To Client: “You Can’t Always Get What You Want”
Sometimes, it’s just too good to be true. Sometimes, a client just wants something so much, that the message you deliver isn’t received. A client comes to you with the sure fire money maker, or some other deal he just has to have. The client lays out the terms and tells you the structure and says “make it happen”. But how often does it happen that once we, the attorneys, start looking at what the client wants to do, we find that it can’t or shouldn’t be done. The client hasn’t really done any due diligence yet, or there are so many obstacles to overcome that it just isn’t worth the effort or expense. That’s when you hear Mick Jagger singing in your head, “You can’t always get you want…” and you hope you can tell the client, that at the end of the day, “you get what you need”.
One client of mine called me a few weeks ago proposing to make a small loan (under $500,000) to a friend so that his friend could buy out his partners’ interests in a warehouse they owned in a Midwestern state. The loan would be secured by a 2nd mortgage on the warehouse. The 1st mortgage balance was under $2,000,000 and the property was worth nearly $5,000,000. The property was leased to a single tenant who’s rent more than covered the total debt service of the 2 loans. And, the friend and his wife would personally guaranty the loan.
It sounded like a slam dunk to the client. Of course, he had not reviewed, or even received any documents. Over the next week I learned:
- The 1st mortgage had a no subordinate lien paragraph. Therefore, consent of the 1st mortgagee would be required;
- There were only 18 months left on the lease with one – 3 year renewal option (yet to be exercised). The proposed term of the loan was 5 years; and, most importantly;
- The friend would not have total control of the property upon purchase of the partnership interests, and therefore, no authority to grant a mortgage. He was acquiring only a controlling (not even 100% interest) in the 53% owner of the property and could not, without full consent of the 47% owner, execute and deliver the second mortgage.
I spent 2 weeks with the friend going over this. He supplied numerous documents including tax returns, financial statements, property tax bills, internal entity resolutions and other irrelevant documents to convince me to let my client make this loan. My client called and emailed me often with suggestions on how to get comfortable with the security. He suggested taking a security interest in the entity rather than a mortgage so that we could force a sale of the property. But ownership of the property is by tenants in common and not as one entity, so there is no governing agreement that would dictate that we could force a sale in the event of a default under the not. He suggested that we accept a 2nd mortgage on the friend’s primary residence. I explained that would amount to alternate security not additional security. If he were comfortable with the equity in the house and the inability to realize on the security until the future sale and, if could accept the risk of a foreclosure by the first mortgagee, he could accept the alternate security.
Decisions have yet to be made nearly 6 weeks later. Further proposals are being made. But, in this case, the client has learned, though it may have taken sometime, that you can’t always get what you want. As a result, he will end up in a better position. He will get what he needs which will either be adequate security for the loan, or, it could be that he won’t do the deal at all. Sometimes, that is the best result.