Inter-creditor Agreement for Property Sale. Bad Idea?

Question

Hey there,

Long time lurker, first time poster! I have been consulting with various attorneys, and have been getting some mixed messages. Heres the scenario.

I have two adjoining properties for sale. They are two separate addresses, but together make up 40 acres, and are used together. One is worth much less without the other and vice versa. I found a buyer who would buy Lot A for 1.1MM and Lot B for 300k, for a total sale price of 1.4m I owe about 480 on Lot A, and own Lot B free and clear.

The way I set up the sale, was for the buyers to purchase  Lot B cash for 300k, (So they would essentially own Lot B outright, but I would have a first position lien securing Lot A) and Owner Finance Lot A with 180k down, leaving a balance of 920k on the loan. Sale was supposed to close in 1-2 week, no contingencies, financing was in place etc... Well here we are a month and a half later LOL!

I set up the trust deed and promissory note so that in case of default on Lot A, I would be the first lien holder on Lot B and it would be held as collateral for the loan balance of Lot A. That way if for whatever reason we had to foreclose, we would be able to get back both of the properties since they are used in conjunction.

The problem is, the buyers didn't have the immediate funds that they thought they did. We have had to push back the closing dates twice now while they're trying to secure the funding. Now they have a family member who is willing to give them the money they need for purchase, but initially wanted to have a first position lien on Lot B to secure their loan to the buyers. I said this would not be possible, as my position is required to protect the property in case of default, and give myself the ability to take back both properties.

They then wanted to have a first position on Lot A, which I sad was a hard no for me for obvious reasons.

The third option they have thrown out is the possibility of a second position lien behind me on Lot B for the full 480k down with an inter-creditor agreement in place to give them more security in their position.

My question is, what kind of implications does this have for me as the one carrying the note, and rights that they have in case of default. The last thing I want to do is end up having to foreclose on the property, and end up having to pay someone a bunch of money to get my own property back because of some obscure lending contract... Also from what my attorney has told me, it gives them the right to force a foreclosure if the family member is not getting paid... Which would not be an ideal situation if I have a cash flowing note that is performing well..

Has anyone had much experience with this type of agreement in a RE transaction? Is it something you would be willing to accept to get a deal done? Thanks for any insight.

J

Mike Hartzog · Answer

Unless you were to subordinate your 1st lien to the 2nd your foreclosure on the 1st would wipe out the junior liens.  You would either get a full payoff or get the property back free of liens with the exception of any tax and/or municipal liens that might have been attached.  From my perspective, your two risks are the two separate loans which could potentially leave you in possession of just one of the properties in the event of default and foreclosure, and ICA language which reduces your rights as a 1st position lender to protect your financial position in the property.

If a the 2nd position lender wants an ICA, the motivation is typically to help them protect their investment.  2nd position lenders can protect their interest by foreclosing and, if they are not paid off, either paying off the 1st lien themselves or bringing it current and making the scheduled payments.  If the 1st forecloses, they can bid at the sheriff's sale up to the combined amounts due on both 1st and 2nd to ensure they either retain the property or get a full payoff.  They can also buy the loan from the 1st lien holder, giving them more control and ability to work something out with the borrower.  An ICA which gives them the right to buy the loan with predefined terms within a certain time frame after default and avoid the foreclosure path would not be unreasonable.  Again, it boils down to ICA language.

Mike Hartzog · Answer

Ok got it.  With both properties securing the loan you are in good shape.  Probably makes sense to have an attorney review the ICA and tell you what your risks are.

Jay Hinrichs · Answer

I kind of agree the actual buyer is cash strapped or does not have the cash.

I have signed intercreditor agreements with my banks.. cant recall why though.. I know on some of my larger credit lines IE 6 to 8 million my bank would pull in another bank to help fund it.. so I was thinking I was signing letting the other bank be a party to the foreclosure if I did not pay back my loan..

your real estate attorney should be able to splain this one to you quickly..

And your right no reason to go junior on any of this stay in first position..

Chris Seveney · Answer

@Joseph Leguenec

I don’t see a solution with them getting the money. I think the buyer trying to make this work is a pipe dream as it seems like they don’t have much cash.

Joseph Leguenec · Answer

Hello Everyone,

Just wanted to update the thread, albeit a bit late! After going back and forth with the attorneys and going through further negotiations it was decided that the ICA was too complex and gave a bit too much exposure. They were able to secure funding from the family member, and I ended up just giving the family member a second position lien on the property.

We also restructured the deal to have them open two separate LLCs to own each of the properties. The family member had an equity stake in both of the LLCs purchasing the property, with loan documents as well between the LLCs and parties involved. This way in case the buyers did start to fall behind on payments, the family member would be able to "take control" of the LLCs without having to jump through too many legal hoops to be able to secure their investment. They were also able to take a second lien holder position, although as mentioned earlier that is more for warm and fuzzies as it would not do them much good in the case of an actual foreclosure type scenario.

All in all we were able to work through it and close the deal! Happy to be done with it. Now it's on to the next project.

Joseph Leguenec · Answer

Thank you Mike for all of the info. I am certainly going to have multiple attorneys look over it to make sure there is no unnecessary exposure. I appreciate your time! I will update the thread with my findings!

Joseph Leguenec · Answer

That makes sense Mike, thank you.

Also, I apologize I may not have stated it clearly, but just to clarify, there will not be two loans. There is only one loan on Lot A, and Lot B is being purchased in cash. The promissory note and trust deed has language that states Lot B is being used as collateral to secure the single loan on Lot A. So essentially the buyers would have Lot B paid off as far as I am concerned, but in the event of default or foreclosure, Lot B would be used as secure collateral which would be taken back as well.

But with the possibility of the ICA, I am just trying to determine how this could potentially change the initial process. I definitely dont want to possibly have to go through all that pain in the butt to end up only getting back one of the properties in a worst case scenario!

Joseph Leguenec · Answer

Thank you all for the advice.

The reason I had split it into two was because one of the properties (Lot A) has a dwelling and the majority of the buildings on it. Lot B has infrastructure upgrades but no dwelling. I am essentially selling the property(ies) as a whole at a premium price. So by splitting off the other property, and allowing it to absorb the extra cost, it will still allow the buyer to acquire traditional financing from a lender in the near future on Lot A. It would be hard for a traditional lender to justify a loan that high in the area if it was combined as one..... That was my initial reasoning for structuring the deal the way I did. It was never supposed to be an issue because the buyers supposedly had cash in hand LOL! 😂

In retrospect, with the current situation it certainly would have been easier to have it as one sale from a financing standpoint, but again it was never supposed to be an issue. But then again, it never is!

I suppose if the ICA had the proper language in it, it would be reasonable to move forward. I guess my major concern is that if for some reason I had to end up foreclosing on the property, I would somehow have an obligation to pay off the second lien holder to get my property back... Or there would be some sort of ability for the parties to collude (since they are related) lets say the buyer told their relative to say they werent being paid.. and to force foreclosure. I would then have an obligation to do so, and they would be able to screw me somehow because of a sentence in an obscure legal document.

Granted, this is the ramblings of an over paranoid individual who is always trying to figure out how someone is trying to F them! 😂 But this is why I also like to keep things simple when it comes to my contractual agreements.

Jay Hinrichs · Answer

that was my thought one loan with release clauses .. in case they wanted to sell one off.. no reason to have two separate loans..

Mike Hartzog · Answer

I think it boils down to the terms of the ICA.   In the event of default, you would want to retain your ability to either get a full payoff or get both properties back.  Because the properties are more valuable together I would look at making a single loan secured by both.