We're investors in commercial real estate - planning the great escape

[kluurs]

Mrs. Kluurs and I have become investors in commercial real estate – at the just the perfect time. My father-in-law was a barber and owned a small storefront in Chicago. The building is probably worh around $170k. When the FIL was no longer able to do the barber business, he rented the barber portion of the store to a young barber. The young guy was great – paid his bills – and the FIL really liked him – gave him a favorable rental, let him retain the name of the shop and encouraged the young man to think about buying the shop when it became available. Originally, the shop was only half the storefront and the other portion rented to a hearing aid company, When the other tenant moved out, the young barber was encouraged to take over the other half of the store. He did so and added additional chairs.

Moving forward, when trying to probate the estate, the young barber sought a mortgage – but he failed to secure one.

So….now, each of the kids own 1/5 of the store. The barber has a 3-year lease at favorable terms but he’s not found anyone to rent additional chairs in the expanded shop.

One of my wife’s siblings suggested a seller financed option to the barber – with a favorable rate of 5%. I and my wife think that’s idiocy as it doesn’t create an incentive for him to refinance. Secondly, if we’re long-term owners of the property, I’ve suggested that we form an LLC to protect everyone – which frightens at least one of the other family members because it makes things “complex”. “You have to have annual meetings!!!” I explained that I’ve held annual business meetings and they can be conducted in under 2 minutes – but to no avail.

Options:

1. Seller financed – at market or slightly above market rates to reflect risk.
2. One person buys out the other family members (not likely).
3. Forget the FIL’s wishes and put on the market – though the favorable rental will hurt sale price.
4. ????

Any thoughts not considered??

[Jolly]

Nope. Best option is seller financed through a LLC. I would give him a favorable rate. If you want to sunset the loan in a timely manner, put a ballon at a certain point (10 years?). At that point he can refinance through a regular bank or you can foreclose.