| Posted by: Tom J Jan 3 2003, 10:25 AM |
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Five freinds and I are looking at purchasing 300 acres of farm/timber land for recreational purposes. I am seeking information on the best way to structure the purchase of this property.
Is the best way for each person to get their own loan and pay off the property? or
Form a corporation and each partner pays into the corporation their monthly amount and the corporation pays the bank? If this is best, what if one of the partners wants to pay off early?
Can anyone refer me to a web page for further info on this topic.
Thanks in advance
Tom J. |
| Posted by: loanuniverse Jan 3 2003, 12:08 PM |
It all comes down to how you and your friends want to purchase the property and how you want to hold title. In your scenario, we got six people with six different personalities and individual resources sharing one piece of property. The purchase and financing can be done either way, but deciding the most advantageous structure depends on other matters. Some things that you should take into account are:
1) Assuming that the purchase amount is about $1,000 and acre, each one of the partners has to borrow $50,000 individually to come up with their share. Can all of your friends qualify for an unsecured loan in that amount?
2) Is there an economic activity performed in the property, such as harvesting lumber? There might be some tax advantages in creating an entity to purchase the land, deduct the interest and offset the gains.
3) If you decided to buy the property by each one of the partners providing the money individually, it doesn’t matter if that person decides to pay his loan early. Everyone still owns 1/6 of the property.
4) Remember that this kind of arrangement will result on a very illiquid asset. If one of your friends needs to sell his share or hits some kind of money problems, it would be very difficult to sell the interest in the property. You might want to create certain articles or bylaws in the formation of the entity that cover things such as “right of first refusal”, “actions to be taken if a member fails to pay his share” etc. I would consult a real estate attorney to draft some kind of document and get more detailed information on the laws affecting your community.
My advice is to consult a real estate attorney in your area. If it were me and a group of friends, I would probably create an “S” Corporation and request a loan based on the combined personal cash flow of the six partners. However, I would also expect to have to come up with a substantial amount of money since most banks would not finance more than 50% of the estimated value of the land. If the land is in production, the purchase can be approached from the point of view of a going concern business and the personal cash flow would only serve as an enhancement. |
| Posted by: Tom J Jan 3 2003, 12:57 PM |
Thanks for your prompt response. The information that you have provided is very helpful.
I agree with you in that the best way to structure the deal is to form a corporation. I did not know which kind, and your recommendation on an "S" type is helpful.
I also understand that the financial viability of the corporation is only as strong as the partners and the bank will want to see financial records from all of the partners. However, we are hopeful that the bank will fund more than 50 percent as some of this 300 is farmground.
What if we do form a corporation and one of the partners wanted to pay thier share off early? How does that work and also, How does each partner of the corporation write off the interest that gets paid on the loan.
Thanks,
Tom |
| Posted by: loanuniverse Jan 3 2003, 02:15 PM |
Regarding the type of corporation, all corporate entities start the same way. The term “S” Corporation means that you have filed with the I.R.S. a piece of paper that will let you take advantage of the benefits provided from tax regulations listed under a subchapter “S” hence the name. This allows small business owners to offset the losses of the corporation against gains from other sources, which is great in this case since you and your friends have jobs that give you earnings.
I work in an urban setting and have limited experience with farm loans. I have probably done only 3 or 4 related loans and those were nurseries not crop farms. Nevertheless, from what you have written here maybe the best way of financing this request would be to use the cash flow from the farm and add the personal cash flow of the partners as a supplemental source of repayment. The percentage of the purchase price that the bank will be willing to finance might depend on factors such as the amount of income that is derived from the farm. I would talk it over with your friends and make sure that all of them are serious about the purchase, give the seller an offer contingent on you guys being able to get financing and talk to banks on your area. Talking to the bank that is lending to the owner currently would be the best way to go since that institution would be familiar with the property . I would assume that you guys would intend to lease the farm acreage and not farm it yourselves as that would avoid any farming experience requirement. Frankly, I am a bit clueless about the standards for farm lending. Once you get your offer accepted, you could shop around by talking to lending officers used to that kind of financing.
Regarding one of the partners paying off their share earlier, you could approach it several ways.
1) Do you want equal share ownership? Suppose that you find a bank that is willing to finance $200,000 out of the $300,000 and you need $100,000 as “down payment” and one of your friends can come up with his $50,000 share right away, while the other 5 can come up with $10,000 each. An easy solution would be to give the guy with the $50,000 a 50% ownership in the property. To make it fair he would also have to pay 50% of any shortfall that might be needed to pay the monthly mortgage payment.
2) The partner that gives the extra money remains as a 1/6 owner of the company and the money that he gives is used to reduce the amount owed by the company. He will not have to pay any part of the monthly mortgage payment and in case you guys decide to sell the property the amount that he has given in excess of the other partners has to be repaid to him.
Using a sub-chapter “S” corporation means that any losses suffered by the company can be passed through to your individual tax returns, and so will any gains. You have to file an 1120S tax return for the company and each stockholder gets to write-off their portion of the losses.
I recommend you read the following information on my website for further information:
http://www.loanuniverse.com/tradcf.html
http://www.loanuniverse.com/banks.html
http://www.loanuniverse.com/perscf.html |
| Posted by: Tom J. Jan 3 2003, 06:08 PM |
Thank you very much for the information. I will get back with you when I talk to the others involved.
Thanks Again |
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