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As you can see, most of these items have already been discussed. I want my attorney to confirm that they have also received the documents and signed off on them.

Once the loan closing checklist is completed, the deal can move toward the funding stage.

Funding

As mentioned in the Initial Review article, the lender’s actual wire amount differs from the loan amount. The lender holds back fees and expenses. Let’s look at an example. I bought a nonperforming loan from a bank in Q4 2024. I pulled the closing statement from the original transaction. This was a rate and term refinance:

A few comments:

• This is a bank loan, so the lender’s fees are significantly lower than those for a private bridge loan.

• The lender’s loan amount was $9,100,000, but the wire amount is only $9,086,447.50. The difference is the listed fees of $13,552.50. The origination fee would have been stated on the term sheet and commitment letter.

• The borrower paid off an $8,368,979.54 loan. It was refinanced into a $9,100,000 loan. The difference is $731,020.46. Yet the borrower received just $496,466.83 back at closing. The $234,553.63 difference is closing costs.

  • Take a look at the closing statement. The 2018 property taxes were a large portion of it.

• The more loans you close, the easier it is to reconcile your funding amount. The good news is that you confirm the amount with the title company before sending the funds. This ensures both sides are on the same page and the books are balancing.

Post Closing

I have another checklist for post-closing items. Again, this is to ensure nothing slips through the cracks.

• Review Executed Documents

  • The borrower will sign all the loan documents before funding. However, double-check that all loan documents are fully executed, including those that require signatures from both the lender and the borrower. If a notarization was required, ensure it was done correctly.

  • The sooner you catch mistakes, the easier it is to correct them.

• Record Documents

  • After the loan closes and funds, the loan documents need to be recorded. Specifically, the mortgage (or deed of trust) and assignment of rents. I have my attorney record the documents to ensure it is done properly.

  • Recording is critical, as it ensures our lien position is protected. If the borrower wants to refinance, a future title search will show my loan is in first lien position.

• Obtain Original Loan Documents

  • This is essential. You need the originals of all loan documents, specifically the promissory note. If you are forced to foreclose, you have to produce the original promissory note.

  • Keep the originals in a fireproof safe.

• Book Loan and Establish Servicing

  • I will get into servicing shortly, but a system is required to track the loan. An Excel spreadsheet is adequate if you are only originating a few loans per year.

  • Keep track of all the transactions from loan funding to monthly payments to loan payoff.

• Schedule Quarterly Communication with Borrower

  • I check in with my borrowers quarterly to see how things are going. This is proactive asset management, and I find it to be effective. If I have a lot of cash in a deal, I want to be kept in the loop.

Servicing

Loan servicing is critical. The deal isn’t over until the borrower pays off the loan. While most of the effort is expended before funding, there is still work to be done. Every month, I send a loan statement to the borrower. I deliver it at least two weeks before the payment due date (which I always make on the 1^st of the month). The loan statement should include the principal balance, interest rate, and amount due. If you are escrowing for taxes and insurance, break down the amount due by each.

A performing loan is easy to service. It is as simple as collecting a monthly payment and sending a monthly loan statement. If the loan starts to sub-perform or non-perform, that is when it can become time-consuming. If a borrower defaults, send them a notice with anti-waiver language. Here is an example from a recent foreclosure:

The last paragraph is key. It contains the anti-waiver language and reserves your rights as a lender. The Life of a Bridge Loan discusses the importance.

If a loan stops performing, it is not the end of the world. If you accurately assessed the collateral value, you have plenty of options. You can read any of my NPL articles for more details. Commercial loans typically have default interest. If a borrower defaults, the interest rate increases to the default rate. This can be quite high. For example, in Florida, the maximum default rate is 25% (assuming the loan documents have the right language). If there is equity in the collateral, you can sit back and run default interest or sell the note to an investor.

That’s a wrap for Bridge Lending. Reach out if you have any questions.

Two notes:

1. SPBH appealed the decision. As of January 29, 2026, the case is in the Florida Second District Court of Appeals.

2. This article is not a legal analysis. I will explain the ruling and the potential effects on the hotel.

Acquisition

Per County records, SPBH purchased the property in September 2022 for $36.5 million or ~$570,000 per key. The purchase consisted of the hotel and the adjacent parking lot.

SPBH financed the purchase with a $28.5 million loan from MidWestOne Bank. It is not clear if the loan was fully funded at closing or if funds were held back for improvements.

SPBH traces back to Sherman Associates out of Minnesota. Interesting the amount of detail provided on their website, even their estimate of project value ($45 million!).

Litigation

SPBH filed the lawsuit against Don Ce-Sar Property Owners Corporation (DCPOC) on March 31, 2023 (Case Number 2023-006426-CI in Pinellas County). DCPOC is a corporation whose members are property owners within the Don Ce-Sar Place plat. DCPOC controls beach access. Essentially, the lawsuit was over who had the right to access the beach. Before getting into more detail, a map overview is helpful.

Here is an aerial of St. Pete Beach. The red mark is The Hotel Zamora.

The Hotel Zamora is on the bay side of Gulf Blvd. It does not have direct beach access.

Hotel guests could access the beach via the Don Ce-Sar Place plat. Here is the legal description:

And here is the approximate location of Block N:

As you can see, Block N is a quick walk from the hotel. Block M is further south, but still walkable.

DCPOC members moved to restrict hotel guests from accessing the beach. This prompted the lawsuit from SPBH. From the original complaint:

I’m not familiar with the history between the hotel and DCPOC. However, the majority of DCPOC members are residential homeowners. I assume they got fed up with hotel guests coming to “their” beach and moved to stop it.

Unfortunately for SPBH, the Circuit Court wasn’t buying their argument. They ruled in favor of DCPOC.

Effect on Operations

The final judgment gives insight into the potential value of beach access. First, the hotel would advertise beach access to its guests:

Second, SPBH hosted a wedding on the beach:

And it seems like they planned to do more weddings and events:

Finally and most interestingly, SPBH was aware of the dispute before acquiring The Hotel Zamora.

The Post-Closing Escrow Agreement is an Exhibit in one of the filings, but most of it is redacted. I do not know how much was escrowed, but it is clear that this was a known issue.

Effects on Value

Assuming the appeals court does not reverse the decision, the lack of beach access could impact demand. At the end of the day, hotel revenues are driven by i) the daily rate and ii) the occupancy. Will the hotel see a drop in guest demand due to the lack of beach access? Maybe. Will the hotel have to lower its rate without the beach access amenity? Possibly. I’m not a St. Pete Beach expert, but a quick hotel search does show many competitors with beachfront access.

Maybe SPBH factored the outcome into their underwriting. Maybe they didn’t. We don’t know. However, there are public records we can monitor for hints of hotel performance deterioration.

First, the 2025 property taxes have not been paid. They are not due until March 31^st, and SPBH has historically waited to pay them until the last week of March. This is the first area to keep an eye on.

Second, several small liens were recorded in 2024. They have since been paid off. This is another area to monitor.

Third, the appeals case should commence in the near future. You can monitor it here. Search by either SPBH or DCPOC (use full legal names).

Finally, if you have access to STAR reports, track the property performance. If the lack of beach access is a big deal, it should appear in the numbers.

I’ll keep an eye on this one and report back with any updates.

The article details urgent capital calls by Key City, including for The Dominik. I concluded that their valuations were ridiculous by almost any metric. The beauty of bankruptcy is discovery. So, while Key City-controlled entities likely filed for bankruptcy to stop foreclosures and buy themselves more time, a host of documents are now public. Bad for Key City, great for us!

If you haven’t read my original article, here is an excerpt:

Key City told investors their original exit value on The Dominik was $112K per unit. However, by meeting the capital call and stabilizing the property, the new expected exit value was $157K per unit. Let’s see what The Dominik’s lender had to say.

Lender Objection

On December 8, 2025, the lender filed an Objection to the Debtor’s Motion to Use Cash Collateral. To start, the lender claims the property is only 30% occupied:

Next, the lender states the loan matured 6 months ago, and the outstanding balance is over $18.2 million or ~$76K per unit.

Finally, the lender states they have an appraisal from January 2025 valuing the property at just $12.4 million or ~$52K per unit.

Notice that the Debtor, Key City, claims the property is worth $25 million today, or ~$104K per unit. Think about it:

• In September 2025, Key City issued a capital call for $4.5 million, of which ~$1.5 million was allocated for The Dominik.

• If the capital call was met, the business plan could be executed, and the property would be worth ~$37 million.

• In December 2025, Key City tells the BK court the property is currently worth $25 million.

• According to this logic, the $1.5 million investment would result in $12 million of value creation. 8x the investment! Perhaps the greatest value-add ROI in history.

Appraisal

The appraisal was included as an Exhibit to the Objection. It was completed by Colliers and dated January 15, 2025. Here are the stated values:

• The as-is value is 50% of what Key City told the BK court.

• The as-stabilized value is 43% of what Key City told investors.

The appraiser was provided with a rent roll dated January 4, 2025. The occupancy was ~49%. Remember, the lender claimed in the Objection that it’s now 30%, so performance has continued to deteriorate.

In-place rent was only $800 per unit per month. Based on the rent comps, there is likely an opportunity for a real operator to stabilize occupancy and then potentially push rents a bit. However, that will take much more than a $1.5 million investment.

Although the appraiser doesn’t think the rents can be pushed much. Here is the potential rent:

If you thought the current occupancy was bad, take a look at the historical operating expenses:

Key City acquired the property in May 2022 for $18 million or $75K per unit. There are exhibits in the appraisal with detailed financials for the periods above. A few comments and observations:

• Occupancy went from 85% to 55% to 30% today.

• I thought the 2022 numbers were just from their ownership period. However, the income statement is dated 1.1.22 to 12.31.22, and the accrual accounting method was used. It is unclear why a property insurance expense wasn’t recorded. Moreover, it isn’t clear why the expenses are so low compared to 2023.

• 2023 offsite management expenses were over $1 million. What are these expenses? According to the itemized income statement:

• As several investors have told me, Key City has not provided a fund audit in years. I wonder why.

I could write an entire article on the operating expenses, but I’ll leave you with this. Compare the R&M and G&A in 2023 to 2024. Notice the dramatic decrease. This is what happens when a property is overleveraged. The owner struggles to make the loan payments, so they slash operating expenses. It’s all downhill from there. Repairs pile up, and the property's condition worsens. Services are cut, and the tenant experience is ruined. This is what makes buying a distressed MF asset difficult, especially an NPL, as you won’t have unrestricted access to the property. It is very difficult to properly budget for capital expenditures.

Moving on to the comps. Here is what the appraiser used to estimate the cap rate:

Along with some additional information on the comps:

We can debate the merit of the comps. I wouldn’t buy 1970s stabilized class C MF in the cap rate range indicated by the appraiser. But that’s just me. Here is the final pro forma and stabilized value conclusion:

Again, this can all be debated, but the number Key City is telling investors isn’t supported by the sales comps or the potential NOI.

Key City needs to do the following:

1. Admit defeat. Stop the capital calls. Investors will only lose more money.

2. Toss the keys back to the lender. Allow the lender to sell the property to a group that can stabilize it and provide affordable housing for the community.

3. Provide a full and transparent audit. If the fund doesn’t have enough cash, then pay for it yourself. There is no reason to avoid an audit unless you are trying to hide something.

I’m still looking through the other bankruptcy filings. Stay tuned for more.

• Introduction

• Credit Box

• Initial Underwriting Review

After the borrower executes the term sheet, the real work begins. Underwriting is a critical phase in the loan origination process. I also refer to it as the verification stage. The initial review gave us confidence to issue a term sheet. Underwriting confirms all the details. If everything checks out, the loan moves toward closing.

My review process consists of 6 phases:

• Initial Documentation Receipt

• Property Review

• Guarantor Review

• Entity Review

• Insurance Review

• Closing Preparation

I am not an “asset-based” lender. Some lenders originate loans strictly based on the value of the collateral, with the value determined by themselves or through an appraisal. While collateral value is critical, I place significant weight on the Guarantor's character. I want to know who I’m doing business with. Asset-based lending might be great for the borrower (and originator), but it is often a bad deal for the capital providers (investors).

Initial Documentation Receipt

Items required:

• The executed term sheet from the borrower.

• The refundable advance (i.e., loan deposit) from the borrower. The deposit amount is stated on the term sheet and determined on a case-by-case basis.

• The completed and signed loan application from the borrower. I provide this to the borrower.

I have a simple rule before starting the underwriting process: I do not begin until I receive these three items. The first step is receiving the executed term sheet from the borrower. Sometimes the term sheet comes back signed in an hour; other times, it takes weeks. The term sheet always has an expiration date. A borrower cannot sit on my term sheet for weeks and expect me to lend under the same terms and conditions if the market has changed. Moreover, if the borrower isn’t sending your term sheet back within a few days, it is a good indication that they are using it to negotiate with other lenders. It can be frustrating, but it’s all part of the game.

After the executed term sheet, I ensure the loan deposit has been received. The loan deposit serves two purposes. First, it shows the borrower is serious about the transaction. To date, the borrower hasn’t spent any of their funds. They will now start to incur transaction costs. Second, it allows me to order third-party reports, including appraisals, Phase 1 Environmental reports (if applicable), and title and lien searches. Moreover, I can engage my attorney and have them start on the loan documents.

Finally, I want the completed and executed loan application. Most of the application is just basic information, but there are three keys:

• Guarantor’s social security number

  • I need this to run the background check on the Guarantor.

• Borrower’s Employer Identification Number (EIN)

  • I need this to run the background check on the Borrower. Remember, the borrower is an entity.

• Consent to conduct background and credit checks

  • There is a clause that authorizes me to run the checks. I always run a background check.

Property Review

The type of collateral will dictate exactly what is required for the property analysis. In general, the following is required:

• Financial Statements

  • I request the prior 2 years and YTD income statement, a current balance sheet, a cash flow statement, and the current year’s budget.

    • I request this documentation, but I am flexible. When the loan amount is under $5,000,000, the borrowers tend to be less sophisticated. They may not have readily available balance sheets and cash flow statements. In those cases, I am fine with current and historical income statements. The larger the loan amount, the less flexibility I have with the documentation requests.

    • I review the financial statements to calculate NOI and analyze trends in property performance.

• Rent Roll

  • This should have been provided as part of the initial review. If a borrower does not want to provide a rent roll upfront, then the deal should be an easy pass.

  • The rent roll should show the in-place leases with all the pertinent lease terms. It should also display pending leases (i.e., signed leases where the rent has not yet commenced).

• Leases

  • It is unlikely that leases are provided upfront. I compare the leases to the rent roll to ensure that what was presented is accurate. This is not required for multifamily properties.

    • AI applications such as Chat GPT, Gemini, or Claude expedite this process significantly.

  • Tip: If you see a bunch of leases executed around the same time, especially in close proximity to the loan application, check the Landlord and Tenant to ensure the relationship is arm’s length.

• Real Estate Taxes

  • Property taxes can typically be obtained upfront. Most counties across the US make it easy to search for property taxes. If you are unable to pull them, the title company will provide a status update as part of their search.

  • If there are delinquent property taxes, they need to be paid. They are either paid by the borrower or rolled into the loan.

  • Ideally, the property taxes are escrowed, but that requires an additional servicing task for the lender. Each lender makes their own decision on escrowing.

• Appraisal

  • Please see the embedded video. I demonstrate how to review an appraisal.

  • I prefer to order the appraisal, but I am open to using a recent appraisal ordered by another lender. Frequently, a loan finds its way to a bride lender after a bank declines it. I will review the appraisal and decide whether its acceptable.

  • The appraisal needs to be reviewed regardless of who ordered it. Confirming valuation is a critical step in the process. That’s why I included a video.

  • In addition to the appraisal, talk to local brokers and investors. It is best to get multiple opinions.

• Phase I Environmental

  • Please see the embedded video above. I demonstrate how to review a Phase 1 at the 19:30 mark.

  • I am open to accepting Phase 1 reports ordered by other lenders. If they are not recent (within the last year), I like to order a report from Veracheck.

• Physical Site Inspection

  • Never skip a site inspection. It is too important.

  • Nothing beats seeing and feeling the asset in person.

  • Don’t just visit the subject property. Tour the surrounding area and visit the competition.

Guarantor Review

With the Guarantor, I focus on their financial situation and character.

• Two Forms of ID

  • A driver’s license and passport will suffice.

  • They are used to verify the Guarantor’s identity.

  • I also use them to run the background check. The driver’s license and/or passport numbers are helpful.

• Personal Financial Statement (PFS)

  • Please see the embedded video above. I demonstrate how to review a PFS at the 22:10 mark.

• Credit Report

  • This is optional, but I consider it a character check.

  • Does this person pay their bills?

  • I don’t have a minimum credit score requirement, and I’m not concerned about distant delinquencies. I want the person’s recent credit history to be clean, especially the mortgages.

• Background Check

  • I never skip a background check. It is absolutely essential. This is where I disagree most with asset-based lenders.

  • A background check will pull the Guarantor’s criminal and civil history, including any foreclosures, bankruptcies, and liens.

  • A background check is a character assessment.

  • I use Lexis Nexis to run the checks. However, there are a number of service providers.

• Verification of Liquidity

• The more liquidity, the better. Borrowers often use bridge loans when property cash flow is limited.

• This is especially important when the DSC < 1 and an interest reserve isn’t being utilized. The source of interest payments will be liquidity.

• Ideally, the funds are in the name of the Guarantor (or property owning LLC), so I know they have access to it.

• I ask for 3 months of bank statements. It allows me to analyze 90 days of cash flow versus a few weeks.

• Meet the Guarantor

  • This is ideally done in person at the time of the site inspection.

  • If I’m writing a large check to someone, I want to meet them in person. It helps me get a feel for who I’m dealing with.

• Negative News Search

  • This is as simple as running their name through a search engine. It ensures that dealing with this person won’t result in negative press.

Entity Review

While I review the entity documents, my attorney does as well. I

• Operating Agreement (OA)

  • The OA outlines the ownership structure, operating procedures, and governance of the borrowing entity.

  • As a lender, I want to see who the Manager is and what authority they have, particularly if they can take out a loan without the approval of other members.

    • If other members must provide consent, then my attorney will send them a Resolution.

  • The OA will contain a breakdown of the membership interests.

    • This details the ownership percentage of each member.

  • The larger the transaction, the more complicated the OA and the ownership structure. Generally, when the loan amount is under $10,000,000, it is a simple structure with minimal members.

• Federal Taxpayer ID

  • Also known as the Employer Identification Number.

  • Not only do we need this for running background checks, but our accounting team needs it as well.

• Articles of Organization (AO)

  • The AO is filed with the state to legally form the LLC. Without the AO, the entity does not legally exist.

  • The AO contains the LLC name, principal business address, registered agent name and address, management structure and organizer’s name and signature.

  • Note that LLCs require an AO. Most borrowing entities will be LLCs. However, that isn’t always the case.

• Ownership Structure

  • When the ownership structure is complex, an organizational chart (org chart) may be required.

  • Again, the larger the loan amount, the more common this becomes.

• Certificate of Good Standing

  • The borrowing entity must be in good standing with the state. If they aren’t, the borrower must pay the applicable fines and get the entity reinstated.

  • This is a fairly simple process.

• Background Check

  • Same concept as the Guarantor search, except for the borrowing entity. It covers the same searches. I don’t want to do business with an entity that is constantly involved in litigation due to non-payment of its obligations (i.e., contract defaults) or cutting corners (i.e., fines and regulatory violations).

• Negative News Search

  • Same concept as the Guarantor search, except with the entity name.

Insurance

Thus far, the underwriting process has focused on ensuring that the borrower and guarantor are capable of performing. I am not a loan-to-own lender. I want my bridge loans to perform. I also need to ensure the collateral is adequately protected. I do this through liability, property, and title insurance.

• Liability Insurance

  • The borrower is responsible for obtaining liability insurance. However, the borrower must comply with the lender’s requirements and add the lender as a loss payee.

