- On March 24, 2020
It’s an often less-understood topic in real estate, but financial structuring is an essential tool in a real estate professional’s toolkit. Financial structuring will make all the difference in whether a deal will ultimately work out in your favor, or if you’ll end up with a not-so-great deal. Ira Zlotowitz dives into what you need to know about creative financial structuring and determining whether a deal is good for you. Don’t let yourself fall behind on this important field of knowledge. Let Ira help you find a better understanding of financial structuring.
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Chapter 6 – Creative Financial Structuring
Chapter Six. We’re going to focus on the topic called Creative Financial Structuring. This is a topic that I love and I think it’s crucial for those that want to get involved in real estate on the stand, especially since now the world of real estate is much more about financial engineering. Understanding real estate finance. The most successful real estate professionals are those that fully understand real estate finance. They understand how to leverage a deal, what sorts of lenders, how long of a loan because they know how these metrics are going to play out for cash and cash and IRR. Different terminologies and I’ll get into it later.
When you meet someone and say he’s a great real estate owner, he’s a great real estate player, big real estate player, it’s usually not because he knows how to manage a building great. Because to manage a building great, you can learn that skill. To manage the buildings, you can hire somebody if you don’t know how to do it. That’s not something that’s unique in the management. To have a financial and structure the deal, that’s what separates the best and they fully understand the whole entire perspective and a full 360 degrees. They understand everything. I’m going to show you a little bit, break it down a little bit to what they understand and how it works from there.
We updated our app and we have an eCalc feature. Calc is short for calculations. We spent a few hundred thousand dollars to take already state of the art group of calculators and upgrade them to this eCalc feature. The reason why we did this is that real estate went from being about bricks and mortar, which means that conversation when I came into the business, the old-timers would say, “That’s a great building. It’s solid. This is the finishing and it’s a steel frame. It’s this, it’s that. The roof’s in good condition.” The focus point was the quality of the real estate. They went on to the income and the market focused on what multiple of income. They said, “That’s not sophisticated enough. That’s not a good metric.” They went, “Let’s value building based on the cap rate.” They said, “What are we doing at the cap rate if the building is worth it?” I came more to focus on what’s the cashflow. What am I going to make cash-on-cash? How much I put in money? How much am I going to make back on that money? Because of this, the Eastern Union Calculator, the eCalc feature will allow you to calculate all of this.
So Many Calculations
In the past, you didn’t need many calculations. A lot of it could be done back of the envelope, figure out the mortgage payment, 2 or 3 mortgages on a property, blended rate. How can you put it all together and fully understand how each step links into the next and it comes back together? That’s financial engineering. The first step of financial engineering says, “I know what I’m buying a building for. I know that it’s worth it because the cap rate checks out, but what’s my cash-on-cash return? How much am I going to make?” As we know, what is the investor who’s putting up the money? They have a choice of what to do with their money. When you’re selling them a deal, they say, “I’ll invest with you because by investing with you, I’m going to be able to go ahead and instead of making 8% of my money somewhere else, you’re throwing off 10%.” The problem was when the new sophistication level came in, people were focusing on the first year of the income and what the cash-on-cash return is.
What happened to years 2, 3 and 4? What happens if someone has a deal? It’s only throwing off 8% of year one, 8% year two, but year three it starts throwing off 12% and then it goes up 14%. There’s something a little bit off because if I’m only going to go raise money, what should I promise at 8%? The cash-on-cash is not good. I need to see what the ROI is. What’s the Return on Investment for the life of the investment? If I start understanding, if I give back money faster, that’s what IRR goes, Internal Rate of Return. Internal Rate of Return is going to say, “It’s not how much you make over the life and investment, but at what speed you give the money back.” Someone who starts to understand this can now be a lot more sophisticated.
How do you do it yourself? You need an expensive model that someone could have built you a complicated model. Not expensive, but complicated. Through the Eastern Union app, you can use it in the palm of your hand and calculate, “If I have this deal, what is the IRR going to be?” This is crucial because it used to be when I was as a mortgage broker, it was one dimension. Someone said, “I want the highest, most money, lowest rate.” That’s the terminology, but what happens if you couldn’t get the highest loan amount and lowest rate? You had to get the highest loan that came in a little bit of a higher rate. The lowest rate was fewer proceeds. Which deal should you take? If you fully understand how everything works, you might say, “This deal, even though the interest rate is higher, but because I’m getting from 75% leverage to 80%, it works out better for my investors.” That’s understanding IRR. It’s no longer about getting me the mortgage as a standalone. It’s putting everything together.
