advice on commercial building

[Dale544]

I purchased a 16,000 sq ft class c industrial building, in Dallas, that sits on 1.2 acres of which about .25 is fenced in for storage. Current gross monthly rent is $5500 from 7 long time tenants. I purchased it with partners last year and had the original seller carry a note for 295k and the balance on that note is now 284k. I want to buy out my partners for 125k.

The thing is I do not want to refinance the first note because it was structured on an original 12 yr note with 7.75% interest that adjust each year, at .75% BELOW prime. So effective May 1, the interest will drop to 5.25% and the payments will drop aprx $200 a month. The building will appraise 525k+. Is there any chance of someone giving a second lien to buy out my partners? If not a second, any suggestions?

[Dale544]

I am new to the forum and Magic Bullets, does anyone have an idea as to the best way to buy out my partners?

[Jim Johnson]

I am new to the forum and Magic Bullets, does anyone have an idea as to the best way to buy out my partners?

I think more information is needed to unpack this question... First- in my partnerships (or multi member llc's) there are operating agreements that spell out some of these guidelines. If this was purchased without such an agreement... before people ask... my operating agreements are state specific and specific to my type of real estate investing... so I will not hand it out... sorry... now back to the regular scheduled posting...

then...

Are your partners wanting to sell?
If so... why?
If they are not wanting to sell... how are you going to get them to sell?
If the property will really appraise for what you say it will, why not take a second out on the building?

Property exchanges hands because a buyer is motivated and a seller is motivated to strike a deal... help us understand the motivations on each side...

[Dale544]

I have a 33% interest in an LLC that purchased the building last year. The 3 members (including myself) of the LLC has decided to dissolve the LLC and therefore wanting to sell the assets. I do not want to sell the building but rather "buy" it from the LLC. In order to buy it from the LLC I need 125k. The other members are in agreement if I come up with the 125k they will sign a deed to me. As for the second lien, that was part of my original question, what type of lenders should I approach and what type of terms could I expect? There are many parts to the deal and I can fill in the gaps if I know the specific questions. Thanks for your reply.

[Jim Johnson]

I have a 33% interest in an LLC that purchased the building last year. The 3 members (including myself) of the LLC has decided to dissolve the LLC and therefore wanting to sell the assets. I do not want to sell the building but rather "buy" it from the LLC. In order to buy it from the LLC I need 125k. The other members are in agreement if I come up with the 125k they will sign a deed to me. As for the second lien, that was part of my original question, what type of lenders should I approach and what type of terms could I expect? There are many parts to the deal and I can fill in the gaps if I know the specific questions. Thanks for your reply.

I would go to the local bank that is accepting the rent deposits. If they know the track record of the deposits and if your operating statement is verifiable you should have no problem securing the loan from the bank. My last 'under a million' purchase had 6.5% fixed for 3 years then adjusted 1% above prime. It was amortized over 25 years but due in 5. I am a strong borrower and under 1 million they really look at fico scores and your personal income along with the property income. If you can find a bank that will underwrite the loan in house that would be best. Strong bank relationships are very important as though banks have guidelines, the do make exceptions.

[Dale544]

Thanks Jim, I will start there.

[The GUY]

Don't be overly protective on an interest rate without considering the payment. In commercial property CASH is KING. Your first position may be a nice rate but when you add your second position (yes, commercial properties can carry seconds and even thirds and more depending on property and income) to the monthly payment your blended rate could be higher than if you were to just replace the whole loan with your cash out. Evaluate the monthly payments not the rates!

Something else to consider when playing with LLC property. It is always cheaper to purchase the LLC and NOT the property. Essentially you can buy your partners out via the operating agreement clauses or you can amend and draft the buy out. A private stock purchase or stock purchase agreement can be used. This event saves you money on document stamps and intangible taxes which eat serious money up in closing costs. This does not usually allow you to leverage the property to buy them out if you do not have the cash in pocket to activate the stock sale.

One last note it is hard to evaluate the value of the property but it seems like your need is to leverage the property to 85% (based on a serious amount of assumptions in the original posts and lack of information). If this is true, that may be a little high for light industrial property which tends to only like 75% and under in small cap commercial. You may want to visit the bank and get best terms and see which party will hold a second your partners or the current note holder in order to make it "fit".

[jickjack1]

First- in my partnerships there are operating agreements that spell out some of these guidelines. If this was purchased without such an agreement... before people ask... my operating agreements are state specific and specific to my type of real estate investing... so I will not hand it out... sorry