How to Pull Tax Free Money Out of Your Commercial Property
How do you pull totally tax free money out of your commercial properties, without worrying about the refinance penalties associated with your existing loan What is simple with single family Real Estate Investing is much more complicated in Commercial Property for one simple reasonHow do you pull totally tax free money out of your commercial properties, without worrying about the refinance penalties associated with your existing loan?
What is simple with single family Real Estate Investing is much more complicated in Commercial Property for one simple reason...
In Commercial Property, the Pre-Payment Penalties are much larger and darn near impossible to bypass when you want to refinance.
Whether your prepayment penalty on your Commercial Loan is via Defeasance, Yield Maintenance, or the standard 5-4-3-2-1 stepdown method ... the dollar amount of the penalty can easily run into the hundreds of thousands of dollars should you try to refinance before the end of the loan term.
But what if you are in this situation...
- You have a distressed property you have worked hard to turn around.
- It is now cash flowing quite nicely and you would love to tap into your equity for your next investment.
Is your forced appreciation stuck in this property until your loan is mature?
Not hardly ...
It just takes a little creativity to pull your money out.
How do you get around the pre-payment penalties?
Any money you do pull out is a totally tax free advance you can use for your next Commercial Property purchase.
Here's how you get there...
The secret is to have great documentation, strong cash flow, and use a Mezzanine loan to pull your money out.
A Mezzanine Loan is an additional loan that sits on top of your primary mortgage. In residential real estate it is commonly know as a Second Mortgage.
You must have strong financials in order to convince the Mezzanine lender to give you this extra money because this new loan will be in second position behind your existing mortgage.
The Mezzanine Loan is what is known as a "soft second". The Mezzanine Lender cannot guarantee the loan by taking the property as collateral because the lender holding the first mortgage will not allow it.
Documentation is one key...
You will need excellent quality records going back at least six months that document the property's superior performance. 12 months of documentation is even better.
Adequate Cash Flow is the other ...
Your Debt Coverage Ratio must also support the additional loan payments.
When you put together the proforma for the Mezzanine Lender, just add in the new loan payments and show them your property's cash flow can adequately cover them.
And remember ...
Your tenants are the ones actually providing the cash flow for you to pull the money out.
If your numbers support the new debt, you can pull the new loan out now and drop the cash into another cash flowing property.
And you don't pay any taxes when your Mezzanine Lender cuts you the check.
It is totally tax free money based on the hard work you did to turn the property around.
This flavor of "refinancing" allows you to pull your money out in year 2 or 3 rather than waiting for 5 years when your loan term is done or until the actual sale of your property.
So, if you have a property that's been under your control for several years and you've made major improvements in the cash flow, check your debt coverage ratio now.
You may be able to move tax free money out by originating a Mezzanine Loan and put even more cash flowing property into your portfolio in this Buyer's Market.
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