Construction Lender Gets Snookered By 100% Release Price Provision

A construction lender client of ours got a bit too casual in specifying release prices on one of its projects. Mindful that it is important to “front load” payments against the loan, the lender forgot that opportunistic developers can manipulate their pricing to the disadvantage of the lender – unless the release price language in the loan documents forbids it. In this deal, the lender provided only that the developer had to pay the lender “100% of all net proceeds from the sale of Units 1 through 4.” Since the asking price for each Unit was $350,000, the lender felt that net proceeds would easily pay down the loan quickly.

This tactic worked well for the first three sales, but the market changed before the fourth sale could close and the developer’s partners got antsy. In order to cut a deal with one of the partners, the developer agreed to a bargain sale of Unit 4 for only $50,000, which netted the bank a measly $46,000, after closing costs and taxes were paid.

The lesson to be learned: always specify exact minimum release prices. If a deal is close, the lender can always agree to take a little less to close a sale, but at least, the lender will have the ability to make a decision whether or not the proposed release price is sufficient.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.

Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.

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Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.

Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.

NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.