The Financing Assignment
An attorney representing a physician recommended us to his client to refinance a $1,685,000 mortgage loan in favor of United Midwest Savings Bank (UMSB) on a 14,248 square foot single story retail / clinical medical building. At the time the loan was in default.
The physician had acquired the property in June of 2011 from a bank that had foreclosed on and owned the property. He was a practicing emergency room physician that owned and operated an urgent care from space he leased a mile south of the subject property. He viewed this as an opportunity to improve the business exposure, as the subject property had a superior location, and control his occupancy cost. He purchased the property with financing from UMSB with the intent to relocate his urgent care business as well as lease to a related physical therapy business with whom he had a close working relationship. These two new tenants would increase the property occupancy from 40% to 100%.
1. The existing financing with Midwest Savings Bank was structured as an SBA 504 loan with a conventional $745,000 1st mortgage loan for the property acquisition and a $940,000 SBA 2nd mortgage loan for substantial property rehabilitation / improvements.
2. When he closed on the property purchase in June of 2011 he had no development experience. He grossly underestimated the time needed in the planning and permitting process. UMSB let him close on the financing without permits or substantially completed and approved plans. UMSB also structured the loans with a 6 month interest only period thinking the contemplated improvements would be made and the loan could then convert to principal amortization. As the conversion date on the loan of February 2012 approached and USMB realized that the project would not be completed in time they started withholding improvement money from the second mortgage loan and put the loan in default.
3. Because UMSB was withholding construction funding the physician was forced to utilize his own money which took very little time to deplete. He then took on additional debt in the form of a home equity line of credit, multiple personal and business lines of credit and financed all of his medical equipment in an attempt to raise the money needed to complete the property renovations.
4. Utilizing incomplete / preliminary plans resulted in project cost overruns. The $940,000 meant for property rehabilitation / improvements was $250,000 less than the money actually needed. Between the loans and the initial equity the physician invested into the property the project was out of balance. UMSB made demand that additional equity be placed with them until the project was complete.
5. With so much time and effort invested into rehabilitation of the subject property the physicians existing urgent care business suffered and experienced a downturn in revenues. Approaching insolvency, the physician stopped paying rent to his existing landlord.
1. We reviewed the historical financials of the urgent care business for the past 5 years and concluded that before the physician embarked on redevelopment of the subject property he demonstrated an ability to cash flow as much as $3,000,000 of long term debt.
2. We underwrote and packaged the loan request asking for a $1,850,000 first mortgage loan on the subject property and an $860,000 debt consolidation term loan secured by a second mortgage on the subject property, equipment, accounts receivable and inventory.
3. We obtained term sheets indicating interest from the local banking community to consider granting these requests and met with the existing lender (USMB) and borrower’s counsel to negotiate a 4 month extension, allowing adequate time to convert the selected term sheet to a commitment, complete 3rd party reports and close on the refinancing.
4. We advised the physician to substantially modify his existing lease on the subject property, increasing the rental rate and extending the lease maturity date. He was previously advised on the lease terms by his tax accountant. UMSB had appraised the subject property for $2,100,000 on 10/11/12. The modifications we made to the urgent care lease resulted in a valuation of $2,600,000 (a 24% increase in value) as of 2/14/13.
5. We closed on the refinancing with BankUnited at 3.75% fixed for 7-years on the $1,850,000 conventional first mortgage loan with a 25-year amortization and a 3.5% fixed rate $860,000 debt consolidation fully amortizing term loan for 7-years. All the physicians’ debt was consolidated into the two loans and the short term maturity issues present with multiple loans was resolved. The economic savings in terms of annual cash flows can be seen on the Loan Variance Analysis.