When you start understanding how all these things come together and what makes it work, you’re going to realize, “Let me focus on what’s important ultimately.” Do you know what’s most important? I started off the overall course. What’s most important is where are you getting your money from and what is the cost of that money? If your money is looking for an 8% return and in order to structure the deal to get 8% you need this type of financing, then take this type of financing, buy this type of property. You can see later on in the course, I’m going to give you how different structuring of leases could get different terms and different cashflows and different amortization. That’s going to pull this all together. They can be one person I met that says, “Ira, this building is worth $1 million. I’m going to buy it for $1 million and I wouldn’t pay a nickel more.”
The sophisticated guy comes along and says, “Ira, I’m willing to offer $1,050,000. What financing could you get?” I said, “The bank’s not going to lend you based on $1,050,000. You’re overpaying. He says, “It doesn’t make a difference. Lend me the best you can based on $1 million.” “Why are you overpaying?” He says, “What’s overpaying?” He shows me that the structure he has with his investors and the type of financing is able to get. Even if interest rates went up during the life of the investment, for the balance where he’s going to be, he’s going to pay it down at a faster rate because he’ll take shorter amortization, let’s say. It works out. He’s making a better return for his investors, but his investors need to work as investors. When the loan matures, the balance will be the same as if he would have bought it for $1 million. He’s going to pay it down faster.
This person is able to now go ahead and get much better deals because they could find deals. The world can’t find deals. It’s tough to find the deal. Everyone owns everything. Is he willing to overpay? Maybe not. From a cashflow basis, he could structure it to work right. To break down what I’m saying, to get it simple and easier so you could relate to it, then you start playing with the eCalc feature. You’ll see how what I’m telling you works. I want to talk more without a calculator in front of me. Everybody has different things that are important to different people. This person who bought the building for $1,050,000, you know how he was able to do it? Because he found investors and not only didn’t they care about the cash-on-cash return he was getting or the IRR that he was getting. This person was able to wait and only care about the ROI.
Tell me how much money I’m going to make when it’s all said and done. I’m not in a rush, so I don’t care if you give me zero year 1, zero year 2, zero year 3 and you give me all the money in the backend. Because every dollar of cash, we’re going to reinvest in the business. Because of that, this person knew I could do it for $1,050,000 because they’re going to take every dollar of cashflow, reinvest it back into the building. No one needs the distributions. They have the equity they could get raised. Because of that they were able to bring value that this building was worth $1.2 million come 10, 5, 3 years down the line. Had they done it normally on a normal investor that needed their return and they knew the cashflow upfront, they couldn’t have enough extra cashflow to reinvest back into the building. They had to go through organic growth. They couldn’t go ahead when a tenant left put a lot of money in. When tenant left, they got a little more rent, fixed it up a little bit. This structuring of the deals stops making a big difference and that’s what you have to understand in 2020 and beyond the buying real estate. It’s not about bricks and mortar, it’s not about the cap rate. It’s about the overall what my IRR is? What is that return I’m going to make? I’m sure there will be other indexes.Successful real estate professionals fully understand real estate finance. Click To Tweet
What multiplier of equity am I going to make? Am I going to get 3X? I put $1 million, I take out $3 million. These are the terminologies you have to understand. That’s why we created the app to make this life much easier for you that you as a layman or as a top-line professional. We built it for the top-line professional. We spent a fortune of money on UXUI that the layman should be able to use it. It hits both worlds and built-in, you’ll have the educational tools. When you’re doing it, you don’t know a word means, click on it, it’ll tell you what that word means. What are all the pieces in the financial engineering? How much equity do I need? What are my mortgage payments? Even if it’s blended, I take a first and a second mortgage or I take a preferred equity piece. What is my cash-on-cash return going to be? What is my IRR going to be, Internal Rate of Return, over the lifetime of my investment?
