Do I Have To Buy The S-corp. If I Just Want The Building & The Land?
A little background: This will be my first commercial purchase and first gas station purchase, but I'm not new to buying houses or managing rentals. However, I don't have any mentors or know any fellow investors so I'm counting on you guys to help me - Please!!!
I recently signed a contract to purchase a multi-use building, which has a gas station with a convenience store, and 3 apartments. My mortgage broker, who is supposed to be an expert in securing loans for gas stations, says in order to buy the building I must buy the S-Corporation, which has been managing the building & the gas station, but does not OWN the building. The owner of the building is not involved in the gas station business nor the apartment rentals. I don't even know if the owner makes any money because the building's rental income goes into the S-Corp. (The owner of the gas station and the owner of the S-Corp are brothers.)
(Put aside all the environmental and gas station equipment concerns b/c a Phase 2 has been done and it's AOK and we've gathered info on the tanks, etc.)
So, my contract says I am going to buy the building, the land, and the convenience store inventory (equipment is included in the purchase price of the building). It does not say that I am buying the S-Corp, but the bookkeeper said it will be transferred into my name via a Stock Purchase Agreement, though I won't be PAYING for it. (I am not buying the goodwill of the business either.)
Naturally I am preparing the documents to send to my broker: he said he needed the gas station's financial information (statements, tax returns, etc.) and I'm looking at the numbers and thinking "this guy doesn't know how to run a business." $7700 in one year on "bus travel??" For a gas station?? Paid $23,000 in lease costs one year and the next year paid ZERO?? (I've got an email out to their bookkeeper about these and other questions - I keep thinking about the "Untouchables" and how the bookkeeper was the key to getting Capone.) Basically, their numbers are screwy and they can't all be correct. There's NO WAY I will get a loan based on these numbers.
Why can't I simply get a loan for the land and the building and forget about the S-corp?
You might be thinking,"Why would you want a building/business that is not making money?" Well, I'm not buying it for the building or the business. I'm buying it because the LAND across the street sold for $800,000 three years ago, and it's just slightly larger than the land that I'm trying to buy. And mine is cheaper AND includes the building! (I think it's a good deal.) And it's at the corner of an intersection with a stoplight and in the center of town and the property values are skyrocketing because it's at an underdeveloped beach vacation island that's taking off. OK, enough said.
And if you're wondering about who's going to manage the gas station, it's my brother-in-law who has done it before, so I'm not worried about that either.
I keep getting confused about having to buy this business. I'm going to dissolve the S-Corp as soon as I get it anyway, because I'll be creating separate LLCs to own each apartment and the convenience store, all of which I will be renting out.
So I'm just confused. Why do I have to buy the S-Corp if it doesn't own the building? Why can't I just simply RENT OUT the convenience store/gas station to my brother-in-law and let him have his own S or C corp and manage his own gas station/convenience store?
Can anyone advise me on this? Does anyone know if it's possible to get a loan with screwy numbers?
Thank you in advance - you're all so smart! I luv TCI!!
AmyClaire-
Be cautious buying a corporation without doiong extensive due diligence. If you don't want or need the S-corp, tell your broker that you just want to buy the corporation assets. Thus, any hidden liabilities of the current owner remain with him. We have purchased 3 corporations this way. The current owner may be disappointed - hoping to dump some hidden liabilities at your feet - but you will be free of problems - at least of those!
Congratulations. Best of luck.
Alan
Is there a distribution agreement with the gas supplier for the gas station in the name of the S corp.? And can that distribution agreement either be voided or re-negotiated in the name of a new entity? Could be that the prior gas station guy got a payment from BP or Shell or Citgo or whoever and is locked in for some period of time. He would want to keep the S corp intact to preserve that agreement. If you are worried about other liabilities that might attach themselves to the corp. then you would need to re-negotiate the distribution agreement.
The distribution agreement is in the name of the president of the S-Corp, but not in the name of the S-Corp, and can be assigned to a new person/entity. It will be in effect until 2014.
In that case I'd be reluctant to accept the S-corp stock. Make them give you a reason otherwise. Do you have an attny representing you in this transaction? If not, get one.
Be very wary of buying corporations, of any kind, S or C. You can get killed with hidden liabilities. And even having the seller indemnifying you for them is not enough. This would be a real show-stopper for me.
And yes, be SURE to have a good lawyer representing you on this if you go forward!
CT
I forgot to mention that my mortgage broker is INSISTING that I buy the S-Corp. He says it's the only way to get a loan. He doesn't understand the concept of buying the building, the land, and the inventory - but not the business. Is this true? Am I living in an alternate universe, or do I need another broker who understands my needs? He's supposed to be good at his job but I've never used him before (b/c this is my first commercial loan).
Thank you for your advice thus far - you've confirmed some of the concerns I've had in the back of my head....
Either your Broker doesn't get it or there is something he is not telling you. If he claims you can't get financing without buying the stock of the S Corp then talk to your lender and confirm if this is true. You need to do whatever you can to only buy the assets of the S Corp and not the stock. You would be liable for all of the S Corps liabilities.
Good Luck
A couple of things come to mind that concern me on this kinda deal #1 its a gas station how old are the tanks? Have they been replaced lately? Is there a clean DEP report on the property? I would do a very close look at all reports about the property if the tank are leaking you have to pay for the replacement and clean up. As for the s corp brooks there is major red flags here travle expense of that amount and the amounts that differ from year to year would make me wonder have to you seen the books or tax returns? If you buy the corp all the problems now become yours I know I would have to really look at this deal before I bought into it no matter how much the property sold for across the street. Get all the answers you need before jumping into anything.