Expert: Mike Fortunato - 2/23/2011

Question
Hello,

I own two 2-family rental investment properties as an LLC, with a business partner.  I have been considering refinancing not so much to get better rates (currently have 6% on the properties) but rather to 1) draw out money to buy out my partner who is no longer interested in our business, and 2) pay down higher interest renovation debt, as we did a major rehab on one of the properties.

As I explore refinance options I find rates not much better than what I have, but the fees associated with the refi are through the roof, around 5-7K each property.  And worse yet these fees come out of the cash I would draw out.

The properties are not expensive relatively speaking: one was purchased for 28K and the other for 44K.  I owe 20K on one and 32K on the other.  Loan to value limits will probably not give me the full amount of cash I need with these fees cutting in.

So I have been wondering what other way I could draw cash out of the properties to buy my business partner out.  Especially as refinance rates will be about the same, so that benefit is non-existent.  It seems I'm spending too much money to get money.

Any alternative possibilities for commercial property owners like myself, aside from refinance?

Thanks for your reply.

Peter

Answer
No other alternatives I can think of. You're correct in that loan fees to refinance will be substantial, and given the strict lending environment we find ourselves in these days, qualification can also be a problem. Lenders are very cautious and underwriting requirements quite strict, which of course makes the whole process more difficult and more expensive.

Assuming the property generates positive cash flow, you could try to buy your partner out by having him carry paper in the form of seller financing, and you could pay him over time at some agreed up terms. This will benefit him in that he won't have a tax liability all in one year, and of course the benefit to you is that you can pay over time.