The next thing I want to talk about is a little bit about the value and this goes into the same thing. When people talk about valuing a property, they hire an appraiser. What does an appraiser do? An appraiser is simply an opinion. It’s important that you know this. An appraiser does not tell you factually what the building is worth. The only way you know how much a building is worth is literally the day the deal closes. A building sold for $1.3 million, that means it’s worth $1.3 million. The next day, it could be worth more, worth less. It’s an opinion based on the previous day. At $1.3 million this building is worth it because the better this worth, so therefore it’s worth $1.3 million plus or $1.3 million minus. What that appraisal being an opinion, what are the three opinions? What are the different appraisal methods that could get used? I want to tie this in. Value is important. You don’t want to buy a building for $1,050,000 when a building’s only worth $1 million. You always want to know the baseline. Because if you’re reselling it, you only get $1 million. On the flip side of the coin, you might overpay and pay $1,050,000 because you believe that you will be able to increase the rents enough that over the next five years, the building is worth $1,100,000. You’ll overpay for now to be getting a discount on the future, but you want to know what the right price is. The right price is based on the appraisal.
There are three appraisals. There’s the sales approach, a cost approach and an income approach. The sales approach is what are buildings selling on a per square foot type of basis? This building has 100,000 square feet. How much do people pay per square foot for 100,000 square feet? They pay $10 a foot. That means $1 million. If it’s $100,000 a foot, it’s $10 million. When someone is buying a home, that is the primary way and primary use for this sales approach. When they got an appraisal and he’s going to give them the three appraisals, valuations, the one that’s the sales approach focuses primarily on homes. You have the cost approach. What does it cost to rebuild this building? That is primarily used for insurance purposes. I could buy a building for $1 million, but this building, the way it was built, to rebuild it might cost $2 million to rebuild.
Am I getting a good deal if I’m buying a deal for half the cost to replace it? You could look at it that way. That was old school. Do you ever have to look at the income? Insurance says, “If I’m insuring this building, you’re going to have to buy $2 million worth of insurance because that’s what it’s going to cost to rebuild it.” If a bank is going to demand that you buy the insurance and bank says, “I’m lending you money, so you have to have enough money to operate this building again and it makes you have $2 million worth.” Sometimes as a side point, it becomes a negotiation. We tell a bank, “Don’t make me have $2 million because if this thing burned down, I’m not rebuilding it for $2 million.” Sometimes the bank will say, “I’ll get the insurance money first. If you want, have enough insurance at a minimum to cover the balance plus any points or penalties you might have and go from there. It’s uncommon.
Typically, they’re going to want you to get enough insurance to rebuild a building because they don’t want to be stuck at any level that something comes up. They trust insurance. You have enough money to rebuild a building. Also, it’s rare. Don’t take this wrong, but sometimes $2 million to $1 million. It’s rare that the building is built in such an absolute type of fashion that to rebuild it now, it’s going to cost you $2 million. The current building is only worth $1 million. For commercial real estate, lo and behold, the income approach is going to be it. Income is financial is money. That’s the driver in most commercial real estate.
The Whole Topic Of Financial Structuring
Hence, this whole topic of financial engineering, the whole topic of financial structuring so they focus on based on income. How much is it worth? They take the income, they apply it, and they take the income, they take the expenses, they have an NOI, the Net Operating Income, and they apply a cap rate. The real way they do this because they do like to discount the cashflow model, which they basically take income and expense. They do it based on comps and they say, “You’re running this too expensive, too cheap,” and they come up with what they think the correct NOI is. They also say, “Let’s say the cap rate is a 6% cap,” so you have $100,000 in NOI divided by 6% gives you the valuation. They take a year two and they say, “My year two, based on the projections,” and the eCalc app is able to calculate what I’m telling you. You can project over the next 5, 7, 10 years, the income increases. They then apply the same cap rate for every year based on that year’s NOI and they somehow average and bring it back together. If you make it in the simple form of an appraisal, that’s what an appraisal does.
It takes the NOI for this year, puts the cap rate on, figures out then and why the next year, puts the appraisal on and so on and so forth, and then an average of back out and it tells you the valuation. This is all an opinion. The appraisal is not finite. What you bought on that day for that you told the world that it’s worth it if you bought it. If you want to know what you should buy a building for, the best way how an appraiser figures it out is it draws these conclusions. What does it start with? It starts with something called comps. This is part of the financial structuring and understanding because it starts with comp and then says, “Building one down the block sold for two weeks ago at this price, but it’s not as good or it’s not as bad. Building two sold at this price.” Higher cap rate, lower cap rate. Higher sales per square foot, lower sales per square foot, the replacement value. It takes all these comps and it puts it together and says, “Based on the surroundings, therefore I’m going to appraise this building this way to go ahead and move forward.”
