Buy Income Property With Shared Equity Appreciation Program

What is Equity Sharing? My definition is the sharing value of a property less any loans owed on the property. It is, in effect, a partnership wherein two or more parties own a portion of the equity in the property. Maybe we should also define equity. Equity is the value of a property less any and all loans owed on the property; sometimes known as “The Broadbent Formula”.

In my daily travels I see numerous commercial properties, especially Strip Centers, with several or many vacancies, and from what I hear there are quite a few vacancies in Office Buildings as well. This situation creates a problem for many owners of these properties because of lower or even negative cash flow. We call negative cash flow an ALLIGATOR. It eats your cash flow and profits. It could even cost the owners their property!

The flip side of this situation is that it creates opportunities for buyers who may not have large amounts of cash to put down or may not be able to get new financing. Institutional lenders are somewhat reluctant to make loans on income properties that have little income.
Many of the true values of these properties, based on current market conditions, has diminished considerably from what they were a few years ago. However, owners tend to want to hang onto those old values, not desiring to take a loss.

Lets see if we can put together a hypothetical transaction wherein with a little “creative” structuring we can get a sale and still preserve some of the owners pride.

SITUATION
1. A 10 unit Strip Center located in Anytown, U.S.A.
Gross Income when it was fully occupied was $15,000 per month or $180,000 per year.
2. Currently there are 5 vacancies, reducing the monthly gross income to $7,500.00
3. There is a loan on the property with 4th National Bank of $677,088 payable at $4,657 per month.
Operating expenses (management, taxes, insurance, maintenance, etc.) averages out to approx. $4,205 per month.
4. Base on these figures the monthly cash flow is <$1,362.00> negative. That’s a full grown ALLIGATOR.

The owner of the property is primarily an investor who does not have the time or expertise to work at solving the problem. The negative cash flow is unbearable and is affecting his other business.

What to do? What to do?
Comments? Ideas? Solutions?

Continued In Next Post

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.