Really need help/advice on seller financing details
I’ve been browsing this sub for a few months and can tell there are some seasoned veterans in here that could probably help steer me in the right direction.  

I’m a 49% owner of a warehouse property.  The partner(large business) has a 51% stake and wants to get rid of their ownership.  The building and land are valued at approx $6 mil.  They are offering to do seller financing if we wanted to buy them out on their ownership stake.  The building is fully paid off.

While 49% of the sales price sounds good, I would like to hold on to the building as long as possible. The area is rapidly gentrifying and will increase in value dramatically in the next ten years.  Current estimates about lease rent have been made at about $19k to $20k a month.

What would I be looking at from a seller financing perspective?  If they financed the 3 mil, would a 30 year amortized loan with a 10 year term be a standard offering?

With the numbers mentioned, does leasing the building sound like it might work?  How risky does this scenario sound?  Thank you in advance for your help.  This is absolutely not my area of expertise and I want to make sure I’m making the best decision on the property.
[{"id": "gmk82wv", "text": "For seller financed deals, you are rarely in the drivers seat unless you can put a considerable  down payment amount. I think you need to ask what terms would the seller be willing to live with. On a macro level, you need to consider the sale price, the interest rate, the collateral, length of loan. I am a little confused on your post if you are acquiring a business? or property and the business? Regardless, I think you need to calculate your return on investment on acquiring the 51% interest. Additionally, you should compare this to the return you can get if you fully reinvest from the sale of your 49% interest.", "replies": [{"id": "gmlfwkw", "text": "A little more clarification on my post.  There was a long standing business operating out of the warehouse.  Due to market issues and COVID, the business has dramatically reduced its operations and is no longer in the warehouse.  I am a 49% owner of the building.  The other owner is an out-of-state 51% majority owner.  They want to get out of the property and either want to sell the building outright or are willing to offer seller financing to us if we want to buy the building.  As it stands now we would not have any way to minimize taxes on the sale with only half of the proceeds.  1031 would only work if we were able to secure the entire building.  We are just worried about the risk of taking on seller financing and finding a quality long term tenant that could make the numbers work.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gmkdthf", "text": "At 2.50% with no equity, a 3 million 30 year amort is upside down ($11,900.00 mos.) but, in this market you should be able to manipulate the rents over time.\n\nYou can tell him to adjust the interest rate but that only gets you so far.\n\nThere's a TON of questions to answer before someone could give you blanket advice on your deal, but I'd say no, it's not a deal I'd do at those numbers.", "replies": [{"id": "gmkw9b1", "text": "and that\u2019s with a 10 year term. Seller financing deals usually have a ballon due between years 5-7. At least where I\u2019m at (Tier 1).", "replies": [], "depth": 2}, {"id": "gmlghtk", "text": "If our monthly payment to the seller was $11,900/ month and we were able to lease the building for $19-$20k per month, wouldn\u2019t we be okay?  Our equity in the building is worth almost $3 million (49%).  \n\nThanks for your time as this is our first foray into commercial real estate and we are trying to make the best decision on this asset for our family.", "replies": [{"id": "gmlrnde", "text": "If you're buying 51% for 3 million, that means the building is worth 6 million.\n\nA 6 million dollar loan at 2.50% would run $23,707.25 a month. So, at 20K, you're paying your tenants (and your former partner) $3,707.25 a month for the privilege of being their landlord.\n\nThat's awfully nice of you. \n\nPersonally, I would never buy an asset that, with 25% down, I couldn't lease out *1/2 of the building* and cover all my costs (mortgage, overhead, maint. etc.).\n\n19 - 20K doesn't even cover your mortgage values.\n\nEither the rents need to come up, or the price (sales price or interest rate) needs to be adjusted, for my tastes.\n\nThere a lot of ways to manipulate an asset to generate increased cash flow (leakage). Most assets leak money, either through terrible leases, disadvantageous vendor agreements (in some cases, going too cheap rather than paying too much), too generous giveaways to tenants (free for all parking as opposed to 1 per X sf, 45 bucks a month for each additional space).