S.E.C. Real Estate Observer

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Editor’s Note: This article first appeared in the November, 1974 issue of the Real Estate News Observer.

Mr. Bartaloni owned a building leased to XYZ Title Insurance Company. The lease had six more years to run on a 15 year lease. However, Bartaloni forgot, in the original lease negotiations to have a tax clause or cost of living index added to the lease. The taxes had risen substantially causing the property to have a negative cash flow of $200 per month and this could increase in Broker Binn’s opinion to $300 per month over the next six years.

Appraisals on the property indicated a value by “cost approach” of $100,000. The loan amount was $70,000. The main reason Binn had considered “taking on” this building was the fact that the building was well located between Macy’s and a regional shopping center. However, how much do you pay for an income property which produces no income, has a negative cash flow and is locked in on a lease for the next six years?

What Was Their Motivation?

The seller could not financially carry the property, and was thinking about letting this prime location property slip into foreclosure.

Alternatives

The seller attempted to secure a 2nd loan on the property to carry the property over the six years. He turned this alternative down as it would cause even a larger negative cash flow and most second lenders considered this too risky.

For Every Problem There Is A Solution

Broker Binn offered to buy the property for $9,000 cash as a down payment with the balance evidenced by seven personal promissory notes. Each note would come from an investor in a limited partnership in the amount of $3,000 each payable at $50 per month including 8%. This meant Mr. Bartaloni would receive $21,000 in notes plus $9,000 cash. The cash would be used for closing costs. He accepted the offer subject to reviewing each of the investors credit report and financial statement. Binn did not want his newly formed investment group to go into a negative cash flow position.

Kill the Negative Flow

Binn knew his group would be paying the seller a total of $350 per month. Thus, he made an agreement with the seller that portions of the total payments would “service” the negative cash flow and potential future increases to the negative cash flow.

Creating Additional Seller Benefits

As an additional incentive to accepting the offer, Binn offered a 10% interest in the property to Bartaloni. This means that Bartaloni would have an equity interest in the property which would be worth money in six years when the lease was renegotiated. It was both Binn’s and Bartalonis opinion the property would be worth $125,000 to $137,000 by just redrafting the lease to current prices with “all clause.”

The transaction closed. The above is just one solution to a fairly common problem. How many readers could solve this problem with other formula techniques?