Creation Of Wealth - With No Cash

You are a Real Estate Broker/Agent. You have a client named Mr. Carlson to whom you helped obtain a Mini-Storage Facility approximately 3 years ago. The property was in poor condition when Mr. Carlson bought it; however, he has completely renovated it and has increased rents and value considerably. Mr. Carlson wants to acquire more tax shelter; however, even though his cash flow is excellent, he has used most of his cash reserves upgrading the Mini-Storage Units. Also, because he now has great cash flow and property in excellent condition, he wants to hold on to the Storage Units for maybe 3 or more years before considering an exchange into larger property.

Mr. Carlson has now come to you with this situation. He wants your advice and help to accomplish his goal. After a thorough meeting with Mr. Carlson, you begin searching for a property that will provide him with the benefits he needs. You comb through MLS, search the newspaper classifieds, and contact other agents you know who specialize in Commercial and Income properties. You locate through one of the agents you know, a 24 Unit Apartment Complex which has a 30% vacancy problem and needs physical upgrade to the property. The owner, Mr. Mendoza, has had the property on the market for sometime with no acceptable offers. Although he wants out of this property, he is not willing to take what he considers a deep discount.

So you show the apartments to Mr. Carlson. He likes the units and feels that he can do an upgrade and get the units fully occupied again. Still the problem is that he has little cash to buy with, and the units are in such poor condition that it would be very difficult to obtain a loan to purchase them with.

ANALYZING THE SITUATION –
1. Mr. Carlson’s Mini-Storage Units:
Owner’s Value – $260,000
Loans - $0
Equity - $260,000

2. Mr. Mendoza’s Apartment Complex:
Owner’s Value - $400,000
Assumable Loan – $180,000
Equity - $320,000

Possible Solution: Mr. Carlson offers to purchase Mr. Mendoza’s Apartments with a Blanket Note of $320,000 secured by both properties. Terms of the Note would state that after 3 years the Storage Units would be released as security for the Note providing Mr. Carlson has upgraded the Apartments.

BENEFITS TO THE PARTIES –
1. Mr. Mendoza receives full price and has excellent security for his Note.
2. Mr. Carlson receives the Tax Shelter he is looking for and can exchange the Storage Units after 3 years.
3. Each Broker/Agent has earned a commission.

These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.