\n\nToo many landlords try to be tenants buddies. They don't expect you to be.  They want good service.  That costs money.\n\nMy buildings generate 30% more than nearly all of my competitors (who all charge less than I do) and because of the way my tenants are treated, they *love* being here and I love having them but....they get spectacular service...and they pay for it.\n\nThe reason why is....it's always spotlessly clean, inside and out (and I don't mean, I pick up the wrappers and cigarette butts....I mean...it's spotless.....inside and out), when they call me to ask if they can have thus and such....sometimes I say \"*sure*\", other times I say \"*if you want to pay for it*\"...always followed by....\"*how soon do you need me to take care of this for you?\".* If they say *\"I'd like it in 30 days\"*...it's done in 2 weeks.\n\nThis means they get to do *their* job.\n\n(Not mine).\n\nWhich is why they prefer to rent from me.", "replies": [{"id": "gmm5hno", "text": "I understand the numbers you are showing and when described that way doesn't look great.  \n\nI'm looking at it this way, let me know if this is a bad bad way of looking at things.  I am financing 3 million to buy out my partner.  On a 30 year 2.5% amortized loan, that looks like $11,854 a month.  Let's say the place rents NNN at $20k a month. The building would be generating $97,752 a year.  Based on my current equity in the building (approx $3 million) that would be a 3.25% return.", "replies": [{"id": "gmmhi55", "text": "Property management (whether you do it or you pay others, it's a real cost) is 7% ($1,400.00 a month). Vacancies (budget 10%...it's an industry standard %) = $2,000.00 a month over time averaged out. Whether vacancies happen tomorrow, or 10 years from now, it's important that you include them in your actual costs because they are.....an actual cost.\n\nJust on those two alone, we're down to $4,746.00 a month income. Take a few unexpected hits (new roof that gets amortized over 30 years but...paid up front on completion), and your cash flow is seriously upside down very quickly.\n\nYour partner doesn't have a lot of opportunities to sell to others.  You're the best deal in the house.  If you say no, he's dead in the water.  That's no reason to take the guy for a ride but, it's also no reason for him to charge you full retail.\n\nValues for commercial properties are done by cap rates based on income less costs.\n\nI won't go into detail as to how to do the calculations because there are actually several variations of the formula but, put this in google and do a search:  *\"how to determine the value of a commercial building based on cap rates*\".\n\nYou'll find the formula that works for you and...more importantly...what you ***should*** be paying.\n\nIf your partner doesn't agree....offer to sell to him on the same terms he wants you to buy from him on.", "replies": [{"id": "gmmp8ze", "text": "I appreciate your responses on this.  Gives me a lot to think about.  \n\nUnfortunately with the way the agreement was initially drafted and the partner holding the majority stake, we are at a disadvantage in the negotiation.  They want out and the seller financing option is a courtesy offered to us in case we wanted to retain the building.  If we try to lowball them they will just elect to do their due diligence and sell it at the current market with a broker of their choosing.  They are out-of-state so at this point they are relying on us to provide market information we are receiving from local brokers.", "replies": [{"id": "gmn039r", "text": "You are in the advantage.", "replies": [], "depth": 7}, {"id": "gn3gxbq", "text": "Using your numbers, a $20,000 NNN lease (tenant pays ALL the expenses of the property including real estate taxes, building insurance, and maintenance), a valuation of $6 million gives you a cap rate of only 4%.\n\nIf you truly think the warehouse would sell for $6 million, I'd take my half of the proceeds and find another property with better returns.\n\nAnd the building is vacant.  Unless a potential buyer wants the property for his or her own use, I don't see how your partners expect to get anywhere near $6 million without a long-term lease in place.\n\nA Walgreens store, considered the gold standard for NNN investment property, typically sells with a 5-6% cap rate with 15 or more years left on the lease.\n\nI'd want at least a 6% cap rate.  That would give you a valuation of $4 million.\n\nI'd prefer a 7% cap rate with a $3.43 million valuation.\n\nI'd love an 8% cap rate with a $3 million valuation and that's what I generally aim for.\n\nI wouldn't buy their half for more than $1.5-$2 million.  Don't forget they'll also be saving the 6-8% in commission for a commercial agent.