In the first two articles of this series (Financing a Large Office Complex — Making The Offer and Financing a Large Office Complex — Structuring The Deal), we discussed the numbers you need to make your offer and how to get the seller to partner with you to obtain financing. Now we get set to take the deal to the bank for funding.
The next step for the two of you (you and the your seller/partner) is to go to the bank and sign off on the deal. Even though you have an LLC, you should sign personally because the bank already has the property as collateral and they are more interested in the cash flow. That’s two of the C’s — all that’s missing is the credit, but this property doesn’t have any, so what they want is the credit of the people who own it.
Even if you have a FICO of 500 they aren’t going to refuse this deal because you have a partner with $3,500,000 of equity in the deal, who is going to sign personally.
That is one less obstacle, because the bank is going to view this as a viable deal. Your partner has real equity in the property, so they can use that for his down payment and they don’t care where the money comes from-they don’t even mind that it comes out of the equity of this property, because it conforms to the laws of their auditors.
When you are working on financing a large office complex, getting the seller to be your partner is the best form of financing there is. The seller has a substantial amount of money, has had this business for some time, and has some real motivation to execute this deal. Therefore, he is a prime candidate for this type of arrangement.
The “You and Me LLC” will buy the property for $6 million. Then, the owner leaves and takes out a big chunk of cash, meaning $3.5 million, of which he contributes half to the You and Me LLC. Then, he takes $1,700,000 out of the deal in cash, but you still own half the property.
Your partner now has a safe, profitable investment with which he feels very comfortable, it’s a built-in reinvestment plan. One of his biggest benefits is tax-wise, he now has half the capital gains on which to pay taxes, had he sold the property without reinvesting.
If he took $3.5 million out of this property, he would have to invest that somehow. When people sell something, they may be very pleased that they took all of that money out. However, if it hadn’t occurred to them up to that point, they have to begin to worry about reinvesting issues. This approach gives this owner a chance to reinvest the money in his own property, one that he knows quite well.
The new deal has the Him and Me LLC paying $6 million for the property. You must give him $1,700,000 and pay off the $2.5 million mortgage, so you need $4.2 million to complete the transaction.
The $4.2 million you need to borrow is 70% of the total property value. With this figure in mind and your contract in your hand, you and the owner go to the bank together. Hand them your contract showing that the Him and Me Corporation just bought this building for $6 million. You have $1.7 million for the down payment. Therefore, all you need is a 70% loan to value, since the building carries itself.
If you found this article helpful, be sure to read the rest of the series Financing a Large Office Complex — Making The Offer and Financing a Large Office Complex — Structuring The Deal.