Invest in Property LLC Using Leverage?

Question

I'm looking at a commercial multifamily property that's owned by another investor. Property was purchased at ~$1M and is valued at ~$1.5M. This investor has debt on the property around $650K. The property is in an LLC.

I have the option to invest in the property at cost up to 50% (i.e. I could buy half the property for what the other investor paid, 500K = 50% even though it's worth more).

Is there a way to get a commercial loan (i.e. 20% down) to buy into the LLC? I.e. come up with $100K (20%) and the bank supplies the other 80%.

Abraham Anderson · Answer

I appreciate the inputs, everyone. It seems like I will have to check with the original lender if they would authorize a 2nd lien on the property. If I proceed with this deal, I will update the thread with the info I find out.

Jonathan Twombly · Answer

Here's the problem you may run into.  What is the collateral for the loan?  If it's the property or the shares, you may get blocked by the original lender on the deal, who does not want any other debt on the property.  Or, the first lender may insist that your lender take a "second position," which means that your lender's claim on the property is subject to the first lender's claim.  Most lenders don't want to take a second position, or if they do, they will require a very high interest rate for the loan.  If you cannot use the property or the shares as collateral, then you will need some other collateral worth $400K so that the lender is secure.

George Despotopoulos · Answer

@Abraham Anderson this is interesting. Are you looking to put a second lien on the property?

I also don't know who the first lender is and what their docs look like. The borrower my need to notify them of a new member in the LLC, especially if you own a certain % and they may want you to guaranty the debt or they may even disallow it.

I don't know where you can get a loan to buy into an LLC from a commercial lender, but I'll do some digging around and update if I do.

I'm interested in seeing other responses on this from other members on the forum.

Alex Deacon · Answer

@Abraham Anderson be careful there is a reason why the deal sounds so sweet. Do your research and ask a lot of questions before diving in. check with a few good local RE attorneys and good CPAs to find out how this can be done correctly.