Part of my concern was that lenders would object to the values we assign them, though appraisals will support those values. Our inclination is to assign a price based on three things: cap rates of comps, our preferred exit, and loan terms. This leaves the last property pretty darn cheap ($100k purchase, with a tax value of $500k) and we’ll pay cash for it. Your prorata method is an easier defense, for sure. I just don’t know if there will be anything to defend or any questions asked by lenders whatsoever, since I’ve not bought commercial property or portfolios before.
Again, thanks for taking the time to answer my question.
I have 3 properties under contract. It was a package deal. The initial offer was for all 3 on a single contract and it was accepted. However, the lenders (2 different lenders, one is a conduit loan)will require us to allocate a portion of the purchase price to each property using a separate contract for each property. The seller wants to make sure we don’t just cherry pick and close the best ones, leaving the third.
Does anyone have suggestions for how to accomplish this via an addendum and not negatively impact our ability to obtain financing?
Are there any potential land-mines here with regard to price allocation? The quality of the 3 properties (all self storages) is very different. One is turn-key with no deferred maintenance (conduit material and we’ve allocated price based on a 7 cap value) and the other two have deferred maintenance and are turn-around projects, and we’ve given them a 10 cap and 13 cap value.
Unless there is a real good reason to intentionally mis-allocate the price, allocate your purchase price exactly they way you analyzed the deals. the beater is priced at a 13 cap…
remember, in allocating the price, you will them need to sub-allocate the individual deal prices to land (non-depreciable), building (39 year depreciation for commercial structures), and other depreciable items (faster than 39 years). office equipment and furnishings and flooring, etc. talk to your tax advisor about making these sub-allocations. it can accelertae your depreciation expense (if that’s important to you)
I’m not sure about the term “mis-allocate.” The total purchase price is a 9.53 cap. That’s how we negotiated it. We started our offer at a 10 cap and that’s where we ended up agreeing. We didn’t want the 3rd property, but it was part of the deal - all or none.
The reason we would allocate using different cap rates is that we have different exits in mind for each, and the appraisals will definitely support our allocations.
The best property is a long-term hold and we don’t intend to refinance and we wouldn’t expect to buy at a 9.53 cap in a typical situation. The others have a lot of immediate upside but also have repairs we estimate at about $200k, and we’d like to do a cash-out refi to get our initial investment plus repair costs out within a year or two.
Does that constitute a good reason? And is this “mis-allocation?” Is that a technical term?
“mis-allocation” is not techical. just descriptive.
I’ve bought portfolios of properties several times. I then have the job of allocating my purchase price accross the portfolio. Sometimes, I use the county assessed values as my guide (if property x is assessed at 50 and the whole portfolio is assessed at 200, I would allocate 25% of my pp to x). but there have been times when the assessed values were out of whack (some well below my idea of FMV, and some well over. if everything is consistently under-assessed or over-assessed, the prorata method still works)). if i used the prorata method described above,where assessed values are all over the place, I would have a misallocation of pp.
Do what you want. Just be reasonable. you will end up with more basis assigned to the beater than you would have ever paid for it, and less basis assigned to the cherry than you could have ever bought it for.