  • Each lender has different liability requirements, but generally, the requirement is a minimum of:

    • $1,000,000 per occurrence

    • $2,000,000 aggregate

  • You can always require higher coverage or request an umbrella policy. However, this will likely be seen as a burdensome request (even if it protects the borrower).

  • Note, if the borrower allows the insurance to lapse, immediately default the borrower. If the policy isn’t immediately reinstated, then force place the insurance (i.e., place the policy yourself and add the premium cost to the loan balance).

• Property Insurance

  • The borrower is also responsible for obtaining property insurance and must comply with the lender’s requirements and add the lender as a loss payee.

  • Property insurance can include hazard, wind, flood, earthquake, and more. It is critical to understand the threats in the areas where you are lending. For example, I need wind insurance in Florida, but not earthquake.

  • The amount of property coverage is at the discretion of the lender. Typically, it is the lesser of the replacement cost or the amount of the loan. I always push for replacement cost as I want the funds available to rebuild if disaster strikes.

  • Flood insurance is primarily placed through FEMA. It is federally regulated. For commercial policies, the coverage limit is $500,000. It provides minimal protection. If you are lending in an area prone to flooding, you may also request that the borrower obtain a private flood policy.

  You do not have to be an insurance expert. I definitely am not. You need to have an expert on dial. I call my friend Andrew Ryan to help. Give him a shout next time you need insurance.

• Title Insurance

  • The borrower ultimately pays for the title insurance at closing, but the lender controls this process. In fact, I prefer to choose the title agent and company for the transaction.

  • The borrower obtains an Owner Policy while the lender obtains a Lender Policy.

  • The Lender Policy protects the lender’s interest up to the loan amount.

    • The policy starts at loan funding and ends at loan payoff.

  • A title search is run to look for any outstanding liens. I need to be in first position on the loan policy. If the title search finds anything, it needs to be paid off or subordinated to my interest.

  • In a case where the title search missed something and a claim arises, the title insurer is responsible for handling and paying that claim.

  • My attorney always reviews the title policy. Your attorney should also.

Closing Preparation

• Loan Documents

  • While my attorney completes the loan documents, I still read them before they are sent to the borrower.

  • I use the same set of loan documents, so I know exactly what is in them. Sometimes minor tweaks are required. With minimal to no changes, I can focus on reading the business terms and ensuring they align with what was agreed upon.

• Management Agreements

  • For larger properties or operationally intensive properties (multifamily and hotel), a management agreement typically exists.

  • It is important to read through it and understand the ramifications if you have to foreclose and take title.

  • Most property management agreements can be terminated quickly with notice. Hotel management agreements tend to be long-term and survive a foreclosure.

• Estoppels

  • Banks and other traditional lenders require estoppels from tenants. An estoppel confirms the terms of the lease and the current payment status. It is signed by the tenant and landlord. I require them on a case-by-case basis.

• SDNA

  • Subordination, Non-Disturbance, and Attornment Agreement

  • National tenants typically require them. The tenant, landlord, and lender sign them.

  • The SDNA protects the tenant as the lease survives foreclosure. A tenant does not want to invest millions of dollars in its space only to have its lease terminated.

• ACH

  • If a borrower is making monthly interest payments, push to put them on ACH. It makes servicing the loan much easier.

  • Best practice is to include an ACH authorization form with the loan documents.

That’s a wrap on my underwriting. Let me know if you have any questions or comments.

River Tarpon LLC filed a foreclosure complaint against 1515 Miami Development LP in the Miami-Dade County Circuit Court on May 19, 2025. River Tarpon also named the loan guarantor, the debt broker, and the debt brokerage as defendants. River Tarpon accused the defendants of providing false financial statements and of concealing that the sole guarantor was already in default under a separate loan agreement. As a result, the loan was accelerated, and River Tarpon moved to foreclose.

Before reviewing the complaint, it is important to understand the lender, the borrower, the collateral, the transaction history, and the loan structure. I will address it in that order.

Lender

River Tarpon LLC is the lender. The Fiorentino Family Office controls River Tarpon LLC. This is evidenced by the term sheet, which is Exhibit A of the complaint.

Jeffrey Fiorentino signed the term sheet. He also signed the loan documents.

While I do not know Jeffrey, I’ve worked with (and continue to work with) family offices and high-net-worth individuals (HNWI). Real estate lending is typically a small part of their portfolio (if any). Therefore, they tend to lack the experience and expertise required in the Wild West of lending. Again, I do not know Jeffrey. This is just a generalization based on my experience.

Borrower

The borrower is 1515 Miami River Development LP. The address on the loan agreement traces back to Gomez Development Group. The owner, Marlon Gomez, is also one of the guarantors. I am not familiar with Mr. Gomez or his company. Their website claims one successful multifamily development and exit. The other projects appear to be in the pre-construction phase, including the subject property, 1515 Miami River, which is described as 40 townhomes covering 80K SF.

Collateral

The collateral is a ~77K SF development site on the Miami River. It is located at 1515 NW S River Drive, Miami, FL. The property is zoned for multifamily. This area of Miami has attracted developers and continues to grow. Here are pictures from a prior listing:

I assume Gomez Development Group planned for rentals rather than for-sale townhomes.

Transaction History

Per County records, 1515 Miami River Development LP acquired the site from 1515 Miami River LLC in February 2020 for ~$2.2 million.

The managers of 1515 Miami River LLC trace back to Fausto Callava and Antonio Pardo. Both are also named as defendants in the complaint, as they were still involved in the deal.

Since Callava and Pardo were involved in the deal before bringing on Gomez, it is important to look at their transaction history as well. The site has three parcels. All were acquired in 2014, totaling ~$3.9 million. However, the County lists two of the parcel sales as “atypical motivation.” I do not know the story behind their acquisition. The land was refinanced multiple times, starting in 2014, until it was eventually transferred to 1515 Miami River Development LP.

In February 2020, 1515 Miami River Development LP borrowed $4.62 million from Linkvest Capital. I suspect this was structured with an interest reserve.

In May 2022, 1515 Miami River Development LP paid off Linkvest by borrowing $6 million from ROK Lending. Again, I suspect this was structured with an interest reserve. I highly doubt that ROK would provide over $1 million in cash-out proceeds.

Finally, in February 2024, 1515 Miami River Development LP paid off ROK with the loan from River Tarpon LLC, aka The Fiorentino Family Office. As I’ll detail shortly, I know this loan was structured with an interest reserve, as the complaint has exhibits with the loan documents.

While underwriting this loan, the red flags should have been going off:

• Land is the riskiest collateral.

• The borrower/guarantors likely have little to no cash in the deal at this point.

• The borrower likely hasn’t made out-of-pocket loan payments in 4 years.

• The loan balance continues to increase due to the borrower’s inability to make payments (i.e., they are rolling interest payments into the loan balance).

• The borrower already tapped two of the most active bridge lenders in South Florida: Linkvest and ROK.

Perhaps Fiorentino was interested in developing the site and thought the basis was good. Either they get paid off and earn a high yield, or they foreclose and develop themselves. This is just speculation on my end.

Loan Structure

The complaint did not include the promissory note as an Exhibit, but it did include the term sheet and loan agreement. Based on these documents, here are the terms:

The term sheet references a commitment fee and an exit fee:

The loan agreement has the commitment fee being paid to the broker:

I only bring this up as it affects my sources and uses. I’ll touch on this shortly. I found the interest reserve language in the term sheet interesting. I haven’t seen an exit fee included in a reserve before. This gives a slight increase to the yield. Also, the management fee is essentially a servicing fee. $30K! Another way to slightly increase the yield.

Onto the projected Sources and Uses. Based on the transaction history, I assumed the ROK Lending loan payoff was $6 million. The term sheet and loan agreement provided the brokerage fee and interest reserve. I estimated the closing costs. The stated loan purpose on the term sheet was:

I do not see any reference to a reserve for development plans. I have a hard time believing that the lender would release over $2 million to the borrower at closing. Without a development reserve, that would be the case.

A development reserve would be very beneficial to the lender:

• Any progression towards a construction permit should increase the value of the collateral. By holding the funds, the lender controls the process.

• By holding a reserve, the actual funds advanced at closing are less. Yet, the lender is charging interest on the full $10 million loan amount. This would further amplify the yield.

FYI: I checked whether the property taxes were paid around the same time as closing. They were not. In fact, the 2024 property taxes are delinquent, and a certificate was issued. This is a monetary default, and the lender failed to include it in their complaint.

One final note on the loan structure. There is a condition on the term sheet and a covenant in the loan agreement that states the LTV cannot exceed 65%. This is high for a land loan.

Between the transaction history and the loan terms, it seems clear that the borrower had few refinancing options. In fact, this may have been the only one. Between the rate, fees, structure, and costs, the effective borrowing rate was over 20%.

Complaint

The lender cited two issues in the foreclosure complaint:

1. The borrower/guarantor provided a false financial statement.

2. The borrower/guarantor failed to disclose that they were in default of another loan.

As a result, the borrower was immediately in default of the loan. Forget 15.50% interest. 25% default interest from day 1!

Before addressing the points, it is important to remember the loan structure. Since the loan had a full term interest reserve, there wouldn’t be any loan payment defaults. Outside of the delinquent property taxes, the earliest monetary default would have been loan maturity.

The two issues cited are tied together. According to the complaint, Gomez failed to disclose a mortgage he personally guaranteed, and that the mortgage was in default:

Based on the information presented, it seems clear that the borrower and Gomez misled the lender. Gomez submitted a personal financial statement (PFS) that not only excluded a liability but also failed to disclose that it was in default. As the lender notes, this violated multiple clauses in the loan agreement.

Does the lender have the right to file a complaint? Absolutely. Should the lender be pissed off? Absolutely. Could the lender have flagged this issue and avoided making the loan? Absolutely!

Due diligence requires more than just looking at a PFS. It requires analyzing the PFS and verifying the information. This can be done through additional documentation requests or public records. For example, if you want to verify a guarantor’s liquidity, you request a bank statement. If you wish to confirm a guarantor’s real estate holdings, you use public records.

Looking into Aventura Eco-Offices Property Owner LLC would have taken less than 5 minutes. After all, the lender is claiming it was critical to the loan approval, as Gomez claimed a $950,000 receivable, $8 million in equity, and no mortgage liability.

I pulled the recorded mortgage. Aventura Eco-Offices Property Owner LLC borrowed $15 million from ROK Lending. Yes, the same ROK that the lender would pay off on this transaction. Furthermore, Gomez signed the mortgage.

If you have experience lending money in South Florida, you know the probability that this is a nonrecourse loan is almost zero. Additionally, I checked the property's taxes. They haven’t been paid since 2022. Even then, they were late!

Again, this whole process didn’t take long. The lender should have checked. It doesn’t excuse the borrower’s behavior. The lender has every right to go after them. But the lender could have avoided a bad decision. Now they are tied up in litigation, and I question if the true value of the collateral is even above the loan amount.

Public records are your friend. In my opinion, Florida has the best public record system. Almost every county has user-friendly databases. Use them to your advantage. It has prevented me from making mistakes in the past, and it will continue to do so in the future.

As a side note, ROK Lending foreclosed on Aventura Eco-Offices Property Owner LLC and took title to the property (also a development site). River Tarpon LLC will eventually foreclose on 1515 Miami Development LP.

Any questions? Feel free to reach out.

In this article, I analyze VQ Everglades Investments LLC, VQ Everglades Units LLC, VQ Everglades Buildings LLC, and VQ Everglades Homes LLC v. CNP XXXV Ventures LLC. Case number 2025-020090-CA-01 in Miami-Dade County Circuit Court. VQ accused CNP of inflating the payoffs. As you’ll see, CNP took an aggressive position, which opened the door to the lawsuit.

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Background

In September 2014, Biscayne Bank originated 8 loans to VQ Everglades Buildings LLC, VQ Everglades Development LLC, VQ Everglades Investments LLC, VQ Everglades Units LLC, and VQ Everglades Homes LLC. The entities are all controlled by Victor Antonio Quezada Rijo, who also personally guaranteed the loans. The loans are also subject to a Cross-Collateralization and Cross-Default Agreement. In 2019, First-Citizens Bank & Trust Company (FCB) acquired Biscayne Bank. FCB eventually sold the loans to CNP in July 2025.

VQ states FCB sent them a demand letter on May 9, 2025, alleging a loan default due to failure to pay property taxes. VQ did not deny the allegations. They state the default was cured. County records show the property taxes were paid on May 16, 2025.

VQ then states CNP sent them a Notice of Sale and Notice of Acceleration on July 14, 2025. The Notice informed VQ that CNP had acquired the loans from FCB and was accelerating them due to loan defaults. The defaults included failure to pay the property taxes and cure code violations. VQ then requested loan payoffs from CNP. After receiving the loan payoffs, VQ alleges that CNP included fees that are “excessive, duplicative, unauthorized, or unsupported.”

Basically, CNP took an aggressive position on the default interest. They ran default interest from the day the code violations were recorded. VQ disputes that this is allowed. This is the crux of the lawsuit.

VQ’s Argument

VQ makes two arguments:

1. VQ and FCB executed Modification Agreements on June 17, 2024. The Modification Agreements fail to mention any default interest or outstanding amounts owed by VQ. Therefore, FCB waived its right to collect default interest before this date

2. VQ cured all the alleged defaults in the demand letter sent by FCB on May 9, 2025.

While there are modifications for each promissory note, the language is the same. For illustrative purposes, I am using loan number 534919 as an example. This is one of the loans in VQ’s lawsuit. Here is the code violation specific to this loan:

CNP is running default interest based on this code violation. What date should they use? The violation date, letter date, or recording date? I don’t know which date they used. If this were a large loan amount, the difference would be hundreds of thousands of dollars. Moreover, the loans have cross-default provisions. CNP could theoretically use a code violation on another property that occurred well before this one.

Onto the Modification Agreement. There are two key sections. VQ will point to page one and argue FCB verified the outstanding amount due as of June 17, 2024. It included just the Principal Balance.

CNP will argue that FCB did not waive any of its rights under the loan documents.

Based on just the Modification Agreements, I don’t think VQ has much of an argument. The lender clearly reserved their rights. However, we need to review the notice provisions in the loan documents. If the loan documents required formal notice, and it was not given, then the lender cannot apply the default interest back to the code violation date. More to come on this.

FCB’s demand letter clearly states that there are non-payment defaults, and they need to be cured (i.e., code violations).

FCB confirmed the loan was in default due to payment and non-payment defaults. They gave the borrower 90 days to cure before accelerating the loans. Per County records, the code violation lien specific to loan 534919 was released on July 23, 2025, within the 90 days. However, other code violations remain, and as previously noted, the loans have cross-default provisions.

There is one line in the demand letter I would point to if I were VG. “First Citizens is now applying the maximum allowable interest owed to the indebtedness of each Loan, as of May 9, 2025, and thereafter.” This is a decent argument that May 9th is the default date, but CNP can point to the reservation of rights clause in the demand letter:

Loan Documents

Loan 534919 was paid off on July 24, 2025. VQ agreed to pay the amount due but reserved its right to challenge the payoff. CNP recently filed a foreclosure complaint against VQ over the remaining loans. Therefore, we have access to the original loan documents. I had to assume they are the same as loan 534919.

A few notes so no one is confused:

1. Since loan 534919 has been paid off. It is not included in the foreclosure complaint by CNP against VG. Given that the loans were all originated at the same time and the modification agreements contained uniform language, I assumed that the original loan documents for each loan shared the same language.

2. Since there is a Cross-Collateralization and Cross-Default Agreement in place, CNP had to approve the release of the collateral attached to loan 534919. CNP could have declined to release the loan unless all debts were paid in full.

3. If you are a borrower, it is smart to pay off a loan, then challenge the charges. Avoid legal battles when the default interest is running. That being said, if there is insufficient equity, it is not possible.

I reviewed the loan documents. Typically, the loan agreement has detailed language regarding events of default and the corresponding notice provisions. These loan agreements do not have events of default, and the notice section does not discuss a timeline to cure defaults. It only addresses where notices should be sent:

The original promissory notes do contain language regarding default notices, and it is very lender-friendly:

It is clear that formal notice is not required. While the promissory notes do not state the events of default, the mortgages do:

I’m not an attorney or a judge, but based on my review of the loan documents, CNP has the right to apply default interest back to the original loan default. VG really can’t make the case that they were diligently pursuing the cure. The violations were in place for at least a year. In the case of loan 534919, the code violation was cured right before the loan payoff. VG had to clear the code violation to sell the property. They could have cured well before then, but chose not to take action.

Cost-Benefit Analysis

The VQ loans won’t provide a good cost-benefit analysis. Most of the eight loans were under $500,000. In Florida, the max default rate for commercial loans under $500,000 is 18%. For loans over $500,000, the max default rate is 25%. When looking at just loan 534919, the actual default interest is low. Here is CNP’s payoff from their Notice of Sale & Acceleration:

Perhaps CNP didn’t expect pushback, given the actual dollars that are at stake. If litigation is lengthy, the only winners will be the attorneys.

Let’s look at the same timeline, but with a $10 million principal balance. Assume there is plenty of equity in the collateral. The aggressive scenario uses the recording date from the code violation specific to loan 534919 as the default date. The conservative scenario uses FCB’s Notice of Default as the default date.

Assuming a payoff date of October 31, 2025, the difference is $2,328,767 in default interest due.

Is it worth pursuing? With the current loan documents, I think it is. $2.3 million is a substantial amount, and there is a strong chance we will prevail in court. If the loan documents weren’t as strong, I would probably err on the side of caution.

Remember, this analysis is specific to Florida. It may not apply to loans in other states.

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When seeking potential distressed opportunities, court filings can provide valuable leads. I use Westlaw to search court records. In July, a default final judgment was entered in Miami-Dade County Circuit Court against 2814 Collins Ave Development Group LLC in favor of Picassa USA Corp. Let’s see what’s going on.

2814 Collins Ave Development Group LLC owns the property at 2814 Collins Ave, Miami Beach, Florida. Why and how did I confirm this?

• Westlaw won’t tell you a judgment pertains to a real estate deal. However, the name of this defendant warranted an investigation. It is helpful when real estate investors name their LLCs after the property location.

• Paragraph 4 of the complaint explicitly stated that the defendant owns the property. I also confirmed it via Miami-Dade County property records.

A quick Google search reveals the property is currently listed for sale by Corcoran, asking $25.5 million. The listing states, “All structural and exterior work has been completed, allowing you to step into the final phase of the project permitting you the opportunity to design your own unique concept.” Here are some other property facts:

• Lot size is 13,939 SF

• Gross building size is 28,606 SF

• Year Built: 1924

• Year Renovated: 2020

• Property Type*: Multifamily

• Number of Units*: 25

*This is listed on Loopnet under Property Facts, but the listing description states it is approved for a mixed-use hotel/retail property with 44 suites and 7,500 SF of retail. Prior news articles confirm that the original intention was to develop into hotel/retail. Given that exterior and structural work have been completed, I’ll assume it must proceed as hotel/retail. Big picture: great location, but the project is partially completed.

Back to the default final judgment. The original complaint against 2814 Collins Ave Development Group LLC was filed in May 2025.

Exhibit 1 is a demand letter sent by Picassa USA Corp’s attorney requesting a ton of information. Here is the full list:

Obviously, if the project were going well, an investor wouldn’t be seeking so much information. We have multiple red flags that suggest we should keep digging:

1. Listing the property for sale when it’s only partially completed.

2. The investor inquiry and eventual lawsuit.

3. The default final judgment. Court records show the defendant never responded.

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Background Investigation

Once a lead is identified, it’s time to start investigating the public records. For Miami-Dade County, the following are very helpful:

• Miami Dade County Property Appraiser – allows you to search by property address, owner, or folio number.

• Miami Dade County Property Taxes – allows you to search the status of the property taxes.

• Miami Dade County Records – allows you to search the public records. This is particularly helpful in finding mortgages, liens, judgments, etc.

