Seller financed sales leaseback - how do I protect myself?

General Real Estate Investing
1

Hey everyone.

I found an interesting deal. It’s not in the greatest neighborhood but it was intriguing enough for me to look further in depth.

The building is a 6k sq. ft building with 2/3 office and 1/3 retail. The retail is tenanted by a 99cent store and the office has a mix of non-profits, 6 really small office tenants, and 2 other commercial enterprises. The building is a historic building built in 1890’s but was completely overhauled in 1992.

This is the deal. Seller is selling at $750k, which is about $120/sq. ft. The NOI on the bldg is about $70k, which makes it a comfortable 9 cap. How?

Seller wants to lease the buildng back on a Triple Net basis for $8,350/month and will carry a 1st loan in the amount of $625,000 with payments of $6,350/month producing a $2,000/month net positive cash flow. This would be a $2k x 12 / $125k = 19% CCR before taxes.

If I were to sell this at 7 cap, the potential upside is $250k. Of course, potential.

Here are some more facts.

  1. There is an existing 1st position loan on the property. Because of prepayment penalty, the seller wishes to finance the deal w/ wraparound 1st. I do not know where he got his “$6,350/month” from. At what interest rate and amortization period.

  2. The seller wants an option to purchase the property back from me at the end of 2 years.

  3. Since the seller has the master lease, he will sub-lease to the 6 smaller tenants he has there already.

And when I met with the seller, his attachment to the building comes from the fact that he’s running his “spiritual business” (sorta like private SBA that helps fund small businesses) and his “commercial enterprises” there for over a decade. He told me he even did weddings in the backyard, and that his 99cent store is the only store really helping the neighborhood b/c the other stores are gauging the customers.

Now here is my concern.

If he decides to not pay the rent and the property goes into foreclosure, how do I protect my self? Remember that the property is about 16% equity and 84% debt (125k down, 625k debt). If it forecloses and 80% is recovered from the auction, the seller has pretty much all his butt covered. In that case, I’m the only loser and the seller pocketing the 125k down payment. Yes, I can evict him and all his sub-tenants

Not to mention, this isn’t the greatest neighborhood. The only reason I’d do this deal is b/c

  1. it’s retail/office … meaning I wouldn’t have to frequent the place… not to mention the seller wants to buy it back so I’m pretty sure he’s not gonna trash it.

  2. there is a tenant on day 1

  3. there is a clear exit strategy (the seller wants it back in 2 years)

How do I protect myself? Here are some ways I can think of:

  • put a second position lien on this property (is this even doable?)
  • put a lien on the seller’s primary residence (assuming he has one)

Thanks in advance, everyone.

2

Are you sure this guy has all his marbles? I can not see any advantage to him in this deal at all. It looks to me like the whole thing will cost him $2000 a month out of his pocket more than if he just kept it.

Since the seller appears to be acting against his own best interest, I would certainly be cautious.

3

Ah yes. There is another fact I forgot to mention.

He apparently bought a property that had a tax lien that he didn’t “know” about (i am not sure how ). That lien was from unpaid property taxes (by the previous owner). The amount had accrued to $75k. That basically sucked the life out of his previous business and basically all the resources needed to keep his 99 cent store going.

He needs the 125k to replenish the funds necessary to expand his business. Yes, it will cost him money to get this expensive financing, which explains why he’s doing it.