\n\nYou've owned the building for a long time and are most likely looking at a huge capital gains tax bill should you sell, unless you do a 1031 exchange.\n\nWith a 1031 exchange, you'll have a somewhat tight timeline but see what's out there.  You'll be in the cat bird seat with the ability to make an all cash offer (refinance down the road or just don't have a mortgage---it's a great feeling).\n\nUnder a 1031 exchange, you can use the money to fix up a distressed property.  Distressed properties are often the best way to pick up a good deal.  Banks generally won't finance them.  \n\nBut be careful and make sure you know how much money will be needed for renovation.  Get a contractor's estimate and double it. Again, you have a strict timeline and you'll need to fully research the ins and outs of a 1031.\n\nBest of luck to you.", "replies": [{"id": "gn3pptb", "text": "Thank you for the reply. In talking to our accountant, a 1031 seems to be out of the equation as the 51% partner isn\u2019t looking to reinvest any proceeds with us and will just take the tax hit.  I don\u2019t think we can do any kind of 1031 with only half of the proceeds from the sale.", "replies": [{"id": "gn3zym2", "text": "Sorry, I see now that you had already mentioned it.\n\nLet's assume a $6 million sales price. After paying closing costs, which include the realtor's commission, you'd end up with about $2.7 million.  I'm not sure what your initial investment was, but let's say it was $300,000. Your federal capital gains tax would be $360,000 and you'd net $2.34 million.  (Assuming your income is less than $300,000 or so.  You would also have to pay state taxes unless you live in  Alaska, Florida, Nevada, NH, SD, Tennessee, Texas or Washington.) \n\nYou're also looking at the IRS applying a 25% tax on the amount you've claimed for depreciation.  The flip side is that you can once again claim depreciation if you buy a \"new\" property.\n\nAs another Redditor posted, I think you have the advantage over your partners.  Was the $6 million arrived at by an appraiser, or was it a real estate broker?  Brokers sometimes inflate their valuation in hopes of getting a listing.  After a property sits on the market for months, they suggest lowering the asking price.\n\nI personally wouldn't pay more than $2 million for their half with a NNN of $240,000 annually.  And that's if it already had a tenant in place.  It might take months to get a tenant.  I would not buy it without a tenant.\n\nDo you have the resources to pay the mortgage, insurance and taxes for 6 to 12 months without a tenant?  If not, they can foreclose and you could potentially be left with nothing.\n\nThese are very uncertain times.  Many people would scoff at my aversion to debt, but we've had to give partial forbearance to almost half our tenants since the pandemic started.  We could evict them, but they're mostly good tenants we've had for several years.  If we did evict them, we might not find another tenant for 6 months.  We're in good shape because we have no debt.  \n\nDespite having no debt, my partner (family member) and I are currently only paying ourselves the minimum salary ($15K per year each)to keep our health insurance.  We also had some uninsured losses we sustained after Hurricane Michael.  Any extra money has been going towards repairs.  Even with insurance, a fire or natural disaster can eat up huge amounts of capital.\n\nWe usually do owner financing and pay the property off in full by the time the 5-year balloon is due.\n\nOur tenants are primarily small businesses.  Everything from attorneys to a pest control company.  We have some small restaurants but I don't recommend restaurants.  They have a high failure rate and they leave a huge mess that can cost us a lot of money.\n\nOur spaces are for the most part 1200-1500 square feet.  It's much easier to find tenants for smaller spaces and we don't have all our eggs in one basket.  If you only have one tenant and they leave, you have nothing coming in.\n\nTo clarify, we have some single-tenant properties, but most of our buildings have 5 to 7 tenants.", "replies": [{"id": "gn4c2et", "text": "I really appreciate your input. I'm learning a lot about these transactions work.  The property was purchased back in 1972 for something like $50,000.  I am trying to find the original documents. The realtor has been saying that federal capital gains would be 23.8% but when I look up info, it shows 15% for long term capital gains up to $500,000.  We do not have any savings to cover rainy day issue (vacancy / large repair/ etc...).  This is what makes me the most nervous.  The property is in a red hot re-development area.  There are multiple condos being constructed directly across the stret with $1,000,000 1bd units.  