The Brief
In the midst of the Great Recession, I was tasked with sorting out a multi-dimensional situation involving a recently developed retail property, owned by twenty-four individuals, most of whom were cash strapped and unwilling or unable to aid in recapitalization. This left the bank’s sights on my client’s eight-figure guarantee as the main target for the repayment, but my client couldn’t pay either.
To make matters worse, due to the extremely slow progress of state mandated road construction, the property’s access points had been greatly reduced and multiple adjacent developments were delayed for years, resulting in a devastating effect on tenants’ revenue, and the building’s value.
Other Considerations…
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Loan in Default – Negative Loan To Value & Debt Coverage Ratio
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High Vacancy & Low Net Rates
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Cash Poor Partners
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Joint and Several Personal Guarantees on Loan
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New Leadership at Bank & FDIC Scrutiny
“Chad I am a marine, and in the marines we learn it isn’t a question of if we can take you down, it’s only how much firepower we need to use.”
-New Bank Leadership
Under new leadership, the bank took an intelligent and interesting position; sue on the guarantors without foreclosing on the building – a very difficult position considering the bank was removing the asset’s value as a form of immediate repayment from cash-poor partners. Even worse, the partnership agreements actually dis-incentivized the partners from contributing more capital to resolve the situation.
Strategic Next Steps…
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Legally Delay A Judgment
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Negotiate with the Bank
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Negotiate with 24 Partners to Consolidate Ownership & Raise Cash
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Procure Alternate Financing
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Facilitate Lease Up & Value Appreciation of the Asset
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Avoid Forgiveness of Debt & Other Taxable Events
When it became very clear that we would not ultimately prevail in any legal matters, and that the partners needed all other income to pay ordinary bills, then we took the following steps towards protecting them from a judgment in the immediate future. This consideration created a lot of goodwill and bought time that smoothed the path to eventually accomplish the necessary partnership consolidation.
Actions
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Consulted with Legal to Successfully Delay Judgment for Two Years as we:
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Created a New Legal Entity (NLE), Owned by 25% of the Partners, that Negotiated & Financed a Purchase of the Note and Guarantees From the Bank
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NLE Stepped into the Bank’s Position as Plaintiff
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As Plaintiff, NLE Negotiated Terms for Exit of the Partnership and Releases of Guarantees with the Other 75% of Partners; Eventually Resulting in Identical Ownership Structures of the Entities
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Refinanced Asset with the 25% Remaining Partners & Subordinated Debt of NLE to New Traditional Financing (No Forgiveness of Debt)
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Eventually, Consolidated The Two Entities with Identical Ownership (Sill No Forgiveness of Debt)
Recap
All in all it, the multi-year processes turned out to be a success and ownership still holds the asset which now is finally realizing the expected value as the surrounding development and road opened in 2015.
This particular assignment was the pinnacle of difficulty I have been involved with due to the need for consolidating of the large number of partners, the timeline and financial constrictions, and the bank’s tactics. However, at the end of the day it was a fantastic learning experience that would not have been possible without the thought leadership of lawyers, accountants, bankers, and owners, effectively merging into a successful strategy.
I truly enjoy discussing and working through these complex and difficult situations, so I encourage anyone with any situation to discuss to contact me at chad.commers@gmail.com.