Let’s talk about a little bit of going back to the beginning of time. How did people buy mortgages? How did people buy buildings before mortgages? What are the steps they did? What are the methods? The first method, I’ll refresh your head for those starting with this. We’re going to use Brian as the buyer. Larry is the lender. For the buyer, BB. LL, Larry the lender. Brian would purchase an entire building property on his own free and clear. That’s what happened. The old school building sold for $1 million. Brian had $1 million. He bought a building. The second method is Brian didn’t have $1 million. He got himself three partners. Let’s say two, whatever number. We’ll use for this example a total of four people. It’s $1 million purchase price, $50,000 closing costs.
They each put up 25%. Pari passu, it’s a common word and it’s basically everything is even Stevens. If there’s a loss, there’s a gain, we split it evenly. If each of us would put up 25% of the money, $262,500. We each put it up. That works out to the $1,050,000 purchase price and we bought this building. The third method is popular, syndication. We spoke about a syndicator. Brian syndicates this. It’s the same idea. It takes partners, but he could work out a deal where he ends up getting each partner, they start off even at proportion what they put in. As he starts seeing more and more profits, the splits end up becoming disproportionate towards his favor. All of his investors are even amongst themselves typically. Brian ends up with a bigger piece proportion to his money. Even though he may only put up 25% of the money, he could end up at 35% of the profit, let’s say. This idea, you’re talking about how the splits work. This is the list level of sophistication. It’s called the equity splits, the waterfall between himself, the syndicator, the GP, the General Partner, and the investors, the LP. It will show you how those splits work out accordingly. That’s before the mortgage. They put up the money 100%.
Let’s go with an example of how the math would work. Brian, we have this from a previous chapter. They buy the building for $1,050,000, each put out $262,500. Since the building has a net operating income that we use the example of $72,967, the Return On Investment, their ROI, is 6.95%. Because if you have $1,050,000, that throws up $72,967. If you want to run a calculator without the eCalc, it’s $72,967 divided by $1,050,000, works out the 6.95%. Each partner takes 25% and they move on. After syndication, let’s see how this deal works a little bit differently. In the syndication example, Brian would go ahead and work this deal and say, “I’m going to go ahead and we’ll put up the money. We’ll each put up into this deal 25%.” However, Brian says, “If you start making money, I want 20% of your profits. Each of you is going to give me 5% of the deal.”A deal is only a good deal if you can sell it for more than you bought it. Click To Tweet
When all is said and done, it works out Brian ends up at 40%. He’s 25% plus the 5% times 3 that the other three people gave him. He will end up at 40% of the profits and the other three partners end up with 20%. They gave up some of that piece. Sometimes, they could give up the piece from dollar one which means he says put up 25% but you’re only getting 20% of the deal. He could have a structure, which is what’s called like a waterfall. You’re in for 25%. For the first profit-sharing, the first 8% return on your money or whatever the deal is, you’ll earn 25%. After that, then I get 20% of your piece or 9% to 10%, whatever the deal works out. In this case, we can use an example where they worked out that from dollar one, he ended up splitting it. They get 20% even though they put up 25% of the money and he gets their extra 5%, which ends up to 40%.
In that case, Brian’s ROI jumps from 6.95% to 11%. It moves up because he ends up with 40% of the profit of the NOI, Net Operating Income. He gets 40% of the $72,000 which gives him $29,186. You take that number divided by the actual money that he put in the $262,000 he works out, he gets 11%. The other investors take the remaining money. They go down from 6.95% down to 5.55%. Why? Because they get 20% of the $72,000, which works out the $14,593.40 to be exact. You take that amount of $14,593.40 divided by the $262,000 that they put in, they work out with 5.5%. This is illustration purposes and each deal is structured differently. It can get complicated, but this is showing you the idea that before they take a mortgage out, there are two ways they could have done it. Take an even partner, pari passu, or by syndicating it and he gets an extra big and extra piece to make it work.
How does leverage work? When you take out a mortgage, how does that change the whole game? This story here with $1,050,000 was the total cost. Let’s say he only got a mortgage for 75% of the purchase price. Most banks don’t care about your total costs. They care about your purchase price. They lend typically 75%. If Brian bought this building for $1 million, Larry the lender would lend him $750,000. Let’s use an example of the bank did it for a rate of 4% and the rate and the bank did it on a 30-year amortization. If using the Eastern Union app, the eCalc feature, type in loan amount $750,000, type in 4%, 30-year amortization. You could have started from the beginning of the eCalc and start putting it all the numbers in the beginning. Put the NOI and put the income and the expenses and the cap rate and the purchase price and bring it all the way down to here.
