As the financial markets continue to tighten, financing terms for apartment buildings and other multifamily property are seeing the pinch, in the form of tighter LTV’s for buyers, and lower effective sales prices for sellers. In what many industry observers are calling an 80’s throwback, the seller carried apartment loan is becoming increasingly popular, however few sellers, buyers, or financiers are aware of how powerful an option the seller carry can be.
A “seller carry” is, most simply, a private note, typically held in a junior, subordinate lien position behind a primary apartment loan, by and between a seller and a buyer, wherein the seller accepts a note to be repaid by the buyer with a specific interest rate, amortization schedule, and terms, taking as collateral equity in the property. A private loan in lieu of immediate payment, often used to reduced down payments for the buyer or otherwise ease the sale of the subject property at a higher price point.
In addition to enabling sellers to achieve a higher price point on their asset sale, the seller carry affords apartment owners a variety of rewards, including:
o Ability to defer gains for 5, 10, even 15 to 20 years or more.
o Ability to sell a property at a premium to income approach value
o Faster transaction closings / Less time on the market
o Creation of a passive revenue stream from sold property
o Increased risk adjusted ROI over the sales price
o Potential tax advantages (for which you should consult a tax professional)
As always, these rewards do carry associated risks, which including but not limited to:
o Default
o Potential tax consequences (for which you should consult a tax professional)
o Regulatory / Legal ramifications associated with servicing debt
The seller carried apartment loan is a relatively sophisticated financial structure involving equally sophisticated financial instruments to ensure an optimal outcome, and should be treated as such. Sellers considering carrying back debt should consider their options carefully, and employ the counsel of only the most experienced financiers specializing in these structures in order to achieve their goals.
DISCLAIMER: The author is not a tax professional or lawyer. This content is not, should not be construed as, tax advice or legal advice in any way, shape or form. Please consult your tax professional and legal counsel.
Tristan Hunt is a seasoned professional with a wealth of experience in the finance business, advising clients on commercial real estate acquisition, development, refinancing & conduit loans at Centuriant’s Commercial Lending Group
Phone: (800)290-4770
Email:Â Commercial@Centuriant.com
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