Advice needed on best way to cashflow or exit my deal

[Matthew Marenyi]

I have managed to get myself into a bit of a complex situation on my first deal and I'm looking for some advice. I've definitely made some mistakes here but I'm going to be very candid with the info on the deal, so please go easy on me haha.

My brother and I purchased a property on a large lot in Culver City CA in 2020 that was essentially a tear down. We did this through our LLC, I was actively managing the project while my brother was passive. The original goal, rightly or wrongly, was to maximize rentable units, so we rebuilt the main house from the foundation up into a 3 bed 2 Bath 1,600 sq foot main house, and added a 600 sq ft 1 Bed 1 Bath JADU, along with a 1,200 sq ft 3 Bed 3 Bath ADU. Each one with separate addresses and utilities.

We originally put $585k of our own money into the project, and by the time we were ready to go to market in 2023 we were into it for about $2M (the pandemic really threw a wrench in our timeline and costs but also greatly increased the value). We put it on the market at $3M but never got the offers we wanted, it was during the holidays and when rates were skyrocketing. At the time we received an offer from a reputable short term drug and alcohol rehab facility who operates out of SFHs in LA to rent the entire property at above market rates. We were running out of money to continue carrying the property, so we took it.

We refinanced all our existing debt into a new 30 yr loan for $2M, which was 10 years IO at 8.375% before going principal + interest in years 11-30. The monthly cost is high, but we currently are cashflow positive about $1,200 a month. Not great, but not terrible. The plan was to refinance when rates dropped to improve cashflow, we just had to get out of our hard money loans at the time. The problem is, and here's where I really screwed up, is that now I'm told by lenders that because we have a commercial tenant banks won't refinance the property. My lender at the time ASSURED me that it was totally fine, as I had asked him explicitly multiple times about refinancing a year or so later and he knew about the lease. Not to mention that I've also learned having two ADU's is a no-go for many conventional bank lenders. I have a couple lenders who say they could "figure it out", but it would require some grey area finagling like having the tenant sign a lease personally instead of the company.

So the questions is, what do I do now. Seems to me my options are...

SELL - If I were to put it on the market I think I could reasonably get $2.8M - $3M, but at a 2.9M sale price my return on my initial investment is only 38%, or 7.6% a year over the 5 years. To me that's just not attractive enough to consider selling. Do I continue to hold it and hope the appreciation eventually makes for a more palatable return? Will it ever get there?

HOLD & REFI - The improved cashflow (I have one lender saying he could get me into a DSCR loan at 6.5% which would 3x my cashflow) is enticing, but I'm don't want to risk anything especially having been burned once and would prefer to be on the up and up.

HOLD - Essentially do nothing. I know I'm getting the tax benefits of depreciation, the minimal positive cashflow, and the appreciation on the property, but It's pretty much a long term play of slowly raising rents annually to increase cashflow, which will eventually get basically reset when my loan goes P+I in 10 years. My capital continues to be completely tied up in the property since I'm pretty maxed on my LTV and likely can't unlock any more equity with a HELOC or something like that.

The goal of this project was always meant to be a short term exit so I could continue to try and aggressively grow my real estate portfolio, but now it feels like I'm stuck at first based. If you were in my shoes, what would you do?

Would appreciate any sage advice BP, be gentle! haha