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Monday, March 05, 2007

Update On Louisiana Project

Sometime last month, I got word that the mortgage payment on the commercial properties in Louisiana was going to be missed. That payment is now 35 days past due. In that time, the mortgage investors (of which I am one) and minority property owners have had several conference calls discussing in what direction to proceed. The situation has been pretty fluid and I didn't want to post anything about it because it was changing so rapidly.

It looks like now we have a course of action that everyone agrees on - mortgage holders, minority owners, and the majority owner. The main issue is that the new majority owner is in a cash crunch. He is still actively rehabbing the property, but most of his money is tied up in other buildings and until he sells one of those, he's short on cash. In looking at our options, we discovered our mortgage note wasn't as strong as we would have liked - it specified only that we could collect the maximum amount we loaned, not any additional foreclosure costs, which could be in the tens of thousands for the amounts we are dealing with. (The note was provided by a title company, not a lawyer, and although it does have some nice points, we've learned from that mistake.) The value of the property has never been an issue and there would definitely be enough equity in the property to cover the mortgage loan, but foreclosure is a long process and the majority holder suggested the process would be even longer if bankruptcy was involved - a not-so-veiled threat.

So to get payments started again, the minority investors have proposed underwriting a second mortgage on the property. This mortgage will have stronger language, should a foreclosure still be required down the road, and it will be large enough so that the missed payment(s) and penalties on the first will be covered. There is still plenty of equity in the properties, as verified by a recent appraisal. The parking lot is in the process of being refinanced at a 50% lower interest rate. Since it already has a positive cash flow at hard money rates, the refi will not only get back some of the investors' money, but also increase the free cash available for meeting the mortgages on the other three buildings. It could take another month for the second to get hammered out and funded, so I may end up with two missed payments, but they will be made up shortly.

All in all, it's been a great learning experience for me. I get to listen in to how much more knowledgeable real estate investors handle problems and work out solutions that benefit everybody. I get experience with commercial lending and multi-million dollar deals. I am also impressed with how the minority owners are looking out for the mortgage holders. All of the minority owners have sold part or all of their interest to other investors, as Les did to me, so there are roughly 30 investors in this deal, although there are only about 5 owners. Even those owners that no longer have an interest in the mortgage note (i.e., they are in it for the capital gains, not the cash flow) are concerned that the mortgage holders start getting payments again and are brought current. They have been on top of this since the moment they found out a payment would be missed.

There are a lot of details I've left out, including the many other options that were investigated, but I feel confident the solution that has been reached will benefit everyone. Of course, being the detail-oriented person I am, I won't feel 100% comfortable until the second mortgage is signed, but I'm feeling much better about the situation than I was a month ago.

6 comments:

Shawn said...

Nice post, I was wondering how this was going. It's good to hear things are being straighted out. Keep up the good work!!

Doug O said...

Wait, I'm confused now... I thought this was a group of investors who pooled money, and then took out a mortgage as an LLC (or similar), thereby making everyone a 'minority owner'???
From what you've said now, it doesn't sound like that is the case at all...
How exactly was this deal structured, and what is your role in this?
I'd like to know a little more about it so I can at least offer some educated opinions/advice..

Shaun said...

There is more than one LLC involved. Basically four or five investors pooled money in an LLC to write a mortgage on the property. Some of those investors also took an equity stake in property by investing in another LLC that actually owns the building and got the mortgage from the lending LLC. So one LLC owns the buildings (is on the title) and another LLC is the note holder on the property. Some investors are in both LLCs, so they are, in effect, lending money to themselves.

Those that are part of the lending LLC have sold some of their interests to other investors. For instance, Les sold me part of his share. He gets paid 14% and pays me 12%, pocketing the 2% difference.

When I talk about majority and minority owners, I'm referring to the membership of the owning LLC, not the lending LLC.

Do that clear things up?

Doug O said...

Ahh, yes.. Now I see... Jeez, I wish I knew that before - I could have given you a few pointers to try and protect yourself...
Is there a main partner on the lending LLC? And, is he/she also a partner on the ownership LLC?
If so, that would raise some red flags for me...
I know you mention this project appraising out well, etc., etc... But is it in a strong commercial market? (ie, what part of LA is it in?) ... Regardless of what your involvement in a particular deal, I'm a big proponent of knowing the area you're investing in, regardless of what capacity you do it in...
The one positive seems that the 'parking lot' is producing some cash flow.. But do you have any idea how far along the rehab is and what the future costs are going to be with it?

Shaun said...

No, the main partner of the owning LLC is not a member at all of the lending LLC.

The properties are in Shreveport, Louisiana. Before investing, I got a very detailed prospectus of the properties, the area, the business outlook of the community, etc. Of course, this was put together by the people selling interest in the property, so it will be somewhat biased, but it looked good to me. And Shreveport seems to be far enough inland that a major hurricane won't cause too much trouble - something I was worried about since I found out about this deal while the images of Katrina were still fresh in my mind.

The parking lot is cashflow positive and one of the buildings is close to it, even though it is mostly empty. New property managers have been brought in to increase the number of tenants and they used to manage the property a couple years ago, so they are familiar with it. They also moved their offices into one of the buildings, so that's a good sign :-)

Don't know how far along the rehab is, but the mortgage is due in a balloon payment around the end of this year, so the investment should be over by then. The owners will need to refi before then, which could be with private money again or a traditional lender. That said, the rehab is moving along at a good pace - much faster than when the previous majority owner was in charge. The new owner may have missed a payment, but he is a micro-manager and is at the property 2 or 3 times a week making sure everything is getting done. The new second will include some funds for the rehab and, the last I heard, will be set up similar to a line of credit so that the money is disbursed as needed, which will help keep the owner's monthly payments down.

Shaun said...

Oh, and in case I haven't said it before, thanks for your comments, Doug! I've found them always to be helpful and insightful!

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