A 50k second position where the cure right never got used and still earned its place in the paper

A small position worth studying, 50k, because it shows what the paper looks like when it works the way a junior lender wants. Take a single family flip in a first ring suburb, purchase 195k, rehab 68k, borrower's own equity 22k. Senior hard money at 224k from a lender whose paper has been seen before. The junior comes in at 50k behind them, 12% interest paid monthly, 2 points, 6 month term with one pre priced 3 month extension at a flat 1,000. Exit is a sale rather than a refi, which is the only reason a position like this deserves a look at all. What takes three weeks is the intercreditor. The senior's default position is no acknowledgment of the junior lien at all. What a junior can usually end up with, after the senior's counsel strikes about half of what was asked for: notice within 5 business days of any senior default, the right to cure senior payment defaults and add those advances to the junior balance, a 90 day standstill running from notice, and the senior's agreement not to increase the senior principal without the junior's consent. That last one is the clause that matters most and the one nobody asks for. The version that goes wrong is the senior advancing more into a struggling deal without telling anyone and burying the junior, and no junior lender wants to find out how that feels. The position also carries an interest reserve, 3,000, funded at closing from the borrower's side and held by the junior, covering five of the six monthly payments. So the borrower's cash flow never determines whether the junior gets paid. What nearly breaks it: the buyer's appraisal comes in at 292k against a 305k contract and the deal reprices to 296k. The borrower's profit drops from about 26k to 17k. The junior gets principal back plus 2,970 of interest and the 1,000 in points at closing on day 178. Total return on 50k for just under 6 months is about 3,970 counting the points, call it 15.9% annualized. What to keep: the pre priced extension and the funded interest reserve, and above all the no increase in senior principal clause. What to change: paying an attorney 2,400 to negotiate an intercreditor on a 50k position is 4.8% of principal in legal fees. That math only works if the same senior lender will accept the same form next time, and the honest answer from most of them is probably.

ehernandez74 PC3BPRO 12

Answer

karen_whitfieldPassivePRO

The no-increase clause is the right ask and it's the one seniors resist hardest, because protective advances are how they defend their own position when a rehab stalls. Getting it on a 50k piece says more about that particular lender than about your negotiating, so I'd test whether it survives when the senior is a fund with a credit committee rather than a shop where one person signs.

Move one variable and this looks different. If the exit had been a refi instead of a sale, your 6 month term plus one 3 month extension is a 9 month window on an event that depends on a rate environment you don't control, and your standstill starts running from a notice that only tells you the borrower already stopped paying. The sale exit is what made a 90 day standstill adequate. On a refi I'd want 180 and I'd want the borrower's takeout application in my file before funding.

Second variable. The appraisal came in 13k light and the borrower absorbed all of it because he had 26k of projected profit. Take that projection down to 12k and the reprice puts him underwater on his own equity, at which point he's arguing with the buyer instead of closing, your 6 months becomes 9, and you're deciding whether to cure. Your position was fine. The reason it was fine is that there was 22k of real equity plus profit beneath you, and I'd write your minimum for that down as a number rather than a feeling.

On the 2,400 in legal: amortize it across the next three deals with that senior and it's under 2% each. If they change the form, you're paying it again.

karen_whitfieldPassivePRO

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