Those who have been following along with this blog may know that I have purchased a condo within a new build to move my practice into. We have now been in this office for over 6 months and starting to fill it up with patients. Things seem to be going very well. However, I have run into a bit of a hiccup with my commercial loan for the space. The issue is when the bank tried to switch from a “construction” loan to a permanent loan. Seems that the bank I initially did the deal with has sold to a new bank. This new bank had an issue with my loan. A bit of bad advise or an overly cautious bank? I’ll let you decide.
Since we were buying a condo in a new building, the developer had all of the financial obligations until I took ownership of the building space. The space that was delivered to me is referred to a “shell.” It is literally an empty space and the interior needed to be built out to suite my needs.
Prior to closing on the purchase of the “shell” of the property, I had already been shopping rates. One bank wanted to do two seperate loans. One for the shell and another for the build out. The problem with this was that the interest rate was about a full percentage point higher than the other banks offer. Another problem was the length of the loan was 5 years shorter than the other banks offer.
The second bank that I went to was willing to do them as one loan together. The first 8 months of the loan were going to be a “construction” loan that would purchase the shell. It would also fund the build out for the interior. This loan did not provide any money for “soft” assets for the business.
Bank Number 2
Since the second bank that I went to seemed to have a better deal, I went with them. Afterall, this bank was willing to do it all in one loan, one closing cost, and offered me a full 1% point lower than the other offer….I thought it was a no brainer!
Everything was going well with them until it was time to switch from a “construction” loan to a permanent loan. When this happened, all of the sudden I was getting lots of emails and letters in the mail that were from the bank. I was getting unhappy letters from the bank who was now bought out by a much larger national bank.
Lowering Taxable Income And How Some Businesses Pay No Taxes
You might of heard about how some companies pay zero corporate taxes at the end of the year. It is not always the case, and I admit that I am oversimplifying things, but if a company spends net profits at the end of the year on equipment (or other expenses that can be listed as a deduction), this can often be used as a deduction to lower the taxed amount.
In an effort to lower my tax bill for 2020 I opted to make large one time purchases that I knew I would have to make in 2021 anyway. This equated to about $93,000 in one time purchases for equipment. I did this in an effort to lower my tax bill for 2020. This equipment was needed anyway in 2021.
I ran this strategy by my accountant and even asked the representative from the bank who did not seem to have any objections and told me that this is very common for businesses to do.
The New Bank Was Not Happy
The bank that I initially received my construction loan with was bought out a month before my loan was set to flip to a permanent loan. The broker who did the deal with me for the initial loan, the one who I ran by my plan to decrease my taxes, left to go to another bank during that takeover.
This new bank and their new representative did not like that my net profits were in their eyes too low for 2020. As a result, they threatened to call the entire note! That sure was a lovely letter to open one day.
The one page letter simply read in the comments:
“Your loan balance of 1.3 million dollars is due [on a date marked within the next 30 days.]”
Once my lawyer got involved, the bank quickly shut that down and flipped it back to a construction loan with the same exact terms as before. They even extended it another 8 months and did the exact same deal as before to give them time to “sort things out.” This gave the new bank that bought out the old bank I used time to flip it to a permanent loan.
More Strict Loan Terms
Despite me personally putting now almost half a million dollars of my own money into the principle (almost a 30% down payment) this new bank who took over the loan still gave me grief.
They also gave me a hard time despite having a 9 month runway of money in the checking account that owns the real estate. I kept bringing this up, plus the fact that I never missed a note payment to the bank. This new bank that took over my note only focused on free cash flow and my relatively short existence of a business.
The Ultimate Problem
The previous bank that I initially used was a smaller semi-local bank. They were willing to underwrite a company (me) that did not have two full years of tax returns. Turns out that is where the new megabank had its ultimate issue.
I finally was able to get one of the bankers to admit that they were not happy my business started in mid 2018 and I bought the property at start of 2020. My business was technically not even in existence for 2 years when I closed on the note for the commercial property! This made the new big bank very nervous in light of the pandemic. Fortunately for me, there was not a lot they can do to reverse it at this point since everything is in writing.
The new bank of course tried to look at my 2020 tax return to show improved cash flow and I unknowingly shot myself in the foot making those purchases in an effort to lower my tax bill.
More Money More Problems
Every business is going to have problems that come up on a day to day basis. I have to admit that I honestly took this news pretty hard when it first broke.
I was pissed that I was getting questions from this new bank like:
Bank: “So this $4,000 purchase of computers for your office, is that a recurring yearly or monthly expense”
Me: No, we will not be buying new computers every month or year.
Bank: “The $20,000 in exam tables, is that a monthly or yearly recurring expense?”
***Me banging my head against my desk*** No, we do not plan on buying exam tables in the foreseeable future as those are built to last at least a decade and have a warranty.
You get the idea.
I had to have several meetings explaining how we do not plan on throwing out exam tables, EKG machines, printers, computers every damn month. With each meeting I felt like I was beating my head against a wall trying to explain one time purchases to the bank.
In the end I threatened to refinance with another bank and all of a sudden everything ended up being okay.
Get ready to overcome every obstacle. I could have avoided this by going with the first bank but paying a higher interest rate. I also could have continued to rent instead of buying but with real estate in my area prices going vertical, I am so happy I bought when I did. There is no way even today I could buy the space I’m in for the price I paid. I would estimate that I would pay 30% more due to increased real estate prices and construction costs.