A Conduit Loan Adventure: Brokerage Pain in Action

Editor’s Note: Will Jones, a guest at the Society’s 2004 Marketing Meeting in Irvine, shares with Observer readers the challenges he faced during a recent brokerage adventure. As you read Will’s story, you will discover a powerful message about the magic of the Society of Exchange Counselors and our core philosophy that: “Real Estate is a People Busines.”

Representing the Seller of a medical building listed for $7,100,000 in Temecula, California led to some excitement that I hope I never experience again. All due diligence was finished for this 90 day escrow, $300,000 was non-refundable to the Buyer, and we were eight days away from closing escrow. What looked like a fairly normal escrow quickly turned into a live hand grenade.

An approximate conduit loan balance of $2,800,000 needed to be paid off to allow the Buyer’s new loan to fund and complete the Buyer’s purchase. This type of loan is syndicated among several lenders and packaged with other loans to be sold through investment brokers to fixed income buyers. When that is done, it normally has a term of ten years and may become extremely expensive to pay off at any time before that. Since this loan was originated at 8.14% in 1999, the maturity date of the loan was October 2009.

There is yield maintenance penalty language in the note and, when speaking with the Vice President and Asset Manager at originating bank, he said to just be aware of where interest rates were since their fluctuation would lead to a change in the payoff amount. Therefore, the indication was that the payoff was procedural and not unlikely. Thereafter, an assistant to the Vice President sent a follow-up email to the Seller that the Borrower must inform the Asset Manager if she wished a payoff so that they may ask the loan’s “Master Servicer” for consent. The Seller stated that the she wished to continue with the marketing of the property and desired to pay off the loan. For a $250 yield maintenance calculation fee paid by the seller, we were given a $555,900.62 payoff amount.

One week before closing escrow, on November 15, 2004 (while I was at an S.E.C. meeting in Irvine, CA) we were informed that the loan’s Master Servicer would not allow prepayment. This was despite the fact that a $250 fee was paid for the exact calculation of the prepayment penalty given on June 22, 2004. We started the process to defease the loan, but the Buyer had his 180th day of his 1031 tax deferred exchange on our scheduled Nov. 23rd close date. We were never informed of the Buyer’s deadline until the crisis erupted November 15 & 16, 2004 and we immediately began working a solution to accommodate the Buyer’s need to fulfill his exchange. Typically, escrow submits the loan payoff demands to the holders of existing liens 21 days before the scheduled close, as the receiver of said demand has 21 days to accept or decline. Had this demand been submitted on time, it might have allowed us more than the 8 days we had to remedy the situation.

Lawyers immediately got involved and found a solution to the problem. S.E.C. President Jim Brondino knew of a lawyer in Irvine who did a great job. Fran Buerman of First American Title acted fast and First American agreed to endorse around the 1st lien after the Buyer’s lender approved the plan with their loan committee. Outside counsel for the Buyer’s bank stated that, as the bank lawyer, he had just finished a defeasance and that he was okay working with another one; however, some time was necessary (more than the few days remaining in the Buyer’s looming 180 day 1031 exchange deadline) for loan committee to meet.

Therefore, to satisfy the 1031 deadline, the principals agreed to the concept of a “soft close” (Buyer delivers acceptance to escrow of the Seller’s signed grant deed that remains at escrow; and a signed note and deed of trust for the balance of funds would also remain at escrow). This “soft close” would have satisfied the 1031 exchange (a delivery of a property’s benefits and burdens qualifies for the transfer of ownership and fulfills IRC 1031 without recording constructive notice); control of the building would have gone to the Buyer and defeasance would have had time to happen. A firm specializing in defeasance stated that they needed approximately one month, but once the defeasance was complete, the existing lien would have been removed thereby placing the new first lender in its place.

Despite working around the clock to bring First American Title, the defeasance firm, the Seller, Seller’s legal counsel and the Buyer’s bank to come up with a viable solution, the Buyer’s lawyer, a litigator and not a problem solver, stated that he “gave up on new ideas a long time ago” and largely blocked any of our attempts to mitigate the problem. Thus, the sad ending to this story was that the Buyer failed to complete the exchange in the allowed time frame of 180 days, allegedly creating a significant tax liability.

Thanksgiving arrived two days later, but even wallowing in the turkey and pumpkin pie would not ease the brokerage pain of knowing that the solutions found for this challenge worked for all yet it did not close.

As I mentioned earlier, this adventure began unfolding the first marketing day of the Society of Exchange Counselors Irvine meeting. On Monday night, I shared my challenge with Society members Robbie Robinson and Virgil Opfer. The next day, Virgil arranged a brainstorming session where all S.E.C. members shared their ideas about the challenge I presented and began searching for solutions and opportunities…. an amazing process.

Almost all of the ideas tossed about in our marketing room were explored the next day in the conference room of the Irvine lawyer Jim Brondino suggested. Virgil and Cliff went to the lawyer’s office with me to ensure that the ideas generated in the marketing room were now communicated properly to the lawyer.

I was very touched by the outpouring of ideas and support by the Society members. It was very impressive and very kind. It almost felt like a brotherhood that was rallying around one of its group who had fallen and, boy, did I feel like I had fallen! Thank you to everyone.

And a special thank you goes to Cliff Strand for his help and especially to Virgil Opfer and his wife, Sharon. Virgil has invited me to so many of the S.E.C. marketing sessions and has been a wonderful mentor to me. I now understand the “magic” of the Society that Virgil talks about all the time.

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