I’ll never forget standing up in front of them, all alone, with a feeling of dread and all the courage I could muster, and telling them we would not be signing the loan extension. (I had drawn a line in the sand and determined to let the chips fall where they may...as I knew it could only get worse.)
But, there’s a backstory. Six months earlier...as soon as things started heading south, I initiated a consistent series of meetings with our private investor, John. In these monthly meetings, my Partner and I told John exactly how it was...no sugar-coating.
-We showed him our financial projections for barely covering the 1st bank loan.
-As a result, we negotiated an extension of his 2nd loan with interest payments being accrued into the balance of the loan.
-We even shared how the bank’s requirement for a deposit from him...and that we wouldn’t accept that because we knew that appraised values would continue to decline.
In addition, the bank started receiving increased pressure from State Auditors. They had to get their bad loans off the books by year-end.
-The bank’s next step was to contact “Vulture Capitalists” to see if they would buy the loan. (Yes, that’s a term...and it means exactly what it implies.) These firms acquire bank loans at a deep discount and then turn their lawyers loose on the Borrowers to go after their personal assets under the Guarantee. It was about to turn ugly...and I couldn’t believe it was happening to me.
-But the bank waited too long. There were no takers.
-And, then, with 10 days left in the year, they did turn to John, our private lender and sold him the loan at a $1 million discount and a lower interest rate. The investor now had a loan amount that was in line with decreasing property values and an interest rate that he could cover easily from building rents. Plus, he had the means to wait out the economy and later sell at a profit.
And...he had the power, in his hands, to decide our fate, because he was now our 1st and 2nd lender.
But John remembered how we treated him during that prior 9 months now. He remembered that we’d rather take the fall than have him put more money with the bank just to protect his investment.
-So, he willingly accepted a deed in lieu of foreclosure, in which we gave him the property and he forgave the loan.
And, of course, Uncle Sam had to weigh in, taxing us on the $1 million loan forgiveness John had negotiated with the bank.
Despite all of that, I’m sure you can imagine how happy I was, even though I lost $250,000 of my personal investment. It could have been worse...much worse.
What I learned from this was that I had to stop playing the ‘swinging for a home-run’ game. No more ‘feast or famine’. I needed to pursue a path that could bring in consistent income. So, I turned to the Internet because it was a path that I knew could move me in this direction.