Re: How to structure this Deal? - Posted by ray@lcorn
Posted by ray@lcorn on July 26, 2004 at 11:07:34:
Road,
Sounds like a motivated seller, or if not he/she sure should be.
The first question I have to ask is why the complex is 47% vacant? If the reason is because of the $70T needed in improvements, then make sure that’s all that is needed. Sounds like a total rehab may be in order. If the vacancy is due to the unit type (i.e. 1 br and studios), then that may be good reason to pass on the deal.
I don’t like the unit mix, but that’s just me. 1 br’s are good for students, but little else. I’d want to know that the market has a demand for that type of unit.
If there is sufficient market demand for the product, then you can move on the the structure of the deal. I’d approach it from the standpoint of solving the problem, which is probably the owner. I would assume that the cash flow is negative since the property taxes are not paid. (Wonder if the lienholders know that? More on that in a minute.)
That means you could have some options as to who you deal with. If you’re going to deal with the seller, then I wouldn’t even consider paying a down payment. If I were going to put $70T into the property then that’s more than enough down, and you’re likely paying the seller for the work you’ll have to do to make this a viable investment. Read the appraisal to see what the occupancy assumptions were to support the $580T value. It is likely that the appraisal assumed a 5%-10% vacancy factor… that isn’t the case, and so the appraised value is meaningless unless you adjust it for reality.
A master lease with an option, with payments tied to the occupancy and cash flow would be one way to structure the deal with the seller, but the risk to you is that the property stays in the seller’s name, which leaves you exposed to any other of his/her financial problems, e.g. judgments, foreclosure, etc…
Similarly, I wouldn’t do a wrap because that also leaves you vulnerable to the seller not making the payments on the two loans and puts you at risk for a default. A straight sale that gets it out of their name with a cash flow mortgage may be a better way, but there are still the two existing loans to be dealt with.
Which brings me to the alternative way to approach the deal… you may want to consider talking directly with the lienholders. It could be that if the cash flow is seriously negative then the property taxes are not the only thing not being timely paid, and one or both loans may be delinquent. You could start the conversation with a request to talk with them about assuming the loan, then show up with pictures of the present condition of the property, a copy of the past due tax bills, and an inquiry as to whether they would entertain an offer to take over the property. I’d talk to the 2nd lienholder first. If the 2nd is from a previous seller, then there could be even more motivation to get out while there is a chance. The lienholder may either sell the note at a discount or agree to a payment moratorium to give you a chance to complete the turnaround.
A deal cut with the lienholders could get the property bought at a price where the improvements make sense, and avoid the risk of keeping the seller in the picture.
ray