Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

CHAPTER 11

Partnership Structuring and Deal Restructuring

The purchase of real property is capital intensive. Although historically, 75 to 80 percent of the acquisition price consists of third-party debt, the balance of the purchase price is equity, the down payment, and other monies invested by the buyer. Therefore, when you are purchasing a property for $10,000,000, you still must come up with $2,000,000 to $2,500,000 in cash. Complicating this picture is the fact that, in times of credit tightening, lenders become more conservative. The loan-to-value ratio is reduced significantly: typically to the 50 to 60 percent range. The result is that now the buyer must write a check for $4,000,000 to $5,000,000. Of course, individuals or entities might have sufficient resources to front the entire equity portion themselves. However, if the acquiring party lacks the necessary funds, or desires to conserve its cash—perhaps to facilitate multiple projects or simply to spread the risk—a partner or partners might be taken into the venture.