The fund just resolved a deal that turned a neglected non-performing loan (NPL) into a $4 million profit in just over 60 days.
Here’s how we did it:
Last summer, we spotted this mid-stage construction NPL in a widely marketed pool. It was a ground-up multi-family project burdened with mechanic liens, tax defaults, and the usual payment issues; issues that scare off most credit investors.
Where most saw only risks, we smelled opportunity. Despite the risks of investing in mid-construction debt, we tossed out a bid; just under 50 cents on the dollar. There was a higher offer, but ours had a 30 day close and minimal due diligence. The note didn’t trade at all as the lender wasn’t ready for bathtime just yet.
Months later, a broker rekindled our interest. We swung by the site and were excited to see many trades on the job pushing it forward. We submitted a new LOI at $12 million (75 cents on the dollar) and closed in late June.
The numbers:
- Purchase price: $12mm
- Contract rate payoff: $16mm
- Default rate payoff: $17.5mm
- Estimated cost to complete: $10mm
- Stabilized value: $35mm
We weren’t excited about the prospect of stepping into this mess and dropping the 10 million bucks needed to complete it, but we didn't think this outcome was too likely; maybe a 10% chance. We would make a lot of money in that outcome anyways, but it would take work.
For most credit funds, that 1 in 10 chance of having to actually do real construction work is enough to pass on the deal. We saw it differently: there was a 10% chance we would have to work a bit more to make a lot of money and a 90% chance we would make a decent amount of money. The perfect setup.
We did something the previous lender had refused to: we called a default and started foreclosing. This pushed the borrower to get off the couch and get a refinance.
A little over 60 days later it paid off. While we didn't expect it to resolve as quickly as it did, our thesis played out and we even gave a break on the default rate.
All told, we made 4mm on a 12mm ticket in less than 3 months for a cool unlevered 33% return.
And we didn't have to dust off our hard hats.
