S.E.C. Real Estate Observer

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How often do you wonder about the added yield potential of the free and clear property and/or other equity sitting dormant in your portfolio?

Many times, developers, investors, and/or business owners (hereinafter called the “Sponsor”) are short on capital to get quality deals funded. The banks or other lenders may have shown interest in funding a loan but need additional collateral in the transaction through credit enhancement, additional income for debt service, and so on.

The marketplace possesses a tried-and-true method of raising this capital, but not in the conventional way.

There are literally tens of millions of dollars of unused equity in the marketplace available for these deals that can be unlocked and used by Sponsors to help close those deals.

THE PROVIDER

But why would an entity (hereinafter called the “Provider”), content in ownership of its free and clear property/equity, have any interest in becoming involved in a transaction such as this?

There are a multitude of answers why the Provider may wish to unlock this unused or underused equity to further enhance investment yield, change benefits, split partnerships, and more

First of all, as a passive Financial Partner, the Provider can use its asset(s) in a number of additional ways, including:

1. Joint Venture;
2. Loan or Pledge Title;
3. Asset Exchange;
4. Create a Mortgage against;
5. etc.

The Provider’s increased financial benefits accrue through the exchange of that stagnant equity into a number of interesting optional areas including:

1. Shares in Sponsor’s Development;
2. Some cash + shares in Sponsor’s Development;
3. Income producing paper (i.e.: mortgage(s), preference shares etc.,);
4. An asset class more fitting for the Provider
5. Many more creative solutions

EQUITY ASSET CLASSES

First of all, it is noted that concepts are consistently the same regardless of whether we are dealing with a Provider’s small residential lot or a large multi-national corporation’s head office.

Think about your portfolio and these various equity options.

Cash, Office/Retail/Commercial, Mortgages-Notes, Multi-Family, Assisted Living, Vacant Land, Home(s)/Condo(s), Retail Commercial, Business(s), Recreational/Resort Properties, Cottage(s), Hotels/Motels, Mini-Storage, Motels, Multi-family, Mobile Home Communities, Campgrounds, RV Park, Condominium(s), Farms/Ranches, Timeshare Membership, Interval Ownership, Building Lots, Agricultural Property etc.

To this can be added personal property and many others.

CAUTION

1. Creativity does not replace sound due diligence required by all parties in anticipation that all participants come away with better benefits than they had previously.
2. Enhanced creativity may require further tax planning.

Through personal involvement and third-party observation, real-life transaction closings of this formula are numerous. Below are some examples:

• A free-and-clear land parcel used as collateral to secure a Seller Take Back Second Mortgage for part or most of a down payment on an income property sale. The new conventional lender would not allow a second mortgage. This formula allowed the buyers to close satisfactorily.
• Purchase of a mid-sized company whereby Buyers pledged raw development ground as a credit enhancement to obtain a bank loan plus cover a small loan to the seller for some Seller financing.
• To close a transaction, Sponsor borrowed assets for a short period of time from Provider. Afterwards Sponsor closed on long-term financing. Upon this new funding, the credit enhancement Provider property was released back to Provider. The initial added collateral allowed Sponsors to secure the initial debt.
• Creation of a Lease/Option on a property by adding free and clear equities as collateral. Once rehabilitation, allowing new financing and closing, the free and clear equities were released.
• Use of a blanket mortgage over the property was acquired, with off-site equity used as additional security for the project. This created partial discharges for all or part of the security from under the blanket mortgage based on negotiated performance criteria.
• No Money Down Buyer was able to acquire hospitality property through partial bank financing and the Seller agreeing to take a safe offsite 1^st
• Sponsor had sold its property with a pre-negotiated long-term closing. In the interim, Sponsor found replacement property owned by Provider that was suitable to Sponsor’s needs. To allow quick closing of Provider’s property, Sponsor gave Provider a safe 1^st mortgage on its property in exchange for the deed to Provider’s property.
• Provider owned development property but had neither interest and/or expertise in the development business. However, the Provider acknowledged the profit potential if taken over by a qualified Sponsor. The Provider exchanged the title to the property to a new company (“NEWCO”), jointly owned by Provider and Sponsor. Deal The deal was structured to give Provider a safety-first position.

A wealthy, passive Lender foreclosed on a property and did not have the expertise or interest to develop it. It was acknowledged that if Lender received all cash for this property, Lender would immediately seek to lend out the received funds again. The structure:

1. Sponsor, through Provider, offered a larger, safe 1^st Mortgage on a separate approved property in exchange for free and clear title on foreclosed property + additional Lender cash.
2. Sponsor gained free and clear development property + cash for the development of the acquired property.
   1. Provider did not sell its free and clear property, but created passive low interest rate 1^st mortgage, in exchange for a high return JV position with the Sponsor.

The passive Lender converted non-active free and clear perceived problem property plus available cash into a comfortable safe debt instrument.