“Whip Out” — a technical finance term for entrepreneurs

Big Red Car here.  Wanted to go out for coffee with The Boss but he had something on his mind and made pancakes and bacon at home instead.  That always puts The Boss in a good mood but only on Saturdays.

So he took a phone call this morning and got talking about “whip out”.

Now, stop right here and tell the Big Red Car if you have ever heard that term before.  Be honest.  If you have, then the second question is — what is whip out?

Whip Out Defined

So you own a big office building and you spent $70,000,000 building it.  A building like this one.

About five years after you finished it and got it leased up your cash flow is approximately $10,000,000 per year.  You did great.

The rent roll and the cash flow are stable and predictable and you have a mix of good credit tenants and regional tenants and you are happy with the result.  All operating expenses are passed along to the tenants through the net leases you have signed.  Life is good.

You put a mortgage on it and were able to finance about 70% of the long term value.  The lender agreed that the building was worth $120,000,000 — $10,000,000 capitalized at 8% cap rate.  So, at $120,000,000 value you could borrow 70% or $84,000,000.

Cash flow annually – $10,000,000
Cap rate – 8%
Value – $120,000,000
Total investment – $70,000,000
Phantom equity – $50,000,000
Mortgage amount – $84,000,000

So you have a new $84,000,000 mortgage to refinance the original $70,000,000 construction loan and mini-perm loan (bit of equity invested to get the original loan but we are just glossing over that for the purpose of this discussion) that you used to build the building in the first place.

Bottom line — $14,000,000 in excess loan proceeds.

And, that, my friend is the whip out.  The amount of excess proceeds that you can generate by refinancing an existing loan on better terms.  And whip out is your friend.  A fickle friend to be sure but a damn good friend when you can find him.

Friend:  Hey, Big Red Car, I see you refinanced your building downtown.  Any whip out?

BRC:  Yes, my friend, $14,000,000.

Friend:  Hey, Big Red, you buying the Q today, right?

BRC:  Damn straight, friend.

Whip Out Used Wisely

So there you stand with $14,000,000 in whip out and you ask yourself — what the Hell should I do with this whip out?  Think it over slowly, it is not a timed test of any kind.  Whip out requires a bit of thinking.

Remember it is tax free.  <<< This is the thing those geniuses in Washington don’t get — rich folks are not stupid, they are going to refinance assets and use the whip out tax free, they are not going to sell stuff and pay capital gains taxes.  Whip out is tax free.  And the estate planning strategies which will be based on this fact are myriad.  Rich folks are not stupid.

So, you spend $1,000,000 on doo da — lakehouse, boat, airplane, beach house.  Yes, you have earned some doo da and it should initially be focused on your family, bringing them closer together like only a lake house, a beach house or a ski joint can do.  But do not go nuts, just a nice little one the first time around.

AND THEN YOU SAVE THE REST for future, education, retirement and stuff that goes bump in the night.  You take it out of the game, you do NOT reinvest it in your business.  You do not act like an NBA point guard or a NFL quarterback and spend it expecting you can count on a lot more future whip out.  Making money should not be the prelude to going bankrupt.

Whip out can also be used to pay off all your debts — college loans, mortgages, personal debt.  Is that going to make you feel better?  Yes, says the Big Red Car, it will.

Did I mention that you pay more than a passing glance to getting the whip out beyond the reach of your creditors through legal organization or other legal means?  Well, you do exactly that.

Whip Out’s Kissing Cousins

So, you are an entrepreneur who has built a nice startup and taught it to walk and do other tricks and the opportunity presents itself in one of the rounds of financing to “whip out” some liquidity by selling a few shares into the financing — you do it and you treat it like whip out because it is a blood relative.

You are an investor and one of your prize Shih Tzus hits a bit so that you can sell a few shares and get your bait back — putting you in the envious position of spinning the wheel with only the house’s money on the felt.  You treat that like whip out and you make that sale.

