Creative Real Estate Structures

The beauty about real estate is there are so many ways to win the game and acquire a property/deal.

You could buy the debt from the lender, you could issue a short sale and try to take it over, work out the debt with the lender to assume it, have seller financing on something - many different ways to skin the cat.

In 2020-2023, we saw a LOT of syndicators + take on floating rate debt with 3-5 year terms. In 2023, there was an uptick in foreclosures or capital calls from these syndicators. As a result of cheap money, there were many projects that were started with short term debt which is now coming due.

As we venture into 2025, I imagine the amount of good deals would be coming if you are sitting on “dry powder”.

A friend approached me with an opportunity couple days ago. A new 7 unit townhome development had been built in a Tier 2 city.

Basic facts:

• $3.5mm first position lien

• $700k second position lien

• Comps are $650k ish in the area

• Builder is asking for $720k/unit (total $5.1mm)

• Metro is overbuilt with new supply and not worth $700k/unit

• 12/23 monthly rent roll was $24k/month

He had approached me with what I thought he should do…

I had a few thoughts of how to creatively do this deal.

1. Buying the debt from the lender

2. Short sale

3. Selling them off individually

It seems like a tough deal because someone’s gotta give - either the lender or the sponsor.

The pros of the deal:

• Brand new townhomes

• Low capex for LONG time

• Submarket is very strong

• Very good outcome for the next 10 years

• Individually parcelled for individual sale

The cons:

• $728k for a townhome is more than a 3/2 1500 sq ft house with a yard

• Neighborhood is nice but could be overpriced @ today’s interest rates

• Rents are between $3300-4800 on the high end

How would I do this deal?

I would definitely lowball the shit out of this deal. I could see this working out if you had a good agent with boots on the ground and you can get it for around what the debt is worth.

It’s nice that it’s 7 individually owned townhomes. You could take that and individually sell them as townhomes and capture the spread from the acquisition and disposition price.

The rental price is not strong - 0.5% rent to price ratio and I highly doubt the rent would cover your holding costs for the loan.

Let’s do some numbers:

Assume I am able to get it for $3.85mm ($550k/unit) and put down 20% ($770k). We have 30 year amortization, 5 year balloon, and 6% interest rate.

My PITI would be $18.5k for P&I or $15.4k for IO payments.

The seller has $4.2mm in outstanding debt obligations right now. Assume a blended 9% rate (construction + hard money loan), the payments are probably $31.5k/month.

Remember, the rents are between $23-25k/month so she’s $6k/month underwater and probably overspent on the construction of the home. The finishes are really nice, but the law of the land is… it’s all about cost basis.

Sales comps are $650k/unit - even for that, the total would be $4.55m with a down payment of $910k.

Monthly P&I would be $21.8k and IO payments would be $18.2k

$36k/year for a down payment of $910k = 3.95% or ~4% cash on cash…

seems like a terrible return based on the amount of risk and that is being rosy.

Conclusion:

In the world of commercial real estate, creativity and flexibility are often rewarded.

The key is to thoroughly understand each method, including its benefits and potential pitfalls.

Remember, every deal is unique, and what works in one situation may not be appropriate in another. Always conduct thorough due diligence, understand the legal implications, and consider seeking advice from experienced professionals before pursuing any of these strategies.

By expanding your toolkit and thinking creatively, you'll be better positioned to find and close deals, even in challenging market conditions.