• Miami Dade County Clerk of Courts – allows you to search circuit court records.

• Florida Sunbiz – allows you to search for entities registered in Florida.

Miami-Dade County Records show the property was deeded to 2814 Collins Ave Development Group LLC from Bamar Investment of Florida Property Inc in December 2018. Notice that the addresses match.

Per the Florida Secretary of State (Sunbiz), both entities are controlled by Frank Ferrari. The demand letter was also addressed to Mr. Ferrari. According to the historical property records, Mr. Ferrari (or his family) appears to have owned this property for a long time. Below is from the Miami-Dade County Property Appraiser. You can click the links to see the deeds. This takes you to Miami-Dade County Records.

A day after the property was transferred to 2814 Collins Ave Development Group LLC, Maxim Capital recorded a $5 million mortgage.

The full $5 million was not disbursed all at once. Maxim likely provided the initial construction funding. How do I know? There is an Assignment of Mortgage from Maxim to New Wave in August 2021. Along with the assignment, New Wave recorded an amended and restated mortgage, which increased the loan from a $4 million principal balance to $11 million. This is all found in Miami-Dade County Records.

At this point, Maxim is out. To recap, Maxim originated the loan in December 2018 and exited the loan via an assignment in June 2021. Maxim had the loan for 30 months. The final UPB was only $4 million, which likely included capitalized interest. Permit records from the City of Miami Beach show 30+ unsafe structure violations during Maxim’s financing period. Construction progress had to be minimal.

County records show New Wave still has the mortgage recorded. A cross-default and cross-collateralization agreement was recorded in June 2023. It appears New Wave has another loan (or loans) with Mr. Ferrari.

For those unfamiliar, New Wave is a South Florida-based hard money lender. Their normal loan term is 12-24 months. The fact that they’ve been in this deal for 4+ years is another red flag.

Finally, a check of the property taxes reveals that 2023 and 2024 are unpaid.

At this point, I am confident that the loan is nonperforming. There are too many red flags.

So, why publish this instead of pursuing it? I have no interest in an NPL collateralized by a partially completed hotel. It's not my area of expertise, but it could be yours. If you like it, go get it!

Recent Foreclosures

As widely reported in various business publications, Key City has lost many multifamily properties to foreclosure. In September, Arbor foreclosed on its 6-property portfolio in Memphis. In August, lenders foreclosed on its 145-unit property in Bryan, Texas, called Canyon Village, and its 100-unit property in Joshua, Texas, called Joshua Landing. As I mentioned on Twitter, Key City’s lender on Meadows at Ferguson hasn’t foreclosed due to the condition of the property. Instead, they’ve elected to sue the Guarantors. The loan has been widely shopped. One of the guarantors even tried to buy it - see my thread. Multiple brokers have brought me the deal requesting note financing. Every time a new investor group gets involved, they run away. The property is a disaster. Here is a local news article.

Finally, per investor conversations, ~25% of Fund I assets and ~35% of Fund II assets have already been lost to foreclosure. Except for Joshua Landing, none of the properties listed above are in Fund I and II. Key City’s website, which now redirects to Lasater Capital, lists which fund owns each property. The Memphis assets were in Fund III, Canyon in Fund XI, and Meadows in Fund XII. The losses are astonishing.

Now, in an attempt to avoid additional foreclosures, Key City is issuing urgent capital calls. The following is based on emails and conversations with multiple investors.

Capital Call: Fund III

Key City’s 5-property portfolio in Montgomery, Alabama, is under threat of foreclosure. It is held in Fund III. The lender, Merchants Bank of Indiana, has already appointed a Receiver. Key City is now attempting to raise $5 million to exit receivership and stabilize the properties. What’s their rationale? The portfolio is worth $100 million once stabilized, and their all-in cost basis will be $75 million. Let’s look at the number. Here are the properties:

Based on the stated $100 million valuation, the per unit is $111,857. Now, I can’t say I’m a Montgomery multifamily expert. In fact, I’ve never been to Alabama (if and when I do go, it will be to Tuscaloosa for a Bama game). However, I am resourceful and found a current multifamily listing three minutes from Midtown Oaks. Matthews listed Governors Parc Apartments in February 2025. As of this writing, it still hasn’t sold.

The OM states that ~$6.5 million of capex has been spent to date, including new exteriors, roofs, stairways, mechanical, electrical, plumbing, windows, and parking lots. Plus, 60% of the interiors have been renovated. Here are the property rents:

Here are the T6 and Pro Forma Numbers:

Finally, here are the sales comps provided:

The Crexi listing states, “Year One offers a high 7% cap rate, with a clear pathway to achieving a fully stabilized 9% cap rate and double-digit yields by Year Two.” Based on the Pro Forma NOIs above, this suggests an asking price of ~$11.5 million or ~$50,000 per unit. Based on the sales comps, this seems reasonable.

Given Key City’s management history, I suspect their properties are in rough condition, but let’s assume they are in decent shape. Here is some back of the napkin math:

This is likely optimistic, but it paints a picture. If everything goes right and they stabilize the portfolio, NOI could be ~$4 million. This implies they are valuing the property at a ~4 cap. If you apply the asking cap on the Crexi listing, the value is ~$51 million or ~$57,000 per unit. This is at least defensible.

I quickly looked at the NOI under different rent and occupancy scenarios, holding the OPEX at 50% ):

The implied cap rate is based on their $100 million valuation. I have no idea where performance stands today, but I’m willing to bet it's closer to the upper left-hand corner than the bottom right-hand corner.

The portfolio won’t sell for anywhere close to $100 million. It won’t sell for anywhere close to their reported cost basis of $75 million. This will go back to the lender, who likely takes a large loss as well.

Key City is so desperate for cash that it is asking investors for $500,000 immediately while it attempts to raise the remaining $4.5 million. They are accepting checks as low as $5,000 and offering the following:

• Repayment priority over all Fund III equity (i.e., preferred)

• The greater of 50% ROI or 20% per year (not clear if this is measured as IRR or ARR)

Capital Call: Fund XI

Fund XI has also issued a capital call. Key City is seeking to raise $4.5 million to fund capex at three properties: The Hive Apartments in Dallas, Holleman Oaks, and The Dominik in College Station. They even provided investors with their new projected exit values:

I shouldn’t bother analyzing The Hive. While the original exit value was outrageous, the new expected exit is even more so. Let’s take a quick look anyway. Northmarq currently has a 212-unit, Class C multifamily property listed for sale, approximately 1.5 miles from The Hive. It’s been on the market since the end of July. Although it’s unpriced, it provides us with rental comps and a pro forma to work with. The stated market rent is ~$1,300 per month or $1.64 per SF. The comps have a unit mix of studios, one-bedroom units, and two-bedroom units. The Hive has some three-bedroom units, but this will not materially change the valuation. On Apartments.com, The Hive offers a wide range of prices for its units. For example, a 700 SF 1-bedroom unit has a price range of $1,240 to $2,220 or $1.77 to $3.17. The actual available units are listed at $1,240. This makes sense when compared to the comps. No one is renting a class C unit in Dallas for $3+ per SF.

Moreover, Northmarq has a pro forma year-one OPEX of 55% with a gradual reduction to 50% in year five. I’ll be optimistic and use rents of $1,400 per unit and 50% OPEX. Here is back of the napkin math:

Key City’s new valuation implies a ~3 cap. Again, let’s look at NOI under different rent and occupancy scenarios, holding OPEX constant at 50%:

Again, just completely unrealistic. To achieve a 6.5 cap, I must increase the rent to $2,500 per unit, set occupancy at 95%, and run OPEX at 45%.

Moving on to Holleman Oaks and The Dominik. College Station is home to Texas A&M University. There are a few sub 100-unit multifamily properties for sale in the area. I am also familiar with the market. Based on the current listings and my market knowledge, monthly rents per SF are $1 - $1.20. The total rentable SF at Holleman and Dominik is ~345K, and the total unit count is 438. Therefore, monthly unit rents should be between $780 - $945. Let’s run the same exercise as before, using rents of $945 per month, an occupancy rate of 95%, and OPEX at 50%.

Finally, rents and occupancy under different scenarios:

Obviously, unrealistic valuations.

Enough investor capital has been destroyed. No need to destroy anymore. It’s time to hand the keys back to the lenders and move on.

Fee Machine

One thing Key City has excelled at is enriching its owners, particularly the Lasatar bros. I’ve reviewed one of their funds’ operating agreements. Here is what investors were charged:

An investor told me they also charge a 10% construction management fee on all renovation work. To give you an idea of the fees generated, I reviewed the Memphis Portfolio investment deck.

I don’t have the final numbers, but this is what was presented to investors. The portfolio was 95% occupied at the time of acquisition. I assume they were able to collect at least one year of asset management fees before things went south.

The total equity required to close the deal was ~$12.6 million. Key City earned half that in fees!. They proceeded to lose all their investors’ capital.

By the way, they promoted this deal as having a 31% IRR with an average annual cash yield of 16%.

Closing Thoughts

There are many honest, hard-working multifamily GPs out there. Groups like Key City stain the industry. To move ahead, it is best to expose the bad actors.

I spent the entire article focusing on investor capital, but let’s not forget how many individuals and families were hurt by Key City’s incompetence. When you fail to repair properties, neglect to pay utility bills, and fail to provide a safe environment, you significantly impact the lives of others. Those who do not take that seriously do not deserve to be in this business.

The bridge loan origination process tends to be high volume, low conversion. More deals do not fit your criteria than do. The objective is to gather enough information to determine if the deal is viable. The client will rarely provide everything up front. However, before issuing a term sheet, the following information is preferred:

1. Collateral Address

2. Loan Request

3. Estimated Collateral Value

4. Status of the Property

5. Business Plan

6. Sources and Uses

7. Cash in the Deal

8. Loan Repayment Plan

9. Interest Payment Plan

10. Guarantor Information

Let’s review each item.

Collateral Address

Yes, I realize this seems obvious. However, brokers and borrowers sometimes forget to include the property address. Along with the address, the type of collateral should also be stated. If you are a mortgage broker reading this, the more details you provide, the better. The lender should not have to request the property address. It should be one of the first items listed.

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Loan Request

I am a firm believer that whoever submits the loan to the lender should make a specific request. I despise the request, “highest proceeds possible.” It is lazy and shows a lack of seriousness. At a minimum, the request should include:

• Desired loan amount

• Estimated collateral value

• Required term

With the loan amount and collateral, I can quickly calculate the LTV to ensure it fits my credit box. I will independently verify the collateral value, but this is a starting point. Rarely does an owner underestimate the value. If a borrower is seeking a loan at 80% LTV, I can quickly pass on the deal. The required term serves a similar purpose. I do not lend more than 24 months. If the borrower needs a longer term, then it is an easy pass.

While helpful, I am fine without a rate request. Based on the preliminary information received, I set rate expectations with the client. I ask upfront if this meets their expectations. I don’t want to waste time reviewing a deal that requires an 11% interest rate when the borrower wants an 8% rate. Ultimately, the client respects this as well.

Estimated Collateral Value

The client will provide their estimated value at the time of loan submission. It is my responsibility to check the value. Note that I will order an appraisal if a term sheet is issued and executed by the borrower. However, I need to confirm that the estimated value is realistic before issuing a term sheet. There are a few ways to do this:

• Call local sales brokers

  • Brokers are best suited to provide real-time market conditions. If you can connect with one, do so.

  • There is nothing wrong with cold calling brokers, but it is much more effective to get a warm introduction. For example, if I have a strong relationship with a retail sales broker in Miami, I can ask for an introduction to a sales broker in their Dallas office. You will get much better information with a warm introduction.

• Call Appraisers

  • The more you lend, the more appraisers you’ll work with. You can call them to assist or ask for a warm introduction to another appraiser who works in the same market as your deal.

  • If you decide to proceed with the deal, try to give them the actual appraisal assignment.

• Data Provider

  • This is a benefit of having CoStar or Crexi. You can quickly search for comps to get an idea of whether the estimated value is realistic.

  • Note that their data is not always correct. This is why you order an appraisal as part of the full underwriting process.

I strongly prefer talking to local brokers (and investors) about value.

Status of the Property

I want to know the current state of the property. Along with the business plan, this will help me structure the loan and quote initial terms. There are a series of questions that need to be answered:

• What is the occupancy today?

• What is the in-place NOI?

• What is the condition of the property?

• Does the property require capital improvements? If so, how will they be paid?

• Does the site require any entitlements?

The type of collateral will dictate the questions to ask. The more deals you look at, the better you’ll become at asking these questions.

Business Plan

Experienced borrowers present business plans that anticipate and address the lender’s concerns. As the lender, I want to know the current status of the property, the ultimate goal for the property, and the plan to achieve it.

The status of the property and the business plan overlap. I do not need a 3-page report. I'm looking for a concise outline of the strategy. Of course, it needs to be realistic. I don’t want a multifamily investor telling me they are going to renovate 300 units in 12 months.

As a bridge loan originator, I know I’m dealing with properties that are in a transition phase. Occupancy and NOI are likely below potential. I want to review the plan and timeline for stabilizing the asset. The borrower should provide supporting data. For example, if the property’s rents are significantly below market, leasing comps should be provided. Moreover, a summary of the current leases with their expiration dates should be provided to show the timeline for rent increases.

Sources and Uses

Every deal submission should include a Sources and Uses. This itemizes how the loan proceeds will be used. The borrower should provide one; however, you need to run your own. Let’s look at two examples.

Example 1: Purchase transaction

A borrower is buying a small bay industrial property for $10,000,000. The property is currently 75% occupied. The borrower plans to lease the vacant space and stabilize operations. Based on the information received thus far and my desired lending terms, here is what I am willing to offer:

Notice that the estimated appraised value is greater than the purchase price. Best practice is to calculate your loan amount off the lesser of the two values. This ensures that the borrower is putting the maximum cash into the deal.

Also, note that I mentioned the desired loan terms. My initial terms may not be competitive. If the broker or borrower receives better terms, I must decide whether to match or beat them. For example, this could be a lower rate, fewer points, a higher LTV/LTC, or a combination of these.

The Sources show the required debt and equity under my desired loan terms. In a purchase transaction, the borrower will always bring cash to the table.

The Uses show the deal costs. I do not need a specific breakdown of closing costs. I will get to it later in the process. I just need to estimate for now.

On a purchase transaction, the Borrower Equity is an input to balance the Sources and Uses.

A few comments:

• LTV is calculated off the appraised value of $10,500,000.

• LTC is calculated off the purchase price of $10,000,000.

• In-Place NOI

  • Ideally, the borrower sent a current rent roll and operating statement.

  • If the borrower has not, an estimate is fine for now. The in-place NOI will be verified during full underwriting.

• Debt Yield

  • The debt yield equation is NOI / Loan Amount.

  • It measures how much income a property generates compared to the loan amount.

  • Replace Loan Amount with Property Value, and you get the equation for the Cap Rate. Another way of looking at debt yield is the value we would be stepping into if we had to foreclose and take title to the property.

  • The higher the debt yield, the better.

  • I do not have a hard and fast rule for in-place minimum debt yields. More to come on this.

• DSC

  • Debt Service Coverage

  • The equation is Annual Debt Service / NOI

  • A DSC > 1 means the property can support the debt service.

    • All my loans are interest-only, so this is measuring the annual interest payments relative to the in-place NOI.

    • If the DSC <1, then the borrower will need to show ample liquidity, or an interest reserve will be required. More on this to come.

Example 2: Refinance Transaction

The borrower’s current loan is maturing and needs to be refinanced. The loan payoff is approximately $5,400,000. The estimated property value is $10,000,000. The borrower prefers not to bring any cash to the closing table. Moreover, the property lacks sufficient cash flow to service the debt, and the Guarantor is tight on liquidity.

This is a common situation in the bridge lending world. Often, borrowers will jump from one bridge loan to another. In these cases, the value of the collateral is of the utmost importance. If the borrower fails to perform, the property serves as your means of recouping the investment. The ability to originate this loan is dependent on the value of the collateral.

[In these situations, be very wary of the estimated collateral value. Experienced borrowers and brokers are familiar with the LTV limits of bridge lenders. They will overstate the valuation to make the deal work. While you will ultimately discuss value with brokers and obtain an appraisal, it is a waste of time when the estimated value is blatantly inflated.]

Let’s assume we reviewed the collateral and are comfortable with the valuation. Due to the lack of property cash flow and Guarantor liquidity, an interest reserve is required. The interest due on the loan is held back at closing and placed in escrow. Each month, the interest is drawn from the reserve to service the debt. The interest is repaid when the loan is paid off. I will revisit this example in the Interest Payment section.

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Cash in the Deal (“Skin in the Game”)

The amount of actual cash a borrower has in the deal is a critical factor. Not all bridge lenders share this view, but I place significant importance on it. It comes down to human nature. The more a borrower has a stake, the more likely they are to fight through challenges.

If you are a borrower or broker reading this, document all your costs. This isn’t an issue on purchases, but it can be an issue with refinances. You should be able to prove all the cash you have in a deal via invoices and bank statements. It will help with the loan proceeds. It also shows a lender that you are organized and professional.

Interest Payment Plan

• How will the debt be serviced?

• Does the property have sufficient cash flow?

• If not, does the borrower have enough liquidity?

• Is an interest reserve required?

This is a question the borrower and broker should be prepared to answer immediately. If the property had ample cash flow, the borrower would typically opt for traditional financing, which offers much better terms. There are cash flow issues if the borrower is talking to me.

Circling back to the $10,000,000 refinance example. The property’s annual NOI is $350,000, and the annual interest due under the proposed terms is $669,167. Therefore, the shortfall is $319,167. We do not have to escrow the exact amount of the interest shortfall. An approximate amount is fine, which is 6 months in this case. I refer to this as a partial interest reserve.

Generally, there are two ways to structure a partial interest reserve.

• Full payments commence after the reserve is depleted

• Partial payments are made over the life of the loan

If the property lacks current cash flow but has a specific rent commencement date or liquidity event approaching, then full payment after reserve depletion is a good solution. For example, assume the property in the refinance example is an empty retail big box (i.e., there is no NOI/cash flow). The borrower has an executed lease with a credit tenant; however, the rent does not commence for six months. We can offer to hold back 6 months of interest at closing. The borrower will begin making “out-of-pocket” payments in month 7, once the tenant’s rent commences. Alternatively, let’s say the borrower does not have a tenant lined up. However, the Guarantor is in the process of selling another property and will have a liquidity event soon. This structure would work as well. I prefer the former scenario, as it is much less risky.

If the property has some current cash flow, but not enough to service the full interest payments, a partial monthly payment is a feasible option.

In the refinance example, assume the property is a small bay industrial with 50% occupancy. The borrower plans to lease the vacant units, but it is unknown how long it will take to sign new leases and reach rent commencement. We can structure the loan with partial monthly payments.

Each month, 50% of the interest is paid via property cash flows (reminder that annual NOI was $350,000), and 50% is paid with the interest reserve. The interest reserve gradually depletes.

I prefer to collect interest on a monthly basis, even if it is a partial payment. It derisks the deal. I also find it forces the borrower to focus more. When a borrower sees an interest payment deducted from their account every month, it pressures them to execute their plan. When the interest is deferred, borrowers can get complacent.

Interest payments can be structured in endless ways. This is one of the benefits of private lending. For more on this topic, check out this article: Full Term Interest Reserve.

Loan Repayment Plan

• How will my loan be repaid?

• Does the borrower plan to sell the property or refinance?

• Is the plan realistic?

I don’t want to guess what the plan is to repay my loan. The borrower should have a clear strategy from the start. If the borrower doesn’t know, run away.

