Story

The lender who never mentioned the building once

I sat in on a call because a friend from my land group wanted a second set of ears. He owns a piece of a small industrial park and the senior loan was coming due. The new lender would only go so far, and there was a hole between that number and what he had to pay off.

So a second guy gets on the call. Forty minutes, and he never asked one question about the roof, the tenants, the parking, anything. He asked who owned the LLC. He asked whether anybody else had a claim on the membership interests. He asked to see the operating agreement, twice.

I kept waiting for him to ask about the property and it never came. Afterward my friend said, that's mezzanine, he isn't lending against the building, he's lending against the company that owns the building. If my friend stops paying, that guy doesn't foreclose on the industrial park, he takes the ownership interest and becomes the owner of it.

I have owned land for a long time and I thought I understood what a loan was. That call rearranged something. The senior lender has the building. The second guy has the keys to the person who has the building. Same collateral in the end, completely different door.

The rate was roughly triple what the senior was charging, which my friend said sounded about normal for that kind of money. He is still deciding.

7 replies

tashaford30PB2APRO7

The detail that got me is he asked for the operating agreement twice. That's the whole story right there. He's reading who can be pledged, not what got shingled.

laurenkim53Passive

Nobody is doing this in my markets, the deals are too small. But I like knowing the shape of it. "He has the keys to the person who has the building" is going in my notes.

angela_burkeServicePRO6

I've been in three walkthroughs where the money guy didn't look up from his phone and I judged him for it. Maybe some of them just weren't buying the building.

brandonlee36Passive

@cobalt that's a little generous, plenty of them are just not paying attention. But orchard's guy asked forty minutes of the right questions, which is different from asking none.

What happened with the gap in the end, orchard? Did he take it or bring in a partner?

derekj19SB1B

Wait, so if the second lender ends up owning the LLC, does he also inherit the senior mortgage sitting under it? Or does that get wiped?

monica_tran3SF4CPRO6

@beacon the senior loan doesn't go anywhere. It's still against the property, and the property is still inside the company. Whoever ends up holding the company holds it with the first mortgage still on it. That's the part that makes people think hard before they take the pledge.

paulgrant17PassivePRO5

I'm nowhere near this and I read the whole thing twice. The thing I'll remember is that the size of the hole was set by what the senior lender wouldn't do, and everything after that was about who fills it.