I have an opportunity to possibly purchase a business associates community. It’s 56 spaces which needs a bit of turnaround as he went for a home rental model(of course attracting the wrong kind of tenant base). Rents are $270 per month including trash pick up. Water/Sewer/Electric are all metered directly to tenants through utility co. There are approx 42 payers at this point plus about 4-5 homes to make ready for rehab and sale. He’s a bit burned out and doesn’t have the time to turn it around.
I proposed a purchase price of $750k (generous IMO considering the work that needs done… lots of clean up) but he won’t benefit much if at all with cash in his pocket due to the depreciation recapture he’ll have to pay taxes on so it’s not lucrative enough for him.
What could be another way for me to give him what he wants and avoid the cap gains? I was thinking of maybe $100-$150k cash to buy equity in the LLC and leave him as a minority partner in perpetuity. This gives him cash up front and an income stream. I would take over the community and clean it up and fill remaining lots. I would also need to refinance the community as the rate and terms are not efficient. I have a lender locally that I think could get that done for me.
Thoughts? Is there a better way? I don’t have ANY experience doing anything like this.
While we don’t know the extent of his recapture/tax liability, you might master lease and option the property.
It would solve some immediate problems.
control of the property would switch to you.
no change in title = no tax liability for him until the option is exercised. This gives him time to possibly find a replacement property under IRS-1031 rules.
gives current owner cash that’s not currently taxable.
Make sure you properly secure your option and lease. Without securing your rights, the deal could unravel down the road when memories get foggy.
You’d still retain the ability to secure better financing with the park (under new management) producing a better NOI. Better NOI receives higher appraisal value and therefore higher loan amounts.
Keep in mind, some lenders won’t look at anything under $1MM in this asset class.
you wouldn’t refinance because you never technically took the title of the property or purchased it. you are leasing the property from the owner and are running it your way while paying them a fixed amount for doing so. then at the end of your agreement you have the option to buy the property at a set price you’ve already agree upon. that is when you go get the financing for the property and hopefully all the work you have put into the property supports the value for what was proposed when you made the agreement.
you always have the option to decide not to purchase it at the end of the period as well if things don’t go right or if you situation changes.
The financing terms at present are not that good so I don’t believe a master lease accomplishes much for me. I need to finance on good terms. I have a lender that would do that for me and I have used them for another park I purchased a couple of years ago.
Your best option is to take your concerns for your business associate out of the equation. Your concerns for his finances are not serving your best interests. Stick to your offer, assuming it works for you, and let him decide his own future.
Business first.