S.E.C. Real Estate Observer

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Real-life 3-way exchange: Path to cash or down and out? Brandon has a former restaurant in Kansas he’s shopping with. Value is $1,200,000 with $500,000 debt. He liked it as an STNL over the last 7–8 years but doesn’t like the return near as much when it’s vacant. He’s learned real estate always has cash flow, but it can be either negative or positive and he prefers the latter. His goal is cash flow for this partnership. Most options he sees available are cash only, so he is looking for a way to get to cash or primarily cash. Gary has a gas station in New Mexico valued at $380,000 free and clear and cash up to $1,500,000 with available financing. It’s a 10% return currently, but the tenant has given notice and will vacate at the end of the term in 12 months. Brandon offered an exchange to Gary for the restaurant. Although it’s not Brandon’s end goal, this option would provide short term-income and a smaller free and clear property, pay off existing debt, and put a little cash in Brandon’s pocket. Gary is looking to move up, but he’s not extremely excited about the offer. Sam saw Brandon’s offer to Gary on the SanderBoard wall, and he wants it. Sam has a note at $1M; it’s strong and will be stable for years, but Brandon’s not really a note guy, so he’s not that interested. Gary sees the note and thinks, “Now that’s very interesting; I really like notes.” However, Sam has no interest in Gary’s gas station.

So, nobody got want they wanted . . . but Brandon decides to take Sam’s note. Brandon now has a strong existing $1M note and has created a 1st position note on the Denny’s for the remaining $200,000 with favorable terms (Sam could also get financing if Brandon wanted cash to pay off the existing debt). Sam now has the restaurant with very low leverage, and he’s happy.

Brandon takes his new $1M note and uses that as a trade for Gary’s cash and gas. Gary gets the note at $1M and gives Brandon $380,000 in free and clear property plus $620,000 cash. Brandon pays off the existing debt with the excess cash. Gary’s now happy.

At the end of the day, Sam has the restaurant and a new tenant who substantially increases his cash flow and adds value to the property.

Gary has the $1M note and will use that to trade into an even larger property as down payment.

Brandon paid off the existing loan and now has $400K cash, $380K F&C equity, and a $200K note in 1st position at 20% LTV. Brandon has one year of cash flow to figure out plans for the F&C property; he also has cash and a secure note to trade. He is searching for two to three separate properties using these equities as down payments.

***Extra Credit***

Option the Payments: Brandon wants to stop the eat and Sam wants time to search for a tenant; both parties need to find a solution to meet each goal. Another option they discussed was for Sam to option Brandon’s Denny’s while he searched for a tenant. Most important to Brandon was to stop the $5,000 per month eat while he searched for another deal. Sam’s note pays $5,000 per month. Sam just options his payments toward the Denny’s and has control while he searches for the replacement, and Brandon stops the bleeding.