it monthly for the first 24 months. Then do it all over again. Once you're comfortable with those, you will be comfortable making the ask, and they will be confident in the project.

Originally posted by @Kristin Horowitz :

I guess I'm really confused why this is so vague for some of you? Stuff like "climbing gym not mentioned" - it was in the first sentence? I'm sorry if there's not a ton of details, but I think I'm looking at high level solutions vs concrete ones to start - get gears turning, you know? 

I'm currently occupying a space worth $1.4 million as a rental with the non-profit and I'd personally like to buy it and rent it to the nonprofit. My personal assets, as I said, are pretty limited (it took all of them to get the gym successful and running in the last ten years). The next location may be something more like a $4 million acquisition about 4 years down the line if possible so it makes sense to try to figure out a way to buy the existing building first for a few reasons.

Anyway . . . it looks like I got some really good advice. The 401k was a good idea, but as Randy says, not an option for what I'm going for. 

The crowdfunding might be a brilliant idea - a way for EVERYONE to have a personal investment in the next gym without having to worry about the non-profit aspect of it (no one "owns' a nonprofit nor can they take shares.) Since I'm looking to find a way to get an asset in this scenario, things like grants aren't going to work. 

Beyond that . . . I guess my final question would be this one: for my existing property owner with the $1.4 million dollar gym I'm renting, what encourages him to buy vs sell? It was an option but like I said, we had too much pressure to lock down the rent and get the gym going first, my investor friend was pushing me to get a purchase option in the lease but no matter how hard I push my real estate agent to get it handled, he wouldn't. Now that we're in there, I'm not sure what a creative offer to the landlord would be that would entice him. We're a stable business that won't leave for thirty years or more. He stands to make more money off us renting than selling.

 Your broker did you a disservice by not negotiating an option to purchase.

You are right to question what would motivate your landlord to now be interested in selling you his property. In all likelyhood, unless there is a personal or fiscal need to sell he's probably not going to be interested in selling. I've had publicly traded tenants in my buildings for multiple years and I wouldn't sell them the building for three times its value. There will certainly nearly zilch motivation to structure any kind of creative financing, unless as I mentioned a need to sell develops, but those hanging onto a hope and a prayer.

Now, to address how to buy. As others have mentioned, you can possibly qualify under and SBA loan program. With a traditional SBA loan normally the principals of the business buy the property personally and then execute a lease with the business for the term of the SBA loan. The loan terms are 25 years, and the lease is executed for this same time period. Its a requirement of qualifying for the loan.

I believe there are non-profit loans that are similar to SBA loans and/or there is a modified SBA loans that are designed for nonprofits. You would need to speak with your bank or a bank that offers SBA loans to ferret out the best SBA loan option for your circumstances.

One of the reasons SBA loans are popular with small businesses is because they allow a borrow to put down as little as a 10% downpayment. The loans are also amortized over a full 25 years making them easier than conventional loans. Easier to qualify for and easier to maintain. Conventional commercial loans typically have call dates of 7, 10, or 15 years. So even though the loan maybe amortized over 20 or 25 years, the loan is due and callable in the time frame reference above.

Since you have four years until you're next location perhaps you and your husband can set up a long term plan to put aside enough each month to build up to the downpayment for the next building. I realize that's not an immediate solution, but maybe the savings you do set aside can be used to grow the downpayment "fund". 

You seem like a sharp cookie, and obviously your here learning more about real estate. Maybe you can use those saved funds to buy a really good commercial deal, I mean the once a decade type of deal, and turn it for a profit. You know what it takes to operate a commercial building, its systems, and the likes and dislikes of tenants. Maybe a small industrial or office or retail building comes available down the street or one or two towns away that is just too good an opportunity not to buy and then improve, fix, re-tenant, and or then re-sell. They come to me nearly everyday. So I know they are there, you just need to be looking for them all the time.

I wish you the best in buying that commercial building. 

Super great input guys, I really appreciate it.

Travis, I had thought about that until yesterday when a friend of mine (and a part time employee of mine with some assets) started asking about the property and conditions and essentially tried to cut me out of the deal entirely because if he had the money, why partner with me. OMG did I panic . . . I guess I gotta keep my ideas to myself. I don't know why anyone would partner with me if they had the money to do it themselves? 

Christopher, Thank you . . . you hit the nail on the head for a lot of the thoughts I've been having about this.  I don't think that my husband and I can feasibly get the money together in the time frame - we simply don't take home enough (ha ha, right, I'm an executive director of a nonprofit).  The flipping idea has occurred to me as a way to make the downpayment on these buildings, but not commercially. Hadn't thought about that. We do have a LOT more experience in that arena than private homes - so why not? I'd think there's a lot more opportunities out there that I'd understand . . . THANK YOU!

