Hard Money Lender Needs Due Diligence Help for Commercial Note

[Kris Fox]

I have a borrower who wants to make me an equity partner on a commercial deal he's looking at. There's a 6000 sqft building that currently has a tenant. Borrower has been around a long time and has a tenant ready to sign a new lease at $6/sqft NNN. I'm waiting to hear back when the current tenant's lease ends.

Purchase price on the property is $100k.
Conservative cap rate in my area is 10%. Obviously if these numbers are accurate this will be a heck of a deal. Get performance up for a couple of years and have a property that cash flows $33-$35k per year. Does NNN truly get me $36k/year? And then 10 cap will get me to a value of $360k.

The property requires about $15-$20k of exterior repair that the tenant is willing to do.

This seems like one of those too good to be true deals.

How do I protect myself here? Can I get any assurances?

[Daniel Chang]

Kris,

You are right to be suspicious. 

If the deal is that good, why would he make you an equity partner?  Why not take a loan? 

I wouldn't rely on anything from the borrower.  I would investigate into who this tenant is, their financials, their credit, and why they are willing to pay above market rent for this property.  If their credit is good, and their reason is sound, then it just may be a great deal.  Also be wary of letter of intents as they are not legally binding, specifically as there is a current tenant in place, and I'd imagine you likely will not be able to get a signed contract in place from this potential tenant.

If the borrower won't reveal who the tenant is, I think that might be red flag enough to turn this down.

Just a thought, in Southern California, there are a lot of tenants who are willing to do this in the marijuana industry.  Even though medical marijuana is legal in CA, it is still not federally.  I personally do not deal with marijuana industry in my brokering or my properties.  However, they certainly are willing to pay 3x market rate. 

Bottom line: Investigate into the tenant