We can start with the mortgage payments. It works out to his payments of $42,967. It comes out that if the NOI was $72,967, if you had to pay the mortgage of $40,000, debt service is called. Service the amount to service to debt, you had $30,000 leftover. Therefore, it works out now that Brian and his partners, let’s say they bought it even, instead of making an ROI of 6.95%. They start making year one cash-on-cash return, which ROI takes in the lifespan. Cash-on-cash, I’m into changing the word here because we’re focused on the first-year return, but hopefully every year it goes up a little bit because you get more NOI and more profit every year, so it works out a better return. Let’s focus on cash-on-cash return for year one. He goes from getting a 6.95% up to 10%. Why? Because if you invested $300,000 into this deal, that’s the difference of $1,050,000 and $750,000, what the bank is lending, and you’re throwing off a net $30,000 after everything, that’s a 10% return. That’s an even partnership. Imagine if this was syndication, the return for Brian is going to even be higher than that because each of the other partners is giving him a piece of the deal.
Why do people take a mortgage? People take a mortgage for 1 of 2 reasons. Going back to an example at the beginning, he has $1,050,000 he could have bought the building. If you took a mortgage, he could either buy three smaller properties and put down $300,000 each approximately. He could have one large property. Instead of buying $1,050,000 property, he could have bought a $4 million property. Because he buys a $4 million property, gets a bank for 75%, he puts up the difference. The other angle is he is keeping the same building. Does he look at his money as what return can I make? $300,000 is throwing them off a 10% return. He buys another building, the same metrics, it’s also 10%. Ultimately, he would put out his $1,050,000 and be throwing off for himself a 10% return on that if he’d leverage every dollar, meaning every building he bought, he bought in clusters of $1,050,000 and he took a $750,000 mortgage, put them $300,000. He bought a $4 million building, put up $1 million. His return goes up to 10%. This is the easy part of financial engineering. You can think of leverage from a bank.
If he’s throwing off a 10% return to his investors, if there was an option to borrow $800,000 using the example of saying before, let me see numbers talk within a specific example. If instead of borrowing $750,000, he borrowed $800,000. Even if he paid a higher rate, 4.25% instead of 4%, it could work out and it does work out, he’s going to end up with a better return. Because now he’s not putting in $300,000, he’s putting in $250,000. On that last $50,000, he used to be making 10%. He’s now paying 4.25% for that plus the extra quarter on the rest of the money. He’s making bottom line more money on the money and the money he’s putting on as a partner for the equity. When you’re going to go out and take out the eCalc and play with it, you’ll see live all the crazy examples you could do to be financial engineering.
This is one part. People take it to the next level. They go out there and have a thing called preferred equity. Instead of partnering in this way, they find someone and say, “Can I take $1 million at a 10% rate?” They take $800,000 at 4.25%, they take $1 million at 10%. By now, before this, the difference from $800,000 to $1,050,000 was throwing off probably 11% or 12%. They found someone to go from 80% to 90% at 10%, they only have to put up $150,000 and they get a higher return. Here’s the other key. At a certain point, this person may be able to buy the building himself because he may have had $150,000. He didn’t have $262,000 at the start. He didn’t have $300,000, he didn’t have $400,000. He didn’t have different numbers, but at $150,000 he says, “If I did it this way, I could buy this.” Is it riskier? This is the key piece. It is much riskier.
I want to make sure that everyone understands. I showed you the pros of taking out the mortgage. I want to show you the negative talks right here. While you are reading this thing, let me leverage it all the way up. Take a debt than equity, all these different structures and I barely put up any money to make a return. That’s fine and dandy for the good times. Let me tell you the negative to leverage. I wanted to say this to the last point, but I’m to go with the flow. Even though it was planned the other way, I’m going to say it here. You bought this building $1 million, let’s round now the number, let’s use the $1 million number from now on, not the $1,050,000 just to keep round. You want $1 million to build all cash. God forbid the real estate market takes a correction. It’s not worth $1 million anymore. It drops by 20%. You still have $800,000 left. You bought it for $1 million. It’s only worth $800,000. You lost 20% of your value. If you took out a mortgage, you leverage it all the way up. You took out an 80% mortgage plus a 10% preferred equity. Real estate goes down by 20%, you lost all your money.
