Wrapping a note on raw land where the underlying loan is a seller carry already
Sitting on 41 acres, split-zoned ag and rural residential, bought two years ago with the previous owner carrying 190k at 5.25%, seven year balloon, no prepayment penalty. I've got a buyer for 34 of those acres who can't qualify for anything and wants terms.
The question in front of me is whether wrapping makes sense when the underlying paper is itself a private carry rather than an institutional mortgage. The upside is obvious: no due-on-sale clause the way a bank writes it, because the original seller wrote the note and I can read exactly what it says. The downside is that my note has a partial release clause I negotiated badly. Release of any parcel requires principal paydown at 6,200 per acre, which on 34 acres is 210k, more than the balance.
So I can't release the acreage to convey clean title, which means any wrap I write is on land still encumbered by the full underlying note including the 7 acres I'm keeping. My buyer's counsel is going to see that and either walk or want the whole thing restructured.
Options as I see them:
- Approach the original seller to renegotiate the release formula. He's 70-something and has been agreeable. But I'm reopening a note that's currently working fine for me.
- Sell all 41, wrap the full parcel, keep nothing. Buyer would pay 340k at 7.5%, I'd earn spread on the full 190k balance. Clean, and I lose the 7 acres I actually wanted.
- Wait out the balloon in five years, refinance into something with a sane release schedule, then wrap.
Option 2 pencils at roughly 14k a year of spread income. Option 1 is unknowable until I ask. Option 3 costs me the buyer.
What I keep circling is whether a wrap on land with a defective release provision is a deal any competent buyer's attorney signs off on, or whether I'm building something that only works if nobody reads it carefully.