In October 2008 a broker came to us with a property that he claimed was being purchased for about 12cents on the dollar! It came with a full package around 700 pages of information. The appraisal was done by CBRE it looked very thorough. So from Private Money prospective this appears to be a good opportunity for our board of Directors to invest in. The reward appears higher even if the project fails and you have to foreclose your loss ration profit a very high and makes the deal worth foreclosing on. The property was worth 40 Million and change they needed a loan for 5.3million to purchase it.

Loss ratio is a calculation we have to asses on every deal, we have to ask the question what happens if we end up owning the property, how do we get our money back?

Problem #1 they wanted us to finance in a rush, which means that we have to carefully verify the 700 pages of documentation they submitted, perform a site visit, and get comfortable with a borrower that is not worth 5 million dollars personally. But the opportunity as presented to us outweighed this requirement.

WOW! 12 cents on the dollar I wanted to talk to these people. An initial conference call set up rather quickly. The first question I asked was why are you able to purchase this property for 12cents on the dollar? The current owner had purchased this property with cash I was told; he bought the property for his son who failed to develop it and had lost interest in the development. It was a failed Ski resort. I asked him about his experience it was rather light, he did have management experience but I felt it might be a little light on actually running this place profitably, I address my concern with him on the phone, he re-assured me that he was hiring a management company to run the place. I stated, “so you intend to manage the management company? His response was yes, then we discussed some cost problems potentially associated with these type of relationships. He acknowledged my concerns and seemed prepared to deal with them. He stated that they had projected higher expenses in the first year then lowering expenses as the ski lodge got running.

I asked about his marketing plan – he stated they wanted to make this a green development and do a formal SEC offering possibly using Pink sheets or other financial vehicles to repay our loan , I offered to assist as I felt environmental people would not be difficult to identify to raise money for this type of development.

We are going to be closing on a loan however where we are missing any potential income for the season, since it is October and Ski reservations are typically made months in advance.

One of the most important things for us to understand is WHY? Why is our potential borrower getting this opportunity, why did the resort fail? What if anything can be done to revive it and make it a profitable venture?

Fortunately one of our Loan officers is a Skier; I decided it is best if I send him to the site for review as I have never made it past the bunny slope, at least not in an upright position.

Our site inspector had to fly into an airport about 100 miles from the site. He called me and said he was lucky only two car rental places he got the last car. An hour into the trip he called a bit startled that he was going into the mountains road signs were sparce, numerous roads were blocked, and basically the road going up to the left was blocked an looked scary and the road to the right had a Moose standing in the middle that did not seem to care that he needed to drive thru, we were on a schedule the moose did not seem to care.

I asked him did you get the full insurance on the car, he said yes. Good I acknowledged. I told him that once he got moving stop at the next exit and purchase some Brandy and supplies, perhaps a flashlight.

We did not hear from our site inspector for several hours. I have to admit all of us were concerned about his well being and whereabouts. Finally he called us he had made it to the site and was with the prospective clients and half the town was present, the local Banker, Town officials, everyone with an interest in the property. Great, we said call us later to let us know how things look.

Later that evening at dinner, our LO was proposing a toast, he raised his glass and asked, “So what happened to the seller, 12 cents on the dollar, did he die?” The response he got was , “Oh no worries he is staying in the deal, going on preferred stock second position.” Our LO stated but I reviewed the documentation myself before this trip, your request and purchase contract do not mention a partnership, only a purchase.”

Needless to say the loss ration assumption made during the submission of what appeared to be a well prepared loan application and a smoking deal now smelled like Fraud. This application was to form a partnership, and the partners were not clearly specified as is required in the conditional commitment we issue.

We denied this loan request, the borrowers attorney told us that they had stated the seller staying in the deal, page 396 paragraph 3 sentence number 2. Had this information been presented upfront I am not sure we would have agreed to underwrite this project.

If you are reading negative blogs against us, they exist understand that a real reason exists for turning down a loan. Typically we give the potential borrower notification of the problem and several days to cure that problem, all of these people ask for more time. We grant that time.