If you took that $1 million originally that you had and leveraged it up 90%, that means you bought $10 million worth of real estate. You’re right, you’re killing the good times. You make a fortune on the return on your money and you’re getting a lot of cashflow. If real estate went up, you’re doing amazing. If the real estate goes down a mere 10%, you’re wiped out because you bought $10 million worth of real estate, you have $1 million in. If it’s worth $9 million now, you’re totally wiped out. Forget about closing costs, forget about everything else. When you have to look at real estate, it’s fine and dandy on the way up. I don’t understand financial engineering and risk tolerance and all that, but that’s negative.
Let’s go in the normal day-to-day. What are the normal negatives of taking a mortgage? That’s why I told all of you from the first chapters, you want to find out when someone’s giving you equity not just how much money is it giving, how much return do they want? How much leverage is he allowing you to take? Because some investors say, “I’ll put up the money. I’ll take less of return.” You can never borrow more than 75% leverage. Because in a normal case, values don’t change. Another negative is what happens if vacancies increase? Your building is 95% occupied. You start losing a few more tenants, only 94% occupied, 93%, 92%. Expenses rise. Inflation kicks out on expenses or taxes go up. Debt Service Coverage Ratio, DSCR, could run into a problem.
Let me break this statement out to two. The first part is obvious. It could come to a point where expenses keep rising too much and/or the vacancy rises. Your occupancy is lower and you can’t afford to pay the mortgage. That’s for sure a problem. When you take out a mortgage, the bank requires what we call the debt service coverage ratio. The bank requires that they have to make sure that you’re paying. I’m going to show it to a different perspective so you’ll see DSCR. The Debt Service Coverage Ratio, the bank says, “We want to make sure that you have a 1.25%, which means that for every dollar you’re making payments, you have to have another 20% or 30% or 25% available.”
Let’s use a number, 1.25 means 125%. Your payments, for example, would be $40,000. You have to have another $10,000 available. They’re only going to lend you as long as the building is throwing off $50,000, so there’s $40,000 to the bank, 25% of the $40,000, there’s another $10,000. What happens if the building is fine, you’re paying the rent, paying the mortgage, everything is great, but your NOI drops $50,000 to $48,000? That’s a problem because you’re in technical default. The bank could start a foreclosure if they wanted to. Is it the right thing for them to do? Will they practically do it? You can’t answer at different times. Practically, they’re not going to but you can’t run your life that way.
Therefore, if it dips a little bit, that’s a problem. I’m focusing only on the problems. The reason I’m focusing heavily on these problems here, like a scare tactic, because that’s not just a scare tactic. The joke, ROI is not Return On Your Investment, it’s Return Of Your Investment. This deal is only a good deal if you’re going to be able to sell it for more than you bought it for. Throughout the process life span, you took a return. If you don’t make a return, you have a problem. At least while you’re looking at a deal, make sure you’re counting for these scenarios when you are moving forward. The other issue you could run into, let’s go back now to the story of running with. You bought it for $1 million, you have $50,000 closing costs, total cost $1,050,000. You took out a mortgage, $750,000. You could calculate what your balance is going to be at the end of the term, whether you take a 3, 5, 7 or 10-year term.
What happens five years from now? The balance of your mortgage is higher than a bank would lend you. Let’s say real estate values go down a little bit. No problem. It used to be worth $1 million. It’s only worth $800,000. You’re still above water. You took out $750,000 on a mortgage. Originally, your mortgage, let’s say, pay down $50,000 worth, it sounds to $700,000. If you sold the building, you’re fine, but you want to hold on to the building longer until the real estate comes back. If you went to a bank that day, took a five-year loan and the bank tells you, “I’m sorry, the loan’s maturing. We’re only lending 75% now and the building is worth $800,000. $800,000 times 75% is $600,000. You’re underwater.
If you have $100,000 to pay down the loan, great. If you don’t, you might be forced to sell in a bad market. If you do, remember the bank is in the first position. If you sell it, you’re going to be fine at the end of the day. Whenever you go into, realize the bank takes their money first. If it’s worth $800,000 and you sell it and the balance of the loan is $700,000, you’re comfortable. If it starts getting closer, God forbid it goes through a situation where it drops in price that you’re underwater on the value, that’s where you start having problems. Thank you. I’m looking forward to the next course.