S.E.C. Real Estate Observer

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This is a whole series of creative financing techniques used on one property over a 15-year period.

In 1999, I had a client who was in a pickle. She was living in an assisted living facility, but she still owned a residential triplex where she had lived for many years previously. She had given power of attorney to some unscrupulous people who were living in the unit she had previously lived in, and they were using the rental income from the other two units to pay their own living expenses.

In the process of all this, we found her a good, reasonably priced attorney and arranged a new and trusted power of attorney to help handle her affairs.  After bringing her situation to national exchange meetings and not finding a good solution, we arranged the following as a solution to her problems with the assistance of her attorney:

1. I found a solid NNN- office building leased to a strong regional utilities construction company, with a strong positive cash flow, and put it under contract. Price = $575,000.
2. She contributed her free-and-clear triplex into the deal. Value = $200,000. I became the new 100% owner of the triplex. I financed it at $150,000 and put $150,000 as a down payment toward the office building, which we owned together. After a year or two, I sold the triplex, paid off the loan, and broke even.
3. I obtained new financing on the office building from a regional bank (my regular bank), using my own personal guarantee, but no borrowing requirement on her part, in the amount of $460,000. The “excess” of $35,000 covered financing fees, environmental studies, surveys, title work, title insurance, inspections, prepaid expenses required to close, and so on.
4. My deal with her: She was 1/3 owner of the office building. I paid her a base payment of $2,000 per month for the first year, which was about 80% of what was left after paying the mortgage each month. In addition, I guaranteed her an increase of 5% per year for the rest of her life.
5. In 2003, when she died, the lease was at the end of its life, so the appraisal was considerably lower than what we had paid. I paid the estate $75,000 for her interest (using funds from my home equity line of credit); the $75,000 was higher than the appraised value, based on the remaining $400,000 note.
6. In 2004 I exchanged one-half interest in the building to the owner of my subtenant for a free-and-clear office building about a mile away (exchange value = $260,000) and a new ten-year NNN lease on the building, at a considerably higher lease rate. As part of the deal, we refinanced the building for $500,000, and I got $20,000 from the refinancing. This worked out really well because my credit was shot at this point, and I could not have refinanced it alone. We also escrowed $50,000 from the refinancing to build an addition to the office building, providing some warehouse space adjacent, to consolidate the tenant space in one location. As part of the refinancing, we separated out parcel #2, and kept it free and clear. Simultaneously with the closing, I attempted a 1031 exchange on the note as a result of short-term seller financing on the sale of the $260,000 office building. I was unable to find a suitable exchange property and began receiving payments on the note after several months until it was paid off a couple of years later.
7. During the next ten years, this building provided me with a steady source of income, ranging from $1,500 to $2,800 per month, which helped keep me going through the recession.
8. In 2010, my partner sold his business to a large German company, which increased the lease payment dramatically because they did not want a NNN lease arrangement.
9. In 2014, the German owner vacated the building and put it on the market for sale.
10. Finally, in 2016, we sold both of the properties.