If the borrower plans to sell the property, I need to review market conditions. How long does this type of collateral take to sell in this specific market? For example, land will take much longer to sell than a multifamily property. CRE takes significantly longer to sell than residential. A non-land or development deal typically takes around 60 days to close once it is under contract (30 days for due diligence, then 30 days to close). Before that, the property must be marketed, and the buyer and seller must negotiate a Purchase and Sale Agreement (PSA). If there are no delays, the entire process could take approximately 120 days, or around 4 months. The borrower should give themselves significantly more time, as delays are common. That means if a property sale is the exit plan, it should be listed by the start of month 7 if the loan is only 12 months. I’ve seen too many instances where borrowers wait too long to list the property.

Real World Example: I am writing this in August 2025. The sunbelt multifamily market for properties built in the 1970s and 1980s is generally stagnant. The bid-ask spread is too wide. This is due to distressed Sellers, mainly syndicators who bought at the peak of the market. If a borrower approaches me about refinancing their existing debt with an exit plan to sell the property, I had better be very comfortable with my cost basis. There is a good chance I have to take the keys in 12 months (or sooner due to payment default).

If the borrower plans to refinance, I need to understand the typical terms of their takeout loan. A common strategy among bridge loan borrowers is to refinance into permanent financing (i.e., a long-term loan with a traditional lender such as agency, bank, credit union, life insurer, etc.). The terms vary depending on the lender, the type of collateral, and numerous other factors. For example, a borrower approaches me for a bridge loan secured by a 40,000 SF retail strip mall. The repayment plan involves refinancing into long-term financing with a community bank. Transaction details:

The borrower's business plan is two-fold:

1. Increase occupancy from 50% to 90%.

2. The current rents are under market and are month-to-month. Increase the rents from $15.50/SF to $18/SF

After researching the market and property, I agree that the plan is feasible. How are community banks underwriting retail collateral today? This will likely be their criteria:

• Max LTV: 65%

• Min Debt Yield: 10%

• Min DSC: 1.25x

There may be other requirements (e.g., deposits), but if the property can hit these metrics, the borrower will be able to find another lender.

Based on the business plan, here is what the new loan metrics would look like:

A few comments:

• The DSC assumes a loan with a 7% interest rate and 25-year amortization.

• I stress-tested the assumptions. If the occupancy increases to only 80% and the rent to only $16/SF, the new loan is still achievable (all else equal).

• If the borrower is executing the business plan, but is taking longer than expected, I typically have no issue extending the loan.

Guarantor Information

Before issuing a term sheet, I want some information on the Guarantor. Ideally, the Personal Financial Statement (PFS) will be provided. Some borrowers are hesitant to provide upfront. At the very least, I want the following:

• Background

  • What is their real estate experience?

  • Is it specific to this collateral type?

• Estimated liquidity

• Estimated net worth

The PFS is a borrower’s personal balance sheet. It gives us a snapshot of assets and liabilities. The higher the net worth and liquidity, the better.

If I review those 10 items upfront and proceed to issue a term sheet, I am confident the loan will close. While it may seem like a lot of information, the process is relatively quick when you are familiar with the market.

In December 2020, Ft Lauderdale Home Improvements LLC acquired the 7,700 SF waterfront lot for $1.5 million. Note that there was an older home on the lot, but the developer clearly bought it for the land (very common in South Florida). Here is a Google Earth image from early 2021:

At the time of the purchase, market conditions for luxury single-family development in South Florida were improving but had not yet reached their highest levels. 2021 brought historically low interest rates, high demand fueled by in-migration, and constrained inventory, particularly for new waterfront homes. In the luxury residential market, this combination of factors often leads developers to pursue spec development as they are confident that absorption will be swift and pricing will be strong. The plan was to build a modern waterfront estate spanning 5,765 SF. It would feature 7 bedrooms and 6.5 bathrooms. The acquisition timing positioned the developer well, but the competition would grow fiercer by the day. The sooner the home was built, the better the chance to maximize pricing.

Unfortunately, the developer did not obtain the new construction permit until March 2022. I reviewed the permitting records to understand why it took so long. Here is what I found:

The developer applied for the demolition permit almost immediately, but it was not granted until nearly a year later. I assume the seawall required repairs before the City would allow the existing home to be demolished and a new construction permit to be issued. Perhaps Florida’s environmental agencies had to sign off. This could have easily delayed the project a year. Notice that the original demolition permit in January 2021 was voided. The completed demolition permit was from January 2022.

In April 2022, shortly after the new construction permit was finally issued, the property was listed for sale with an asking price of $7 million. Developers often look to pre-sell new construction homes to reduce their risk and lock in a profit. In a hot market, this can yield strong results. However, by the end of 2022, this strategy had not succeeded, and the listing was withdrawn. The inability to secure a pre-sale at $7 million suggested either i) the market was beginning to slow or ii) the buyer pool for this price point preferred to see a finished product before committing. I believe the latter is more relevant in this case, as the South Florida market was still strong. It just wasn’t as strong as 2021.

In May 2022, the developer secured a construction loan from Seacoast Bank for $3.1 million.

Once again, I used public records to get an idea of how Seacoast structured the construction loan. I already established that the land acquisition price was $1.5 million. I estimated the construction costs through the permitting fees. Fort Lauderdale charges 1.75% of the construction costs as a permitting fee.

I pulled all the permit fees incurred by the developer. Here is a list:

This would make the total hard construction costs $1,787,482 or $310 per SF. I estimated the developer’s cost basis to be:

Every lender handles construction financing differently. I am unsure how Seacoast structured the loan. I had to make assumptions based on how other lenders would structure this deal. The land likely appreciated since acquisition, so the LTV would be lower than the LTC. Here are my assumptions on the rate and fees with Seacoast:

To calculate the interest due, I assumed $500,000 was advanced at closing. This would have provided liquidity to the developer while also keeping significant cash in the deal. I then used the dates when the Prime rate changed and increased the loan balance by 10% until the loan reached its maximum limit. The loan balance increase represents construction draws and interest accrued. The actual loan history will differ, but it provides a proximity for the construction financing.

Given the hard construction cost estimate and projected accrued interest, Seacoast financed 100% of the construction costs. This makes sense considering the borrower had adequate cash in the deal, and the as-completed LTV would have been quite low. The biggest risk for Seacoast was the developer not completing the project. If the house was completed, the probability that Seacoast would lose capital at $3.1 million was very low. Note, I have a feeling the developer went over budget, but I will cover that shortly.

If you look at the chart above, the 15-month permit delay had a meaningful impact. During this period, the Fed initiated one of the most aggressive rate-hiking cycles in modern history, with the fed funds rate rising significantly between March 2022 and mid-2023. If the permits were issued in January 2021, the developer may have saved hundreds of thousands of dollars in interest expense.

In October 2023, while the home was still under construction, the developer re-listed the property at $9.325 million. Quite the price increase over the original asking price of $7 million. Unfortunately, properties in the $6 to $10 million range were already showing signs of slower absorption. The listing remained active until July 2024 before being withdrawn. It was quickly re-listed in August 2024 with a new asking price of $9.15 million. It remained on the market at this asking price for the next 7 months.

In February 2025, the developer refinanced the Seacoast loan with Flatiron Realty Capital (FRC). FRC provided a $4 million loan.

I assume the Seacoast loan was approaching maturity. Moreover, the project was approaching its 3rd anniversary, and the Certificate of Occupancy (CO) had still not been issued. Seacoast likely wanted out at this point. The permit records indicate multiple plan revisions, which likely contributed to the delays.

The CO was eventually obtained in May 2025, three months after FRC closed.

Before estimating the developer’s return, let’s look at the transaction from FRC’s perspective. The recorded mortgage confirms the loan amount was $4 million. However, this wasn’t all advanced at closing. FRC likely structured the loan with an interest reserve, allowing the borrower to avoid monthly debt service payments.

At closing, FRC would have held back a 12-month interest reserve and its origination fee. FRC would have also financed the borrower’s closing costs. Therefore, the actual amount wired at closing was likely in the $3.5 million range. This is why I think the developer went over budget. I doubt FRC would have provided cash back. The refinance would have been cash neutral, so the Seacoast payoff may have been higher than $3.1 million. However, Seacoast may not have financed the overage, and the developer was forced to fund the project with equity. In this case, FRC may have provided cash back, allowing the developer to recoup some funds. FRC is in a good position. Their basis at $4 million is less than $700/SF and close to $600/SF on the amount they advanced. The probability of capital loss is low.

I estimated that they charged the borrower SOFR + 4%, or ~8.35%, as of mid-August 2025. Assuming a 1-year holding period and no changes to SOFR, the projected IRR to FRC is just under 12%. Given the risk, this is a solid deal.

Of course, lenders love leverage as much as borrowers do. FRC is no exception. The county records show they have a warehouse lender. First, FRC assigned the loan to one of its entities:

This entity then assigns the loan to Churchill MRA Funding I LLC (Churchill).

FRC likely uses FRC VTX Assets LLC to fund loans. They then assign to IronFund Loan Seller I LLC because it is the legal entity with the facility at Churchill. For those unfamiliar, Churchill provides financing to loan originators. FRC borrows money from Churchill to fund its loans. Again, I made assumptions about the loan terms:

Churchill would fund 75% of FRC’s loan. Put another way, Churchill contributes $3 million and FRC $1 million. Churchill’s interest rate is less than the rate FRC charges its borrowers. Therefore, FRC has positive leverage (as long as the loan performs). Churchill structures its facility as master repurchase agreements. Without getting into the weeds, it advances less than the $3 million. Similar to the interest reserve structure used by FRC.

By utilizing leverage, FRC can significantly increase its return. However, it also increases its risk. In my opinion, the risk is warranted as this is a high-quality deal for FRC.

Jumping back to the development timeline, in March 2024, one month after closing the FRC loan, the developer cut the asking price to $8.9 million. The home still did not sell, and the listing was withdrawn in July 2025.

In August 2025, the property was re-listed at $8.25 million, which is the current asking price as I write this article. $8.25 million equates to ~$1,430 per SF. For context, while new construction in Fort Lauderdale’s top-tier waterfront neighborhoods can certainly command more per SF, many competitive properties in the immediate area are listed under $1,300 per SF. The subject property’s location within Lauderdale Harbours is desirable, but it is not regarded as one of the top waterfront markets in Fort Lauderdale. That being said, it is a beautiful home:

The good news for the developer is that they will likely make a nice return. Here is their projected cost basis through February 2026 (when the FRC loan matures):

Here are the projected cash flows, excluding the eventual property sale proceeds:

Again, I had to make many assumptions. The land purchase and property taxes are accurate, as they are based on County records. I assume the FRC refinance was cash neutral, which is why there is no activity. As mentioned previously, this means the Seacoast payoff was higher than $3.1 million. FRC could have also provided the remaining financing. Either way, it shouldn’t significantly change the outcome.

For the developer, the return potential is strong under a range of scenarios. Assuming 6% selling costs, here are the projected returns:

This is likely why the developer has been patient with the sales process. While they want to sell it, they aren’t forced to sell it right now. $100 per SF in the sales price is a meaningful difference. I predict this will sell for around $1,200/SF.

Notice that FRC will likely have a better return than the developer, and didn’t incur any of the brain damage. The downside for FRC is that they’ll have to reinvest the loan payoff proceeds in the coming months. That requires them to find another good deal. In contrast, the developer had its capital invested for 5 years. Some prefer the former scenario, while others prefer the latter. That’s what makes the capital markets efficient.

There is also a Dropbox link in the listing section that has a video of the property:

dropbox.com/scl/fi/nt7b0o6uuzlnpi4310u65/1637-SE-14th-St-Full-Video.mp4?rlkey=katdrlyo84k30n8herm2z3q8k&st=93v3vvef&dl=0

I’m active in the luxury resi financing space. I find Zillow and public records to be useful tools for finding opportunities. When a new construction home has been sitting on the market for many months (or years), it is worth reviewing the development timeline and financing situation. If you represent a buyer in a transaction, this can give you an edge in the negotiation.

A bankruptcy filing provides a treasury trove of information. I was able to review many of the key documents, such as the Purchase and Sale Agreement, Operating Agreement, CBRE property valuation, and the monthly reporting packages. Throughout this deal analysis, I included key sections of the documents so you can see them for yourself.

Before diving into the deal, it is important to understand the company behind the entity that filed for bankruptcy, Penn Florida Companies.

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Penn Florida’s Distress and the Via Mizner Opportunity

Penn Florida Companies, a Boca Raton-based real estate investment and development firm, was (still is?) a prominent player in South Florida commercial real estate. Financial troubles started to brew in 2023 and eventually became full-blown legal issues in 2024. Several of Penn Florida’s properties faced foreclosure.

Let’s start with two office buildings near 101 Via Mizner: 101 North Federal Highway and 1 North Federal Highway. Palm Beach County records show City National Bank (CNB) was the original lender on both properties. Shortly after the loans matured in September 2024, CNB sold the loans to Kore Capital, which quickly filed a foreclosure complaint. Here are two sections of the 101 North Federal complaint:

While the foreclosure case was dismissed in May 2025, it resulted in a change of control. Florida Secretary of State records show Penn Florida’s CEO, Mark Gensheimer, was replaced as manager of the owning entities by local investor James Batmasian. This suggests Batmasian stepped in (likely injecting capital) to take majority control and prevent the office buildings from being lost. Here is the Notice of Dismissal:

and the Manager change:

Other Penn Florida holdings were similarly distressed. The company’s property at the Santa Lucia River Club (a golf club in Port St. Lucie) had a foreclosure complaint filed by CNB in October 2024 (still ongoing).

The company’s prime land parcel at 422 E Royal Palm Road (adjacent to the Boca Raton Resort golf course) also faces foreclosure after its loan was sold to Safe Harbor Equity.

While fighting these foreclosures, Penn Florida must have been attempting to refinance the debt on 101 Via Mizner. An affiliate of Blackstone was the lender. The loan was set to mature in December 2024, and $195 million had to be repaid. As I will show later, a significant paydown would have been required. This is likely why they were unable to refinance. Plus, Penn Florida’s other legal issues made it nearly impossible.

When Penn Florida failed to pay off the loan at maturity, Blackstone moved to enforce its rights. Instead of pursuing a traditional real property foreclosure (which in Florida can be lengthy), Blackstone initiated a UCC foreclosure on the equity interests of the owning entity, Via Mizner Owner I LLC. This was a savvy move by Blackstone and must have put tremendous pressure on Penn Florida.

In response, Via Mizner Owner I LLC filed for Chapter 11 bankruptcy protection in January 2025, which paused the UCC foreclosure via the automatic stay. The bankruptcy was essentially a defensive move to buy time, but it also opened the door for a court-supervised sale of 101 Via Mizner.

Bankruptcy Auction and Cardone’s Acquisition

Grant Cardone, via Cardone Capital, quickly emerged as the stalking-horse bidder in early 2025. For those unfamiliar, the stalking-horse bid sets the initial purchase offer to beat. Per the bankruptcy filings, Cardone’s opening bid was $230 million with a $20 million deposit.

It appears that the only other bidder was Crescent Heights (CH), which offered $236.5 million. However, the bid was eventually withdrawn. The bankruptcy filings had a draft PSA and emails from CH’s attorney. The emails seem to indicate that CH wanted a longer due diligence period and was willing to pay for it. CH is a very experienced developer. I believe they wanted more time to analyze the condo conversion process.

To secure the deal, Cardone increased its offer to $235 million. The bankruptcy court approved Cardone’s bid, and the sale closed on July 18, 2025.

While Cardone is best known for syndicating multifamily investments, this would not follow his typical playbook. Instead, the business plan was a condo conversion as outlined in the Operating Agreement.

Mizner 366 JV Operating Agreement

To acquire the property, Cardone formed a joint venture (JV) with Penn Florida named ‘Mizner 366 JV LLC’. After all its legal troubles, Penn Florida was able to retain a stake in the property. However, they were significantly diluted, owning just 7.4% of the entity (obviously better than zero). Cardone owned the other 92.6%.

Note that the Camino Member is Penn Florida. They did not contribute $15 million in new cash to the deal.

While the JV was formed to acquire 101 Via Mizner, it would also acquire $100 million in BTC.

I was and still am skeptical of including BTC in a real estate transaction. If I want BTC exposure, I can easily buy it. I don’t need Cardone to buy BTC and charge me an AUM fee. It also adds volatility to an already risky real estate deal. That being said, Cardone structured it in a way that gives him a call option. More to come on this shortly. Here are the assets of Mizner 366 JV LLC:

With $335 million in assets and only $205.2 million in equity capital, how was the remainder financed? Arbor provided a $155 million bridge loan. This was outlined in the Operating Agreement:

The loan was also recorded in Palm Beach County:

Therefore, the final capital stack was:

As you’ll see, the overcapitalization was required as the property will operate at a loss and incur condo conversion costs. The risks in this deal are starting to emerge. Condo conversions are already difficult. Add in a 3-year bridge loan and a volatile asset like BTC, and the risk is amplified. Before moving to the property analysis, let’s analyze the special covenants that govern the condo conversion strategy and provide various options to both parties. Here is section 4 of the Operating Agreement:

• Camino Purchase Option:

  • This is Penn Florida’s purchase option. They can exercise the option anytime within the first 12 months of closing and buy 101 Via Mizner for $300 million.

  • Penn Florida must give Cardone at least 90 days’ notice and escrow $5 million. The escrow can be secured by Penn Florida’s membership interest instead of cash, and it would be credited to the purchase price at closing.

  • If Penn Florida fails to close, Carone keeps the deposit or reduces their ownership interest in the entity.

  • Commentary: I don’t see Penn Florida exercising this option. As you’ll see when we get into the numbers, you would have to be an extreme optimist to acquire the property for $300 million. The one caveat is the profit split on the condo sales. If the conversion takes place within 18 months, Penn Florida is entitled to 50% of the net sale proceeds over $300 million. If the conversion takes place after 18 months, the net sale proceeds are allocated by the membership interests. Penn Florida could exercise its option to force Cardone’s hand, but they are at risk of him declining his option and allowing Penn Florida to buy the property.

• Cardone Option

  • If Penn Florida exercises its purchase option, Cardone has a counter option available. By giving 30 days' notice after Penn Florida’s exercise, Cardone can reject Penn Florida’s purchase attempt and proceed with the condo conversion under the JV as originally planned.

  • If Cardone exercises this option, Penn Florida will be entitled to 50% of the net condo sales over $300 million, as this will all occur within 18 months.

  • Commentary: I think Cardone would welcome Penn Florida exercising its purchase option. Setting aside the BTC price, the profit on the real estate transaction would be over $60 million, and the return would be over 27%. I don’t know what his promote structure is with his investors, but this would be a homerun for him. If Penn Florida fails to perform, he dilutes them even more. Moreover, if Penn Florida doesn’t exercise its option, Cardone has little incentive to exercise his until month 19. That is when the profit split reverts to the ownership interests. Of course, this all comes with risk. The Arbor loan is only 36 months. If the Boca Raton condo market is struggling, it could be difficult to find new financing.

• BTC Investment and Call Option

  • If the property is sold in its entirety to Penn Florida under the buyback option (meaning the condo conversion doesn’t happen and Penn Florida takes the building), then Cardone has a call option to purchase Penn Florida’s entire interest in the JV’s remaining assets (i.e., its Bitcoin) for an amount equal to Penn Florida’s cost basis.

  • If Penn Florida does buy the property, the distribution of that sale’s proceeds is structured such that Penn Florida only gets distributions until it has recovered what it invested in BTC, after which any remaining sale proceeds all go to Cardone.

  • Commentary: Again, I still don’t like mixing BTC with a real estate transaction. However, this is clever. Cardone essentially takes all the upside if BTC appreciates. Penn Florida (and Cardone’s investors) takes the downside if BTC depreciates.

I have certainly been critical of Cardone and his social media retail fundraising, but credit where credit is due. This deal was structured strongly in his favor. I suspect he was aware of Penn Florida’s struggles beyond 101 Via Mizner, which he likely used to negotiate this deal. However, this is all irrelevant if the business plan fails.

