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

[Arman Ahmed]

Hey Garrett,

This is definitely a creative deal structure, but there are a few things to consider before moving forward:

1. Lease-to-Own Structure – The biggest risk is that you’re committing to a non-refundable $300K down payment without having guaranteed financing in place for year 3. If market conditions change or you struggle to generate enough revenue, securing a commercial loan could be tough, and you’d risk losing that money.

2. Commercial Loan Considerations – Yes, most commercial loans require 20-30% down, meaning you’d likely need another $290K-$435K when the balloon payment is due. Lenders will evaluate the property based on the Debt Service Coverage Ratio (DSCR) rather than personal income, so they’ll want to see consistent revenue covering at least 1.2-1.5x the monthly loan payments. Right now, your revenue projections are promising, but lenders may want at least 2 years of documented financials to qualify the deal.

3. Potential Financing Gaps – Since the STR income and pumpkin patch business are still projections, lenders may view this as a higher-risk deal. You might want to explore:

• Seller Financing – Ask if the seller would be open to carrying some of the financing after year 3.

• Commercial Bridge Loans – Short-term financing that could help if you need more time to stabilize income.

• Partnership with Investors – Bringing in experienced commercial investors might help strengthen your lending position.

4. Protecting Your Investment – With the title staying in the seller’s name, make sure you have a strong legal agreement in place to protect your interest in the property. You don’t want to risk making improvements and generating revenue without a clear path to ownership.

If you’re set on this deal, I’d recommend talking to a commercial lender now to get a sense of what financing could look like in year 3. That way, you can go in with a more solid plan. Happy to brainstorm more if you need!