Bank Refi Existing Loan & payoff 2nd pos. Creative Private Loan

[Wayne Scheler]

I've got a small apartment building that I would like to refinance. Its worth about $425K and I've got $40K left on the bank loan that matures next year. I would like $265K so that I can payoff the balance and build a duplex on some other property that I have. Bank says they won't refinance and give me cash out if the money is going to be used on another real estate project other than the property that is securing the loan, but they are willing to refinance and payoff a 1st and 2nd loan. So my thought was to write up a loan agreement between my Dad for the balance of $225K for a 2nd position loan on my apartment building, then have the bank pay off my 1st mortgage and my Dad the 2nd, in which he could then give me the $225K to build the duplex. Am I breaking any laws with this creative financing? See any IRS problems?