Property Performance and Conversion Analysis

According to the bankruptcy filings, the building was only 84% leased as of February 2025. While historical financials were not included, monthly financial reports were required as part of bankruptcy proceedings. Here were the January to May 2025 operating results:

The annualized net operating income (NOI) was about $8.3 million. I believe the lender started sweeping the rents in April 2025, which is why the numbers are distorted. The bank accounts showed actual collections to be significantly less than booked revenue. NOI of $8.3 million equates to an in-place cap rate of 3.5% on the $235 million purchase price.

When factoring in the $155 million acquisition bridge loan, the property is cash flow negative. I don’t have loan terms, but I assumed the following:

This is one of the reasons the JV had to overcapitalize the deal. I built a pro forma to look at the potential NOI based on stabilized performance, which assumed 95% occupancy:

The unlevered yield on cost (UYOC) is still just 4.4%. This deal simply does not work as a multifamily property without a significant basis reset. Even Arbor’s $155 million loan doesn’t look great on pro forma NOI. The debt yield is just 6.7% and the DSC is 1.05. This is likely why the $15 million paydown was required. At $140 million, the debt yield is 7.4% and DSC is 1.15.

Finally, to illustrate why Penn Florida struggled to refinance the property, even the pro forma NOI couldn’t size the loan to reasonable proceeds.

DSC would have been an issue at this loan amount. Regardless, the Blackstone loan was $195 million. A significant paydown would have been required. The only option was the condo conversion play.

That brings us to the CBRE valuation from July 2025. CBRE valued the asset at $334.5 million, as shown here:

Bankruptcy filings show CBRE was paid a commission of $618,000. I’m not accusing CBRE of wrongdoing, but that certainly influences how an asset is valued. Remember, there were only two bidders, and both were under $240 million.

Let’s start by analyzing the retail pricing, which seems quite optimistic. As of July 2025, the retail space has a single tenant. Citibank occupies 30% of the retail SF, and the rest is vacant. The CBRE valuation contains the occupancy information:

The building is nearly 10 years old. This isn’t a lease-up story. It’s a lack of demand. The building, while in a great location for residential, is at the southern end of Boca’s downtown retail corridor, with less foot traffic than retail further north on Palmetto Park Road. Selling retail condo units is difficult. Investors and businesses are hesitant to buy condo-ownership of retail space in a residential building because the condo association (led by residential owners) can impose rules or fees that complicate operations. Moreover, there is limited dedicated parking for retail. This affects employees and customers. The probability that the units sell anywhere close to $24.5 million is very low. I’m willing to bet that if you ask Penn Florida why ground-floor retail was even included in the development, their answer would be that the City mandates it. Their preference would have been more residential units.

Moving on to the residential units, as this is what makes or breaks the deal. I’ve already established that the value isn’t there as a multifamily property. Without a significant basis reset, the property has to be converted to condos. Here was the CBRE analysis:

I’m not sure what CBRE was trying to imply. I assume it’s worth $761/SF or $310 million today, considering you can convert it to condos and sell them for $1,250/SF or $508.9 million. The sensitivity analysis also suggests that $761/SF was a reasonable price due to the spread between for-sale condos.

Say what you want about Cardone, but Crescent Heights is definitely a smart and experienced real estate investor and developer. Their max offer was under $240 million, and it included the retail component. That should tell you everything you need to know about this valuation. Before discussing my condo conversion financial analysis, we have to analyze the Boca Raton luxury condo market.

Boca Raton Luxury Condo Market Overview

The viability of the condo conversion rests heavily on the strength of the Boca luxury condo market. Boca is known for its affluent buyer pool and has seen high price points for new luxury condos in the past few years. Downtown Boca, in particular, has added several high-end residential projects that have pushed prices well into the thousand per SF range. However, there are signs the market has cooled from the Covid boom. Through June 2025, inventory of luxury condos in Boca rose by 50% YoY, and average days-on-market (DOM) now exceed 300 days for high-end units. Supply has been increasing, and buyers are taking longer to make purchases, suggesting a shift toward a more balanced or even buyer-favorable market.

Let’s look at comps. Here were the comps CBRE used:

Here are my comps followed by commentary:

• Alina Residences

  • Built in 2024

  • Luxury condos in downtown Boca

  • Located on the Boca Raton Golf Course, with many units having golf views

  • Superior building to 101 Via Mizner

    • New construction

    • Significantly better amenities, including a rooftop pool with ocean views

  • 101 Via Mizner units won’t price close

• Tower 155

  • Built in 2020

  • Luxury condos in downtown Boca Raton

  • Super building to 101 Mizner

    • Newer construction

    • Better amenities

    • Arguably a better location

  • 18 units currently for sale

    • Units are taking over a year to sell

    • Units 822 and 919 have been on the market for over 16 months and are still asking over $1,00/SF

    • Units 618 and 1215 sold in March 2025 in the mid and low 900’s per SF

• 200 East

  • Built in 2009

  • Luxury condos in downtown Boca

  • Good comp for 101 Via Mizner

    • While 7 years older, the amenities were just fully renovated, including the lobby, fitness center, and clubhouse

    • Great location on Mizner and Palmetto (more noise, but central location)

  • Recent sales vary widely

    • Fully renovated units have sold up to $930/SF

    • Original units have traded closer to $700/SF

Based on the comps, for 101 Via Mizner, I have a ceiling price of $950/SF and a floor price of $700/SF. My base case is $850/SF, which equates to an average sales price of $850,000 per unit. I’m concerned about adding 366 units to the downtown Boca condo market. It is already slow, and this price point doesn’t appeal to ultra-high net worth buyers. While there will certainly be cash buyers, financing will play an important role. Therefore, the level of interest rates will affect transaction volume.

Condo Conversion Financial Analysis

Here are my base case assumptions and pro forma returns based on them:

While this seems feasible, it still feels a bit aggressive. If the market continues to slow, prices will eventually fall. Here are the unlevered and levered IRRs under different scenarios:

The top row represents the gross residential sales price per SF, and the left column represents the number of residential units sold per month. Notice that the levered IRR is less than the unlevered IRR in many scenarios, including the base case. Debt is not accretive if the sales price per SF and/or the number of units sold per month is too low. While the condo conversion cost and timeline could materially affect the deal, the residential sales price and volume will more than likely drive the results. In my opinion, hitting the downside is more likely than the upside (i.e., the top left quadrant is more likely than the bottom right quadrant).

Other Deal Risks

Converting 101 Via Mizner from apartments into condos will be a challenge. Along with the financial uncertainties, there will be legal and operational risks.

• Legal Conversion Process:

  • In Florida, creating a legal condominium out of an existing building involves preparing and filing a condominium declaration and plat, creating a condominium association, and obtaining approval from the state’s Division of Florida Condominiums. This obviously takes time and cost money.

  • After the 2021 Surfside condo collapse, Florida implemented more stringent condo laws around building safety inspections and reserve requirements. Although 101 Via Mizner is relatively new, it will be nearing 10 years old by the time it becomes a legal condo. This may trigger certain milestones, such as structural inspections.

  • Florida also mandates periodic inspections for condos and adequate reserves for structural elements. Cardone and Penn Florida will need to commission engineering inspections to ensure there are no latent defects or deferred maintenance issues. If any are found, they must be addressed upfront as part of the conversion.

• Capital Improvements

  • 101 Via Mizner was delivered as a luxury apartment in 2016, so its finishes and amenities are 9 years old. While the finishes may have been high-end for rentals, a luxury condo buyer may expect more in 2025. Interior upgrades may be required, and that’s not factored into the budget.

  • The same goes for the upgrades to the common areas and amenities. This is one of the reasons I think 200 East is a better comp than Tower 155.

• Operational Challenges

  • Running the property during the conversion process will be difficult. As units are designated for sale, the building will stop renewing leases. Over time, the rental occupancy will fall from 84% to zero, resulting in a loss of rental income and increased carrying costs before units are sold.

  • Ownership may target investors to buy the condos and try to sell them on a renter being in place. However, the in-place rents won’t support an owner's carrying costs.

  • Showing occupied units is possible but can upset tenants and result in a poor buyer experience, so it’s not ideal.

Conclusion

Buying a distressed asset does not always equate to acquiring it at a favorable basis. Based on my analysis, Cardone and Penn Florida did not get a steal. I suspect the market felt similarly, as evidenced by the lack of bidders above the stalking-horse bid. I wouldn’t invest in this deal. From a purely real estate investment standpoint (i.e., no consideration of the BTC investment), the risk of capital loss would be low without the Arbor loan. I do not like the use of debt. The business plan will take longer than 3 years, which means the debt will have to be refinanced. The structure of the loan adds unnecessary risk to the deal. Surely, there are better financing options available in the market.

There are better real estate investment opportunities with much less financial, operational, and legal risks.

And, I have no desire to pay Cardone a promote if BTC continues to appreciate.

Funding Source

I do not operate a debt fund. My partners are Ultra High Net Worth (UHNW) investors. Not only do they have substantial assets, but they are also sitting on a ton of cash. They are seeking opportunities to deploy that cash into high-yielding, short-term investments. CRE bridge lending is an attractive option.

They could invest in a debt fund, and some do. However, I’ve found UHNW investors want:

• Control

  • This is by far the number one factor. My partners are self-made. They’ve always called the shots (and made the right decisions). They prefer not to outsource the decision-making.

• Flexibility

  • If they invest in a debt fund, their money is committed for a lengthy period. By funding deals themselves, they have the option to pursue better opportunities if they arise.

• Higher Potential Returns

  • I will touch on this more, but the return potential is higher. They aren’t paying servicing fees and tend to have better deal splits.

• Work

  • They enjoy reviewing deals and spending time analyzing them. The individuals are usually “retired”, sold their company, or are no longer involved in the day-to-day operations.

Everything discussed moving forward is from the perspective of this funding source.

Alternative Investment Options

The yield on a bridge loan must be superior to alternative investments. After all, bridge loans come with risk, and significant time and effort are required to source, review, and close them. Bridge loans are short-term, typically 12 months. An easy alternative is to invest in: money market funds, bank CDs, T-Bills, or commercial paper. They are all short-term and very low risk. As of early July 2025, yields are generally in the 4 - 4.50% range. The lending rate will be much higher, but this is the starting point.

I didn’t include longer-duration fixed-income securities or mortgage REITs, as capital losses are more likely due to changes in interest rates and/or credit quality. Of course, this could also result in a positive outcome. However, the appeal of bridge lending is principal protection plus an attractive yield.

Competition

Like most products, competition influences what I can charge. If I try to charge a rate substantially above market, I’ll only see the worst deals (i.e., the ones everyone else passed on).

Pro tip: There are two types of lenders you come across. Those who offer to take care of you on referrals, and those who don’t. Take a guess who gets more deal flow. I am a firm believer in compensating the person who brought you the deal. To be clear, if a lender refers a deal and it closes, you compensate them from the lender side (i.e., a piece of the origination fee).

Collateral Type, Collateral Location, and LTV

Unless you are brand new to the industry, this is obvious. Class A multifamily in a primary market with a 50% LTV will always price better than a rural motel seeking 75% leverage.

Return Allocation

It would be unusual to see a UHNW investor sourcing bridge deals. At least not consistently. Deal sourcing and reviewing is a time intensive process. Ask any CRE originator/lender their ratio of closed deals to opportunities reviewed. The figure is low. That’s the nature of the business. When you have the capital, you can have someone else source, structure, underwrite, and close the loans (of course, with your input). That’s where I come in. Now, this comes at a cost. The potential deal splits are endless. Let’s look at a few examples using this loan:

The term "Partner" refers to the person who sources, structures, underwrites, and closes the deals. The cash flows are allocated based on a negotiated split. The key term is cash flow, as it aligns the interests of both parties. As cash is received from the borrower, both sides take their cut.

A similar concept, but the points are shared. The Partner is compensated at closing, then the interest is shared through the life of the loan. Under the Cash Flow Allocation, the origination fee isn’t earned until the loan is repaid. Interests are still aligned, but it allows the Partner to earn (or “eat”) for closing the loan. There are advantages and disadvantages to both sides. Imagine if the loan becomes nonperforming and default interest begins to accrue. Assuming the loan eventually pays off, which deal is better? It depends on whether you are the Partner or UHNW.

A pref and promote structure is also feasible. This gives the UHNW first claims on the cash flow, but limits their upside. Bridge loans tend to generate a higher return than the origination fee and stated note rate, due to late charges, default interest, extension fees, and other similar fees.

As you can see, the returns to the UHNW are similar under the three scenarios. However, as interest rates change, the benefits accrue more to one side. If rates increase, the Partner benefits more. If rates decrease, the UHNW benefits more. The degree of benefits depends on the structure. For example, if a loan becomes nonperforming and has a 25% default rate, you want to be the Partner under the Pref and Promote scenario.

The key point is that the UHNW investor is looking at their net return. This will significantly influence how the loan is priced, as their capital requires a suitable return given the deal-specific risk.

Leverage

This may not apply to all UHNW investors. Typically, leverage is only utilized when sufficient cash has been deployed. For example, if you are looking to invest $50M in bridge loans, it doesn’t make sense to put 50% leverage on the first $10M loan. You are only investing $5M of your cash and still have $45M more to deploy. As you approach your full allocation, it may be beneficial to consider using leverage. It will free up capital to originate more loans and (potentially) increase your returns. It should be noted that with this type of volume, it is likely becoming a full-on business venture.

Community and regional banks are active warehouse lenders in the sub-$200M bridge lending space (i.e., lenders originating $200M or less annually). Even with a limited lending track record, a UHNW investor can secure a warehouse line with sufficient deposits and a personal guarantee (although it is likely the bank will require a review process for every draw, at least initially). Banks tend to price their warehouse lines at the Prime rate plus a modest spread, typically ranging from 0 to 50 bps. As of early July 2025, the Prime rate was 7.50%

When using leverage, the goal should be to lend at least 300 bps over the borrowing rate. Therefore, if I am paying 8% on my warehouse line, I should aim to lend between 11 and 12%. Moreover, the warehouse line is usually a floating rate. When originating a loan, I must decide whether to offer my borrower a fixed or floating rate. If I originate a floating rate, I can lock in the spread. In my experience, borrowers prefer a fixed rate. If I lend at a fixed rate and Prime decreases, I make more money. If Prime increases, I make less money. I know many bridge lenders who got squeezed in 2022 due to the rapid increase in Prime.

Conclusion

With this particular capital source, pricing a loan is more art than science. Capital availability, alternative investment options, partner splits, and deal-specific risks all play a factor. If you are a broker or borrower, I recommend frequent check-ins with groups that invest with UHNW investors. You may be able to get a great deal when you least expect it.

• Examine the defaults and interpret the loan documents

• Review the collateral

• Discuss how I priced the deal

The Loan and Defaults

The loan was originated in Q3 2021, with an original principal balance of ~$ 7 million. Within a year, the borrower was having payment issues. From Q2 2022 to Q4 2024, the loan was sub-performing. Payments were frequently late. The payment history showed late charge assessments every month. Somehow, the borrower managed to make the full principal and interest (P&I) payment before the end of each month. The borrower even paid the late charges.

In Q1 2025, this changed. The borrower stopped making payments, and the lender ran out of patience. Here was the loan balance at the end of Q1:

The Other Charges consisted of protective advances, specifically for insurance. The borrower failed to renew the liability and property insurance in May 2024. The lender had to force-place insurance (i.e., pay the premium themselves to ensure their collateral was protected). This is a costly outlay for lenders, as force-placed insurance is very expensive. The collateral was also in Florida, so the premium amount escalated quickly.

I also noticed the 2023 property taxes were delinquent. In Florida, property taxes are due by March 31^st of the following year. This is another loan default. Therefore, the loan had three defaults: delinquent loan payments, delinquent property taxes, and failure to maintain property insurance. If the defaults could be enforced retroactively, significant default interest would have accrued:

While all three are enforceable defaults, the notice provisions in the loan documents are key. If notice is required and the lender failed to provide it, then the default interest cannot be applied retroactively.

[Note that the notice provisions are not critical to this deal. As you will see, there isn’t much, if any, equity in the collateral. Therefore, the default interest is irrelevant. Please feel free to skip ahead. For those who enjoy reading and interpreting loan documents, read on.]

The notice provisions in the loan documents are murky. There is contradictory language. If there was sufficient equity in the collateral and I tried to apply default interest retroactively, I would expect it to be litigated.

The Loan Agreement contains the notice provisions. Excerpts from the Loan Agreement:

Definitions Section:

Section 10:

[Borrower and Lender Contact Information]

That’s the entirety of section 10. The only other commentary on notices in the Loan Agreement or any other loan document is in Section 9:

I know aggressive NPL buyers who would apply default interest retroactively. They may even issue the notice as soon as they acquire the note, then apply the interest when the default isn’t cured. This strategy makes more sense when you have in-house counsel to handle the litigation. If you do not and lose in court, it will hurt.

In my experience, private lenders typically have more stringent loan documents than banks. Private lenders tend not to negotiate loan documents, so their language is uniform and generally favors them. Bank lending tends to be more relationship-driven, and therefore, borrowers can negotiate for more favorable provisions.

Additionally, experienced private lenders understand the importance of servicing. If you haven’t read The Life of a Bridge Loan, I recommend doing so. It discusses the nuances of loan asset management and servicing.

Collateral Review

The loan was secured by three pieces of collateral: a 5K SF luxury single-family home, a 30K SF office building, and 10 acres of land. Let’s start with the single-family home, as that was the easiest to value.

While the home wasn’t the Guarantor’s primary residence, he did use it as a second (vacation) house. The lender required him to deed the property into an LLC, sign all necessary affidavits, and use it as collateral for the loan. Therefore, it was considered an investment property.

The house was 5K SF and sat on nearly an acre. It was also in a desirable location and had extensive waterfrontage. After reviewing the comps, the lot was likely worth as much as the home. I valued the property at $3.9M.

The office and land were more challenging to value. The Guarantor’s business occupied the office building (i.e., this was a PropCo-OpCo structure). If you are unfamiliar with this terminology, I will cover it in a future post. Given the status of the loan, I had to work off the following assumptions:

1. If the borrower is unable to make loan payments, it is typically due to financial stress within the business.

2. If the business isn’t profitable and/or has cash flow issues, operations will eventually cease.

3. If operations cease, the business no longer needs the office building.

This is the long way of saying, if I foreclose, I’m inheriting a vacant office building. This means I won’t receive any rental income, and I’ll incur additional costs. The extent of the cost is unknown. For example, I will have to pay property taxes, insurance, and utilities. If I want to find a new tenant(s), I will also incur tenant improvement allowances and leasing commissions.

To gain a better understanding of the market, I had a friend introduce me to a local sales broker. Given the layout, it would be challenging to subdivide the space. Therefore, whether the building was offered for lease or sale, it was likely to be occupied by a single user. The broker believed he could sell the property for $2.7M.

The land was intriguing. It sat next to the office building, but it was individually parceled and had General Commercial zoning. This allowed for a wide variety of uses. Additionally, the traffic counts were solid, national retailers were down the street, and a hospital was nearby. At 10 acres, it was a nice-sized site. Unfortunately, only a portion of the site was developable. I discovered this after talking to a developer friend. I had to adjust my value expectations significantly to just $1.1M. Therefore, I concluded that the total value of the collateral was $7.7M. The lender’s appraisals valued the collateral at over $11M. This is always a fun discussion with the lender.

[When buying NPLs, industry relationships are gold. The ability to obtain input from specialists is the difference between potential homeruns and disasters. I can’t stress the importance of this enough.]

Deal Pricing

With a collateral value of $7.7M and a loan balance of $7.1M, there isn’t much equity in the deal. In fact, after deducting legal fees and selling costs, there is no equity remaining. Additionally, I need to make a sufficient return. This means a discount will be required. With this particular collateral, I had no intention of holding it long-term. The game plan would be simple: acquire the loan, initiate foreclosure, and sell off the properties (assuming I take title).

I have to make many assumptions in this scenario. First, the foreclosure timeline and legal fees. Given that the borrower operates his business from the office, I must assume bankruptcy is on the table. The process could take longer than 15 months and incur more than $100,000 in legal fees; however, it serves as a fair starting point for the analysis.