This property will dramatically increase in value over the next 5-10 years, but it seems like our equity in the building just isn't enough to buy out our partner.", "replies": [{"id": "gn4hd77", "text": "I don't want to come off as some big-time developer.  We are small potatoes compared to the big boys and we've slowly amassed our properties over the past 20 years.  We plowed almost all profits back into the business and lived off the money from our \"real\" jobs.\n\nThe sales price estimate may well be just for the land if million dollar condos are going in.  Do you know of any comps for vacant or underdeveloped land nearby?  Is it in an Opportunity Zone?  Lots of big outfits are building in Opportunity Zones.\n\nWhen you figure in state taxes and the depreciation tax I mentioned earlier, you may well be looking at a 23.8% capital gains tax rate.  But you'll be keeping 76.2%.  That's a nice chunk of change.\n\nIf you don't have savings for the mortgage and carrying costs, I'd be very hesitant about taking on a huge mortgage for a vacant building in the hope it may increase in value in 5 years.  You could lose most or all of your equity in foreclosure. Maybe the value will double in 5 years.  But there's no guarantee.\n\nOur best investment was a building that a fellow had done a spectacular job of renovating (it's on the National Register of Historic Places.)  We got it in a short sale for less than half of what he'd invested during the 2005-2009 crisis.  Despite a cap rate of 8% at listing price (we got it for less with a cap rate of 10%), it had been on the market for two years.\n\nIf I had a crystal ball, I would have bought Bitcoin when it was $0.10 per coin.\n\nNot all of our purchases have been home runs.  There's the 6,000SF building we figured we could split into 5 units with a renovation cost of $300,000.  Then we got the report from the structural engineer...\n\nFor another building, we acted as our own contractor (it can't be in the name of an LLC or company and is not for the faint of heart.)\n\nDuring renovations, I scoured Craigslist, the Habitat ReStore and EBay for building materials and got free stuff when a building was being demolished.  We did our own painting and cleaning.  Because we paid as we went, it took over two years.\n\nWhen all is said and done, we may have been better off investing in an indexed mutual fund.  But it's been fun in a lot of ways.", "replies": [], "depth": 11}, {"id": "gn4ly4t", "text": "Another thing to consider...\n\nWhile I'm ecstatic that Trump is out of office, it's possible that Congress will change the capital gains tax and treat it as income.  Down the road, you could end up owing 37% in federal taxes rather than the current 15%.", "replies": [], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gmkiuso", "text": "Would love to help, but have a few questions first:\n\n* Is the warehouse currently occupied? If so, is it leased to a related or non-related company? Occupancy is extremely important in this scenario, because it opens up your opportunities for less expensive financing options. \n\n* What does your partnership agreement specifically say about the dissolution of assets? Does the partnership agreement stipulate seller financing is the only option to buy out a partner? \n\n* How long have you been a 49% owner of the property?", "replies": [{"id": "gmlepci", "text": "Appreciate the replies. Regarding your questions, at the time this deal would be done the warehouse would be unoccupied.  We have talked to a commercial real estate broker who thinks the property would lease very quickly due to its central location, sq footage, ample parking and loading/receiving area that can accommodate 40\u2019 containers. \n\nThe partnership agreement does not stipulate options on the sale of the asset.  \n\nWe entered this agreement with the partner in 1974.  We have been 49% owners since the inception of the agreement.  The majority owner is willing to be flexible as they are the ones that want to terminate the agreement and take their portion of the asset.", "replies": [{"id": "gmljpjv", "text": "Gotcha. Seller financing is a perfectly acceptable option, but likely more of a last resort IMO. \n\nA \u201cwin/win option\u201d for you both would be for you to buy your partner out now. You can easily get a loan from a bank, secured by the real estate, to pay off your partner. \n\nAsk for a bridge/mini-perm loan with an initial 24-month interest only period to keep your payments at a minimum while you secure a new tenant. After 24 months, the loan will convert to a standard CRE amortizing loan for the remaining duration. The bank will likely concede to an 18-month interest only period, which should be fine.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gmkk56z", "text": "What state are you in?", "replies": [], "depth": 1}]