Following are some examples of the use of our loan programs to provide Creative Solutions to financing needs:

Example #1: Assume a commercial building offered for sale for $400,000 that is currently experiencing a 50% vacancy rate and further assume that it will take $100,000 in fix up cost and leasing commissions to get up to full occupancy. Comparison with other buildings indicate that if the building were fully occupied and fixed up it would be worth $750,000, so it is a good opportunity for the creative entrepreneur. The problem is that with 50% occupancy the current income barely covers operating expenses and there is very little available for debt service. As a result conventional lenders will only loan $150,000, which means the buyer/entrepreneur has to come up with $350,000 cash out of pocket.

example-1Obviously it will very difficult to make a sale of this property using conventional financing. But, with our lender they will probably finance $200,000 with an additional $25,000 to cover an interest reserve during the first year of the loan and an additional $50,000 toward fix up costs. They would allow the owner to carry back a second deed of trust for $200,000, which means that the buyer would only need the additional $50,000 required to fix up the property and get it turned around.

The terms on such a loan would probably be interest only for two years with a final balloon payment at the end of the third year. At that time the property would be worth $750,000, which means that the buyer/entrepreneur could refinance it and borrow $550,000 to payoff the $275,000 loan to our lender, the $200,000 second to the seller and extract $75,000 in cash.

Example 2: Buyer wants to buy a tract of vacant land for $100,000. Unfortunately the seller demands cash and buyer only has $10,000 down. Because buyer also owns a free and clear rental home worth $70,000 he is confident he can borrow $90,000 from the bank so he gives the seller $10,000 earnest money to secure the land purchase. Unfortunately because the buyer’s credit isn’t quite perfect and because the rental house isn’t conventional construction, the bank says “No.” By taking a Deed of Trust against both properties we can loan the $90,000 needed to save the deal.

Example 3: Buyer has the opportunity to buy a lot adjacent to his business that will provide additional parking. The lot is worth $100,000 and the Seller will only sell for cash but the Buyer has only $5,000 available. However the Buyer is receiving payments on a $63,453 Seller Financed Note that he took back from sale of his former home that was a mobile home situated on 1 acre of land. There are two ways that we could finance this transaction: 1) If the Buyer can afford payments on a $95,000 loan we could loan him that amount by taking a Deed of Trust against the lot being purchased and a security assignment of the $63,453 Seller Financed Note; or 2) If the Buyer did not want to incur that amount of debt, we could buy the $63,453 Seller Financed Note for $50,000 cash and loan him $45,000 secured by a Deed of Trust against the property being purchased.

example-2Example 4: Buyer owns four free and clear rental houses (worth $150,000 each) but little cash. He now has the opportunity to buy a run-down 4 plex for $200,000 and with his own labor and $50,000 for materials and appliances he can make it into an attractive rental worth $400,000. We can loan him the full $250,000 he needs by taking a blanket deed of trust against the 4 plex and two of his rental homes.

Of course creativity does come at a price. The interest rates on such loans usually run 12% to 14% and cost 4 to 6 points, plus normal closing costs. Clearly such a loan would make no sense for the purchase of a standard performing property, but it can be quite attractive when there is an opportunity to earn a large profit by fixing up and turning a property around. So when you have commercial properties that require creative solutions, please give us a call!