All Forum Posts by: Greg Scott

Do you have a mortgage?

People usually freak out about the due-on-sale clause, however, I've never heard of that really being a problem. 

The bigger issue is one that most people don't talk about. If the mortgage is in your personal name but the property is owned by the LLC, have you pierced the corporate veil? Would your LLC survive a legal challenge?

Raising money is much harder now than it was 3 years ago because so many syndications have gone belly-up.  While you may have a good track record, if this is your first money-raise, you will still need excellent marketing and a compelling pitch.  Columbus is a great market so that helps, but can you sell yourself and your deal?

It is worth noting that, there are numerous people, some of them here on BP, that could raise $3M for the right venture with a few phone calls and emails.  Something to think about.

FWIW, I'm not selling myself here.  I've raised a lot more than $3M, but never for development.  It is not my expertise.  But, those people exist.

@Sean Graham

I believe my post is 100% in agreement with what you just wrote. Please read my second paragraph.

In my first paragraph, I was trying to correct the thinking of the original post. It was unclear whether they thought they could get a good price or there was some strange tax benefit to having a fully-depreciated property.  I probably could have worded that second sentence better, because if that is all you read, it would appear I don't understand depreciation.

Lori:

Why did you not test for Radon or Asbestos? 

Those are dangerous things, arguably worse than lead based paint, and your property probably has them.  If you were going to test for something, those would likely be higher priorities.  Because you did not test for those, does it mean you do not care about your residents safety?

I'm not asking that because I believe you should do the testing, but to make you think about the answer.

I'm going to give you a reason to not have a wait list. 

In the apartment space, you shouldn't need a wait list unless your property is 100% occupied.  A property that is 100% occupied is usually a sign of laziness or fatigue.  Those landlord will keep rents well below market so they don't have to deal with unit turns.

To maximize your business, if you are getting close to 100% occupancy it simply means your rent is too low.

As a follow-up post, the one thing I would test for in a house is Radon.  That is one carcinogen that is a common health hazard.  It is also easily mitigated which is why you don't hear much about it.

If you want to go deeper into what the media and trial lawyers would have you believe are dangerous, you should test for mold.  It exists everywhere, so you will find some.  You can also test for formaldehyde, Volatile Organic Compounds (VoCs), arsenic in the water, DFAS, gas stove fumes, microplastics, fecal contamination, and so on and so on.

It is worth summarizing it this way.  In many respects, you shot yourself in the foot by testing for lead.  You hurt yourself without providing any real safety for your tenants.

Lori:

I don't want to be snarky.  I was trying to be gentle with my first post.  Now I am simply trying to point out the realities of your situation.

Given the age of your house, lead based paint is not the scariest chemical.  You should definitely test for asbestos.  (Side note: 100 years ago, owners got a discount on insurance the more asbestos they had in the house because the insurance companies thought it was safer.  That is why there was a ton of it in a 100 year old house.)  Chances are nearly 100% you would find asbestos in several parts of the home, and there is a pretty good you would find lead water pipes.

By digging up all the skeletons, you now have to disclose them.  With all that wonderful knowledge, the value of your property will drop to near zero.  Because of the disclosures required, nobody will ever rent it.  Even though it was a serviceable rental property before with an exceptionally low risk of harming anyone, you would have destroyed the value of the property for yourself, the community, and those seeking a place to live. 

If you had maintained the property well, it could have been a safe, comfortable home for a family.   Now, your property goes vacant and rents in the area go up, making renting less affordable for working class people.

That is the reality of being a landlord today.

Pretty much everything from the 1970s and earlier, you can just assume it has lead-based paint.  With houses of that age, there is also a high probability it has asbestos, as asbestos was used in numerous products well into the 1980s. The media would have you believe these are both like nuclear waste, but most of the time they are very manageable. 

Testing to prove those things exist opened you up to additional disclosures.  In a well-maintained property, the health risks of either should be low, but the additional disclosures are surprising to tenants and generate a lot of fear. 

Lead based paint is most dangerous when ingested. It is also most damaging to children. Apparently the lead tastes somewhat sweet so small children, and presumably
cognitively disabled adults, might eat it. I've heard some historic houses with original wood windows can get a lot of airborne lead dust from microscopic paint flakes generated by opening and closing windows. In your case, the exterior paint has very low risk to anyone unless someone is eating the paint flakes.

Remediation is always more expensive than encapsulation.  For lead based paint, encapsulation is usually a fancy way of saying re-painting. New paint will encapsulate the old paint.  However, if the paint is already flaking that would require special handling.

I'd get professional painting company to assess your situation.

Congrats and good luck.

I'd recommend against a syndication on a deal this size because you can expect the costs to be $10K+, which means you are giving up a large % of your profit to legal fees. Also, because you made this posting, you have violated the law if you wanted to do a Reg D 506(b) offering, so your options are now more limited.

It would be far cheaper and simpler to find a true partner.

Your mortgage broker is partially correct. 

If you want a Fannie Mae loan you have to wait 12 months.  Here are the guidelines.  Since an agency loan like this will provide the best rates and terms, it may be worth waiting. 

On the other hand, if you are in a hurry, you can get a commercial loan from a bank just about any time.  If you do, you will likely have a higher interest rate and a balloon payment after 5 or 10 years.