Commercial Lending and Partnership Questions

[Garrett H.]

Hi All, 

I appreciate any answers and guidance in advance. A group of us 4 investors are looking to form a partnership to purchase a property for commercial purposes and have a few questions about if we are going about this in the most efficient way. 

Property is in San Diego County and consists of about 40 acres. Seller wants $1.75 million total. Seller says they will accept $300,000 down (non-refundable) with lease payments of $4,500/ month (doesn't count towards principal) for 3 years in which we would have to pay the remaining $1.45 million at that point (title stays in seller's name until then and also pays the property taxes). We would then seek to get a commercial loan to pay the remaining amount. The thinking was that the limited lease payments of $4.5k a month would provide some additional time to establish the business revenue. 

The business: Short-term rental on two houses (One is turn-key, the other needs a little improvement then can be rented out). Estimated short term rental annual revenue estimated conservatively at $60k/year ish. Pumpkin patch and apple orchards (+ some ag tourism related activities) would be the other initial business pursuits. Estimate pumpkin patch revenue estimated at $100k for first year then by year 3 around $250k. Apple orchard takes much longer to establish and revenue wouldn't be realized until year 5 or longer but can net as much as $100k/acre for U-pick operations (+ cider making, etc). 

The problem: Although we are all business owners of our own entities separately, none of us actually have any experience with commercial lending. 

The questions: Initially, does structuring a deal like that up front with purchasing in a few years make sense or dumb? If so, we aren't positive on the commercial lending part when year 3 is up. Would we need to put an additional 20% down on a commerical loan at that point to qualify, and what flexibility is there in establishing income minimums to even meet a criteria for commercial lending? It is my understanding that it isn't like traditional loans like mortgages based on personal debt to income ratios but more about the properties income potential? We have a few more questions but wanted to see if anyone there can shoot holes in this plan and help educate a bit more on the process. Thank you again for anytime spent reviewing and responding. 

-Garrett

[Garrett H.]

Hi Jaycee,

We were hoping to secure the property with creative financing now since we don’t have enough capital to outright purchase it with a loan, while keeping our monthly payments lower than a mtg. I agree that the down payment and monthly doesn’t feel like the best route, hence my inquiry on here to get better suggestions. Rob proposed an alternative here that definitely seems like a better approach than what we put forth. 

Thank you for the suggestions on the USDA and SBA 7a for lending.

We have not organized a formal proforma yet, just discussed various revenue projections and expenses. Would this be most beneficial to present to lenders when trying to qualify, or are you stating that it would just be good for all of us to have all the number crunching written down?