Brother, could you spare $80,000?
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Dear Mr. Berko:
My wife’s brother, whom I’ve known for 45 years, owns four office buildings totaling 52,000 square feet. He has asked to borrow $80,000 from us to meet his mortgage payments because of unexpected vacancies. He has the buildings up for sale and will pay us when a building sells. My wife and I are 66 and 69, and have a modest retirement. The $80,000 would be secured by a second mortgage and personal note on one of the properties, and he needs money ASAP. He tells us that the National Association of Realtors (NAR) thinks the property market has reached bottom. (We also heard the NAR say this on the radio.) We would get 8 percent, which is better than the 2.5 percent we get on certificates of deposit. He has always been a reliable and honest man, and we would really like to help him out of this temporary jam until the market recovers. What do you think?
G.M., Boca Raton, Fla.
Dear G.M.:
What I think is that no matter what I say, you’re going to lend your brother-in-law that money. Still, I’ll tell you that family — especially relatives — are the worst people with whom to do business. And I don’t give 10 hoots and five hollers how honest and reliable your BIL is. The office market will continue to decline. In fact, the worst is yet to come, as 70 percent of existing commercial and office property mortgages come due in the next three years.
Your BIL is up to his ears in buffalo chips; the banks won’t give him an extension nor will they agree to a new loan, so you are the suckers of last resort. And even though the recession is over, the recovery will be as slow in coming as ketchup from a fresh bottle of Heinz.
At your ages, lending him $80,000 is financial suicide. The number of small office buildings has tripled since 2006, and vacancies are spreading like wildflowers.
Frankly, I wouldn’t trust any economic forecast provided by the National Association of Realtors. These fools exhorted the public to buy real estate in 2006, 2007 and 2008. The NAR’s David Lereah told the media and public in 2006: “There’s no real estate bubble. Prices are strong and headed higher.” In 2007, this NAR spokesperson told the media: “After reaching what appears to be the bottom, we expect property sales to gradually rise this year and next.”
Well, the NAR got itself a new economist in late 2007 (Lawrence Yun), who told the public, “Mortgage disruptions have hindered sales this year, but the fundamentals are now favorable, and we expect an upturn with broad improvement in 2008 and 2009.” G.M., I wouldn’t trust the NAR to boil water or turn off the light. Those dastardly peculators always espouse two universal truths: (1) It is always a good time to buy or sell property; and (2) We’ve seen the worst of the correction. Now, would you expect a house painter to tell you that your home doesn’t need painting, or a tire salesman to tell you that you don’t need new tires and brakes?
No matter what I tell you about the NAR, the office market or risks, you’re gonna give your BIL that $80,000. If you do, be mindful that you hold all the cards in this transaction. So here are some thoughts: (1) Make certain that those four office buildings are worth more than the mortgaged amount. Frankly, I suspect they are under water. (2) Hire an attorney to draw up an agreement. (3) Do not accept a second mortgage on the properties; rather, file a lien on all of them. A property cannot be sold if the lien holder is not satisfied. (4) Don’t take interest on your $80,000; rather, take an equity position. When the properties are sold, that entitles you to a percentage of the sales price, which is taxed at the lower capital gains rate rather than the higher ordinary income rate. (5) If you can’t get an equity position, then 8 percent is too low; demand 14 percent. Remember, you are not the Salvation Army. (6) Follow your lawyer’s recommendations, keep your fingers crossed and spend time in the “amen” corner of your church every Sunday.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, Fla. 33775 or e-mail him at mjberko@yahoo.com. © 2010 Creators.Com
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