So, essentially, it looks like creative financing doesn't live in the commercial real estate market like they say it does for residential and that I'll need to scrounge up over $300,000 somehow to make it happen, whether that's partnering with people to share the return or doing it myself. I got great advice about buying people out over time, etc.

You guys are great, thanks so much.

Time to go out and hustle. :) 

Originally posted by @Kristin Horowitz :

Super great input guys, I really appreciate it.

Travis, I had thought about that until yesterday when a friend of mine (and a part time employee of mine with some assets) started asking about the property and conditions and essentially tried to cut me out of the deal entirely because if he had the money, why partner with me. OMG did I panic . . . I guess I gotta keep my ideas to myself. I don't know why anyone would partner with me if they had the money to do it themselves? 

Christopher, Thank you . . . you hit the nail on the head for a lot of the thoughts I've been having about this.  I don't think that my husband and I can feasibly get the money together in the time frame - we simply don't take home enough (ha ha, right, I'm an executive director of a nonprofit).  The flipping idea has occurred to me as a way to make the downpayment on these buildings, but not commercially. Hadn't thought about that. We do have a LOT more experience in that arena than private homes - so why not? I'd think there's a lot more opportunities out there that I'd understand . . . THANK YOU!

So, essentially, it looks like creative financing doesn't live in the commercial real estate market like they say it does for residential and that I'll need to scrounge up over $300,000 somehow to make it happen, whether that's partnering with people to share the return or doing it myself. I got great advice about buying people out over time, etc.

You guys are great, thanks so much.

Time to go out and hustle. :) 

 Partially wrong, creative financing does exist in commercial. I said there's no motivation for your landlord to offer you creative financing (if you approached him to buy the building).

Sellers of commercial properties will sometimes either want to carry the entire mortgage (to save on their tax liability) or carry back a 2nd trust deed of a smaller percentage e.g. 10-25%. 

Getting an owner to carry back say just 10% means that you could then get conventional financing for the property with just 10% down. 

$500,000 X 10% = $50,000

So if you buy a small building you'd only need $50,000    bucks to get into that deal. In addition, to get the deal to cash flow while you are fixing re-leasing, etc you might try to negotiate a 2nd that accrues interest for five years with a balloon payment at the end of the five years. 

I have an office building in workin on right now that the owner wants to finance. Before I've even made an offer I'm being told he wants to finance with 25% down amortized over $15 years. Ordinarily that'd be an opportunity I'd be all over like bees to honey, but you know what; I don't know if I'd want the property unless he darn near pays me to take it from him.

I'm exaggerating here of course, but my point is that just because there maybe easy financing terms doesn't mean the deal is going to be a good investment deal. In the case of the owner financing above the seller has a thought of value that is higher than the reality of his improvements.

His building is literally falling down. It's a late 1950's office building with popcorn ceilings and a roof that's caved in through the middle of the building. It's what I'll call Fuggly!  

I like ugly, ugly screams opportunity. And because it's ugly it doesn't allow me to employ stupidity analytics in terms of buying just to buy. I've got to be able to buy it right, improve it, carry it during the improvements, get it leased up, and maybe then sell it. I want to account for about a double on my capital invested. I think the process will take 12-18 months. This particular investment is more of a development opportunity, but still its sitting out there.

Easy terms doesn't always mean good deal. Good deals mean easy terms + calculated ROI. Don't be afraid to buy vacant buildings just make sure you can fix a problem that exists and or get it leased per your business plan for the property.

@Kristin Horowitz you asked "why would anyone partner with me if they have the money". The answer, for your 'friend', is the guaranteed tenancy. If they are looking to purchase a building, they will build their own models, that must account for vacancy, concessions, and potentially build-out. You take all of the unknowns out. Plus, let them know that it is part of your personal goals to find a building that you can take part (even minimal) ownership of. And while this building you have found is perfect, there are no shortages of alternatives... If they want the building, they can buy it themselves. If they want the building WITH a tenant waiting in the wings with no (or at least known) concessions and buildout - then they need to bring you onboard.

Hey Kristin

I have read this post and there may be a few creative ways to finance this project. The non-profit status may be a hurdle but more importantly you have management and industry experience. Don't let anyone scare you on the SBA paperwork process. If you are running a business the paperwork should be easily handled.

With the right lender you should be able to find a way.

Best of luck, Dan

@Kristin Horowitz

Just wondering how you got on with your project?

I was reminded of this thread when looking at this cool climbing gym partnership in my city: http://urbanmilwaukee.com/2016/01/15/friday-photos...