In this post, I take you through the 11 stages I use when closing a commercial property through a partnership.  This journey was a little unusual because I found it on craigslist, and ended with instructing a bailiff to threaten to take the multimillionaire seller’s furniture.

Finding a Property on Craigslist?

There are many ways to find investment properties that are off the beaten path.  The most common way to find properties is through the Multiple Listing Service.  Less often-used ways of finding properties include word of mouth, craigslist, newspaper, or more active outbound marketing.

One of my first commercial properties was found when I wasn’t really looking.  Nerdy as I am, I was browsing through craigslist classified ads looking at commercial properties.  I sorted on price high to low, and was very surprised to see a fairly large (for craigslist) commercial property at the very top.  The property for sale included a Global Fast Food Franchise, a provincial liquor store, and a municipal tenant, all accounting for 70% of the business!  90% of the tenants were AAA national tenants.

Making an Offer

Why initial due diligence showed that the property was profitable and cash-flowing.  The Net Operating Income, CAP Rate, and Mortgage Rates that I entered into my proforma showed an 18% return (pretax).  With a projected dividend of 5%, it was likely the property would enjoy years of liquidity.  The leases were Triple Net, which means that property taxes, common area expenses and insurance costs were the tenant’s responsibility.

The property had upside.  Rents were below market, and I knew they could be increased over the next few years, as the leases came due.  I was confident that this property could have very little vacancy because of its location.  The property was 200 metres from a subway and on a major thoroughfare that has 50,000 cars passing in the morning, and the same in the evening.  The property also enjoyed 90 parking spots and free on street parking.

The risks I identified in the property were not too intimidating.  60% of the leases were renewing within 5 years, but McDonald’s was staying for another 11 years.  Interest Rates were historically low, but a sufficient down payment and a fixed term of 5 years would allow a lot of equity to be built into the project.  The rest of the risk needed to be mitigated after an accepted offer in the due diligence phase.

Why was the seller selling?  I asked the realtor, and he told me that the seller was restructuring.  I called my lawyer and had them perform a title search.  It was in the results of the title search that I understood the whole picture.  The seller was highly leveraged, having more than one mortgage on the property, and suffering under the debt load.  I knew this was a motivated seller.

Within 24 hours of finding the property, I was comfortable making an offer.   Within 7 days and some back and forth, I had an accepted offer at an aggressive price that the realtor told me I would never get.  This was my lucky break.

No Down Payment, No Problem!

I did not have the liquidity for a down payment, but I was confident.  The property was showing a return of over 18%.  I immediately introduced this to my list of partners, and within a few days, I secured all of the funds required to close on the property.  These partners had worked with me before, and I had helped them achieve double digit returns, so the level of confidence was already high.  For this project, they brought in two more partners, so the bonus was that my partner list was expanding.

Skillstacking Tip.  What do you do when you find a profitable investment property that you cannot buy on your own?  One strategy is to work with partners!  You can share the load with partners, creating a scenario where everyone wins

A Plan B is always a good idea.  My partners had committed, and being 8 weeks away from closing, I knew there could be some cold feet.  Personally, I do not like to force anybody into any deals, so I always have a Plan B.  I was already putting 30% of the required capital, but I made sure I could liquidate some assets for another 30%, just in case.  Ultimately, I never had to do this, but it sure removed some stress to know I had a Plan B.

Picking Partners

My partners like to write checks and collect profits.  They are typically very busy people with extra capital, and no time.  They like to diversify their holdings from the stock market, and believe in real estate.  They believe in investing for the long run.  

So, we structured a partnership to reflect the “busyness” of my partners.  They contribute the cash, and I do the work for a cut of the profits (and the equivalent risk).  With my list of partners intact, I sent it to my lawyer, and a Shareholder Agreement is drawn up with the rules for this property.  My partners and I like to have an agreement where decisions are taken by vote, proportionate to the shares in the company.  Full stop.  I am the leader, but every significant decision is put to a vote.  Information is transparent and they can dive deep anytime they like.  This method of operating has served us well.

I am more in the Partner Picking Business than the Real Estate Business.  It is absolutely essential that the group of partners on any project are aligned in their interests and goals.  All of the partners must win/lose together in direct proportion to their shares.  This is my philosophy.  Read the following for an idea of how I pick Business Partners: Suitcases of Cash and Finding Your Ideal Business Partner

Due Diligence

After an offer is signed, and before the property closes, it is important to perform due diligence.  The property musty be vetted to make sure that risk is minimized.

The physical property must be assessed.  A full inspection revealed that the roof was requiring replacement.  The property had not been maintained properly.  The Environmental Assessment showed that the soil was not contaminated.  The property was up to fire code.  All this added up for me to require a slight price adjustment.

The legal aspects of the property must be assessed.  All leases were examined.  Contracts were assessed.  We made sure there were no outstanding legal claims or liens, and the legal state of the property seemed sound.  Rent estoppels provided by the tenants confirmed the rental agreements.

The financial statements of the last 3 years were examined.  It turns out that the revenues were exaggerated and the expenses were minimized.  This meant I would need to request a price drop in order to maintain the profitability from the original accepted purchase offer.

