Monday, September 10, 2007

Louisiana Update

This investment is a textbook case of why you should always know who you invest with and make sure your objectives and styles are compatible. (Although in our defense, I will say that when we went into this deal, the problem person was not the majority partner. He only became that after buying out someone else.)

The last time I wrote about this, it appeared things were looking up - our investment was brought current, a new team had bought out the slumlord majority holder "Joe", and we were looking at a possible 100% upside potential. Not any more.

I just got off a conference call and have the latest info. Apparently, the purchase never went through. During the due diligence phase, the team went to check out some of the properties that were in Houston that were part of the sale and found out they were in bad shape. Like, ready-to-be-demolished shape. So three of the nine properties in the deal were rejected. The deal was moving forward, but Joe then contested the sale, saying we were getting the Louisiana properties too cheap. Legal counsel for the new team advised them to cancel the purchase, so the deal fell thorough and Joe is still the owner.

The good news is the investors have been brought current, at least through August. The September payment is due by the 15th, but it's looking like that won't be made. Also, the property tax still has not been paid since the beginning of the year and there are several other outstanding payments owed, including one to the property manager (someone you definitely want to keep happy).

At this point, we are moving forward as fast as possible with foreclosure. If you recall, we have both a first and second on the properties. The second has the stronger language, so that is the one that will be foreclosing. We have a couple of options here. If we don't get the September payment, we can foreclose for that. Because the tax bill is a senior lien to any mortgage, we can pay the delinquent tax bill to protect our interests in the property and foreclose for that reason. (The second actually still has a couple hundred thousand available, so we wouldn't have to come up with any more money to pay the taxes.) Speed is of the essence here because, as mentioned earlier, Joe is a slumlord and we want to take control of the property before he runs it into the ground and destroys the property's value.

In the past, Joe has threatened to file bankruptcy if we start foreclosure. At this point, we're ok with that. If he files bankruptcy, the buildings go into a trust and the court assigns a third party to administer the trust. This accomplishes our goal of getting control out of Joe's hands. Additionally, our second mortgage contains an assignment of rent clause, which means we can collect rent directly from the tenants, again, keeping the money, and therefore control, out of Joe's hands.

Once foreclosure has been filed, even if Joe brings the payments current, it still won't be enough to stop the foreclosure. Joe will need to show he has a plan and the resources to continue to make payments and effectively manage the property.

Joe has asked some investors what they want for their interests. In other words, he wants to know if he can buy them out. We've told him we will sell our interest at cost, cash only. He doesn't have the money to do that, but he may be able to talk some other investor or investors into partnering with him.

So if anyone reading this gets an offer to go in on some office buildings in Louisiana, contact me before you say yes :-)


Trisha#1 said...

Wow, Shaun, I'm sorry to hear it hasn't gone as planned. However, if you could just get the property out of Joe's hands, it sounds like you'll do just fine.

Here, in Tulsa, properties are entered into a tax auction if the property taxes are unpaid by the month of October each year. You should definitely check into that--you don't want to find out that your property was auctioned off unbeknownst to you. Joe may be receiving the warning letters and not telling you about them.

Doug O said...

Shaun, fortunately it sounds as though you're learning an important lesson without it really costing you much since the payments are, for the most part, current ...
I never like investing with a group of people I've never met, and in an area that I haven't researched... Partnering up with people who you don't know can only lead to problems, as you've experienced...
You'll also want to be careful foreclosing on the 2nd, if the holders of the 1st are not the same as the 2nd... You could wind up in a foreclosure subject to 1st situation, in which case you'd have to satisfy the full amount of the 1st mortgage as well as taxes owed (not sure if this would apply in your situation, but is still prudent to look into)...
Not sure how taxes went into arrears though? The 1st mortgage holder should be responsible for paying taxes since, as you mentioned, a tax lien will always become the most senior lien on a property, regardless of when it was placed on the property...
Anyways, keep us updated - it's interesting to read how this continues to unfold!

Shaun said...

The holders of the first and second are the same people, so there isn't an issue there. Not sure about the tax issue as the first was already in place before I bought a part of it. It is private money though, and it's an interest only loan, so there is no escrow account set up.

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