My First Office Loan · Make Money In Local Markets

My First Office Loan

My first office loan was a refinance of a property in Oceanside, CA. The property was located near the Tri-City Medical Center and the owners were a group of four doctors. They purchased the property, in 2002, with bank financing and the 10-year term was coming due.

I faced two challenges:

1- There were 8 tenants, all with leases which expired in less than 3 years but had options to extend.

2- The docs wanted to pull out all of the initial equity in the property so they could buy out one doc and "play with the bank's money"-- MEMO to sponsors-- bankers know this trick.

The opportunities:

1- The docs all made tons of money and would guarantee the loan.

2- The properties were cash flowing to a 1.5 DSCR, driven primarily by the fact that rates were 200 basis points lower than the existing loan.

3- The three remaining partners in the property were also tenants of the property (through different entities)

4- All three docs hated their existing lender because it said "no" to their loan request-- docs hate being told no.

I shopped around and found a community bank in Los Angeles County which was hungry for loan business and LOVED owner-user loans. While this was technically not an owner-user loan, this bank loved physicians and was willing to underwrite the loan as owner-user if >50% of the GLA extended their leases to 2022 so that the WALT exceeded 7 years.

This is where is got interesting. Each of the partners was a tenant as well so the three remaining partners were willing to extend the lease; the 4th partner (being bought out) wanted to extend the lease without the rent bumps. The remaining partners were apoplectic, likening his actions to an airplane hijacker. This is where my math skills came in-- I quantified the loss to lease and advised them to lower that amount from the buyout.

We ultimately solved the problem by extending the lease to 5 years, without rent bumps, with NO tenant options to renew. That got my WALT to just over 7 years so they could get the loan. They didn't reduce the buyout number but kicked the other doc out in 2017 and replaced him with a much higher paying tenant.

They bought the property for $5MM in 2002 with a 3.5MM loan. I secured a $5MM loan, 250 basis points lower than the initial loan, for them in 2012 so they could buy out the nuisance partner. They sold the property in 2018 for $11MM

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