Things You Do Not Do With Whip Out

When in the frame of mind to be able to see both the pay window and the notion of whip out at the same time, there are some things you do not do:

1.  You do not take whip out and reinvest it in assets or vehicles which are as risky as the investment from whence the whip out came.  You sweep the whip out off the table and you do not risk it again.  Ever.

2.  You do not expose the whip out to other risks like creditor accessible investments.  No, you go see your estate lawyer and get it beyond the reach of creditors.

3.  You do not tell your spouse about the extent of the whip out beyond the fact that she can start looking at lake/beach/ski houses and that it will not be a problem to get the kids teeth looked at by that fancy dentist.

4.  You never commingle your personal finances, your business finances and your whip out account.  Not ever.

5.  You never tell anyone about your whip out except if it is a Big Red Car.  A Big Red Car will respect your confidentiality and will never tell anyone about your whip out.

Stuff You Will Not Learn at Wharton

So, do you like the idea of whip out?  I knew you would.

Respect whip out, because it will not come along but every so often.

You should also understand that “whip out” is a technical financial term and though they may call it something else at Wharton, it is the real deal.

The rules for whip out are very simple.  Respect them.

But, hey, what the Hell do I know anyway?  I’m just a Big Red Car.

Be good to yourself and your family.  Call you Mom and Dad this weekend.

15 thoughts on ““Whip Out” — a technical finance term for entrepreneurs

  1. Just getting in the conversation here, thanks to your recent comment on AVC.
    At what point do you take whip out every few years versus sitting on the cash flow? With $10M in cash flow, the original $70M loan could be paid off in short order, and then you’re sitting on $10M (albeit taxable) profit annually. And that will likely go up with increased rents over time.

    • .
      It’s determined by your personal circumstances. As a general consideration, liquidity is better than having illiquid investments. But then paying off the mortgage is a legitimate way to create equity even if it is not liquid.

      A real estate owner has a nice depreciation and interest deduction to shelter though not as generous as it was pre-1986 tax act. In the day, I didn’t pay any taxes for a couple of decades. It catches up to you when you sell it all and you have to send the IRS a check equal to the GDP of a small country — it’s called “recapture” and it is an ugly thing.


  2. How did you get the $14M in whip out past the auditors? Seems like when you refinanced, the $14M in excess cash would be setting in the company bank account. Really, this is no different than what many people did on a residential basis during the real estate boom. Although, the high LTV sealed their fate when the market crashed.

    • .
      Private company.

      In this example, you are accessing the phantom equity and not playing games with LTV.

      It is still very conservatively finance and would look like a AA credit.

        • .
          Real estate, when done correctly, is a great asset but it too is subject to business cycles.

          Nobody in this scenario is selling anything. Just refinancing it and getting just a bit of whip out.

  3. Great post JLM, thank you. However, I’m confused about something: Why is the Whip Out for a startup founder selling some of their Common tax free? Can you please explain? It seems like this is normal cap gains.

    • .
      Ryan, startup founders selling shares is NOT tax free as you have so astutely observed. That is why it is only a “cousin” of whip out.



          • But even after paying taxes, the whip out from the cousin can be used to invest in real estate…typically requiring 20% down for investment property loans or new commercial construction loans. So embrace your cousins and make limonade.

          • .
            These days you should probably consider a bit more equity in a deal. You want to get to a 1.5 DCR (debt coverage ratio) and a 70-75% LTV (loan to value ratio). This a threshold “rated” security.


  4. Fascinating how you blended this story from pancakes, real estate, family, lake houses, boats, airplanes, skiing, college debt and cosmetic dentistry. All around life-related things put in the right perspective.

    • .
      Of course, life is real and those are the things in Big Red Car’s life [and mine] that we are all really living.

      When you lie in bed thinking about your life you may think about firewood and firewood thieves.

      Life is real and you can smell it. It is a tapestry of big and small things that you can think about, visualize, touch, taste, hear and smell.


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