On Life Support

When a real estate deal is in trouble, or dying, the commercial brokers I use to buy & sell my buildings refer to it as, “On Life Support.” That was the status of my deal (see previous blog post) for probably two months before closing. Why? The buyer wanted to buy, the seller wanted to sell. They had agreed on price and terms, albeit grudgingly. Well it’s a long story, but the short answer is, the bank went bankrupt.

The buyer was selling another building, and making money on it. So he would have to pay capital gains. In order to avoid that, he structured the sale and subsequent purchase of my buildings as an IRC 1031 exchange. Properly executed, the proceeds of the sale are rolled into the purchase of the new property, and the IRS gets cheated out of their tax money. I believe this technique is widely know in real estate investment circles.

Because I had prepayment penalties on the loans underlying my buildings, and because I wasn’t getting a great price, part of the terms were that the buyer would assume my loans. The loans were assumable, and the interest was pretty good. The problem was that the buildings were selling for less than they had been appraised at when I refinanced. The bank insisted on cramming down the loans so that the LTV, Loan-To-Value ratio didn’t exceed 75%. The buyer was okay with that. It meant he had to come up with more cash, but cash wasn’t a problem for him due to his sale. The bank still insisted on a prepayment penalty on the crammed down portion of the loan. I’m not sure if the mortgage contract allows that or not, but they won. The pre-payment penalty was split three ways between the buyer, the seller (me) and the broker, making it palatable for all.

Somewhere in there the bank, Washington Mutual, went under and got bought out by JPMorganChase, which has swallowed so many banks in the last few years, it’s hard to fathom. It’ll be business as usual they insisted, but it wasn’t. Processing ground to a halt, I had verbal approval for the deal, one key signature and was waiting for the second key signature. I waited two months. The deal was supposed to close before Christmas 2008. Sometime in the beginning of February, the team working on the deal got laid off. The clock was ticking, and I had granted several extensions to the buyer, what else was I going to do? He wanted to close, and was ready, willing and able. In fact, he was willing to come to the table with all cash just to make things happen. A good buyer and honorable too! But I needed for the loans to be assumed, or half my profits would disappear in prepayment penalties.

My lawyer wrote a “Nasty-gram” to JPMorganChase threatening to sue them if they caused the deal to fail. They then resumed processing the loan assumption, and we closed on the very last day we could close and the buyer could still get his tax break. It was a great effort by the broker, and the lawyers for both the buyer and the seller.

I got lucky I guess. The buildings are most likely worth less now than what I got for them. They were in need of some upgrading and renovation, and I was getting a little tired after eight years. I also knew things were going to get worse for rental housing before they got better. The previous two years were tough, and mentally I wasn’t prepared to hang on. Also I had been (and still am) contemplating relocating to the Pacific Northwest, and would need to sell in order to do so. The buildings are no longer a barrier to my relocating. Also, after a little rest, I intend to start over, either as property manager working for a company, or independent again, but in nicer neighborhoods.

I’m not sure what the moral of the story is, or if there even is one. Life sucks, maybe? Or perseverance? Nothing ventured nothing gained? Never give up? It’s frustrating to me when things are out of my control and I’m trying to make something happen. Use good professionals, and hope for the best.