Case: Seller note terms prevent the planned institutional takeout

Hypothetical acquisition and later takeout. An investor buys a $6 million property using a $4 million senior loan, a $1 million seller note and $1 million of purchase equity. Closing costs add $200,000, so the owner’s actual initial contribution is $1.2 million. Both loans are assumed permitted under the acquisition documents.

The property produces $500,000 of annual cash flow available for debt service. Senior annual payments are $320,000, and the seller note requires 6% cash interest on its unchanged $1 million principal, or $60,000. Combined coverage is about 1.316× on $380,000 of annual payments.

The owner expects a later institutional refinance to pay off the senior loan and leave the seller note in place. Timely current payments do not establish that the new lender will permit that structure. All loan terms and underwriting thresholds below are hypothetical.

Apply the proposed lender’s policy before allocating proceeds

Assume the proposed takeout lender prohibits this borrower-level seller debt from remaining after closing. Its accepted annual cash flow remains $500,000, minimum DSCR is 1.25× and annual debt-service constant is 8%. Cash-flow capacity is $5 million.

The accepted value is separately stipulated at $7 million and maximum LTV is 65%, limiting gross proceeds to $4.55 million. New-loan costs equal 2%, so proceeds after costs are $4.459 million. The old senior and seller principal together total $5 million, with no other payoff charges in the base case.

The full takeout therefore requires $541,000 of new equity. Comparing the gross $4.55 million loan only with the $4 million senior balance would incorrectly suggest $550,000 of cash available to the owner. It ignores both the seller payoff condition and $91,000 of new-loan costs.

The OCC refinance-risk bulletin supports evaluating the relevant future financing terms. A borrower’s planned capital structure does not override those terms. An actual historical Block 40 agreement, Section 4.21, also illustrates the importance of reading permitted indebtedness provisions, although its particular rules are not the policy assumed here.

Test a consent alternative without ignoring combined leverage

Suppose a different hypothetical lender would permit the $1 million seller note to remain, subject to negotiated subordination and a 65% maximum combined loan-to-value ratio. Assume its separate debt-service analysis is satisfied after reviewing both obligations; that assumption must be checked in a real proposal.

The total permitted debt is still $4.55 million. Leaving $1 million of seller debt reduces maximum new senior principal to $3.55 million. After 2% costs, it supplies $3.479 million against the old $4 million senior payoff, leaving a $521,000 equity requirement.

Permission improves compatibility but does not create another $1 million of collateral capacity. The $20,000 difference from the full-payoff case arises solely because new-loan costs are charged on $1 million less new principal. The seller obligation remains outstanding and requires its own repayment plan.

This table does not establish the junior payment priority, standstill terms, enforcement rights or future consent requirements. Those are document questions, not conclusions from the arithmetic.

Distinguish a real discount from a postponement

Now consider a separate negotiation in which the seller would accept $400,000 as complete satisfaction of the $1 million note, with appropriate executed releases. With the original full-payoff lender, net proceeds of $4.459 million would cover the $4 million senior payoff and $400,000 seller settlement, leaving $59,000 before excluded uses.

That outcome depends on an effective agreement extinguishing the remaining obligation and satisfying the lender’s requirements. A proposal to pay $400,000 now and defer $600,000 is materially different: subordinate debt remains, so it does not satisfy the assumed prohibition. Changing the note’s label or moving a maturity date does not demonstrate its acceptability.

The case does not evaluate tax consequences of a discount, the seller’s economic reasons, or enforceability of settlement documents. Those issues may alter the choice and require their own advice. The model records only the stated settlement uses and financing conditions.

Sequence evidence and negotiations

Before spending heavily on a takeout, assemble the seller note, amendments, payment history, lien documents and any existing subordination agreement. Ask the prospective lender to identify the precise treatment of the seller obligation: prohibited, payable, or permitted under stated conditions.

Then obtain date-specific payoff figures and a complete proposed sources-and-uses. If an amendment or discount is essential, identify who can approve it and when the documents must be effective. An expression of willingness to discuss terms is not a funded source or an executed release.

The acquisition’s manageable combined payments are useful operating evidence, but they do not answer the takeout question. The owner has a credible exit only when the replacement lender’s debt permissions, its combined sizing and the seller’s effective settlement terms agree with the same closing ledger.