Price Adjustment

When I told the agent I required a price adjustment of 6% in order to get to a fair price, he told me the seller would never accept it.  However, I knew that the seller owed back taxes and had two mortgages on the property, and needed to sell.  I also knew that mistakes had been made in the listing.  So, as part of my counter offer, I wrote a letter directly to the seller explaining that mistakes had been made in the listing, and explaining my reasoning for the price adjustment.  There was no way I was going to let the agent who had made the mistakes control the narrative.

When I officially requested the price adjustment, I no longer had the property under contract.  This is a nerve-racking few days.  I had already spent dozens of hours, over $15,000 of expenses, and had raised the money from my partners.  It was entirely possible for the deal to crash right at this moment.

I kept my poker face, and held my breath, waiting for the seller’s response.  He countered, and I accepted.  The price adjustment was basically accepted!

Financing

In order to finance a property, you need to satisfy conditions for a mortgage from a lender.  For this property, I was looking for 25% Down Payment (75% Loan to Value), and for the lender to finance the remainder.  The conditions included an appraisal, and a personal guarantee from some of the key partners.  The partners for this project wanted to enjoy the best lending terms, so they agreed to the guarantee, given the risk profile of this project.

Then, I commissioned the appraisal.  This provides the bank with a 3rd party assessment of the property value.  This is the value that they will use in order to finance it, NOT the purchase price.  We were lucky that in this case the appraised value was higher than the purchase price.  Most lenders lend on the lower of the purchase price or appraised value.

3 of the biggest partners provided their Personal Guarantee.  As a result, we got a very good rate and conditions.  Our shareholder agreement also made sure that the other partners were responsible for their pro-rated share.  This kept things fair.  We removed financing conditions, and all that was left was to close the property.

The Corporation

During the due diligence period, my lawyer formed the corporation.  I like to form it with myself as the only shareholder, so I can get a few things done simply before I bring on the partners.  I sign all the corporate documents, open the bank account, and assign the offer to the newly formed corporation.  Once all of the groundwork is prepared, my lawyer prepares resolutions for all of the shareholders.

Pre-closing Partner Dinner

Just before closing, I gathered all of the shareholders for a nice dinner to finalize a few things.  Everyone got a great meal, chatted about the project, caught up, and felt as part of the team on a shared journey. My lawyer had prepared a binder for all to sign, and they also came with their funds ready.  After leaving the dinner, the corporation had all the capital it required, all motions were in place, and I was authorized to proceed with the purchase.

The Closing

Closings are supposed to be smooth and without incident, but this one was a little different.  The seller had not come fully agreeing to the adjustment amounts, so there were some last minute calculations that we needed to agree upon.  There were moments of tension, and ultimately, we agreed to nicely sort out the last few thousands of dollars after the sale (big mistake).  There were also some issues with the title that were unresolved, but I made sure that the Title Insurance had the proper language in it.  The Sale was complete.

Bonus Story: It wasn’t really Closed!

So, in this case, it turns out that agreeing with the seller to adjust some recovery amounts after closing was very problematic.  There was about $12,000 that I felt clearly belonged to us, but the seller gave me the run around over several months, cancelling meetings last minute, and other tactics.  I became dispassionately determined to get the funds back.  The seller had shown up for the closing in a Rolls Royce, and he made me feel as a fly he could just swat away.

I decided that since the seller had mistreated my efforts to negotiate in good faith, that I would make things uncomfortable.  I took him to small claims court, which I booked as far away from his house as possible.  I named both owners in the suit, which included his mother.  I managed to get the court date in the dead of winter when I knew he was in Florida.  Ultimately he did not show up, and I won handily plus damages.

Then I found out that collecting the funds was up to me!  So, when he predictably ignored my requests for compensation, I hired a private collector.  I tried to imagine the weakness of someone driving a Roll Royce and living in a huge house.  If I put a lien on one of his real estate properties, it could drag on for many years.  I decided to instruct the private collector to seize his furniture if he did not pay, which is perfectly legal.  Problem solved.  I was told by the collector that the seller simply wrote a check very dispassionately; it appeared routine for him.  The property was finally closed!

Epilogue

Every property is unique and this one was no different.  For the most part it was pretty standard.  However, I found it in an unusual way through Craigslist.  In addition, I learned about small claims court, and finding a unique way to collect the post-closing settlement amount.

Since buying the property, we have stabilized it quite a bit.  We renewed one lease for 10 years, another for 15, and they form the foundation of the property.  3 more leases were standardized and increases have been put in place.  After 5 years, the partnership finds itself in a situation where all of the original capital can be returned through a refinance, and the partners are discussing what to do at this point.  The increase in NOI allows us to do this; it is explained here:Discover How to Turn $1 into $15 with Commercial Real Estate.

It’s been a fun journey.

I wrote this story because many of you have asked me to get more specific.  As a Private Extrovert, it is not always easy.  Please feel free to comment below, send me some direct feedback, or share on the Socials.  I am grateful to have you on this journey with me!