Wanting to consolidate home and business mortgages. Advice?

[mrblotto]

I reckoned what better place to go with questions than a forum of total strangers lol.

Anyhow, the wife and I own a B&M business (Florist), and after 17 years of owning/running it mostly by herself ( I have a 9-5 job, then I go to the florist and work there too), she is wanting to get out of the business. She's just lost the 'passion' for it I guess. Too many hats to wear: designer, order taker, accountant, salesperson, supplies orderer, not to mention the paperwork that has to be done (I guess that falls mostly under 'accounting').

We own the 'space' the business is in (vs leasing it), and there's about 2 1/2 years left on the 'mortgage' (I dont know what its called exactly for a business) before it's paid off. The balance is about 75K at 3.75% fixed.

Our home mortgage is roughly 70K with 5 years left on it at 4% fixed. Our credit is 'good' bordering on 'excellent' at the mid 700's. It is thru a different lender (BB&T) than the business.

She wants to sell the business part of it (inventory, name, customer database, equipment), and just lease out the space.

The loan is in the corporation's name (S-Corp I think it's called), and after conferring with an attorney, he believes it will be much 'easier' to sell the business if we transfer the business loan into our names. I dont have the details on that, as I was not attending the meeting. This is 2nd hand (or 3rd?) information relayed to my by my wife.

So, the wife called the mortgage company that currently has the business loan asking if they could 'merge' both loans (our home + business) into 1 loan under our name and keep the same time period for payoff (about 2 1/2 for the business and 5 for the home, so I'm guess a 5 year loan) and they said "......we only do 25 year loans for this, but you can pay it off early!". My BS-meter immediately went off.

What I'm asking advice for is:
-What is this procedure called actually?
-Is the business loan holder trying to put one over on us?
-What other options are available for this?

TLDR:
-Own business and home
-Want to consolidate both loans into 1 under our names
-Business loan holder says they only do 25 year loans for this
-options?

Thanx in advance
Blah-Toe

 

[IHateMyJob2004]

Lawyer?

 

[Capt Caveman]

Keep the current mortgages

 

[JSt0rm]

Can't you create a llc and transfer the mortgage on the business to that and then sell the business?

I only dabble in this shit so I could be wrong.

 

[Red Squirrel]

My gut feeling would be to keep personal stuff and business stuff separate, but I'd check with a financial advisor and see what they think. Talk to your tax person too to see if this might affect taxes in any way.

 

[drinkmorejava]

If you're taking full ownership of it anyway, why not get a HELOC (assuming you have the equity) and pay off the business loan. Depending your equity, you won't need an appraisal, so fees should be limited. You can get a term you want and probably at a decent rate. You should be able to deduct the interest expense as anyone would for a rental property on their personal taxes without setting up any extra funky corporation/llc stuff. You really don't want the 25 year because it will have a higher rate and you'll pay more, even if you pay it off early.

To me, it sounds like the attorney is right that you don't want an outstanding debt like that when you sell the business. There's no functional reason why the mortgage has to stay with the business, and the pricing and transferring would just be a pain.

my two cents anyway as a rental property owner and ex credit union board member

 

[Charmonium]

I don't get the logic for it being easier to sell the business with the loan in a different name. Presumably, if you sell the business you'll be getting some amount of money for it. If there's only 2.5 years left, that amount should hopefully put a significant dent in the outstanding balance. So the easiest thing to do is sell the business, use the proceeds to pay off the balance and keep ownership of the building in the corporation's name.

Since the property will still be used for an ongoing business, I would want to keep the limited liability of the corporation in place. Either that or create a new LLC and transfer the property to that.

The one problem with a small corporation is that sometimes the corp. can be viewed as just an alter ego for the person who owns it. In that case, it's not difficult to 'pierce the corporate veil' and open yourself up to personal liability. I'm not familiar with LLC's but that might be the better option.

 

[PowerEngineer]

Wow! I agree what everyone has already said. That's a rarity!

I understand why it might be easier to sell the florist business without the mortgage (and presumably then without ownership of the building either). By doing this, however, you are starting a new business as a landlord. You should set this up as a business and do what you can to shield your personal assets from possible business liabilities. I also think that an LLC might be the right way to go.

Good luck!

 

[gsethi]

Is the loan against the business or it is a mortgage loan for the business property?

Continue operating as S-Corp. You sell the Florist business (FF&E, Tenant Leasehold improvements, Goodwill, Covenant not to compete, Inventory, dba name) to a business buyer. Business buyer signs a lease with your S-Corp as Landlord. Use an Escrow company to do all sale related legal paperwork. Use services of a reputable business broker, if everything sounds too complicated.

You will have to pay capital gain taxes on sale of business. Divide the proceeds from sale of business between S-Corp shareholders or keep in s-Corp account or payoff property mortgage or whatever else you want to do.

The lease will generate rent, which will be your new income for S-Corp. mortgage interests and other property management will be your expenses. No need to touch your mortgage if you don't have to and if no liens or UCC filings against the business name (dba name). These are probably against your s-Corp name.

