Seller fears due on sale clause

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Seller fears due on sale clause

Jon Klaus
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes

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?

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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
15y

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.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    I think I like the attorney, it's a partial purchase.

    First, what kind of property is it and what is the business...

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  • Jon Klaus
    OP
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    15y

    100+ unit apartment complex

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    In addition to the purchase or option, that should be inside the company holding the property with the seller guaranteeing performance. 49% can be sold as suggested, an option needs to be made on the balance. The buyer needs a management agreement over the term and there needs to be an agrreement as to who will run what. I suggest maintenance jobs being let by the manager up to a cut off, like $500 without seller consent, tenant approvals, evictions, but the buyer can't encumber the property or obligate the company in any contract over the cut off. The seller should retain tax benefits. Net profits split to the extent of equity established as with losses. The seller may not encumber the property. Debt service, taxes, insurance, maintenace and upkeep paid before net profit splits. That's where I would begin.

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    15y

    Well, the seller's attorney is absolutely watching out for his client's interest. However, the buyer's interest is not protected with this scenario. In truth, the scenario proposed by the seller's attorney has less protection against violation of the due on sale clause than the folllowing scenario: Seller transfers ownership to a trust he sets up, then sells a 90% interest in the trust to the buyer, retaining the remaining 10% for himself.

    In actuality, some risk of triggering the due on sale clause will have to be accepted to do this deal. However, as long as the payments are made on time the loan is seldom called.

    Private Mortgage Financing Partners, LLC
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  • Michael Quarles
    Flipper/Rehabber · Bakersfield, CA · Member since 2008 · 3k+ posts · 3k+ votes
    15y

    The L/O could trigger as well.

    Why not a Performance Contract? Record a memorandum of contact and have the seller bond their position.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    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.

    1Reply
  • Jon Klaus
    OP
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    15y

    The elderly seller only has this property in the company and wants nothing to do with the management.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    Then that works! Now you make me think I said the seller will manage, the buyer manages the property. If he wants nothing at all to do with it, see if the attorney will approve any large disbursement. Without doing this the buyer can suck the property dry.

    There is no issue with the due on sale keeping the transaction within the company and keeping the seller in place. Just put the buyer in place to run the place. All the seller needs is a monthly check!

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  • Michael Quarles
    Flipper/Rehabber · Bakersfield, CA · Member since 2008 · 3k+ posts · 3k+ votes
    15y

    Rather then taking control of the corp what your thought on a UCC-1 filing

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    That was not asked so I assumed Jon and the settlement agent and attorney would cover it, but if I were buying I want an assignment on all personal property in the place to the extent of my buy in. It would clear things up if we knew the type of entity holding the property. The UCC will perfect the security interest for collateral or assignment and be released upon settlement.

    But really, the property is probably on the books of the company. I have been through this and the reason I asked what kind of business was it was to see if there was inventory, my first thought. I have seen buyer's steal inventory and default on the deal. Lucky there was the UCC filed on all inventory assigned as well as acquired in the future. On many items, a UCC will not prevent them from being sold, unless there is a large ticket item. The thing here would be like a stove out of an apartment, but it then helps when you attempt to recover the loss and seek charges against the seller if that's where you need to go.

    Filing a UCC-1 on the corporation as a lien to prevent the sale or transfer of interest can be done but you need to make sure that the interest is valid and not inflated. An option does not convey such an interest in some states and you can get into filing false liens, even though it is a federal issue under the Uniform Commercial Code. It's a tactic that is often misused, but it depends of state statutes and what is allowed.

    And, an option is only one way in this as it can simply be done on an installment purchase, a purchase agreement between partners to purchase the remaining business equity. And a managment agreement.

    What are your thoughts Michael, or anyone?

    .

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