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Thursday, July 2, 2015

Beware of the "Bundled" Loan and Mortgage If You're Buying a Practice

Here's some information for those dentists who are looking to finance their practice acquisition. 

Background:

I was recently working with a dentist that was purchasing a practice and the accompanying real estate.  The practice was in a medical condominium complex with other dental and medical providers.  Originally, I was just asked to help the client clear up and obtain declination's of first rights of refusal that the other co-owners of the condominium association were given in the original condominium documents.  After that, my client asked me to review and help with the financing and closing of the real estate.

The client was obtaining financing from a rather large bank that does not typically deal with financing dental practices.  The bank offered her the “opportunity” to bundle the practice acquisition loan with a small loan that she needed to purchase the condominium.  The condominium was only selling for $33,000, while the practice was selling for around $250,000. 

During negotiations with her dental practice broker and the bank, the bank told her that they would not be taking out a mortgage for the purchase of the condominium because it was such a small portion of the total loan amount and her credit was stellar. 

Well, a few days before the closing when I received the closing documents things had drastically changed. You see, the bank was in fact going to record a mortgage and it was going to be for the entire amount of the loan.  My client went from being told that she would have no mortgage to having a mortgage of almost $290,000.  I truly believe that without an attorney my client would have likely signed those documents not knowing the potential repercussions.

So you may be asking, what are the repercussions?  To put this simply, my client would have taken a mortgage out that would have immediately be in an amount greater than the property was worth.  That means that in order for her to sell the property she would need to release the mortgage, which would have likely required her to pay off the promissory note that was tied to the mortgage in an amount that would be much greater than the property was worth.  The only way she could have done that would have been to sell the practice, or find the money somewhere else to pay off the amount of the loan.  Now, you may say why would she want to sell the condominium and not the practice?  Well, she will likely be very successful and may need or want a bigger and better practice location.

So, in this scenario having an attorney review the closing documents prior to closing may have saved this dentist and her practice.

Lesson:

Work with an attorney that can help identify the hidden risks and costs associated with bank loans, mortgages, and closing documents.

  

The author, Matt LaMaster, is the Founder and Principal Attorney of The LaMaster Law Firm, PLLC, a boutique style law firm committed to delivering legal services to dental practices, chiropractors, and healthcare facilities. 

For more information about Matt LaMaster, The LaMaster Law Firm, PLLC, and mortgages, visit www.lamasterlaw.com.





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