Turnaround of a non-performing asset for a lender
This example shows how I helped a 2nd position private commercial lender turn around a non-performing note. The lender ended up with a profitable leased investment property securing its initial mortgage position. I helped them save another $80,000 up front and $800/month by renegotiating the first mortgage. I also found and put in their possession a $120,000 asset above and beyond the property they took back.
A couple, June and John, now in their 70’s are private investors who made their money running a Dairy Queen in the South Valley. They invested in some of my projects as I built my portfolio.
One day in 2008 June called me because she had a $41,000, 2nd position commercial mortgage on an office building that had a 12%, $280,000 1st. Payments had not been made on either loan since November 2007 and the property was abandoned.
June was told that the property should be worth about $450,000. By this time, the first was already owed about $320,000. June and I discussed if it would be wise to continue considering the holding and sales costs and that the price evaluation may have been too high considering the market at that time. She wanted to press on.
June’s note was signed by a trust and personally guaranteed by an individual - Bashton. It was thought the trustees were pawns controlled by Bashton – who was in fact calling the shots. Bashton ran a mortgage and payday loan company from this building. Some time after signing the note, Bashton was arrested and pled guilty to running a prostitution ring. June’s attorney initiated foreclosure proceedings.
The foreclosure was subject to the high rate 1st so any delay in the process was costing June about $3,000/month.
Where are the borrowers? They were here when we lent them the money.
The first problem was finding the parties so they could be served. Serving them by publication prolonged the foreclosure process. During this delay the liability to the first was unnecessarily increasing.
I couldn’t find the trustees. It was rumored that they were some of the call girls under Bashton’s control. Interestingly, the address for the local trustee did not even exist! This was the first dead end I encountered.
Next I worked on finding Bashton, hoping to convince him that since he was not doing anything with the property and showed no interest in it, that for the benefit of the elderly lady who entrusted over $40,000 to him, he should arrange to have the trustee sign off on a deed in lieu.
I went to the metro court house for a copy of his arrest file to find his address. In the file I found Bashton’s appointed attorney. The attorney did not know how to reach him. I contacted the bail bondsman; he did not know how to reach him either. Finally, I tracked down Bashton’s parole officer who said he’d give Bashton my number and ask him to call me. Bashton called and we had a surprisingly pleasant conversation in which he told me that he’d try to get it done. I never heard form him again. The parole officer said his hands were tied and that he could not provide any more help nor would he assist in coordinating a parole visit with our process server. Even if he would have, we couldn’t find the other parties so we would have to publish anyway. This was our second dead end.
June was not aware that she could secure an abandoned property before the foreclosure was complete. So, I arranged for a locksmith. We met for a property inspection so we would know what she would have after the foreclosure and so we could start thinking about how to market it.
The place was full of abandoned office furniture and file cabinets of mortgage loan documents. There was also another door with a Cingular logo and contact information. I left a voice mail at the Cingular number and we secured the property, including posting notices prohibiting entry.
It turned out that the Cingular room housed the equipment for a cell antenna. No cell tower was on the property; rather the antenna was on the PNM pole in front.
Even more interesting was that AT&T, who recently bought Cingular, was paying $1,475/month rent with escalations on a 25-year lease totaling more than $500,000 if the lease went full term. My first thought was “assignment of rents” as is customary in commercial mortgages. June didn’t know if that was in her mortgage, so I reviewed it and luckily it was. I asked AT&T to send a copy of the lease and a history of payments. The lease payments were being sent to Wireless Capital Partners “WCP”, a finance company that bought five years of lease payments from Bashton for $25K. The WCP rep said that the mortgagee always releases the assignment of rents before WCP buys a cell lease and that she’d check on this. When I called few days later, the same rep said that contrary to its policy, that an exception stating that the mortgagee release was not needed was signed off by someone at WCP and that person was no longer there. By now June and I couldn’t help but wonder if Bashton paid that person to sign off on that exception.
Surprisingly, WCP conceded that we should be getting the payments under the assignment of rents. We got it straightened out with AT&T and now June had $1,475 coming in each month to help offset the costs of the 1st. A bigger bonus was that after shopping the AT&T lease around a bit we got an offer for $120,000. All of a sudden June was in a much better position with this property. The NPV analysis showed she’d have to invest the $120,000 at 16% to get the kind of return the lease payments produced so she decided keep the lease.
By now, the judicial sale was coming up. We had to figure out how to bid. Most likely no others would bid because of the high cost and rate on the 1st. We were pretty sure that Bashton and we were the only ones who knew about the value of the AT&T lease and Bashton thought he already sold it. Part one of our decision was easy, bid the full amount because we would not be able to collect on a deficiency anyway. Part two of the decision was a little more difficult - if someone else bid, how much over the judgment would we be willing to bid to keep the property and the cell lease. It was not an easy decision since we knew any overage would go to Bashton, the same person who put June in this predicament. At the sale, we set the opening bid to the full judgment amount, no one else bid, and we were happy.
Now that we had this property, what should we do with it? June wanted to work on this herself so I stepped out for a while . . . until she called to tell me that she found a potential tenant and that she got bullied into a listing agreement that not only required her to pay for the initial term but for all renewals. I thought to myself: Why/how does she get herself into these situations? I would have structured this for her at no charge. I negotiated with the broker to get June released from the listing and he said he’d get back to me with his costs for getting a sign put up. Instead he called June directly and asked for $1,000. She sent him the check knowing it was probably too much but she just wanted out.
I negotiated the lease with the Tenant’s broker, finalized the lease, and made sure that the insurance, indemnifications, and improvement clauses protected June.
The last issue to resolve was renegotiating the first mortgage that started out at $280,000 and now totaled more than $360,000. During this entire time June had kept in touch with the first mortgagee. She, the mortgagee and the broker that originally put the deal together discussed restructuring. I then stepped in and finalized the negotiation. We got the first to eliminate missed payments and interest and deem only a principal amount of $280,000 thus saving more than $80,000. We also had the rate reduced from 12% to 8% with the interest. The new reduced payments began once the new Tenant started paying rent.
June ended up with a leased investment property generating about $4,000/year on her initial $41,000 investment and she still has the cell lease to cash in for $120K whenever she is ready. It is great when things work out.