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ROWLETT RAMBLINGS

Where's the hangup?

7/16/2019

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Been thinking about Bayside, again.   Got a little "structure" problem.  

In a phone conversation a couple of months ago, I asked the Mayor what was the collateral securing the bonds that were sold to finance the infrastructure of the Bayside development.  Usually, rights of way and streets securing appropriate bond issues have no real market value when standing alone.  I don't recall the exact amount, but let's say for conversation, $40 million.  It is presumed the bonds would be retired from tax revenue of the TIRZ zone.

Any bond purchaser would want some additional security in the event the project failed and the tax revenue didn't materialize.  Of course, the city didn't want to guarantee the bonds.  The Mayor told me ALL the Bayside land south of  I-30 was pledged as collateral to secure the bonds.  The Bayside land has real market value.  I was surprised at that answer, but it did shift the risk away from the city and to the project, itself.  I was pleased with that. 

However, a thought occurred to me, no doubt triggered by the recent delay in closing the deal with a new Bayside developer.  Let me share a little historical background about real estate lending practices.

I was a development loan officer for 25 years.  During that time, a really "clean" deal would take about two months to close.  It took about 30 days for any loan to be approved and another 30 days to prepare the closing documents, and finalize any malingering small details.  Any "deal" that had fairly nettlesome  problems that needed to be cleared up might take another 30 days if the parties were agreeable in principal.    Of course, if the deal was not "doable," the loan would have been turned down a long time before the three month period.  

Bayside had four months to close (120 days), then didn't close.  Another three weeks was added to "tend to some details."  Now we will be at nearly five months, if it closes at all.   

Let's go back to my original point.  The Bayside land south of I-30 was pledged as collateral to secure the bonds.  Therefore, the land is encumbered.    Essentially, a lien was placed upon the land and it would, in real estate law, be in the "first position."  

Now, along comes a new developer.  He wants to buy the land.  He can do so, however he must pay cash (say, $37 million), or he must get a loan.    If unencumbered cash is available, fine.  The free and clear land could then be used to secure other Bayside development.   However, if a loan is to be used to provide funds to purchase the land, a major problem surfaces.   I don't know any lender in this country that would loan $37 million, and take a "second" position behind a first lien.   There must be collateral securing the loan.  That is what lending is all about. .......risk containment. 

So, we have a new developer and seemingly a problem getting the deal closed after four and a half  months, soon to be nearly five months.    Could it be just arguing about superfluous "stuff" or is there something more damaging?    If a developer is attempting to purchase land that is already encumbered, and he needs a loan to buy the land, he must offer collateral that is not encumbered.   If all the developer's borrowing power is used to buy the land, none remains for other development.

Bayside is a sophisticated piece of real estate.  It has a lot of different development skills and disciplines needed for successful development.   The Facebook "intellectuals" think they have it all figured out.  They don't have a clue. 

If two consenting and informed parties agree in principal to a deal, problems can be worked out.   However, if a loan is involved, the situation is quite different.  The lender has the money.  The lender won't contribute the money unless the collateral is sufficient and the market is present.  

That can only mean the borrower doesn't have the assets to close the deal.   That further means the developer is probably "tapped out" of pledgable assets and additional development will be difficult,  if not impossible.  That further means the developer probably isn't a developer at all.  He would be a speculator or facilitator.   That means he secures the zoning and would use bond money for infrastructure, then sell smaller parcels to others that know their own development businesses, such as apartments, condos, office buildings, retail centers, etc.

If the above proves true, we wouldn't have been working with a developer at all.  However, a really good blue suede shoe salesman might be our new Bayside "owner."  We just don't know.  It's a secret.

I will know what we have within minutes of the announcement  about who the new developer is.  I am a little uncomfortable.  The citizens have been completely blacked out.  Why? 

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