Here’s how commercial real estate investors will find success in a rising rate environment.
Rates for Fannie and Freddie are in the high 5’s to the 7’s depending on your market and product type.
With the decrease in sales activity and headwinds like the coming #mansiontax in the City of Los Angeles, deals are getting harder to pencil.
To make a sale, a seller can offer a carryback assuming their loan documents permit it.
An “All Inclusive Trust Deed,” AITD, or wraparound is a seller carry that includes the underlying loan.
The seller remains responsible for the monthly payment obligation.
The seller’s equity is the difference between the note balance and what is owed to them.
AITD is a junior/subordinate trust deed and the seller can choose their rate for the wraparound creating a rate arbitrage.
Here’s the Math:
Sales Price: $10,000,000
Existing Note: $ 6,000,000
Down Payment: $ 2,000,000
Seller Carry/AITD: $ 8,000,000 (The note plus the difference of the sales price/down payment)
The advantage here is:
- The seller
- Captures the price they want (or closer to it),
- Generates a higher yield with the rate delta, and
- Generates a tax advantage with installment sales income
- The buyer
- Doesn’t necessarily need to qualify for a new higher interest rate loan,
- May have a lower cost of execution to effect the sale.
- May need to worry about the ‘due on sale’ or acceleration clause.
Talk to your legal team about this approach to ensure success.
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