S.E.C. Real Estate Observer

• Tweet

• Tweet

Show Me the Money

WHERE WILL YOU GET THE MONEY FOR YOUR IDEA?

Generally speaking, there are two kinds of funds for the equity portion of your deal, partnership interests and loans. Obviously, a partner is someone that will provide cash or a balance sheet for a piece of the deal. Partners come in many “colors,” those that bring other benefits to the deal and those that only put cash or a balance sheet in and do nothing else. Personally, I prefer the partner that you can brainstorm with. My friend and a partner in many deals, past S.E.C. President, Ted Blank is such a partner. Ted has one of the most creative minds in the S.E.C.. The sessions the two of us have had are legend, mostly because of Ted’s ideas. Another S.E.C., Daryl McCullough, is known to be skilled in analysis. And I would be remiss if I didn’t mention some of the legends like Jack Hunt and Colby Sandlian. Both past presidents, Jack and Colby are known to be able to analyze a deal on a napkin. My point here is not to brag about the skills of the S.E.C.. I would like to leave you with the idea that many times what you give away in ownership is worth every bit of that share in structuring the deal to make it more productive.

Many people ignore hard money lenders for the equity portion of the deal. Don’t be too quick to dismiss hard money lenders. If your deal is good enough and you have done your homework, a 12% or even an 18% loan might be cheaper than a partner in the long run. If a “sponsor” already knows the deal and has the next leg in place (tenants or partial sale of the property for instance), it might be more economical to “bridge the equity gap” with a loan instead of giving a part of the deal away. Just be careful. If your pro forma is off just by just a little, you could lose all your blood, sweat and hard work to a lender that has no choice but to protect his interests by foreclosure.

And then there is the bank or seller financing for the remaining portion of the deal, usually about 70% – 80%. I find seller financing on land to be easy to get in a lot of our deals. Seller financing has its advantages and it downsides also. One advantage is no personal liability on seller financed debt in most instances. The downside is a shorter term. Bank financing almost always carries personal liability. I hate signing personally but it is usually required. None of my bank lenders have been willing to provide financing without personal liability over the last many years. The 1980’s taught them well.

NON-STANDARD FUNDING

Let’s think out of the box. The ways to fund the deal mentioned above are most often used, especially in markets like we have now where Cash is King. But what is going to happen when interest rates go up and the banks start refusing to participate in the more risky deals? Let’s consider a few of our other options.

1. OPTIONS – Speaking of other options, consider the Option, Jack Hunt’s favorite way to control property without buying it. Jack has used options for many years to have the right to lease, develop or even sell real property without going through the expense of buying it before his idea is proven. And what will an owner think when you tell him that his option payments are tax free until the option is either exercised or dropped? Try telling the seller that you will pay for the upkeep, taxes, etc. during the time you have the property tied up. An earnest money contract is nothing more than an option contract anyway.

2. MASTER LEASE WITH AN OPTION TO PURCHASE – The property has experienced a big vacancy (do you have any big box retail stores like Winn Dixie or K Marts in your area) and the owner is sick of the property, he just wants to get out from under it but no one wants to buy it. Would he make you a long term lease with an option to purchase? Make certain that he understands that you are going to make some improvements to the property like subdivision of the space. Properly document how tenant improvements will be approved. It is funny how these guys can fall back in love with the property once you are making it a viable income deal again. Consider filing a memorandum of record to protect yourself.

3. SELL THE NOTE – Get your owner to agree to an installment sale and then take his note to the secondary market to cash him out. Have this pre-arranged.

4. CROSS COLLATERALIZE THE DEAL – Your seller wants cash but all you have is a free and clear property you don’t want to sell or trade. Would the seller take the other property you own as additional collateral to allow you to have control, either on a seller financed or option basis?

5. JOINT VENTURE WITH SELLER – The seller is of the age where he doesn’t need any additional work to do. Maybe he is retired and doesn’t want to manage the property any longer. Strike a deal with him to allow you to come in with your blood and sweat equity to own a part of the deal. Your incentive is that if you do not improve the property, you do not get paid. His incentive is that he can travel or whatever he wants to do and doesn’t have to worry about the day to day management.

6. CONTROL THE DEAL, SELL THE LAND, KEEP THE IMPROVEMENTS – Most of us would say that a good land lease is very desirable. You want to buy a retail strip with a sales price of $1 million. You don’t have the 25% equity. Put the deal under contract, find a buyer for the dirt and fund the equity with the sale of the land. Make it a sale/buy back at a stated price and then with the center is up and running, refinance and buy back the land. What if you had to pay the entity that bought the land a 15% per year guaranteed rate? Well, what if you did? It is cheap if your idea is a good one. There is a lot of 1031 money chasing deals at far less than 15%.

There are no limits to the ways to fund the equity on deals. Chuck Sutherland teaches a one day course on Formulas. Past president Virgil Opfer wrote a book on the subject.

NEXT TIME: HAPPY PARTNERS