Edit: If the UCC filings also has business name(dba) or business assets (FF&E etc), then business loan will have to be paid off from proceeds from sale of business through Escrow and you will get remaining balance. It just depends on how your business loan for the property was written (owner operated business property or just property owner).

 

[mrblotto]

Wow.....so much good information. I'm still trying to decipher most of it.

Is the loan against the business or it is a mortgage loan for the business property?

The loan is against the business property.

The plan is to just sell the 'business' part (everything except the building space itself) and keep the building space until it's paid off, then sell that as well. Yes, we will be the 'landlord' then. I'm thinking we'll need to find a good broker and look further into:
-Creating an LLC or
-Remaining an S-Corp and what gsethi says above

 

[highland145]

Would the closing costs of a new loan be worth consolidating the loans?

he believes it will be much 'easier' to sell the business if we transfer the business loan into our names.

He'd have to explain that.

 

[drinkmorejava]

Big thing you need to consider is if you can actually sell the business assets but keep the current mortgage with the S corp. There is probably a mortgage requirement on the type of business, so selling off the business would categorically change your work.

I honestly can only come up with one scenario for a small landlord where an LLC will protect you any more than decent liability insurance. By owning and operating the LLC it's a closely held organization. Closely held orgs are at threat of being pierced if there is illegal activity, commingling of assets, inadequate capitalization, you don't maintain business formalities... etc. It's just another annoying thing to deal with and has real financial costs. Your best protection is liability insurance, which is pretty cheap and something you should have anyway, not doing illegal/fraudulent stuff, and following fire code and other regulations.

The only case is if you have a mortgage that goes under water and the business dies. However, no one is going to be able to get a mortgage like that for a property company without putting a lot down or securing it against your personal assets.

 

[DeviousTrap]

He'd have to explain that.

I don't think he's specifically saying you need to merge the two loans. I think he's suggesting that it'll be easier to sell business assets without the property being included in the sale (much lower selling price presumably).

 

[highland145]

I don't think he's specifically saying you need to merge the two loans. I think he's suggesting that it'll be easier to sell business assets without the property being included in the sale (much lower selling price presumably).

I'm reading it that the space is mortgaged not the business and FFE. I could be wrong.

 

[uclabachelor]

Keep it separate. Sell the business entity, keep the mortgage. Lease the property to the new owners of the business. Don't merge your home and business mortgages together.

 

[mrblotto]

I'm reading it that the space is mortgaged not the business and FFE. I could be wrong.

You are correct. The space has a mortgage on it. But the mortgage is in the business' name. I dont know if that's normal or not.

Which means (I think) if someone wanted to buy 'the business' they would be buying the building as well. To me folks would be more interested in purchasing a business if they didn't have to purchase the building as well. That's a huge difference in dollars. So, that's why we want to take the business mortgage out of the business' name and xfer it into ours.

If I can be any more vague please don't hesitate to say

Oh, and I had to look up what 'FFE' means (Furniture, Fixtures, and Equipment). I knew it wasn't the same as FFS lol

 

[Charmonium]

I can see that there could be some confusion if the bldg and business have the same name but different owners. But confusion to whom? Title searchers?

Sure, anyone who looks that closely is probably going to think 'hmm, same name ==> same owner.' Oh well.

 

[highland145]

The business dba name is fictitious...Bob's Flowers, Mary's flowers....the corp name is what matters. Bob's flowers, inc. So you could open multiple number of businesses under Bob's Flowers, inc. Bob's car wash, Bob's porn...under one corp.

That's my understanding of it. So I'd keep the business mortgage under the s-corp.


And must be nice to get a business loan. The bank told me to put up my house even though I had several years of tax records and the SBA basically said I didn't qualify. Fat, balding white guys verboten, I guess.

Just messing with you on the last....

 

[Fern]

I'm a CPA. I would never advise, nor have I seen, for the purchaser to buy your stock in the S-Corp.

What happens in virtually every instance is the purchaser will buy the assets of your S-Corp.

In effect you will liquidating your S-Corp. You need a tax CPA to look this over.

I'm in a hurry and haven't read everything (I'll try to look back here later) but your biz loan on the commercial property and personal home loan should be kept separate.

Set up an LLC (taxed as a partnership) to hold the commercial r/e you intend to lease. Have the mortgage on the building held inside the LLC.

You must be careful here. Since your asset is held inside an S Corp you can trigger taxable gain on the liquidation or even the transfer of the commercial r/e.

PM me if you wish.

Fern

 

[highland145]

Fern, why bother with the llc and not just keep the building in the s-corp's name as an asset?

 

[gsethi]

Wow.....so much good information. I'm still trying to decipher most of it.

The loan is against the business property.

