What to pay for a property. In need of help!!

Question

I have been offered an opportunity to invest in commercial land with the intention to build a plaza on it.  Approximately 3acres of frontage property. He wants me to buy in at 40% which is roughly 400k. He originally bought the property about 9yrs ago for about 850-900k. He has all the plans laid out of how he would like the plaza.  Everything from the soil testing to the parking spaces. He put in another 30k or so. So comes out to about 930k all said and done. He still owes 550k. I would be paying 40% of the 550k still owed. I would be all in for 620k for 40% ownership. Obviously 620k is not 40% of 900k. The reason for the 620k is because apparently it appraised for 1.5-1.6 mil which would then turn into approx 620k(40%).I have not seen a copy of the appraisal. I plan on getting my own appraisal. My question is say it does appraise at 1.5mil should I haggle over how much he wants from me 620k for the 40% when even though he got it for 900k. If I were to pay the 620k he would have paid off the loan and would have all his money out and I'd be left with a 620k loan. I feel like he is charging me  on the equity he thinks he has in the property and not the loan he got for it. Is he right in doing this and am I over reacting.  I don't mind paying 40% of the 930k but doesn't seem right to be paying 40% on 1.5ish mil. I would be paying 40% on the appreciation that he thinks is about 600k. He paid 930k all said and done and its hard to believe the property gained 600k which would come out to about 1.5ish mil in 9yrs granted it is in a pristine location.  Should I haggle to pay 40% of the original purchase price or get an appraisal and pay 40% of that...

Gabriel Garcia · Answer

I would be all in for 1.42 mil give or take and he would be in for about 2.1ish mil with expected appraisal of about 3.6-4 mil from comparable businesses.Expected monthly income of about 40k with 15-17k for the note and would do a 60-40 split on the remainder.

Zach Quick · Answer

So you two are going to be ''all-in'' at a # that is higher than the potential value of the property?

Patrice Penda · Answer

Maybe your description is overly simplified but based on the information provided, I don't see how you make money.You are paying today for tomorrow's equity.

Gabriel Garcia · Answer

So yes 40% give me essentially 40% of construction and land. The deal was I invest 400k originally and pay 40% of the remaining 550k which is roughly 220k which in the end comes out to around 620k. He would be responsible for 60% of the 550k. The property apparently appraisal is 1.5mil. We would both be paying down the remaining debt 550k. I would be responsible to pay 40% of it. So if the property is valued at 1.5 do you think it's fair for me to be paying 40% of apparent appraisal instead of 40% of the original loan he took out a few yrs back. Should I haggle over this? The area is I would say one of the best locations in town. On frontage property. There's a huge hospital across the street amongst many other stores. Walmart and Sam's less than a minute away. Very popular up and coming area. 4 schools within 5-10 mins.

Ronald Rohde · Answer

its a terrible deal, don't put equity in to pay off someone else's debt.

Patrice Penda · Answer

Alright, here is my understanding of the situation.

ARV = 3.5M (Let's be conservative)Development cost = 2M Value of the land as it is today (If I got it correctly) = 1.5M of which you will own 40% if you pay 620k for it.

Just at that stage, I am struggling to see where the value creation is!

Now in terms of how the deals is structured, I am struggling to see how it benefit you.

All of the 620k you'll pay will go to your land owner who bought it 900k and is now completely out of pocket while the land still carries a mortgage for 550K.

I am not sure how this deal makes sense.Is there more to it?I am missing the point somewhere?

Gabriel Garcia · Answer

Hey Patrice, so the development cost are around 1.7-2 mil. Time frame for construction would be about 6-8 months.  Verbal agreement with bank to do an interest only payment for the first yr.

Patrice Penda · Answer

Hey @Gabriel GarciaI am puzzled here. At it looks like, it doesn't make a lot of sense to me.

if we leave aside the equity split and the money you are bringing to the deal, I wonder where is the value creation? What is hoping to do with the money you bring in?What are the development costs ? What is the timeframe?

Gabriel Garcia · Answer

I would be getting 40% of everything.  We are working out details as we speak. The problem is I currently work  offshore and can only get as many details as long as the weather isn't bad and I can keep a connection. As far as I know the property is his out right.  Once we get an agreement we would go into the next phase which would be the construction side. Once I would become a partner in the llc we would then get a construction loan to begin for approximately 2mil. According to his sources,once everything is done it would appraise between 3.5-4mil. He does business with my sis-in-law. He does have other business around the area. He had a preliminary agreement with a bank and possibly a restaurant that would like to rent once construction is done. If everything were to go well and rented out possible cash flow between 7-9 k a month.

Anthony Dooley · Answer

@Gabriel Garcia It isn't clear what you are getting for you money. Are you getting cash flow from the rents once the building is complete? Are you getting 40% of the equity in the value after the construction? Are you getting a fixed rate of return on your investment? I personally would not invest as a general partner without a detailed agreement in place. You need to know how much they owe on the property to other investors as well. How many other people is he selling shares to? He may owe $2 million already on this land. If it is worth $1.5 million, why does he need your money? A bank should give him a bridge loan to complete the construction, then he can refinance once completed.