Help me figure out how to J-V this with the motivated seller...

[Marc C.]

Hey Gang,

Got five minutes to read a long post? I need some brainstorming from the crowd on a deal. I refuse to give up on it; I’m a motivated buyer, he’s a motivated seller. Here’s the story:

Subject property is a 63-unit built in 1972 in the Kansas City market. It's master-metered and mostly 1 BR's. Condition is C-. Owner lives in Georgia and visits by driving about quarterly. Except his health is failing and this is his only out-of-state property. It is very poorly run by his on-site property "manager," who I suspect is stealing from the seller. I would like to do about $300,000 in improvements over the next 3 years, starting with curb appeal and energy efficiency items, and updating units to modern B- grade as they turn over. I might implement RUBS, or I might just raise rents; most of my competition is not all-bills-paid, and some folks like not having to sign up for utilities. There appears to be tremendous upside in NOI.

The Seller's records are limited, but it appears he's got about a 75% collection/occupancy rate compared to his stated rent roll. THE PURCHASE PRICE IS THE SAME AS WHAT THE SELLER BOUGHT IT FOR IN 2005 ($2.2M.) That's about an 8 cap based on the previous 12 mos. NOI. The property also has some very obvious deferred maintenance that an appraiser is going to flag; I suspect someone would have to pay for repairs in order for it to qualify for financing, but I haven't had a lender drive by it.

Here’s the “rub,” so to speak: I only have about $300K I want to put into this, and the seller knows this. (And that will be pretty much the rest of my life savings, vs. my normal M.O. of putting about $50K into lots of different projects.) Now, the property should be able to fund a lot of the rehab of vacants on cash flow alone, so it’s not like I’ll be spending $300K in the next year. But certainly $100K in the next year to get the curb appeal up. I presently do not have the connections or track record to raise additional funds in a syndication, but I might have both by the time two years have passed operating this property, so I might be able to get some cash back from investors or through the proceeds of a refi.

I had proposed a Master Lease-Option, where I give him $50K and take over the property on a 3-year NNN lease. Rent would be equal to his PITI. He liked the idea until he showed my proposal to a new (to him) attorney, who crapped all over it. He is not happy that this would violate the lender's due on sale clause in the mortgage, but pretty much any transfer of any rights to the property would do that. (But how would they find out? We just notify them that a property management company will now be collecting rents and making the PITI payment to the mortgage company from the rents collected.)

So next I proposed a land trust, whereby he would seek permission from his lender to deed the property to a trustee. I would then (privately) buy his beneficial interest in the trust on payments. This is a better deal for him as it would include interest. There may need to be a master lease between the trust and my LLC as well. But, again, transferring an interest in the owner violates the due on sale clause of the mortgage, so the seller is (rightly) nervous.

So where does that leave us? Some sort of Joint-Venture deal whereby we work toward a common goal. I still take over the property and run it, but maybe we split the profits upon refi or sale? Who gets the cash flow in the meantime? What protects my interests in the improvements I make? Who gets the tax benefits, and how are they allocated?

I’ll be curious if anyone reads this far and will take a minute to give their two cents of knowledge and opinion. But thanks to all who do! 

Marc C.