How to finance and structure this deal.

Question

All, My partner and I are in early in the process of buying a property with multiple, 13, duplexes on it. They are all under 6 years old. The owner wants to minimize the capital gains tax he pays so we want to suggest to him to do a master lease to us for "x" amount of time, and we pay his lease fee and hold the rest of the money in this time we will secure a loan to buy using the money we make as part of the down payment. He will do a cash out refi on the property and we will use our loan to pay off that refi. Here is one of our questions can we use the property in question as part of our down payment since we have it under a master lease.

John Brown · Answer

WHAT WOULD BE THE BEST TYPE OF LOAN FOR THEM TO GET TO REFI ALL OF THE DUPLEXES IN ONE LOAN AND STILL BE ABLE TO TAKE OVER. I KNOW SOME LENDERS WONT ALLOW A TRANSFERABLE MORTGAGE.

Derek Dombeck · Answer

The first right of refusal doesn't lock in a purchase price today, so I prefer an option. And you could still give the seller a floating purchase price using an option simply by tying the future sales price to the then appraised value, or FMV minus 10%, or a fixed price today with a 5% uptick annually until you exercise the option. The point is, with an option, they can only sell to you, but you don't have to buy from them if you choose not too. The right of first refusal gives you minimal control.

To take over the refinance note subject to is doable, but we would need to know the terms of the loan to give proper advice. I do not like taking over debt with balloon payments coming soon or with variable interest rates either.

John Brown · Answer

I have considered taking over his cash out refi because i heard it mentioned one time before but i cant find any info on how to do this.

Derek Dombeck · Answer

You will have no equitable interest in the property based on the Master lease, so I would suggest also having an Option contract in place to secure your right to purchase the properties. You can not likely leverage that with debt, however you can sell a percentage of the Option for cash and use that as a down payment if you need too.

Have You suggested taking over the sellers new cash out refinance loan subject to at some point?

You could also purchase the entity that owns the real estate, assuming there is one. This has some downsides to it, so I'm not a huge fan, but it is another way for you to consider.