Bank stopped due to Covid: How to close with seller finance?

Question

We are purchasing a senior housing portfolio and we have gone through the underwriting process with our bridge to HUD 232 lender. We were at the final step of working with their legal team to prepare the closing documents two weeks from the close of escrow, and they have put an indefinite suspension on all deals in the pipeline.

In the pursuit of closing in the next two weeks, this appears to be our option:

Negotiate a seller finance. The total purchase price is $15MThe sellers have $9M in debt

The sellers have $6M in equity

We will pay them $3M down now, and the remaining $12M at the refinance event in two years. We will pay them interest on the $12M and a 5% share of net profit.

Will the sellers lender allow us to assume the debt, or for the sellers to keep the debt in their name while we operate the community?

Mitch Messer · Answer

Hi @John Clarkson and welcome to BiggerPockets!

First, please share the state in which the property is located. Seller financing between business entities is governed mainly by state law, and some states are far better suited to these types of deals than others.

Next, does your purchase agreement offer you a financing contingency, or are you on the hook to close or else forfeit your earnest money? I'm trying to get a sense of whether your seller wants to get this done as badly as you probably do.

If so, then your offer of 20% down ($3M) certainly seems reasonable and shows good faith.

The specific note instrument the sellers signed when they originally took on the $9M debt will specify whether there is a "due on sale" clause or other language that might prevent you from purchasing the portfolio subject to the existing debt. If I were in your shoes, Sub2 would be my preferred acquisition strategy, over and above actually assuming the debt.

Even if there were language in the note that would preclude a subject-to purchase, I'd still reach out to the lender and see what could be arranged, particularly in light of the current COVID-19 Crisis. No harm in asking!

You'd certainly want to re-visit your numbers to ensure that these payment terms you've described here don't jeopardize your financing goals.

Personally, I would have proposed to simply make fixed principal payments on the balance over the two year term rather than offer interest right off the bat. If this were an existing operation, I'd aim to match my payments to their current cash flow, if at all possible.

There are still plenty of potential negotiation points, including:

• Will the seller require a personal guarantee?
• Will finance points be charged?
• Is there a pre-payment penalty?
• Are payments interest-only, or will there be some scheduled amortization?
• Are finance payments to be made monthly, quarterly, etc.?
• What are the terms of default and what provisions exist to cure a default?

Hope that gets you started!

John Clarkson · Answer

Thank you for a prompt response, here are additional details on the deal:

First, please share the state in which the property is located. Seller financing between business entities is governed mainly by state law, and some states are far better suited to these types of deals than others.

California

Next, does your purchase agreement offer you a financing contingency, or are you on the hook to close or else forfeit your earnest money? I'm trying to get a sense of whether your seller wants to get this done as badly as you probably do.

Our contingencies have all been removed, however the seller is highly motivated.

Once we confirm that the seller finance is feasible we will then negotiate financing terms.

It seems that the three outstanding questions to ask the sellers lender are below, in order of preference:

1. Will the seller's lender allow us to purchase the properties subject to the seller's debt2. Will the seller's lender allow us to operate the property with the sellers still holding the note3. Will the seller's lender allow us to purchase the properties assuming the sellers debt