Show Me The Money!!!!
Hopefully now I have your attention so here's the deal. I need some help. I have found an amazing deal that is located around 5 minutes from downtown Nashville. They are asking 6 mil. for the office complex but I feel I can get them to drop some. The appraised value is at 9.1 mil.
Details:
Property Use Type: Investment
Primary Type: Office
Office Building
Building Size: 110,000 SF
Lot Size: 1.00 Acres
Occupancy: 90.00%
Price: $6,000,000
Price/SF: $54.55
Cap Rate: 10.00%
Cash On Cash: 10.00%
Date Last Verified: 3/13/2004
Financial Summary
Scheduled Gross Income: $1,850,000
Vacancy: $130,000
Effective Gross Income: $1,720,000
Operating Expenses: $660,000
Total Expenses: $660,000
Net Operating Income: $1,060,000
Pre-Tax Cash Flow: $1,060,000
First off is this as good of a deal as it seems to be? Secondly I'm not a multimillionaire but I want this property if their is as much value in it as it seems. I need to know how to finance this property without being personally liable. HELP!!!
You seem to have the right attitude of "Cautious Optimism". On the surface it looks like a GREAT Deal, so proceed with your "Due Diligence" taking one step at a time. Some of the questions you should get answers to are:
If this is such a GREAT Deal, WHY are the sellers selling? What do they know about future events and trends that I don't know?
What are the current and future business trends for the area and what position will you be in if ALL your positive projections fail to happen?
So Best of Luck and success to you as you proceed Full Speed Ahead with an open mind until you discover facts that make this not such a great deal, and if you Never find those type of facts, acquire the property and SMILE all the way to the bank every month. 8-)
PS: Check your PM (Private Mail)
do you actually have the appraisal in hand, in this case seeing is believing, and in what order are the tenants going to be moving out. when will there leases be up ect......
If it sounds to good to be true it typically is
John
After you do your due diligence like stated above, you will need to set up a C-corporation. Preferably in Delaware or Nevada, for tax purposes. Then, there are lenders that will lend to a corporation without a recourse. They are few and far between, and the interest rates will be higher, and there will be points to pay. Most Hard Money lenders that lend in that price range will do it though. Usually you can get interest only payments. The Lenders tab, or an internet search will do the trick. Also instead of talking them down on the price, you may want to talk them into splitting some cash back to build up reserves for the loan payment. Such as anything over 5 million that you can get funded will be an 80/20 split at or after closing. Just a thought.
I, as the last post mentioned, would find out WHY they are selling. Make sure you know the reason they need to run, then make sure you can fix the problem. Read between the lines with there answers. Make sure to get the realtor on your side, by offering a commision on any new tenants, before asking him pertinent info.
Good Luck,
Kyle
Thanks alot for all your help. One question I have is that they said the only way you can have the appraisal at your disposal is if you are a qualified buyer. I'm not a qualified buyer as of this point I wouldn't think. Any ideas on how to get htis appraisal and further information on the property without turning them off before I decide if it's a go or not?
By the way the C-Corp is the best entitiy to establish because it wouldn't affect my personal credit if a deal went sour?
Hello...
Why would he rather setup a C-Corp instead of a LLC or an S-Corp?
I am looking at buying a 6 unit commercial property I looked at recently. Should I setup a corporation BEFORE I get financing or after? I can post the number to give you all a better view, but I have positive cash flow from my analysis so far.
Also, what about obtaining a SBA loan? Just a thought
Thanks...
Chris G
I think if I read right an SBA loan for property has to be occupied 50% by the owner. Please give us some input
Andy yes answer his questions about entities and financing before or after.
You can of course lie as to your financial worth or you can describe yourself as an employee or consultant to an investment company.
I think the answer lies in the leases. I would view them with great care as to date of origination, princ. involved what deposits on lease and they of course transfer to you on sale. How long are the leases what escape clauses if any are involved. Sometimes these deals are structured up complete with tenants. I would of course walk the property, talk to the tenants, coffee, tea and conversation. Check with the maint people and thats only the beginning.
As to holding aloof and not involving yourself or your individual credit. I would not be concerned to participate in a transaction of this type may require and rightfully so your total involvement. You do not seem to have much to loose, so go for it, but go with everything. Heart, Mind, Soul and oh yes pocketbook.
Luicus 8-)
Lufos,
Thanks for your response. Your right in the fact that I don't have much to lose. I plan on walking the property in the next week and a half. The issue at hand is that I'm not currently located in that city and won't be for another year. However I'm not far enough away either that I could run over fairly often.
What type of steps to you reccomend as far as checking out the property. I'll check out the exisiting lease agreements as well as talk to the tenants and present owners. As far as financing goes should I wait to have it financed after I make a decision on if it's a valuable deal or not? Also do you know the answer to the question of the entity I should form? Thanks in advance. 8-)
As to entity, I believe that with the amount of money involved to the positive that a C corp is your only real choice. AN LLC would be best if you were able to take title in that entity for protection of assets but a C has many more write offs tax wise. IF the earnings were less than say 85K a year then a S corp is vastly superior in that you can avoid self employment tax for at least a couple of years and then a large part of them thereafter.
There is really no advantage to setting up in Nevada or Delaware as you are doing business in tenessee and would have to domesticate your corporation there unless you did some creative entity stacking which might in turn trigger an IRS decision that you had a "controlled" group that would set aside your other entities.
As to cash flow, it is closer to 17% what your are describing(If you paid cash for it). Figure in your debt service and go from there
Good Luck![ Edited by Stockpro99 on Date 03/30/2004 ]
Being a contractor among other things I would check into "deferred" maintenance as well, you would need some definate reserves for this to work.