Second, holding costs must be factored into the analysis. At this point, I focus on the material costs: property taxes and insurance. The 2023 property taxes are currently delinquent. 2024 will become delinquent a day after the projected closing date. 2025 and possibly beyond will likely be my responsibility as well. I could delay paying the taxes as a tax lien sale wasn’t imminent. However, I will owe them either way when the property is sold. They must be factored into the analysis.

Insurance has to be placed immediately. When a lender force places insurance, it can rarely be assumed by another lender (note buyer). Therefore, new coverage will have to be placed. It must remain effective through the eventual disposition date. This is a large cost, especially in Florida.

Here are the costs I know I will incur:

• 2023, 2024, and 2025 property taxes on all three properties. I will likely owe 2026 and possibly beyond as well.

• 2025 insurance. As discussed, I will have to place this immediately. I will likely have to renew the policies in 2026 and possibly beyond.

I like to remind my counter parties of these expenses when negotiating the acquisition price.

Third, for each property, I have to project the sales price, sales timeline, and selling costs. The single-family home is the easiest to move. The office and land will be more difficult. I already valued the collateral, and the selling costs will generally be in the 8% range (a couple of percentage points either way isn’t going to affect the outcome materially). The timeline is important. The longer I hold the asset, the more costs I incur. My return deteriorates every day.

Note that based on my assumptions, I have to update the corresponding holding costs.

The fourth and final step is to develop the cash flow analysis and determine the return metric. I prefer to evaluate the unlevered IRR, equity multiple, and deal profit. I always start with an unlevered analysis. If an NPL doesn’t work without leverage, it won’t work with leverage. Think about the number of assumptions I had to make. I can’t say with much confidence that the assumptions will come to fruition. There are just too many unknowns. If I have to lever up the position to hit my return metrics, it is a disaster waiting to happen.

[Always stress test the assumptions with a focus on the downside. In what scenario(s) can I lose my capital?]

Once the cash flow analysis is built, solve for the purchase price using your minimum required return. Given the risks, I wanted to earn at least a 25% IRR on this deal:

Based on my desired return (and metric), the loan purchase price would be ~$4.1M. That equates to a ~40% discount to UPB. The lender rejected this offer; however, they did counter and were willing to take a loss. I didn’t think the projected return was worth the time, effort, and headache to get involved. Often, patience pays with NPLs. Let the lender start spending real dollars on litigation and holding costs. Hang around the hoop. These deals often come back.

Any questions? Let me know in the comments or send me an email.

Scenario:

A prospective borrower was purchasing two industrial properties for $15M. The broker requested 65% LTC or a $9.75M loan amount.

Property A was leased to a single tenant at $7.20/SF, net. The lease ran through October 2030, and the rate was fixed. Property B was vacant. The business plan was to fill the vacancy with a single user after closing. The deal required a bridge loan.

The existing lease was a true triple net lease. Therefore, annual base rent = NOI. At this point, I was already skeptical, given the going-in cap rate was 1.54% and the existing lease was in place for another 5 years (i.e., ~40% of the space had no immediate upside).

I knew an industrial broker in the market, so I gave him a quick call to get an idea of the market rent. It was determined that $9.50/SF, net would be achievable. I didn’t have current OPEX figures, so we had to assume it would be in line with the comps.

With my bridge lending program, the maximum term is 24 months. It was unlikely that NOI would significantly exceed ~$700K during the term. At the purchase price and requested loan amount, this equates to a 4.64% cap rate and a 7.14% debt yield, respectively.

Even if the existing tenant left and Property A could be leased at market rent, the numbers still didn’t make sense. The cap rate would only jump to 5.13% and the debt yield to 7.89%. Our borrower would still be underwater, and we would be lucky to find a buyer at our debt yield in this submarket.

Besides valuation issues, this raises two immediate questions:

1. How will the borrower service my debt?

At 10%, the annual interest will be ~$1M. There is a significant shortfall between in-place NOI and interest due.

2. How will the borrower repay the loan?

The property won’t qualify for permanent financing. Assuming a 6.50% interest rate, the new loan will not have adequate debt service coverage.

Holding all else constant, the interest rate would have to drop to ~3% to hit a 1.25x DSC.

The more deals you review, the quicker the process becomes. Unfortunately, many of us waste our time on deals with a low probability of closing. I’m still guilty of this on larger opportunities. Learn to pass quickly and focus on the real ones.

[Additional Information: After I reviewed the financials, I scanned the PSA and pulled the selling entity’s information. The manager of the selling entity was also a loan applicant. The numbers weren’t supposed to make sense. He was looking for a big pay day courtesy of a clueless lender!]

For those unfamiliar with a full-term interest reserve, it means the entire interest due over the life of the loan is rolled into the loan amount. The interest is held back at closing and paid when the loan is paid off. Here is a simple example:

We receive a $10M refinance request. The appraised value is $17M, and we feel confident this reflects reality (this is key). Here are the loan terms:

Based on the loan terms and existing loan payoff, here are the sources and uses:

At closing, we do not fund the entire $10M loan amount. We hold back the interest reserve, origination fee, and other lender-related expenses.

I will break down a closing statement another time, but a few points:

• As the lender, we are still funding the broker fee. While the borrower ultimately pays it from the loan proceeds, it is coming out of our pocket at closing. The broker is compensated regardless of loan performance. The lender is taking all the risk and therefore should earn more than the broker (in terms of points).

• On refinance transactions, the borrower often finances the closing costs. Put another way, the lender advances the closing costs. Notice above that there are no line items for title insurance, recording fees, etc. We are sending the title company a wire for $8,573,276.67, and the existing loan payoff is $8,418,000. The $155,276.67 difference is the broker fee plus closing costs.

• Depending on the state, actual closing costs may be much higher. For example, in Florida, lender title insurance, documentary stamps, and intangible taxes will exceed $80,000 on a $10M loan.

As you can see, the lender does not make any money until the loan is paid off. There will be no monthly interest payments. The entire return is contingent on the loan being paid off. This leads to another set of risks:

1. Since there are no required monthly payments, the lender does not become aware of any issues until maturity approaches. When payments are required, they know every month if interest is paid on time and in full.

   • Pro Tip: Add loan covenants that require reporting – the more specific, the better.

2. Certain full-term interest reserve loans (LAND) frequently need extensions. How does interest get paid after month 12?

   • Hint: The borrower will tell you the property is worth more and ask for another reserve.

3. If the lender must foreclose, they have yet to collect anything and now have to advance additional funds (such as attorney fees and protective advances).

Let’s look at two examples.

Example 1: Recently completed luxury single-family home

In Q2 2025, a luxury residential developer needed to refinance his maturing construction loan. The home had just received its certificate of occupancy (CO) and was ready to be listed. To avoid a loan default and/or a forced fire sale, the developer sought a new loan.

Despite high transaction costs, a new loan made sense for the developer. Think about the following:

• The construction lender is paid off in full and on time. The lender views this favorably and will remember this when evaluating future projects with the developer.

• The threat of default interest and foreclosure action is removed.

  • If enforced, the default interest was 25%. This would quickly eat into deal profits.

  • If filed, a foreclosure complaint becomes public record. This allows potential buyers to gain leverage in the sales negotiation.

• The developer and his realtor can maximize value. Luxury homes tend to take longer to sell, as the buyer pool is smaller.

From a lender’s perspective, I like the deal under the following conditions:

1. I am confident in the value of the property. An appraisal adds little value. With luxury homes, it's all about consulting with realtors who specialize in this product in the specific market.

   • Pro Tip: Offer to pay them for an opinion of value. It shows you value their time and expertise. The cost is minimal.

2. I can negotiate a reasonable amount of minimum interest. With the property listed for sale, I assume this will likely be a short-term loan. I still need to be compensated for the time and effort. While I typically ask for 9 months of minimum interest, I aim for 6 months on this type of deal.

   • What does this mean? If the borrower pays the loan off in 4 months, I still collect the remaining 2 months of interest due. It will be added to the final payoff.

This is a space I love to play in, especially in South Florida. However, it is competitive. To win deals, you must be competitive on both rate and minimum interest.

Example 2: Land deal with a request for additional soft cost funding

In Q2 2025, a developer needed to refinance his maturing bridge loan. The current bridge loan was used to acquire a development site. After 2 years, the developer was able to obtain site plan approval. However, liquidity was tight, and additional funding was required for the remaining soft costs. Specifically, the developer required funds for architecture and engineering, as well as numerous other small expenses.

This is a high-risk loan for the following reasons:

• The repayment plan is a (very large) construction loan. There will be extensive requirements to obtain this loan, such as:

  • Building permits. The developer will have to complete, submit, and obtain approvals on all plans. He was unable to do this in 2 years and is now telling me it will be done within 12 months.

  • Liquidity. If the developer is tight on cash today, how will he show the construction lender the required liquidity? (Yes, there are services for this need.)

• Land value is very volatile. Interest rates, construction costs, and sales/leasing pricing are key determinants.

  • As a lender, I must consider value based on what a future buyer is willing to pay (i.e., I have to foreclose and take the property back).

  • If construction costs are up and sales pricing/volume is down, the value of the land decreases. This is a real problem for investors who purchased land a few years ago.

• The resale market is limited.

  • Again, this comes back to owning the collateral. Foreclosing and taking title will be a drain on resources, both in terms of time and money.

  • Selling land takes time, and the holding costs can be significant.

Not all land deals are bad, but this certainly isn’t a favorable space. I would rather take a lower return and finance the luxury residential product.

If you want a deep dive into a disaster land deal, check this post out: The Life of a Bridge Loan

Thanks for reading. Please let me know if you have any questions.

I aim to post shorter articles more frequently, with longer, deep dives sprinkled in.

Thesis: Investing in limited-service hotels through a debt position presents an opportunity to earn a high yield and generate an attractive return by originating bridge loans and acquiring non-performing loans. If a foreclosure or deed-in-lieu becomes necessary, the cost basis is a great entry point. With a great operating partner, properties can be repositioned for sale, or a portfolio can be assembled for an eventual disposition.

Why limited-service hotels? It has been a consistent source of deal flow. It is not something I have sought, but it keeps finding me. For those unfamiliar with my work, I specialize in originating bridge loans and acquiring non-performing loans (NPLs) in the sub $30 million space. I aim to lend at a rate of 10% or more. Therefore, I don’t win many opportunities in multifamily (MF), retail, or industrial. The competition is intense, which drives rates down and leverage up. The same can be said on the NPL side (i.e., it's very competitive for those property types).

Now, I like to compete. Always have. Always will. However, I prefer to compete where the odds are in my favor, or at least not stacked against me. I see this today in the limited-service hotel space, specifically with loans in the $3 million to $30 million range. Based on my deal flow, here is what’s driving demand for bridge financing:

• Matured or maturing loans

  • Loans originated before 2022 have note rates substantially lower than the market rate today. This causes a sizing problem due to debt service coverage (DSC) constraints. If a borrower wants permanent financing, they’ll have to write a check at closing.

  • This isn’t unique to limited-service hotels. There is just a smaller pool of lending options available.

• Cap-X requirements

  • Property Improvement Plans (PIP) required by hotel brands.

  • Property owners initiating cap-X as maintenance can no longer be deferred.

  • Why go the private loan route under these circumstances? There are a few reasons:

    • Faster funding and an easier process

      • Every day a room is down and/or a hotel is under renovation, the property owner loses potential revenue. Banks are notoriously slow when it comes to construction draws.

    • Financial Performance

      • Operating a hotel is hard enough. Booking guests and keeping them happy during a renovation is even tougher.

      • Hotel owners need some runway and financial creativity to get through the renovation process.

    • Liquidity

      • Property owners elected to use their cash to fund cap-X projects. This was done purposely to avoid funding delays. However, they depleted their liquidity. To obtain perm financing, they need to demonstrate post-renovation stabilized performance and liquidity (i.e., cash reserves and/or deposits).

• Value-Add

  • Purchase transaction

    • Buyer identifies an underperforming hotel. It does not qualify for perm financing. If it does, the loan proceeds are far too small.

  • Refinance

    • The buyer underestimated the time to stabilization (or the amount of stabilization required). The purchase bridge financing is maturing.

    • A property owner recently changed management companies and is implementing a turnaround plan.

In terms of NPL opportunities, there are three common default reasons:

• Loan maturity

  • The borrower has been unable to secure new financing. As mentioned in the bridge loan demand section, this is likely due to sizing issues. The borrower either lacks the ability or the willingness to inject new capital.

  • This is the easiest default to enforce. There is no mistaking the maturity date.

• Delinquent payments

  • The borrower fails to make the monthly loan payment, allows the property taxes to become delinquent, and/or does not pay the insurance renewal premium.

  • Typically, the first default is a missed loan payment. It is hard to recover thereafter.

  • This is also an easy default to enforce.

• Breach of non-monetary covenants

  • The most common breaches are DSC and LTV covenants.

    • For example, the borrower fails to keep DSC above 1.25x or the LTV exceeds the maximum threshold.

  • Non-monetary covenant defaults can be harder to enforce, especially in judicial states.

This leads to the next question. Which lenders are selling NPLs in the desired deal size range? There are a few players:

• Regional and community banks

  • Most of the NPL volume comes from these banks.

  • Non or sub-performing loans are transferred to the Special Assets Department, where workouts are initiated.

  • Given the operational headaches, banks are more likely to sell the loan than continue with a workout.

  • Opportunity for both portfolio acquisitions and single loan acquisitions.

• Debt funds

  • Smaller funds tend to have more nonflagged collateral.

  • Usually have the strongest loan documents.

  • Opportunity tends to be one-off (i.e., a single loan sale from one borrower/relationship).

• Small Business Administration (SBA) and United States Department of Agriculture (USDA)

  • The SBA and USDA both offer hotel financing.

  • SBA financing is more popular. While banks utilize the program, fintech lenders entered the SBA space during Covid. Shocking, but they were much better at tech. The downside of the SBA is that it offers smaller loans (capped at $5.5 million) and low or no default interest.

  • USDA offers larger hotel loans, but they are restricted to rural areas. However, not all rural areas are bad. For example, there are plenty of opportunities right off the exits of well-traveled interstates (e.g., I-95 and I-10). Note that banks originate and service these loans as well.

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• Return Potential

Before exploring the potential returns, it is essential to know Rule Number 1: only lend on assets you are comfortable owning. A strong personal guarantee is beneficial, but it cannot change the location of the property. We want to lend on properties that have real and sustainable demand drivers. With that out of the way, let’s look at returns.

Standard Bridge Loan

In this scenario, we are originating a $10 million loan at an interest rate of 11.50% with a 24-month term. We are also charging a 2% origination fee, and the broker is charging a 1% fee (i.e., the borrower is paying 3 points at closing).

We have the option to leverage our position with a bank. While it will increase our risk, it will also improve our potential return. Since the collateral is a hotel, we’ll keep the leverage at 50%. The bank charges us Prime + 25 bps.

The projected returns assume the loan performs as expected throughout its life (i.e., with no late or missed payments). It also assumes interest rates stay flat, as we are lending at a fixed rate and borrowing at a floating rate.

The loan term can certainly be shorter. A 12-month term is common in the sub-$30 million bridge space. However, this does not set the borrower up for success. They will almost certainly need 24 months to complete the business plan and show a period of stabilization. An alternative structure would be a 12-month term with extension options available (at a cost to the borrower).

Renovation Bridge Loan

There are endless ways to structure a loan. Each scenario is different. The goal is to structure a loan that enables the borrower to execute their business plan while still maintaining a standard process. As a lender, this will make servicing the loan portfolio much more efficient.

In this scenario, the borrower needs to complete a Property Improvement Plan (PIP). It is determined that the cost will be $35,000 per key. After analyzing the deal, we decided it is feasible under the following terms and structure:

There are different ways to charge and structure interest payments. In this scenario, we are utilizing Dutch interest. This means the borrower is paying interest on the full $11,110,000 even though the construction reserve is being held back at closing. The effective interest rate will be much higher than 10%. This is extra motivation for the borrower to complete the renovation in a timely fashion.

[Borrowers who accept Dutch interest, where 40% of the loan is held back in a construction reserve, will be risky.]

Most of the time, the borrower wants to complete the renovation and refinance into long-term debt. It is imperative to review the business plan and ensure that the post-renovation projections are (i) realistic and (ii) qualify for long-term financing. Note that the Repayment Metrics table calculates the minimum ADR required, given the various inputs. There should be a sizable delta between the minimum and expected ADR post-renovation. Finally, in our actual underwriting scenario, we would stress-test all variables, including the perm interest rate, NOI margin, occupancy, and ADR.

As mentioned previously, the returns will be influenced by how quickly the borrower draws down the construction reserve. Let’s assume the borrower makes six draws every 4 months. Moreover, let’s also assume our bank (leverage provider) funds 50% of each draw and only charges us interest on the outstanding loan balance.

This is a better deal for the lender than the borrower. However, some borrowers believe they’ll complete the renovation quickly and opt for a lower note rate despite the Dutch interest.

I presented this example to demonstrate Dutch interest, as it is used in the sub-$30 million bridge space. In my experience, it results in more defaults. It is better to structure the deal with a higher note rate, and interest is only paid on the outstanding UPB. However, draws are only eligible for the first 12 months. This pressures the borrower to complete the renovation and allows for a stabilization period for the perm financing.

NPL Acquisition at Par

There is a common misconception that discounts to UPB are required to buy an NPL. If there is sufficient equity in the property, we can buy at principal+ and still make a great return. Note that I define principal+ as the unpaid principal balance plus accrued note interest. The lender does not have to take a loss or deal with a problem loan. It allows them to concentrate on what they do best: originate new loans and service performing loans.

Now, why would we buy a loan at principal+? First, the seller usually allows us to pursue other fees that are due, such as late fees or exit fees. Second, and most importantly, default interest. For those unfamiliar, most loan documents have a clause that increases the interest rate in the event of default. The loan documents and state law govern the default rate. For example, the maximum interest rate in Florida is 25% for loans over $500,000. As long as the loan documents stipulate that the lender can charge the maximum rate allowed by state law, the rate can be increased to 25% after a default. Not all loan documents include this language, so it is essential to read them carefully. Debt funds almost always have this language in their loan documents. Banks typically do as well.

Let’s look at an example. Assume the LTV is 65% of UPB.

The borrower failed to make the payment due on February 1, 2025 and all payments thereafter. Per the loan documents, the borrower had a 5-day grace period. Therefore, the borrower was officially in default on February 6^th, and the loan started to accrue default interest.

The lender isn’t going to take a discount. There is over $5 million of equity in the deal. Therefore, we offer the lender principal plus note interest. In a judicial state, the lender does not have to litigate the foreclosure. In a non-judicial foreclosure state, the lender may be required to take back the collateral within a short timeframe. They’ll have to hire and oversee a property manager who is likely to do a lousy job. Although we may not receive all the default interest, there is a good chance we will receive a significant amount.

So, what’s the play after we acquire the loan? There is an element of game theory. Plus, we must decide which return metrics are most important.

Ultimately, the decision comes down to negotiating a forbearance agreement with the borrower and locking in a minimum return, or pursuing foreclosure, which carries the downside of a quick payoff but offers the upside of title to the property at a discount to market value (assuming no bidders at the auction).

If you want to learn more, I suggest reading the following posts:

NPL Case Study Part 1

NPL Case Study Part 2

Part 1 provides an overview of the deal. Part 2 dives into the post-loan acquisition strategies.

Discounted NPL Acquisition

If we are buying a loan at a discount to UPB, be prepared to own and operate the asset. There are certainly circumstances where we get paid off. However, the general rule of thumb is that the larger the discount, the more likely it is that we will take back the collateral. So, how do we price these opportunities? Let’s look at three options:

• LTV

  • Estimate the as-is value of the property and multiply by your maximum LTV.

  • The result is the maximum bid.

  • Using the same loan from the prior section, but let’s assume the as-is value is $9 million.