The plan is to just sell the 'business' part (everything except the building space itself) and keep the building space until it's paid off, then sell that as well. Yes, we will be the 'landlord' then. I'm thinking we'll need to find a good broker and look further into:
-Creating an LLC or
-Remaining an S-Corp and what gsethi says above

Check your original loan mortgage docs to see if any of the business assets (FF&E in particular) is used as collateral for loan or if the lender filed UCC against them. If only property is used as collateral and UCC filing only shows property on it, it is simple then. Sell your business (use escrow, pay capital gains taxes on sale of business, keep the Existing mortgage under your S-Corp and become landlord)

No point into looking to create a new LLC. Getting the mortgage loan transferred from your S Corp to LLC will most likely trigger a sale of property from your s Corp to your LLC, resulting in capital gain taxes on property also, along with higher property taxes etc.

The key issue is what is being used as a collateral for your mortgage, and what asset has a UCC filing.

Edit: just read the loan has the business dba name also? So, most probably your loan was classified as "owner occupied commercial property". Lender might require loan to be paid from sale of business OR they might create an exemption. You should call the lender and speak with your mortgage officer to clarify beforehand

Use an attorney (not the one recommended by broker) to draft a lease between you and your business buyer (your tenant).

 

[gsethi]

And must be nice to get a business loan. The bank told me to put up my house even though I had several years of tax records and the SBA basically said I didn't qualify. Fat, balding white guys verboten, I guess.

Just messing with you on the last....

SBA requires borrower to pledge all assets that you declare on your loan application. You only show minimum assets that is required to get the loan (no need to show all of your assets).

You need to have good relations with local bank/SBA loan officer. They will tell you what you need and you only show them that much (not higher or lower). SBA loans are easier to get from smaller banks. Do not waste time at big national banks like BoA, Wells Fargo, Chase etc.

 

[Fern]

Fern, why bother with the llc and not just keep the building in the s-corp's name as an asset?

Good point.

If the building is currently in the S-Corp it should likely be left there. Distributions of property out of an S-Corp generally are considered a taxable sale. If the FMV of the building is higher than the adjusted basis (purchase price less depreciation) taxable gain may result. ATM, I can't think of way to render it nontaxable.

Fern

 

[mrblotto]

If the building is currently in the S-Corp it should likely be left there.

It is

If the FMV of the building is higher than the adjusted basis (purchase price less depreciation) taxable gain may result.

If I understand this correctly, you're saying if the building is worth more than it was when we purchased it, then (more?) taxes may have to be paid. In that case, yes. The building was purchased in '03 for 144K. The 'Taxable Value assessed', at least on property tax bill, is 173K. I wonder if that's the value they go by for figuring out taxable gain

 

[Fern]

-snuip-
If I understand this correctly, you're saying if the building is worth more than it was when we purchased it, then (more?) taxes may have to be paid. In that case, yes. The building was purchased in '03 for 144K. The 'Taxable Value assessed', at least on property tax bill, is 173K. I wonder if that's the value they go by for figuring out taxable gain

Yes. (And unfortunately it will likely get more complicated than that.)

Appreciated Property, S Corporation

If an S corporation distributes appreciated property to its shareholders, the difference between the fair market value and the property's basis will result in a gain that will be passed through to the shareholders.

Example--Madison Inc. (an S corporation) owns a truck that was purchased for $20,000. The truck has been depreciated so that is adjusted basis for tax purposes is now $2,500. the truck has a fair market value of $12,500. Madison distributes the truck to its sole shareholder. Madison must recognize a $10,000 gain (all ordinary income). The gain is passed through to the shareholder and has to be reported on his tax return.

So, likewise, the s-corp's gain on distributing the building to you would appear to be $177k - $144k = $29K

(However as the above example shows, although you paid $144k for the building it has been depreciated since '03. The cumulative amount of depreciation that was taken/deducted (or should have been taken) is subtracted from the purchase price of $144k in determining gain. So you taxable gain would be larger than the above $29k.)

Basically, the S-corp will be treated as having sold the building for it's FMV and the S-corp's (hypothetical) gain will flow to your personal tax return and you will pay tax on it.

The above is what happens from the s-corp's "side", however it's income flows to you, is reported on your personal tax return and you pay that tax on the s-corp's gain..

Next we have what happens on your "side":

You have what's know as "basis" in your s-corp stock. It's too complicated to explain "basis" for s-corp purposes here. However a simple example is when one buys, for example, IBM stock for $100 a share. If years later you sell that share of stock for $125 you have a taxable gain of $25. The $100 is your "basis".

S-corp basis changes constantly. It's usually computed, or recomputed, annually.

If your basis in your S-corp is $10K and the FMV of the building less the mortgage debt attached to it is $98K, you'll have taxable gain of $88K


Now, I'm not familiar with all your details and I can't teach you all this, so the major point is that I recommend you discuss this with a tax professional familiar with s-corps before you make any moves.

---------
Is tax value correct? IDK. Some jurisdictions try to actually use FMV, some don't. So YMMV. Additionally tax valuations are not done every year so if there have been changes in the market it may have to be adjusted.

I'm out of time and must log off. I'll try to post back tomorrow with more info, particularly how business sales are structured etc.

Fern