1031x, LLC, and Mortgage

[Account Closed]

Hi BP,

So, I'm in a situation where I would like some input on how to proceed.  I purchased a quad cash back in 2012 and now it doesn't meet my long-term investment strategy - it's not in the best location.  I want to pull out and focus on more desirable neighborhoods and larger multifamilies.  I am now in contract to sell it and when it closes, I stand to make some very considerable gains that I want to defer the CG taxes on so I can keep growing.  I want to do a 1031x and have the leverage of a mortgage to secure a larger property.

My question is would I be able to get a mortgage on a larger property with my down payment tied up in the existing property until the closing, while keeping title to the new property within the LLC? I'm sure I will have to personally guarantee the loan, and will be able to contribute more cash if needed, e.g., reserves. The LLC has been open for four years and I have additional W-2 income to help qualify. Which banks or lenders would help in this situation and what is the best approach? I am in Florida.

[Joel Owens]

Laurence if you are selling the quad and moving up to more than 4 units you will be in the commercial space. If you are selling the quad and simply buying another quad at a higher price in a nicer area then you are in the residential loan space still.

You get into a commercial loan and the due diligence and closing costs are more substantial. Some buyers wait until they sell their property before spending a ton of money.

I have one client for a 1031 where we went under contract on the replacement property with a long due diligence period. During that time we worked on getting loan approval ,opening title, and some lease previewing. This was done to keep costs to a minimum until his buyer closed.

With that out of the way now the process can be accelerated with appraisal, inspection, and clearing final title exceptions for the purchase of his replacement property.

If you are under contract to sell your property you can show an "expected proceeds" estimate from the 1031 sale. When you actually close the 1031 company will be holding the funds and can provide an official letter stating the account and escrow amount.

As far as an LLC standing on it's own with no pass through personal guarantee it is not likely. The banks try to get all they can with a guarantee. You could try to limit the personal guarantee and have it burn off after a certain LTV is reached or you could only be responsible for a certain percentage of the debt.

If you were putting down 40 or 50% then the bank might go non-recourse. If the loan is a higher LTV they will want more guarantees for the risk.