  • 

  • This method fails to account for any potential upside or value creation opportunities.

• Unlevered Yield on Cost (UYOC)

  • This is my favorite metric to use with a value-add deal. Assuming we take title to the property, it can be used on a distressed debt as well.

  • UYOC = NOI / Total Cost

    • This is similar to the debt yield (NOI/Loan Amount). Except:

      • Use stabilized NOI, which implies that a realistic business plan is in place to achieve it.

      • Total Cost includes the loan acquisition price and any costs incurred (e.g., legal fees, property tax/insurance advances), holding costs, renovation costs, and other related expenses.

  • We need a wide spread between the market cap rate and our projected UYOC. The wider the spread, the better.

    • In example below, the approximate UYOC would be 13.75% at our desired acquisition price.

• Minimum Return

  • This process involves determining the loan acquisition price based on various other assumptions, including your minimum return threshold.

  • Every investor needs to define their return metric (e.g., IRR, equity multiple, total profit).

  • We are essentially backing into the offer price. Let’s look at a simple example.

Example

In Q1 2025, I was presented with an opportunity to acquire an NPL secured by a 75-key, flagged, limited-service hotel. The hotel sustained storm damage and had been inoperable for over a year. The borrower was in litigation with the insurer. It was unclear if insurance proceeds would even be available (insurer claimed pre-existing damage). Therefore, insurance proceeds could not be factored into the analysis. Here was the loan balance:

While there were multiple loan defaults, the default interest is irrelevant. As you’ll see, the property was worth less than UPB. The probability of acquiring the loan and being paid off was almost zero. We must underwrite the deal as if it were a typical acquisition. The problem is that we are dealing with many unknowns and limited due diligence. Hence, the minimum return has to reflect that uncertainty.

The collateral was in a judicial foreclosure state. Step 1 is estimating the timeframe to obtain title. Given my experience in this County, 9 months seemed reasonable. Note that a deed-in-lieu (DIL) was a strong possibility. This would have significantly compressed the timeline, but it is not something to bank on. Lenders do not allow correspondence with the borrower prior to closing.

After obtaining title, we’ll need to obtain permits as the hotel requires extensive renovations. Certain items can be completed during the foreclosure process; however, an actual permit submittal cannot. Overall, it will likely take a year between acquiring the loan and starting construction.

Step 2 is estimating the construction budget and timeline. Luckily, the borrower provided bids to the lender. We had a General Contractor review and adjusted accordingly. Here were the basic assumptions:

Remember, we aren’t looking for precision at this stage. We need a general idea of time and cost. Conservatism is the key, as much can change between initial underwriting and actual construction.

Step 3 is projecting performance. This involves analyzing market data, reviewing comparable properties, and consulting with brokers and appraisers.

Here were our performance assumptions:

Again, we are not looking for precision at this stage. We need to use conservative assumptions and stress test the key variables.

Note that there are other expenses to consider, particularly holding costs such as property taxes and insurance. These will be incurred during the construction and stabilization phases.

At this point, we have all the required assumptions. We can now solve for the loan acquisition price. I use Goal Seek in Excel. Given the amount of risk, a 25% unlevered IRR was my minimum requirement.

This results in a loan acquisition price of $775,000. That’s an 83% discount to UPB or a $3.8M loss for the lender. Of course, they rejected that offer. However, they were (still are) interested in the deal if the insurance case settles, as they will sweep the proceeds. While the percentage may still be high (~50% loss), the dollar loss will be much more manageable (<$1 million).

Portfolio Construction

For this strategy, a weighting of 75% bridge loans to 25% NPLs allows for a high current yield while maintaining upside potential.

The target would be a 9% current yield with an annual return of 15%. Based on experience, the current yield would likely be lower, and the annual return would be higher. Why?

1. Some of the bridge loan originations would become NPLs. Any bridge lender who says they have a clean book is lying. NPLs reduce the current yield but are likely to result in a higher overall return (assuming the collateral was valued properly).

2. Actual NPL returns tend to be higher. The trade-off is often a lack of short-term cash flow (i.e., your returns predominantly come from the payoff).

Note that this doesn’t factor in leverage. I showed earlier how leverage amplifies the returns on the bridge lending side. It does so significantly on the NPL side as well. The NPL case study referenced earlier discusses leverage.

Please let me know what you think. Thanks for reading!

A few points to cover before diving in:

• The case being discussed is Sky Gardens Residences LLC vs. Safe Harbor Equity LLC

  • Sky Gardens Residences LLC is the borrower

  • Safe Harbor Equity LLC is the lender

• If you want to see every court filing, go here:

  • https://www2.miamidadeclerk.gov/ocs/Search.aspx

  • Select Local Case Number

  • Enter: 2024-007485-CA-01

• If you want easy access to the documents, go here:

  • Dropbox Link: Sky Gardens vs Safe Harbor

  • I included screenshots of many key documents. I also linked to them.

• Collateral

  • Address: 16300 NE 19^th Ave, North Miami Beach, Florida 33162

  • Website: https://skygardenmiami.com/

  • 300+ unit multifamily development site with ~20,000+ SF of ground floor retail

Current Status

Sky Gardens Residences LLC (SGR) filed for bankruptcy protection on January 31, 2025. This was likely SGR’s final move to delay foreclosure. The original complaint was filed by SGR on April 24, 2024, in which it accused Safe Harbor Equity LLC of engaging in usury and fraud. Before getting into the case, it is best to start at the very beginning.

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Sky Gardens Residences LLC Ownership History

SGR acquired the site on November 6, 2020. The Warranty Deed was recorded in Miami-Dade County. County records show SGR paid $5.2 million. The Seller, 163 ST Executive Center LLC, provided financing via a $3.42 million mortgage. While I do not have the settlement statement, it appears the borrower contributed $1.78 million (plus closing costs).

In March 2022, SGR obtained new financing from Safe Harbor Equity LLC via an $8.5 million mortgage. After reviewing the loan agreement, there is no indication that funds were held back (i.e., no interest reserve, construction reserve, etc.). Based on public information, here are the projected Sources and Uses from the Safe Harbor loan closing:

SGR walked away with $4.8 million at closing. Therefore, they recouped their initial investment of $1.78 million and pocketed an additional $3 million. While SGR may have spent money on entitlements and possibly site work, I find it unlikely they spent anywhere close to $3 million. It took only 17 months for SGR to cash out of the deal.

Lender Comments:

• Why would Safe Harbor cash out SGR?

• Collateral was land (high variability in value)

• Guarantors were foreign nationals

• The appraisal was filled with extraordinary assumptions:

The above excerpt is from an appraisal ordered by SGR in September 2022. It was included as an Exhibit in one of the court filings. The appraisal valued the site at $18 million, but that value is contingent on the accuracy of the extraordinary assumptions.

Disclosure: A broker sent me this opportunity in early 2023. I quickly passed for the reasons stated above. I suspect many lenders passed for similar reasons.

Safe Harbor Equity LLC Loan Origination

Before delving into the deal specifics, it is essential to recall the state of financial markets in March 2022. The 10-year yield started the month at 1.72% and closed at 2.32%, for a total increase of 60 bps. The Fed raised rates by 25 bps in March, marking the first hike in a prolonged and aggressive rate-hiking cycle. The Prime rate increased from 3.25% to 3.50%. The real estate market was frothy after two years of cheap financing. Prime was cut to 3.25% during the early stages of Covid and was held there for 2 years.

Safe Harbor is an experienced lender with a significant track record. It originates bridge loans and acquires nonperforming loans. While I do not know its capital sources or structure, public records reveal at least two things:

• Safe Harbor has several funds. The SGR loan was originated under Safe Harbor Equity LLC and was immediately assigned to Safe Harbor Distressed Debt Fund 3 LP. With a fund comes the pressure to deploy capital.

• Safe Harbor utilizes leverage via a warehouse line with City National Bank. The collateral assignment was recorded on the same day as the loan closing.

Loan Terms

The promissory note and loan agreement provide details on the loan terms.

Even for Q1 2022, these were aggressive loan terms. However, on paper, the loan was profitable for Safe Harbor. With some leverage, it was attractive, provided everything went according to plan.

Again, I am unfamiliar with Safe Harbor’s warehouse terms with City National Bank. But I do have experience with similar warehouse facilities. Here are my assumed terms:

The max LTC could be higher, and the note rate may have a spread over Prime (25 to 50 bps). Regardless, the above terms are a fair assumption. Based on this, here are the pro forma returns:

This assumes the loan is paid off on time (i.e., 12 months) and the Prime rate is held at 3.50%. This obviously didn’t happen, so let’s examine Safe Harbor’s position at loan maturity.

First, here is where the Prime rate went:

Prime jumped from 3.50% to 7.75%. As a lender utilizing leverage, profits are juiced by having a spread between your lending and borrowing rates. In March 2022, Safe Harbor had a spread of 5.25%. By March 2023, the spread had narrowed to only 1%, and the Fed was signaling that more hikes were coming. Based on the warehouse term assumptions and movements in Prime, here is what the returns would have looked like:

This assumes the borrower paid off on time. The rise in Prime squeezed Safe Harbor.

Now, the loan was structured with extension options. Here is language from the promissory note:

and the loan agreement:

In March 2023, the 10-year yield briefly crossed 4%, and the Fed was still raising rates. While SGR shopped for new financing, they were unlikely to get better terms. It made sense for them to exercise their option to extend. Safe Harbor couldn’t allow this to happen. Unfortunately for SGR, it made a mistake, allowing Safe Harbor to reset the terms.

Lender Comments:

• If you offer extension options to the borrower, the option should be at the lender's discretion. This gives you the right to decline the extension option for any reason. While this is lender-friendly language, it is not always possible.

• If you cannot get the above language, then any extension option should be contingent on a rate reset with a floor rate. In this case, I would have structured the rate on the extension as follows:

• Prime + 4% with a floor rate of 8.75%

• I use the note rate as the floor rate. This ensures the rate is never less than the original note rate.

• As a levered lender, I want to reset my rate based on my borrowing rate to ensure I keep a spread. This doesn’t mean the rate has to float going forward (although it certainly could). You can fix it on the extension date. In this case, the new rate would have been 11.75%.

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Settlement and Extension Agreement

As a reminder, a broker sent me this deal in early 2023. SGR was shopping for a new loan to pay off Safe Harbor. It was a quick pass, and I didn’t think much of it. At some point, SGR must have realized there was little lender appetite, so they exercised their option to extend. On February 13, 2023, exactly 30 days before maturity, SGR’s attorney sent a formal notice to Safe Harbor:

Two days later, Safe Harbor responded and declined the extension option:

According to Safe Harbor, SGR failed to make timely payments in August 2022 and January 2023. Safe Harbor sent correspondence to SGR in August 2022 informing them of the default:

This sets the stage for the Settlement and Extension Agreement.

Lender Comments:

• Documentation and organization are key parts of loan servicing. Safe Harbor wisely sent this notice in August 2022 with the no-waiver language. Perhaps they were not worried about an extension at 8.75% due to the existing default.

• Safe Harbor already has a plan. Remember, they are utilizing leverage via the City Bank line. They rejected the extension 30 days before maturity. The borrower isn’t paying off on time. The goal is to de-risk the deal, reset the rate, and pick up a fee. Pay down the loan, reset the rate to market, and charge a forbearance fee. It is the same economics as a new loan origination. It actually costs the borrower less than refinancing with another lender when closing costs are included.

Borrower Comments:

• There is no excuse for late payments, considering the amount of cashback received just 5 months earlier.

• Do not wait until the last day to execute an extension option. SGR should have known in January that a refinance was unlikely.

• You have limited leverage once you default.

After declining the extension due to the defaults, Safe Harbor was in the driver’s seat. SGR is not in a position to negotiate.

On March 16, 2023, SGR and Safe Harbor executed the Settlement and Extension Agreement (Agreement). Here were the terms:

Note that the 2% extension fee was calculated off the original loan amount of $8.5 million.

*Safe Harbor required SGR to pay the loan down by $800,000:

**The note rate increased from 8.75% to 11.50%. However, this was contingent on no further events of default:

The clause is clear. If SGR complies with the Agreement, Safe Harbor will only charge 11.50%. However, if SGR violates the Agreement, interest will accrue at the maximum rate permitted under Florida law (i.e., 25%).

Two other key clauses in the Agreement are relevant to the eventual foreclosure case. First, SGR must remain compliant with taxes and insurance. Here is the clause in the Agreement:

Section 5.b of the Loan Agreement discusses property taxes:

Remember, the Agreement was executed on March 16, 2023. In Florida, property taxes are due by March 31^st. They are delinquent thereafter.

Second, SGR waived any default notice requirements:

Again, the language is clear. Safe Harbor does not have to give notice of default. It is SGR's responsibility to comply with the Agreement.

These two clauses are key.

Before proceeding to the default and litigation, let’s examine the Pro Forma returns for Safe Harbor under the Agreement.

I had to make the following assumptions:

• The loan performs (i.e., all interest payments are made on time and the loan is paid off at maturity).

• The $800,000 paydown by SGR was used by Safe Harbor to pay down the City Bank line.

• Safe Harbor still collects the 1% exit fee at payoff, but on the new loan amount of $7,700,000.

• Prime holds at 7.75% (we know it increased shortly after the Agreement was executed).

• There are no fees payable to City Bank.

The main point is to illustrate that Safe Harbor took a loan with subpar economics and turned it into a much better deal. If you are a borrower, you may not like it. As a lender, I applaud them for great execution.

SGR Default and Litigation

Following the execution of the Agreement, SGR made timely monthly payments until the loan reached maturity. Remember, the Agreement mandated SGR to make monthly interest payments of $73,791.66 on the 15^th of each month. On March 15, 2024, the final interest payment and principal repayment were due. SGR failed to make either.

Now, this is where it gets interesting. SGR defaulted on the Agreement. There is no argument about this. It is a black and white issue. So, why did SGR file a usury and fraud complaint against Safe Harbor? SGR was likely infuriated when it received the payoff from Safe Harbor. I will return to SGR’s initial complaint, but let’s examine Safe Harbor’s counter claim first. Here is the part about breaching the Agreement:

I could not find a payoff statement in the court filings or discovery documents. However, I suspect Safe Harbor used the date the property taxes became delinquent as the start date to run default interest. Recall that the 11.50% rate only held if SGR complied with the Agreement. If they breached the Agreement, the maximum rate allowed by law would apply. Furthermore, Safe Harbor was not required to give any notice if an event of default occurred. I assume Safe Harbor sent SGR a payoff with numbers similar to this:

I certainly understand SGR’s frustration, but the Agreement was clear. No excuse for not paying the property taxes. As for Safe Harbor, it was well played. Think about it:

• SGR pays the loan down by $800,000. This helps de-risk the deal.

• SGR pays $170,000 for an extension. 4 times the original 6-month extension fee.

• SGR pays $811,708 in interest. This services the City Bank line and pays out investors.

• Safe Harbor is now entitled to an additional $1 million in interest, and default interest accrues at $5,347 per diem.

• This doesn’t mean much if the property is worth less than the payoff. I purposely avoided discussing the collateral value as I wanted the focus to be on borrower-lender dynamics. Let’s assume there is equity in the property. A development site valuation analysis can be its own case study.

It is rare to see a borrower file a complaint against a lender. SGR likely felt slighted and wanted to litigate, so they filed a Usury and Fraud complaint. Here is part of the complaint:

Let’s run through the allegations. In bold are my comments.

• “Defendants (Safe Harbor) refused to honor a promised agreement to lengthen the maturity of the Loan.” SGR defaulted due to late payments in August 2022 and January 2023. Therefore, Safe Harbor did not have to extend the loan.

• “Defendants manufactured a pretext to impose ‘default interest’ by claiming Sky Garden had not paid property taxes.” SGR had 2 weeks after signing the Agreement to pay the property taxes. They simply failed to pay them.

• I will circle back to paragraph 5

• “Interest and financing charges imposed by Defendants on Sky Garden pursuant to the terms of the Amended Loan Agreement exceed the lawful maximum rate of 25%.” Let’s analyze this claim:

In Florida, the maximum rate of interest a lender can charge is 25%. SGR claimed Safe Harbor charged them over 27%. The law is gray in this area, and Safe Harbor took advantage of it.

1. Safe Harbor charged a 2% extension fee on the original principal balance of $8.5 million. The loan was paid down by $800,00 to $7.7 million. This raises two questions:

a. Is the extension fee even considered interest?

b. If so, should $8.5 or $7.7 million be used when calculating the effective interest rate charged?

2. Safe Harbor applied 25% default interest. Again, this raises two questions:

a. Did they run interest on a 360 or 365-day year?

b. If 360-day year, is this legal?

c. If interest is run on a 365-day year, the per diem interest is $5,274 or $73 per day less than a 360-day year. The difference is $26,645 annually.

SGR’s calculation:

Safe Harbor’s response to the allegation is strange. This was the response in the counterclaim:

I had to read through all the filings and discovery items to understand this defense. I finally found it in an email, which was included as an Exhibit:

I do not agree with this position. I’m not sure how the court could either. The maximum interest rate in Florida is 25% per annum. You do not calculate the rate since loan inception. SGR should look to pursue this defense, even if an appeal is necessary.

Lender Comments:

• The more aggressive your position, the higher your likelihood of extensive litigation.

• The property's value relative to your total payoff is only one factor. Litigation will cost you both time and money. When the collateral is land, the site's value can change dramatically and happen quickly.

• If Safe Harbor used the Agreement maturity date (March 15, 2024) as the default date and then ran the 25% default interest (on a 365-day year), this is likely a standard and expedited foreclosure process.

• Of course, Safe Harbor had the right to go back to April 1, 2023. Legally, they are due over $1 million. Doesn’t Safe Harbor have a fiduciary responsibility to its investors to pursue this?

• My biggest concern for Safe Harbor is its reputation. If you are a borrower or broker, is this someone you want to do business with? To be fair, this is how most of the industry operates.

Back to the claim made in paragraph 5 by SGR. SGR believed Safe Harbor was after the collateral (“loan-to-own”). The evidence they cite was:

1. SGR was offered a joint venture with Safe Harbor if they deeded over the property.

2. Safe Harbor requested a deed-in-escrow as a condition of the loan restructure.

3. Safe Harbor told other lenders not to do business with SGR.

Claim 1: There is nothing wrong with making this offer. It is not uncommon in a distressed situation. I have done debt-to-equity conversions, which have been a win-win for both sides.

Claim 2: This is not illegal, but it doesn’t move the needle much in Florida. Even if you have a deed-in-escrow, you must go through the courts to enforce it. There is already language in the Agreement that will expedite summary judgment.

Claim 3: If you read the deposition, point 3 is easily refutable. Frankly, the deposition is an embarrassment for the borrower. I recommend scanning it. The borrower was unprepared and over his head. Page 154 starts the discussion on this topic. Long story short: the borrower cannot recall the lender's name.

Borrower Comments:

• There is no excuse to be unprepared for a deposition. You should know the deal better than anyone. You have weeks, if not months, to prepare for it.

Status Today

SGR filed for Chapter 11 bankruptcy on January 31, 2025. After 9 months of litigation, SGR was set to lose the property via foreclosure. Bankruptcy is the final legal move to buy more time. SGR likely asked the judge for time to sell the property and provided the appraisals showing an $18 million valuation. I doubt this site would sell anywhere close to that number today. In fact, it is likely worth less than Safe Harbor’s (projected) payoff:

I used $100,000 as a placeholder for Safe Harbor’s legal fees. They could certainly be much higher. Moreover, I am likely missing small fees and costs. However, the payoff is likely around $12 million.

Borrower Comments:

• If you decide to get into litigation with your lender, you better be confident you’ll win. Due to the default rate, over $2 million of interest accrued between the time the initial complaint was filed and April 15, 2025 (approximately one year).

• SGR should have focused on selling the property. If you disagree with the lender’s payoff, you can always challenge it in court after the loan is paid off.

