Promissory Note Question

8 Replies

I hold a note to a commercial property in a Southern California in a desirable area. The buyer is in a negative cash-flow situation. We have already been through foreclosure once this year and the buyer came in at the last minute and cured. The buyer now wants to sell the property and is asking an above market price for the property. He said he has a buyer who has the excess cash to spend on it and can afford to absorb the associated risks. His buyer is asking him if we would drop our interest rate in exchange for higher monthly payments.

Our desired outcomes lie somewhere between a lump sum payoff and taking the property back. Looking at what I just wrote it looks like we should just wait it out and foreclose. We are mulling this over and want to make sure we have enough information to make an informed decision going forward.

Since I'm posting on a forum that is flush full of great investors with great ideas, I would like to get some other viewpoints on this situation without having to give away too much personally.

Suggestions are appreciated. 

Hi David - Need a few more details here.  Can you provide current collateral value, collateral state, anticipated sale price, unpaid balance and terms of existing note, and the payment amount and rate the new buyer is asking for?  There are likely a number of different options to consider.

If the investor has the cash to buy it, it will satisfy the note and he is the new owner, though is there a clause in the note that they can sell it to someone else, or will you allow it if they pay off the note? Can the new investor take out a loan to pay you off?

@Christopher Winkler  I understand how this might be perceived but the new buyer is proposing to give the old buyer the difference between the asking price and the remaining balance of the note, in which case we would either assign or re-write the terms of the note. Does that make sense? 

Naturally, I like to consider all options but asking us to carry at 4% seems a bit cheeky no matter how well capitalized the buyer might be. Additionally, I like to be able to look at a note and know that it is an attractive note to a potential buyer in both value and terms. I've had many note brokers approach me trying to buy it but I won't sell it, especially at a discount. 

Hi @Mike Hartzog  I don't want to go into the particulars on the note in the BP forums. This may come off as rude but I don't want to deal with note buyers or brokers trying to buy this note. That's not my goal here. I know some of this information would be helpful but I want to be cautious about who I give this information to. 

So here's a question I should have asked from the beginning. What is the standard interest rate on a promissory note above $1M?

Hi David - No offense taken. I certainly understand. Regarding your question, there is no standard that I am aware of. Interest rates are defined based primarily on risk. If the borrower is in a strong financial position, the collateral is high quality, and the LTV leaves a reasonable equity cushion, a low rate might be in order. I think your strategy really depends on how you want to exit. If you are planning to hold the note, a lower rate along with higher payment and shorter term might be OK. If you are planning to sell the note, you will want to keep the rate higher. It sounded like you would like to at least partially cash out. You might think about asking for a partial payoff and agree to carry the remaining balance. Another alternative would be to do a partial sale, selling some number of front payments retaining the back payments.

We respect your desire to not give all the particulars, though an offer of the difference between the asking price and the balance means he must be lowballing the offer?

Mike Hartzog brings up a good point, write a new note for the balance, after the due diligence, or tell him no and try for a deed-in-lieu or you will foreclose. Either way, good luck!

@David B. 

No offense but this pretty darn silly.  So, you are secured by a property which can not currently support the debt service it has.  The current Borrower sounds like he is not only selling for a premium, he is doing that on your back.  Logically the only reason an under performing property sells for a premium is if there is capital coming with it.  That capital is your loan.  

It seems the general events here is the Borrower is selling the property either with your loan attached or your likelihood to make a new loan at the same loan amount you are at now, which the property can not support.  In order to benefit the Borrowers they want the rate dropped and the amount to stay the same.  You should be dropping the loan amount (likely significantly if it is being considered for a premium) and raising the rate.  

A commercial loan at 4.0% is a joke.  A new commercial loan on an under performing property for the same balance, selling for a premium, is an insult.  A Buyer willing to step into this situation likely has some other motives.  Those premium dollars should be the least amount of money applied to my loan balance in order for me to extend any new credit here.  The rate goes up not down.  There is your new lesser payment.  

I get this sense that the subject property has some spell on you.  It's highly attractive.  Everyone wants to buy your note.  You don't believe a discount on your note is in order.  The note is not worth par sorry to say.  A discount really is in order, this loan is not written well.  The property can't support the loan.  The Mortgagee then has to look to the Borrower to support the difference.  That is not how commercial investment loans are supposed to work.  If you demand being paid in full, the Buyer either goes away or the Seller has to drop the price I am willing to bet.  Stop taking all the risk and handing out all the reward to everyone else.  That is certainly not in your best interest.

There is no standard interest rate based on loan amount.  There is interest in accordance to risk.  Doesn't matter if you put out $1.0 million or $10k.  If you foreclose, you are not entitled to the property.  If the loan is written well, then there should be equity and the current Borrower being entertained for a premium price would mean someone buys at auction.  In some sense everyone here may have their own agenda trying to position on some future value of this property.  Lenders who get lost in future value get burned.  It's that simple.  

@Christopher Winkler

@Mike Hartzog and @Dion DePaoli thank you all for your input. This has definitely provided some food for thought. I'll let you know what we end up doing. 

Thanks again,


Did I miss how you came into possession of the note (again, you are the bene or control it, correct)?

Without really knowing your objective(s), such as maximizing ROI, or cash flow, or avoiding a taxable gain, etc., how can you get meaningful feedback? If you post in a public forum but don't want the public to know, well, that's just goofy (and Goofy lives just up the road on Harbor Blvd in Anaheim).

Foreclosing is not the panacea that you may think, at least for commercial asset class. What's your exit plan? Foreclose, sell and carry? Or foreclose sell and exchange? 

You could restructure, bifurcate note, cross collateralize, add co-guarantor with equity, add security, ad infinitum solutions. I

f you're going to ask, better frame it completely or just pay experts to advise you privately.

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