Borrower switched managers to save two points, and my note went to 92 cents
I put $180,000 into a private note secured by an 18 unit built in the seventies in a soft secondary market, second position behind a small bank first, paying 10% interest only. Sponsor was competent, occupancy was 94%, delinquency was running about 3%. The one thing I did not paper was who operates the asset.
Month seven the sponsor fired the manager, who was charging 9% plus a leasing fee, and hired a shop at 7% flat. Saved roughly $2,900 a year on a $1.6M asset. The new shop had 400 doors and no staff within 40 minutes of the property.
What happened over the next six months. The rent roll handoff was partial, so five tenants got no payment instructions in month one and two of those never fully caught up. Delinquency went from 3% to 14%. Three notices to vacate got filed late because nobody local was tracking the ledger, so those units sat an extra six weeks each. Occupancy hit 81%. The first mortgage stayed current because the sponsor fed it, and I got paid partial interest in four of six months.
I took 92 cents to exit at month nineteen. Call it $14,400 of principal plus about $9,000 of interest I never collected. The sponsor is still fine, incidentally, the asset recovered a year later under a third manager.
What I would do differently. In a second position note on a small operating asset I want a covenant that a change of property manager requires notice with the new manager's name, door count, and distance to the asset, and I want the right to review before it happens. Whether a consent right like that is enforceable and how it interacts with the first lien is a question for counsel in that state, so I would have it drafted rather than copied. And I would ask for the monthly delinquency report rather than the occupancy number, because occupancy lagged the problem by four months.