The Cash Flow Event Of 2020

by Alex Nakoul
Part I
This was published in THE PAPER SOURCE JOURNAL, January, 2020.  For information, see

By practical definition, a distressed commercial mortgage note is typically a loan that is not
being paid per the contract and that is either in default or in foreclosure. Along with these
characteristics, a distressed commercial mortgage note is typically secured by a
distressed commercial parcel of real estate.

Many note brokers ask us if we buy distressed commercial mortgage notes. In concept, we
always answer yes. In reality, the answer is much more involved.
Let me explain by an example of a distressed commercial mortgage note we recently

The call came in one late afternoon. The caller owned a commercial mortgage note and
stated that no payments had been made by their
borrower for over eight years. Would we be interested in buying it? My
answer: Yes we would be interested in buying it; please tell me more.
Over the next 30 minutes and then several subsequent phone calls, a title investigation and
a property inspection, the following facts were finally pieced together:

The commercial property was an auto repair shop in the Los
Angeles area. It was a small lot of about 5,000 square feet. It had two below ground auto bays.
There was a small building in the rear of the property in poor condition and unusable.

There was an open canopied work area. Debris, neglect and possible oil spillage and
environmental issues were evident upon inspection.

The property was sold in 2007 for $375,000. The seller
carried back a $300,000 first mortgage. The scheduled payments were yearly. The amount was
$100,000 plus accrued interest for 3 consecutive years. None of these yearly $100,000 payments
had been paid. The note holder had filed a Notice of Default in 2011 — and then
rescinded it.

The borrower had sent a check in 2012 to the note holder for $300,000. The note holder
gave me a copy of the check and said that the check was never cashed because there were no
moneys in the borrower’s account to cover it. The borrower confirmed the issuance of the check and vaguely
confirmed that it had not been cashed.

The note holder told me that the borrower had become difficult and adversarial. The note
holder implied that there might be possible legal troubles if another Notice of Default was filed.
It came out that the person I was dealing with was a family member of the note holder of
record. The note holder was going to ‘give’ my contact person ownership of the commercial
mortgage. This was a complication that added to the unusualness of this distressed note.

A review of the county tax assessor verified that the property taxes were paid and current.
This last fact — that the property taxes had been paid by the borrower for 8 years — was
the diamond in the rough I had been looking for. This confirmed to me that there was some user
value in this property. It also led me to conclude that the non-payment of the note was due primarily
to the unwillingness of the parties to re-negotiate the payments.

I was now interested in buying this very ‘distressed commercial
mortgage note secured by a very distressed commercial property.’
So, now the big question was: how much would I pay for it?

Continued next month.

Alex Nackoul is the Managing Director-CEO of Brownstone Mortgage Capital
Corporation. Founded in 1980, Brownstone is a nationwide buyer of commercial mortgage notes
for its private Mortgage Funds. He is also the author of the book “Secrets to
Successful Mortgage Investing.”

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