Financing a Large Office Complex – Making The Offer
Let’s say you are considering financing a large complex with four different buildings, all ground floor level. Six units are in each office building, so that’s a total of 24 units. The person who is selling has had the property for 15 years.
Since he has owned it for this length of time, there’s probably plenty of equity in the property. Fifteen years ago in Fresno, California, he may have built a complex like that for $80 to $90 a square foot, including the land. Today it would take $200 to $300 per square foot range to construct the same building.
So, the passage of time has created a lot of “monopoly money” in this deal. These are condo-ized units of 1,500 feet each that usually rent for $2,500 a month. To calculate the PRI, take 24 x $2,500 a month or $60,000 a month, which totals $720,000 a year. So, we will assume that after subtracting expenses, the NOI would be about $500,000.
Now, in Fresno most people are obtaining an 8% “Cap Rate” for a deal like this, so you can be sure that it’s priced at approximately $6 million. If he started out financing 100% of the deal 15 years ago and paid $90 for the land and buildings, he paid $3,240,000 for the property.
He probably financed it for between 7 and 8%. If he borrowed 100% of the costs and then refinanced it immediately thereafter, he would still be about $2,500,000 in debt. If he is an older person, he probably is seriously motivated to execute this deal-that’s why it’s for sale.
However, it’s not an ideal situation for you to be approaching him about it. People who don’t have their property for sale, normally haven’t put a price tag on it, so it could be out of your reach. To start the deal negotiations, you offer to pay $6 million with an additional motivator-if the property appraises for $7 million, you’ll give him $7 million.
You want to make as many assurances as necessary to make him comfortable with this deal, but you’ll need help to do this properly. That help is going to solve a few extensive problems that he might have when officially listing the property for sale. What you’ll eventually want him to do is partner with you. However, do not offer that condition until you have a signed contract. Then, later that day or the next, arrange to meet with him again and mention that you thought you should have one more meeting with him before you start to raise funding.
When financing a large office complex, you want to make sure that you have enough leverage and can use the bank’s money to make more money in this deal. Then propose the partner relationship to him. After all, he has to do something like reinvest this $3.5 million that he’s getting out of the deal. Then you can suggest that he should leave approximately half his equity in this deal, about $1.7 million, and you two can continue together as partners. You won’t need any other partners. You’ll take care of all the day-to-day activity and send a report to him in the mail every quarter, along with a good-sized dividend check.
Tip: Paying dividends quarterly is better, because it could be a fairly large amount of cash.
Stay tuned for more information on financing a large office complex (Financing a Large Office Complex – Structuring The Deal and Financing a Large Office Complex – Going To The Bank ) in upcoming articles.