Thanks so much for your comments.....I'm taking notes.
Any more info. would be greatly appreciated.
As far as the C-corporation, stockpro may be right I am not intricately familiar with the state of TN. But no matter what definitely set one up now, as you will need the info for your lender. One of the reasons I had mentioned the hard money lenders is that you will need less to get the property as far as a down payment. But by all means, if you have the 10-20% to put down on the property, go with the lowered interest loans, as it just makes sense.
Also as far as the SBA loan is concerned you could set up a different corporation for management of the facility as its own entity. That in and of itself would take care of the SBA requirements, and it would be an entity that you could sell later on, should the need arise. It would also give you some more immediate cash at a lower interest rate. SBA has been doing better with there turn around time in recent years.
There also is one other way to do this. If the seller is amicable you could buy the corporation he has running the facility. By doing this you also buy the seasoning that goes with it. If the seller would take a down payment until you could refinance, you would buy the company and be in a position to seek a refinancing loan based on the seasoning that already exists with the company that you are buying. Thereby getting a better rate, and a lot less out of pocket expense. You will need a good lawyer for the documents though.
Good Luck,
Kyle
Hi Kyle,
What are the reasons for incorporating before getting into a property and why a C-Corp as opposed to a LLC?
You can PM me or post for all to see here.
Thanks!!
Chris G
Also if you could answer this question for me. Why should I put out the money to form a Corp. before I have the property under contract.
If my thinking is correct couldn't I get the property under contract if it turns out to be a good deal then line up the financing and such? Basically purchase an option on the property?
Slowly,
How is the ownership held at the present time? Can you on purchase merely purchase the existing corporation now in ownership? Sometimes that is really the simplest way to go and makes possible many many variations on ownership funds. Utilization of Lease deposits, existing financing from banks or lenders.
During the Punic Wars I fought for Athens, we bought a building here in Los Angeles 8 stories loaded with lofts which were loaded with companies in the garment business. We merely bought the existing corporation then in ownership. We went around and visited all of the various garment companies and offered to extend their leases for a three year period fixed in exchange for a lease deposit. We then took those lease deposits and that was how we bought the corporation then in ownership and merely let the mortgage ride. I negotiated the Due On Sale Clause by merely pointing out what a lovely well secured property it was from the banks viewpoint. Besides no actual change in ownership. Union Bank Agreed and we then owned a building.
One of the tenants started to come up short on power usage as we read meters every 30 days and we then negotiated him out prior to a BK and sold his factory fully equiped to a new tenant at almost twice the existing rental rate. His deposit on lease and funds given to purchase the nice factory gave us a pad on which we ventured forth to buy other small little four and five story manufacturing buildings.
Of course times have changed and most of these little darbs went out of business as China and otherplaces took over the actual manufacture of clothing. Now they are no longer loaded with garment manufactures.
In keeping with our new society dedicated to the arts, services and no actual work. These are now Lofts for untalented very rich wanna be or tried to be artists. Most of which could not tell a crayola from a paint brush. But they aspire.
Now late at night on the streets, you do not just meet the homeless and the occasional mugger, you now view very upper class couples walking their dogs carrying little plastic bags of dog turds.
Not quite sure which I prefer. The homeless had great stories but really bad breath. The newbies having with great effort maintained a C average thru a good ivy league school have no story line and utilize disrupted patterns for communications but, a big but. They do have lovely breaths. Pure pepermint with an occasional hint of Patchouli Oil.
Oh where are the slums of yesteryear!
Oh Tempre oh Mores. Lucius 8-)
Good Question...
My thoughts are that it is held by an investment group that has multiple properties in the area however, that is just an assumption. I will need to check further into that.
Thanks and interesting storie as always.
Story
wow I can't spell when I type fast.
I agree with Lufos, it would be easier and a really smart thing to purchase the existing corporation , also you would be buying the seasoning that comes along with it. If you can manipulate te deposits as well you would have a slam dunk of a deal.
I said a C-Corporation because of the amount of monies involved. Check with your accountant, but I was told by mine that anything over a certain dollar amount should be in a C-corporation because of the further protection and also the amount of tax advantages. The LLC changes from state to state but generally if you are going to have over a million involved, it would be wise to have the extra protection that a C-corp will have. Especially here in Florida.
Also I had stated to get it set up now, as it will take some time with the paperwork involved, and your lender will want to do a UCC search on the company to make sure the company is in good standing.
Good Luck,
Kyle[ Edited by KyleGatton on Date 03/31/2004 ]
I don't think it would be possible to buy the existing corp. because they own multiple properties and won't be selling them all. Am I missing something there....also even if I couldn't buy the existing corporation is it possible to get the lease deposits and such in my deal?
You are due the deposits no matter what. And check with them regarding the corporation, some companies have multiple corporations set up under an umbrella corporation. You may be buying one of the smaller ones.
sweet......you can never learn this type of insider info in school
Here's the update:
I still have no documentation to conclude if it's a good deal or not.
I did have a colleague go by the property though, the area is great, the building is run down. I would have to hire a contractor to renovate the building. The problem is I don't have the capital to carry the loan through renovation if it's not producing any revenue. What would you guys do?
One thing I recently heard from one of the gurus.... make sure your agreement makes it so that your seller cannot lease to any of the current tenants for 5 years or so, otherwise, he could try to take them with him......
Make sure you've covered everything in your figures;;;; maintenance, insurance, water, sewer, licensing, rental agent, management, also get their schedule e (I assume it's still called that with a property this big) to see what expenses they claimed)
This is continued on the post named "Show me the money Part 2"