| Charitable donation as “down payment” |
| Posted by: Josh Mar 18 2004, 04:13 PM |
| I work with a national charity that is looking at a new way (for us at least) of raising funds by attempting to convince sellers of commercial properties to enter into a bargain sale with the charity, selling the property for less than FMV. I was wondering if you had any advice as far as what issues the lender/broker would like to see in such a unique situation. First, some assumptions: The seller’s asking price is X, and backed up by a commercial appraisal, including a lender ordered appraisal establishing FMV. (and ultimately the IRS would have to agree with it as well) We convince the seller to help the charity out by selling the property to the charity for 25% less than X, the FMV (the bargain sale) and taking a charitable deduction for the difference. (okay, the specific rules for how much, and over what time period, the seller can deduct the gift are more complicated, but I would think it not really relevant to a lender) Two questions: Could the charity get financing for the remaining 75%? Would the “value” in the LTV calculation be the bargain sale price of FMV? The seller is getting FMV for it (from the IRS’ perspective) in the form of cash (75%) and charitable good feelings (25%) including a deduction. Assume that the property would otherwise meet underwriting criteria, class A bldg, strong tenants (maybe even credit tenants), greater than 1.25X DSCR, greater than 90% occupied, strong rental history, etc. The reason the charity is interested is that it would be getting two things: 25% equity in a commercial bldg and an income stream. The first question I am asked is why would a seller sell for less than FMV? The answer is that this is a way for them to further the mission of the charity, while getting 3/4 of the money out of their property (most sellers would not consider an outright donation of the whole place) and avoiding a lot of the capital gain tax on the donated portion, etc. So, is this something that a lender would even touch or is it so non-mainstream to be unworkable? Again, I consider the crux issue to be the LTV calculation. I understand that normally the lower of either cash or appraisal is used as value, but here there is more involved. Any advice is greatly appreciated, and bravo for hosting this site, it is incredible! Josh |
| Posted by: loanuniverse Mar 18 2004, 06:52 PM |
| Josh: The scenario you described does make sense. I am in no way knowledgeable about tax laws and how the donor can take the partial deduction, but it does sound reasonable that they could. Now from the point of view of a lender and to answer your question ” is this something that a lender would even touch or is it so non-mainstream to be unworkable?” here is my feedback: Doing a loan under the presented scenario would violate the rule of applying loan-to-value to the lower of purchase or appraised value. Granted, the charity is getting a break in the price of the building, but a good credit policy requires that the lower of the two values is used. Nevertheless, this does not mean that the deal is not doable. It will just take some explaining and a receptive ear. It will then take someone willing to bend the rules by creating an “exception to policy”. Loans with exceptions are done all the time. I do not have hard numbers, but in some institutions a good third of the loans might not be completely true to the text of the credit policy. This is all done behind the scenes, but it happens all the time. The important thing with exceptions as well as with other credit weaknesses is that they must be mitigated. In this case, there would be a great mitigating factor {the appraisal}. Take into consideration that the request is very atypical. It might not be welcomed by all the lenders, but I can see by your post that you got the core of a good case for convincing the right people. Other things that come to mind: 1 Do you have any bankers on the board? Thing will go much smoother if you have someone that can help you get to the right people. Leverage the resources that you have. 2 You say your charity is national. This means that you probably have audited financials. That is a good thing. 3 The bank might want his own appraiser to provide an estimate of value. I know I would. 4 You mention lender/broker… Why do you need to put another layer between you and the lender. I would say avoid the broker unless it is necessary. Talking to a commercial lender and asking him what he needs to underwrite it is all you need. Then again you might want to try a couple of lenders at once. A good one will not charge you any fees until they issue a commitment letter. 4 I would talk to counsel regarding how to hold title for the building. One thing is being a charity, another is being a landlord. Good luck and hope this helps. |
