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.
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