• SGR should have explored the debt-to-equity conversion offered by Safe Harbor. While SGR would have been diluted, it is better than getting zeroed. Moreover, I have a hard time believing two Turkish nationals with no US development experience would be able to obtain a large construction loan.

Lender Comments:

• The accrued default interest due is exciting, but a payoff seems unlikely. Safe Harbor is likely taking this property back. They must sell the site or build the project to recoup their principal and earn a return.

• Litigating for over a year is expensive. You are paying attorneys every month while not collecting any interest payments.

• Liquidity management is key when utilizing leverage, especially with NPLs. Cash outflows are frequent, and loan reperformance or repayment timing is unknown.

Thank you for reading! Please reach out with any questions. I can be reached at edward@lrlfinancial.com

1. The foreclosure process is governed by state law. Judicial and nonjudicial are the primary foreclosure processes. There are distinct differences between the two. We will review both before walking through a judicial foreclosure.

2. Hire an attorney specializing in lender representation with extensive experience in the jurisdiction handling your complaint. While state law governs the process, the loan documents detail the terms and conditions that can trigger a default by the borrower.  

Judicial vs. Non-Judicial                                                                                            

A judicial foreclosure is a legal process where the lender must go through the court system to obtain a court order to foreclose on a property. A non-judicial foreclosure allows the lender to sell the property without prior court approval, based on the mortgage agreement's power of sale clause. Here is a map depicting each state’s foreclosure type:

Please note that I am not an attorney. I understand the legal process due to my debt investing experience. However, I always hire a local attorney who is a subject matter expert. You can see from the map above that there are many nuances between states. Here are the high-level steps to foreclose in a judicial and nonjudicial state:

As you can likely tell from above, judicial foreclosure is much more borrower friendly. A borrower can challenge the foreclosure in court. Even if they do not win, the borrower can drag out the process and buy themselves more time to either i) reach an agreement with the lender (i.e., restructure the loan or enter into a forbearance agreement) or ii) pay off the loan (i.e., find a new lender or sell the property).

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Judicial Foreclosure Process

The following is specific to the state of Florida. Foreclosure complaints are filed at the County level and are public information. Therefore, I am not omitting any information. We will look at: Wildstein Investments Inc. and 9287-0245 Quebec Inc vs. Investments SWK LLC.

The following is how to download the full foreclosure complaint:

• The case was filed in Broward County, Florida. Therefore, you must go to the Broward County Courts website: https://www.browardclerk.org/web2

• Search by case number: CACE22010060

• Click on the case number on the left-hand side.

• From here, you can see the plaintiff, defendant, and their attorneys.

• You can also see every document filed in the case. To find the original foreclosure complaint, scroll to the bottom. The original Complaint was filed on July 11, 2022.

I recommend reviewing this case as it touches on most topics covered in this post. Look how long the borrower (defendant) has dragged out this case. This is how a judicial foreclosure state can benefit the borrower.

1. Notice of Default

• The first step in the foreclosure process. The lender must provide the borrower with a Notice of Default (NOD) detailing the amount owed and a specified period for the borrower to address the default. Here is the original default notice from case CACE22010060.

• The NOD was sent on March 16^th, only six days after the due date. This is a good move by the lender. Put the borrower on notice immediately.

• The amount owed is kept vague: “all sums due”

• The time period is also vague: “immediate.” Is immediate today, tomorrow, or a month?

2. Filing the Lawsuit

• If the borrower fails to cure the default, the lender files a Lis Pendens notice in the county where the property is located. This public record notifies all interested parties that a foreclosure action has been initiated.

• The Foreclosure Complaint was eventually filed on July 11^th. Four months after the NOD was sent. The lender was likely trying to work something out with the borrower. From reading the Complaint, we see the following:

• The borrower missed the March loan payment and every payment since then. This is why it was prudent for the lender to send the NOD on March 16th.

• The Complaint also references default interest.

3. Service of Process

• The borrower is formally notified of the foreclosure complaint. The borrower has 20 days from the date of service to respond. Failure to respond allows the lender to seek a default judgment from the court.

• The plaintiff (lender) notified the defendants (borrower) on July 17^th. There are multiple defendants in this case, including LLCs and individuals. It can take a significant amount of time to find all the defendants and serve them. All the defendants were eventually served by August 15^th.  

• If you go to the case documents, you will see the defendants waited 20 days and then filed a motion for an extension of time. At this point, the lender likely knows they are in for a lengthy litigation process.

4. Judgment and Sale

• The court determines the validity of the foreclosure and the amount owed to the lender. If the court rules in favor of the lender, a judgment is issued, and the property is scheduled for a foreclosure sale.

• This case had a foreclosure date set, but it was postponed or vacated multiple times. Take a look for yourself. This is very frustrating if you are the lender.

• Remember, the original complaint was filed on July 11, 2022. It is now August 2024, and the case is still open!

5. Certificate of Sale and Title Transfer

• Following the auction, the winning bidder receives a certificate of sale. If there are no objections within ten days of the sale, the County clerk issues a certificate of title to the winning bidder. If the lender is the winning bidder, they take title to the property.

6. Right of Redemption

• The original borrower's right to reclaim the property by paying the full debt plus costs. Florida law allows borrowers a limited right of redemption. They can redeem the property before the clerk files the certificate of sale or the date specified in the foreclosure judgment.

Borrower Delay Tactics

As you can imagine, most borrowers do not just hand the keys back to the lender. They fight to keep their property and/or seek to delay the foreclosure process as long as possible. Once again, the following is specific to Florida. Case CACE22010060 is a great example. The defendant tried every delay tactic, including bankruptcy.

1. Respond slowly to the complaint and raise as many defenses as possible.

• The borrower has 20 days from the date of service to file a response with the court. They can also request additional time, but the judge must grant it.

• The borrower’s attorney can put together a laundry list of defenses. While they ultimately may not be valid, it still takes the lender’s attorney and the judge time to read through them all.

• This can be a dangerous game for the defense. You risk pissing off the judge if the defenses are nonsense.

2. Demand "Proof of Standing"

• The borrower challenges the lender's legal right to foreclose. A common defense in foreclosure proceedings is to question whether the foreclosing party holds the note or has the right to initiate foreclosure. The process can be delayed if the lender cannot produce the original note or prove its standing.

• This is very important in NPL investing. The lender must produce the original loan documents as part of the foreclosure complaint. It is not uncommon for a lender to lose documents, especially if the loan was transferred (bought/sold) multiple times.               

3. Loan Modification or Mediation

• Some Florida jurisdictions offer or even mandate mediation before a foreclosure can proceed. During mediation, the borrower and lender meet to discuss potential resolutions, such as loan modifications, which can delay the process.

4. Bankruptcy

• Filing for bankruptcy offers an automatic stay, halting all collection activities, including foreclosure.

• While bankruptcy can temporarily delay the foreclosure process, it's a significant step with long-term implications. Chapter 13 bankruptcy can allow borrowers to develop a repayment plan, potentially saving the property from foreclosure.

• I will cover Bankruptcy in the next section. Lenders need to think about bankruptcy when originating loan documents.

5. Challenging Service or Notification Procedures

• The borrower claims they were not properly notified about the foreclosure. If a borrower can prove that they weren't appropriately served with the foreclosure complaint or that other mandatory notices were skipped, the foreclosure process might be delayed or invalidated.

• This is much more common than you would think.

Bankruptcy

As noted in the prior section, all collection efforts must be halted when a borrower declares bankruptcy. The legal jurisdiction also changes from state to federal. The U.S. Bankruptcy Code governs the steps a lender must take and can vary based on the type of bankruptcy filed. Bankruptcy is designed to provide financial relief to debtors, but it also offers an organized process through which creditors, including lenders, can stake their claims and potentially get repaid. As a lender, it is important that you retain an experienced bankruptcy attorney who specializes in creditor protection.

The following are the general steps in the bankruptcy process for a lender. Remember, this is done at the federal level, so this is consistent across geographies.

1. Automatic Stay

• The lender must immediately stop all efforts to collect the debt or seize collateral. Continuing collection efforts can lead to sanctions.

2. Notice of Bankruptcy

• Upon receiving the notice, the lender should confirm that all collection activities have ceased and should review the type of bankruptcy filed to determine the next steps.

3. Proof of Claim

• The lender should file a proof of claim by the specified deadline. This claim should detail the amount owed, include supporting documentation, and specify if the debt is secured or unsecured.

4. Relief from Automatic Stay

• If the lender believes there's cause (i.e., the collateral is at risk), they can petition the bankruptcy court for "relief from the automatic stay." If granted, the lender can resume collection efforts.

5. Attend the Meeting of Creditors

• Also known as a 341 Meeting. The lender can attend this meeting and pose questions to the debtor.

6. Review the Repayment Plan

• The lender should review the proposed plan to ensure their interests are represented. They can object to the plan if it doesn't adequately address their claim.

7. Monitor the Bankruptcy Proceedings

• It is vital for the lender to stay informed about the proceedings, ensuring that their rights are protected and taking action when necessary.

8. Receive Payments

• The lender should monitor and document any payments received, ensuring they align with court orders or repayment plans.

Big picture: as the lender, you do not have to be a bankruptcy expert. You must understand the process and then find and retain an expert attorney to represent you.

Single Asset LLCs

Before wrapping up this post, I want to cover one more topic briefly: single-asset LLCs. You may have heard these terms before if you are familiar with commercial lending. Lenders frequently require the borrowing entity to be a single-asset LLC. While it does not prohibit a borrower from declaring bankruptcy, provisions in the Bankruptcy Code make life easier for a lender.

Before going any further, let's define a single-asset LLC. The Bankruptcy Code defines it as an entity that derives substantially all of its gross income from the operation of a single property and has no substantial business other than the operation of the property and its incidental activities. Due to concerns about single-asset entities using bankruptcy mainly as a delay tactic to avoid foreclosure, there are special provisions in the Bankruptcy Code. The lender can request relief from the automatic stay unless the debtor does one of the following:

• Begins making interest payments to the lender within 90 days of filing for bankruptcy.

• Files a feasible plan of reorganization that has a reasonable chance of being confirmed within these 90 days.

We tend to see bankruptcy used as a strategy to buy time, particularly when there is equity in the property. While CRE transactions are slow, 90 days is a significant amount of time. This allows the borrower to sell the property or find another lender (hello, bridge lender!).

That’s a wrap for foreclosures. I know it is not the most interesting topic, but it is critical to CRE investing, especially debt investors.

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The capital stack refers to the various sources of funding used to finance a real estate investment, with each layer of capital representing a different level of risk and return. The capital stack is typically organized in order of priority, with senior debt as the bottom layer and common equity at the top. When evaluating a real estate deal, you must know where your investment falls within the capital stack. Deals look dramatically different depending on your position.

Layers of the Capital Stack

Senior Debt: This is the primary mortgage on the property and has the priority lien. The senior debt has the lowest risk and, therefore, the lowest expected return. The debt is collateralized by the property, meaning if you fail to make timely payments to the lender (or fail to comply with the loan agreement), you risk losing the property via foreclosure. While the senior debt does not participate in any upside from rental growth or property appreciation, it is the first to be repaid. From an ownership perspective, senior debt is your lowest cost of capital.

Mezzanine Debt: Also known as ‘mezz debt.’ This is a secondary loan against the ownership of the property and is inferior to the senior debt. Mezz debt has more risk than senior debt and should have a higher expected return. The property itself is not direct collateral. Mezz is secured through the ownership shares of the owning entity. Mezz debt is repaid after senior debt but before the preferred and common equity.

Preferred Equity: Also known as ‘pref equity.’ It serves a similar role as mezz debt. It helps bridge the funding gap between senior debt and common equity. The risk-reward is slightly different. Mezz debt investors have more security via claims on the ownership shares. Pref equity does not enjoy such protection. To compensate for the additional risk, pref equity will receive a higher return, potentially the ability to participate in any upside, and the right to take control of the property if the common equity defaults on their agreement.

Common Equity: The top layer of the capital stack. It represents the residual value of the property after all other debts and obligations have been paid. Since it has the highest level of risk, common equity investors expect to receive the highest returns. The structure of the common equity can vary widely. If you purchase a small investment property by yourself, you own 100% of the common equity. However, if you buy a $50,000,000 industrial park, you will likely have partners, and the common equity will be allocated based on each member’s capital contribution.

Layers of the Capital Stack: Simplified

Most CRE investors are purchasing properties with less than 100% cash. They use debt and equity financing to acquire land or property. Having all four capital sources in your capital stack is not required or necessary. It is normal not to have mezzanine debt or preferred equity in a deal. However, the larger the deal, the more likely it is to have multiple sources of financing. Understanding your position within the capital stack is critical to properly analyzing a deal. If you are providing senior debt, your analysis is different than if you are a common equity investor. 

Numeric Examples

Senior Debt: As discussed in the prior section, senior debt is your lowest cost of capital. Unsurprisingly, investors try to push senior debt proceeds as much as possible. Remember, senior debt does not participate in any deal upside. As long as the deal performs, more debt will “juice” the returns to the common equity investors. However, excessive leverage is a dangerous game. Remember, you risk losing the property if you can’t service the debt. Let’s look at an example.

You are attempting to purchase a property for $1,000,000 and offered the following options:

LTV = loan-to-value. This is the loan amount divided by the value of the property. Our example assumes the purchase price is the property's market value. The higher the LTV, the more leverage in the deal. Look at the required equity (or cash) an investor has to contribute to each scenario.

All else equal, investors prefer to put less cash (equity) in a deal. However, all else is never equal. There are tradeoffs. High leverage = higher interest costs. The property’s current cash flow needs to cover the debt service. If it doesn’t, you better have a realistic business plan to increase the property’s cash flow and the ability to cover the interest costs until it does.

Continuing the example, the property’s NOI is $70,000. This implies purchasing the property at a seven cap ($70,000 / $1,000,000). Which loan makes sense?

The $900,000 loan at 8.75% does not work. The property’s NOI cannot service the interest payments. The $800,000 loan at 7.75% looks attractive. Realistically, traditional lenders will not offer this as an option either. The debt service coverage (NOI divided by the annual interest) is too low. Traditional lenders typically want to see at least 1.2x. Note, for simplicity’s sake, we are using just the interest payments to calculate the debt service coverage. The interest is calculated on a 365/365 basis. Lenders will use the fully amortized loan payments and 365/360 basis. I will cover the basics of debt in another post.

Finally, to wrap up the example, let’s see what happens if the property doesn’t perform as expected. Assume you lost a few key tenants, so the NOI dropped by 40%.

Under this scenario, you can only cover the interest payments with the $600,000 loan amount at 6.50%. Even then, cash is very tight.

As I mentioned previously, understanding your position in the capital stack is of the utmost importance. A lender will analyze the rent roll and be very concerned if 40% of your tenants have leases expiring within the next year (or within a short period). Your ability to pay interest is contingent upon receiving rental income. On the flip side, the common equity investors may be excited if they believe the market is tight (i.e., not much space available to lease) and the tenants’ rents are under market (i.e., new leases being signed in the market are at a higher rate).

Mezz Debt: Continuing with our above example, let’s assume you only have $100,000 to invest and do not want to take on any equity partners. You look for mezz debt and find a lender willing to go up to 90% CLTV. CLTV= combined loan-to-value. This is the total amount of loans to the value of the property. In our scenario, this is the senior debt plus the mezz debt divided by the purchase price. The following summarizes the terms and key financial metrics:

Would you sleep comfortably at night under any of these scenarios? Probably not. The NOI essentially covers the debt service. One thing goes wrong, and trouble will ensue. Remember, you now have two debt obligations that must be serviced.

Preferred “Pref” Equity: In the example above, an investor could raise capital in the form of pref equity instead of mezz debt. You reviewed the mezz debt terms and feel uncomfortable proceeding. The debt service and NOI are just too tight. So you start exploring pref equity options. An investor offers to contribute an additional $200,000. In return, the investor wants a 15% internal rate of return (IRR), which must be paid before the common equity receives any cash flow. Since you only have $100,000 to invest, this will allow you to complete the purchase. However, the senior debt and pref equity have priority over your common equity. Here is the proposed structure:

Does this deal make sense to you? Depends on your assumptions. Let’s assume we anticipate holding the property for two years. The in-place NOI can service the senior debt and pay for property upgrades. There are no remaining cash flows to distribute to the pref equity. However, you believe the property upgrades will increase rent once the current leases expire. Hence, your NOI will increase and (hopefully) the property’s value. After two years, you will owe the following to the pref equity:

We will cover the calculation in another post, along with many others. Excel makes it easy and efficient to calculate. To break even on the deal, we must increase our NOI to $74,515 or ~6.5% in 2 years (assuming the same cap rate). Note, CRE transaction costs are high. Your actual breakeven would be higher.

This seems realistic, but the market is out of your control. If cap rates increase to 8%, the property value drops to $931,438 ($74,515 / 8%). Guess what? You lost all your common equity. The senior debt and pref equity have priority over your common equity. You better find a way to increase NOI by more than 6.5%.

On the other hand, if cap rates decrease to 6%, then the property value increases to $1,241,917. You pay off the senior debt and pref equity and enjoy all the upside in the deal. In this scenario, you did 2.77x your initial investment.

Common Equity: Continuing with the same scenario, you decide mezz debt and pref equity are not for you. While you like the potential upside they offer, the downside is risky. The thought of losing your hard-earned capital is too much to bear. So you decide to look for a partner who will contribute common equity. You secured the $600,000 loan at 6.50% and need an additional $400,000 to close the transaction. You will commit $100,000. An acquaintance brings you an investor looking to deploy $300,000. He offers the following terms: we will form a partnership called ‘Holding Company LLC.’ You will be the General Partner (GP) and contribute $100,000 for a 25% ownership stake. I will be the Limited Partner (LP) and contribute $300,000 for a 75% ownership stake. We will both be entitled to an 8% return (measured as IRR). Any return generated above 8%, you will be entitled to a 25% promote.

Here are a few key points to understand before jumping into the returns:

1. The GP and LP’s capital receive equal treatment. One does not receive priority over the other.

2. The 8% return in our example is often called a ‘pref return.’ Not to be confused with preferred equity. It simply means the common equity investors must receive an 8% return before any promote is paid.

3. A promote is an incentive for the GP. The GP is responsible for managing the project and executing the business plan. LP’s offer a promote to incentive the GP to achieve higher returns as they will receive a disproportionate amount of the profits above the pref rate.

4. You will also hear the GP be called the Sponsor.

Holding Company LLC shows each member’s capital contribution and corresponding ownership stake. It matches the total common equity invested in the deal as shown in the capital stack.

Let’s once again assume we held the property for exactly two years, and no cash was distributed during our holding period. All cash distributions come once the property is sold.

At the end of year two, you sell the property for $1,300,000. After paying off the $600,000 loan, you are left with $700,000.

Now it’s time to calculate the pref return due to the GP and LP.

The GP and LP are entitled to their initial capital plus the 8% pref return. The LP will receive $349,950, and the GP $116,630. The GP is eligible to receive the 25% promote on the remaining proceeds.

The GP promote is $58,355. The remaining $175,065 is then distributed pari passu or proportionally based on the ownership percentages.

The final step is to look at the returns of the GP and LP.

A few observations:

1. The total proceeds from the GP and LP are equal to the sale proceeds. Put another way, $481,249 plus $218,751 equals $700,000. If they do not equal, then something was calculated incorrectly.

2. The GP’s IRR is significantly higher than the LP’s. This is the power of the GP’s promote.

3. GPs prefer to put in a small amount of capital and raise the remaining funds from LPs. The GP makes their return from the promote (and other ancillary fees).

4. This is a very simple example. The GP-LP terms and structure can be very complex. It is not uncommon to have multiple tiers (i.e. a waterfall).

The big takeaway from this post is that there is no perfect deal structure; rather, there are tradeoffs between risk and reward. Your position within the capital stack is key.

That’s a wrap for CRE Investing Fundamentals. Please let me know what you think.