All Forum Posts by: Ken Jernigan

You did say property and business, right? Lenders have a couple of legit reasons for this information: 1) Arrive at a value for the business absent a business appraisal; and 2) Verify the cash flow from the business can service the loan. Seems like the buyer would want this information as well.

This is how larger investment partnerships are put together. The sponsor (you) puts up little or no money and your friend all of it. He has no say in the business and you control all decisions. He gets the preferred return up to the agreed percentage first, and thereafter all cash is split 70% him and 30% you. This applies to liquidity events such as a sale or cash out re fi. You can see this structure on crowdstreet.com an active platform for accredited investors, mostly multi-family.

So you get 30% of the deal for finding, managing and selling a construction project. And none of your own money at risk. You're free to negotiate your best deal, but I would treat investors, especially friends fairly.

This structure mostly applies to all equity deals. If you're looking for institutional debt (bank or non-bank lender) they're likely to require you to put some of your own money in, and you both to personally guarantee the loan. You can PM me if you want some more detail on all this.

BTW--I lived in Westfield NJ for 10 years or so, and had friends in Ridgewood. Liked Westfield a lot but don't miss the winter, or commute to NYC.

Traditional structure for larger deals like this is preferred return to investor, something in the 7-10% range and 70/30 investor/sponsor split on liquidation.

Hi Folks--can anyone recommend a good realtor for investors who knows the NC/SC beach markets? Anywhere from Myrtle to the Outer Banks. Thanks.

I PMed you.

This is going to be difficult to structure and satisfy a lender. Your investor is putting in all the cash equity, so I don't see how he can avoid the personal guarantee. That means not only credit check, but personal financial statement and copies of tax returns. I have seen some structures with two classes of ownership, one voting and the other non-voting. Most of the equity comes in from the non-voting, and they aren't required to guarantee. But they have no say in running the business. Voting members should have at least a token cash contribution, but will have to personally guarantee. It then becomes a question of personal financial standing and goes into the credit decision mix, along with LTV, collateral, management experience, cash flow, etc. As far as sourcing the cash, lenders like to see at least a few months bank statements.

You're welcome to go get your own appraisal, but any lender will want to order it themselves. Sometimes it's possible to re-transmit the appraisal to the lender but it has to be an acceptable appraiser and a recent appraisal. In any case, there's no sense in paying for two appraisals. You should be able to get a good estimate of value based on market cap rates. The lender can then process the re-fi based on a minimum appraisal value. Do you know any commercial realtors who could ballpark the value for you?

Value of assets is established through appraisal. Most appraisers will value RE and FF&E separately. You can get a separate appraisal on the business, but it's normally goodwill, or the purchase price less the value of the business assets. Of course, this should be structured as a purchase of assets, rather than purchase of stock. Rule of thumb on business valuation is 3-3.5 times average cash flow over the last three years. Sometimes it's calculated at 2 times revenues. Your calculations should come off tax returns and not internal reports. Of course, price is a negotiation and the cash flow factor is only a guideline.

For daycares, your due diligence needs to go much deeper. Danger areas can be receivables, facility utilization, pending regulatory actions and code compliance.  You should be comfortable that you won't lose families when the business changes hands. That said, daycares can be extremely profitable if run right. I've financed a number of them in the past. You can PM me for more info.

That's not your total return. You'll get: 1) a tax benefit from depreciating the property, deducting interest, taxes and insurance which are usually inside your mortgage payment; 2) equity build up from the rents paying down principal on the loan; and 2) hopefully, capital appreciation when you sell or cash out refi.

$400/mo is still 16% cash on cash return which is not too shabby.

Make sure you are including all costs, including vacancy and maintenance in that $400/mo calc.

Overstock.com is working on this through a JV with Hernando de Soto to document land titles in underdeveloped countries.

https://www.crowdfundinsider.com/2017/12/125858-blockchain-jv-overstock-founder-patrick-byrne-economist-hernando-de-soto-partner-global-property-registry/