Financing,Large,Office,Complex finance, share, loan Financing a Large Office Complex (Part 3 of 3)
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Financing the Property This 70% loan loan-to to-value deal should be very easy to finance. For one thing, one of the signers on the loan has owned the property for 15 years and has a great payment record. To make the cash flow work, start with the Gross Operating Income of $720,000. Then subtract the annual debt, which is the mortgage payment: $4.2 million x 7% for 25 years x 12 = $356,260. NOI is $500,000, which you divide by $356,260 for a total of 1.4 Debt Coverage Ratio. The Debt Coverage Ratio indicates what kind of a cushion the borrower has in the deal. If you have an NOl of $500,000 and youre only paying $350,000 in debt service, you have about a 40% cushion. Most banks want 1.2 ratio, but youre giving them 1 .4 ratio. Their conforming loans are between 75 and 80%. Since youre giving them a 70% loan-to-value, the bank should agree to the loan without question. After youre finished paying on this loan, youll have $143,000 in cash, half of which is yours. As to the owner, he dramatically reduced the amount of his cash flow but he still has that $1.7 million in his hand, and if the property was resold 10 years from now, it is likely to bring $10 million to $12 million. LLC Partnership One of the best features of an LLC, and why its so popular today, is that you can structure create an LLC within an LLC, which is an IRS-recognized structure. Its usually recognized in any state youre in as a type of a corporation, but the IRS recognizes it as a partnership, which is why you can make contributions to it that are not taxable. Another feature of an LLC is that you and your partners can reallocate the benefits periodically. You can set this up in the very beginning or by unanimous consent. As you go along, you can change the benefits, one to the other. Changing the Deal Consider the scenario where the owner changes his mind and decides that hes not going to give you half the cash flow in this deal, which amounts to $143,000 in cash. You can make an agreement with him wherein he acquires half the stock, and until hes gotten back the $1.7 million left in the deal, youll only take a quarter of the income. So, it will take about 17 years before you get anything more than 25% of the cash flow, but you still own half the property. Therefore, if five years from now, you sell the property for $9,000,000, he the owner will get back his $1,700,000. first on that 75-25 basis. The remainder will be split 50-50. So, dont consider it an obstacle if he insists on having a bigger portion of the deal. If you get a quarter of the income now, you can equalize the deal when the property is sold. First-Out Situations First, he will get his $1.7 million back. Next, youll count all the payments hes received so far and subtract that from the $1 .7 million. Then if hes already gotten back $200,000 in dividends, you only owe him $1 .5 million on this 75-25 split. Anything above this, you split 50-50. Even if you have to take less of the cash flow, always make yourself a 50% partner in the deal, so that at the end, you get your half of the profit. Ultimately, he gets his original equity back and you split the monopoly money. This is called a First-Out situation. Investors receive their money first and you obtain yours second. Most people are used to this type of accounting when financing commercial deals. Tip: Income property doesnt appreciate as fast as residential, which is part of the reason you can buy commercial property proportionately cheaper than you can buy houses.
Financing,Large,Office,Complex