Seller fears due on sale clause

[Jon Klaus]

Potential buyer is looking at a commercial property with poor trailing performance, so it will not qualify for a new loan. It is mortgaged. The seller is willing to be creative, but not do anything that might trigger the due on sale provision.

The seller's attorney recommends a JV with the buyer where the seller holds 51% and the buyer holds 49% until a buyer refinance takes out the underlying loan and the seller. The buyer then gets full ownership and title. The problem I see with this is that the buyer has no control, but must make the investments to stabilize the property. Once stabilized, the seller might have motivation to renege.

Other options: Lease/option or master or sandwich lease? Don't these put the buyer in a weak position, too? Buyer makes all investments and then the seller has new found motivation (performing property) to stop the option exercise?

Other creative options that protect all?

[Bill Gulley]

Obviously I didn't make that clear, the Option is inside the company. If the property is held by a corp or LLC, it is between the partners and adopted in the minutes. The management agreement isalso a corporate document. Neither are filed in real estate records. The buyer buys into the company, buys a job. The protection for the buyer can be made a little stronger with performance, hold harmless and indemnification agreements in the management agreement.

Michael, if the deal is large enough a performance bond could be a good idea, premium should not be too much. But, you could also simply have the deed escrowed depending on when the deal is to close. A deed from the company could be made and held.

Jon, does the seller hold other properties in that company? If so, they can be excluded through the modified operating agreement/by laws.