Board Topic: Appartment building Purchase
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Appartment Purchase

Posted by: Newcomer Nov 17 2004, 12:51 AM
Admin, I would like your advice.

I have come across a spectacular deal which I'm confused at how to proceed.

A 60 unit appartment complex is for sale in my local area. I am very aware of the local market and this is a rare deal by any standards.

Gross Income: 507,540
NOI: 315,534
Vacancy: 0% (100% occupancy)
5 year track record of 99% ocupancy.
Year leases with all tenants. No month-to-month.
Built in 1990
Appreciating at 4% per year.


Purchase includes an attached VACANT 3.5 acres already cleared and zoned for an additional 45 units.

A little background on the area. The 3.5 acres is the last buildable "for sale" vacant property within a mile radious. Also, the surrounding area is exploding. The highway has just been re-built and is now an 8 lane with easy access. 10,000 new jobs were added in the area within last year alone.

The problem.
We need approx 855,000 cash to make the deal work. I have an investor who may be willing, but I'm confused as to how I would set up his exit stratigy. How would I pay him back and gain complete control of the property?

Is it possible to obtain financing, use his money for down payment, and then re-finance in 2-3 years and cash him out? I might be dreaming here. The investor is willing to overlook a few things and is a personal friend.


Any thoughts or creative input would be greatly appreciated.


Sincerely,
- Newcomer








Posted by: loanuniverse Nov 17 2004, 10:07 AM
I think that there are several things that you need to consider.

The value of each piece needs to be determined. Because you are buying a bundle {both an existing apartment building and partially developed land}, the valuation of the property is difficult. You need to find the value of each piece as you might be able to sell the land or the building and keep one piece using the proceeds of one to pay off the investor totally or partially.

Here is where it gets tricky because the lender will probably want all proceeds of such sale to be used to “pay down” the loan specially if you are using one facility to purchase both. On the other hand, using two facilities will probably get you into a higher loan-to-value for the land portion.

Using your NOI number and adjusting it downward by a 5% vacancy {I am assuming you did not} you get a rough estimate for the building using the income approach of $2.9MM to $4.6MM {I used 10% and 8% cap rates for the range}. I would not like to estimate the land because that is based mostly on sales comparison. It would have helped if you had mentioned the purchase price.

The selling of a portion would works only if the lender is willing to do a partial release of collateral, which some lenders are sometimes unwilling to do as it might leave them at a higher loan-to-value than desired or with the least desirable piece.

Using the investors money and cashing him out later seems like a good idea, but how is this investor coming in? Is it going to be an equity partner or a lender or both? You probably want him to come in as a lender so that he does not have any claim on the upside, but the bank is going to want to see repayment for both loans coming from cash flow. Taking into consideration that a portion of the property is not producing cash flow, I would think that paying the first loan will be difficult, and paying a combined debt service will be next to impossible.

This means that he is going to have to come in as an equity investor, but you might want to consult an attorney about some kind of agreement that you can make on the side with him where you can buy him out either with a refinancing, the sale of one of a piece of the property or gradually as cash flow comes in. You might want to ask the attorney about a way to make sure that the investor does not have a claim on the upside and his earnings are limited to whatever you two agree.

You are counting on too much appreciation if you think you can cash him out in 3 years Assuming that your cash flow is going to be tight, due to the ongoing payments to your investor. In 3 years at a 4% compounded appreciation, you will end up with {1.04 X 1.04 X 1.04 = 1.125}. Refinancing then at 80% loan-to-value will only get you 93% of today’s purchase price. You are probably going to have to wait at least 5 and probably 6 years to cash him out.

That is it off the top of my head, I am going to a meeting right now will take a look at it some more when I get a chance later. If you come up with more questions post them here.

Posted by: Newcomer Nov 17 2004, 11:49 AM
Thank you Admin. I appreciate your thoughts.

The purchase price is $4,157,500. CAP of 8%.The land is included in the purchase as an afterthought, and the income is strong enough to support a first loan ( bank ) but probably not two loans, i.e. paying back the second lender (investor). The real problem here is I cant seem to find a way to make it worth the investors time/risk and cash him out quick enough.

I will keep thinking about this. If you have any additional thoughts please feel free to share. I appreciate the time and effort you took in your response.


Sincerely,
-Newcomer

Posted by: loanuniverse Nov 17 2004, 02:11 PM
The whole thing depends on the kind of terms that the investor is willing to accept. It comes down to you getting the benefit of the other person's wealth, and how large of a benefit the other person is willing to let you have. Because if the investor is the one providing the down payment, he should be entitled to all of the benefits, but if you can place yourself in between you can get some.

The numbers do not sound bad, not great, but not bad. You could make an argument for a $4MM value of the existing building alone, and if you could sell the land for more than $157M, you just made some paper profits {to be realized if you can sell the building at $4MM or higher}.

Maybe you should go for a smaller property where you can provide a higher percentage of the equity and you can take out the partner quicker. The investor wants high return and short-term, you really don't want to give him a bigger share so work on the time issue.



Posted by: Commercial Lender Nov 25 2004, 11:42 PM
Ignoring the numbers....
- what is the max that the investor is willing to invest?
- how much of you own $ do you have to put in (email me if you do not want to post)?
- is a cashout the only option for the investor ? how soon does he want to exit?
- Understand that unless you have a 60% of you own money, there is no way that this investor having putup a bulk of the capital can be cashed out. The property in my opinion will not appreciate fast enough (Unless you agree to build on the vacant lot, retain atleast 50% ownership, sell the property and pay him off)

Again, ignoring the numbers, on face value you should have two purchase contracts, one for the 48 unit and one for the land. Obtain full doc commercial finanicng/in on the 48 unit (You will get 80% LTV). Use the rest of it to either pay off the land or get a construction loan. Once the construction is complete, we for example can do a take out loan based on the property and you get the builtup/completion equity out. Depending on how much you have left, you can either pay him off or start you own RE empire biggrin.gif Good Luck! Thanks! Naj

Posted by: Newcomer Nov 26 2004, 02:04 PM
Thank you Naj,

Your opinions are valued. This piece has been purchased by another investor, and so we won't be able to move forward on it. However, we will be purchasing within the next 12 months and I will give you a call to discuss options when we have a possible deal.

Appreciate the support.


Sincerely,
- Newcomer

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