Acey suggested this topic might be timely for a new thread....
[Another good thread Acey might be 'what happened to the Merlin IPO?'
]
I'll repost what I wrote in that other thread at the end, and pad it out a bit with some background below.....
a good friend of 10 years who has leant me money and vice versa several times over that period started a property company in Brisbane in 2001. They hit on a couple of gold mine opportunities, one in particular in 2002....everyone was after it...600 acres 25km north of Bris cbd.....lendlease delfin, stocklands, devine, dennis family from Melbourne, AV Jennings, Mirvac, Peat and Co from Perth, etc etc..... it was a farm across the road from a new lendlease delfin planned community that broke a lot of sales records....
anyway, the two old bachelor farmer owners took a shine to my friend and sold it to her, rather than the stiffs in suits...... she had done alright in a couple of earlier deals buying property on the Brisbane River in West End, flicking them for quick profits but still needed to borrow for the deposit. A long settlement was negotiated, and after a few weeks, she had bought the land for $22 million. Within 2 months she was made 3 offers over $35million. About 12 months ago she entered a JV. The offers still come in. The last was $80 million.
That was a springboard to go on a buying spree. The boom hadn't hit Bris full on yet. So over the next 18 months, several distressed half completed projects were bought, as well as some blue chip properties- cleveland point, Brisbane River sites at west end, south brisbane, and on and on. Even two 600 acre+ coastal sites fronting Hervey Bay...land bank stuff for retiring baby bomers....
Anyway, to cut a long story short, I trusted her. I was lending significant money from the beginning unsecured. I just thought that there was no way they could get into trouble with an $80 million piece of dirt behind them.
As it turns out, they have not had DAs approved as quickly as they would like, plus they have grown rapidly and have high operating costs....a freshly renovated office, expensive consultants etc etc.
But the thing that hurt them most is that they had borrowed from private investors at seed capital rates 50%-120% pa. They had intended to retire these loans with new institutional loans once they got their prospectus released at the beginning of the year. However, the beginning of the year saw reduced sentiment for property. Getting institutions to take an interest wasn't as easy as had been planned. Nevertheless, operating and holding costs were ongoing. More high interest private loans had to be taken. Although now the lenders weren't that naive. They are financiers who insist on security. So now we have a situation where the equity of this company has been eroded dramatically through 12 months of continuing high interest borrowing. Some of the properties are on the market. And the original private investors, me being one, have been told prospectus loans will be forthcoming any week now, which will allow original investors to be paid out.
Meanwhile, creditors and secured lenders have been screwed around, and litigation is mounting. The credit rating of the company has been damaged. The directors are spending more time and money in court than getting projects finished, in addition to explaining all the ASIC alerts appearing against their string of companies.
To try and get to the bottom of what is happening is one of the most frustrating things I have ever been through. This woman is/was a good friend, and yet fear, delusions of grandeur, and a stubborn will are distorting her judgement, or are they? I have been trying to get my money back for 5 months, and keep getting a new excuse. I know some of the excuses are real though. The frustrating thing is that I know she is paying out people who can damage the company name. I have yet to threaten that. And with every week that passes, I am faced with the point that their equity is eroded a bit more.
My loan only has a personal guarantee, but there is significant property holdings within the directors' names. Though if they were wound up, it would all probably go into the holding company pool.
You are probably all thinking that she is no friend if she is jerking me around like this. I have considered my options:
- get litigous and send a letter of demand against the personal guarantee, while there is still reasonable equity.
- hold my breath and let them trade out of it with the loans they say are coming.
- forget talking to lawyers, and just threaten to go to the media with other investors to complain about their behaviour. (there is around $15 million of private investor money in the company.)
Last week's drama was a Supreme Court appearance to quash an underworld figure (it turns out) who my friend jerked around on a short term loan. The legals are consuming the cash flow. And the underworld guy is now up to all sorts of erosive dirty tricks, as the court ruled against him.
I have spoken to media friends and am now seriously considering the legal angle. However, if the company is damaged further, and they go down, a lot of people are going to get hurt. It truly is a moral dilemma. It is difficult to know which way to go. But the behaviour of my friend has disappointed me beyond all belief. I shall never trust her again. And will finish with her if/when I get my money back....
Funnily enough, I was also approached by another developer who was trying to develop a block of land held by a liquidated developer called Iezzi Constructions. This company had been around for 30 odd years, and went down in June this year. The founder, an ageing Italian, had found a new young girlfriend with expensive tastes. And the guy's sons' property acumen amounted to an interest in Gold Coast beach penthouses, maseratis, ferraris, and porsches. No wonder this 30 year old company went bust.
Anyway, this is another story that I didn't get burnt on, but learnt a few tricks to protect myself from. To be continued.
________________________________
original post.........
I currently have money invested with a reasonably new startup, established by a good friend. And they are having difficulties.
Keep these things in mind:
- no matter how honest the developer, ignorance, the unexpected, and market forces can still get them into positions where your money is placed at extreme risk.
- as others said above, institutional lending is generally available for non marginal projects. I have heard some lenders are prepared to lend all construction money based on 30% presales in some locations.
- seed capital interest rates can be 5-10% per month, mezz finance can be 20% pa. THat is a lot of interest to be paying if the market turns significantly.
- my final word to you, and my most profound, is to NEVER EVER lend money unsecured. The banks don't do it, and neither should you. Anyone who approaches you to borrow, without offering you security, does not respect you. You must do you research and find out the details of the mortgages on the property, the current valuations, and write into your contract that no further borrowing can be taken out against the property you use as security. Always get a good solicitor to review the loan agreement.
If the developer is liquidated, the administrators pull hefty fees, then the first lender, secured creditors etc. If the property market has softened a little, there will be little left for a second mortgage lender. The administrators are happy to let the property go as quickly as they can. THey don't care about getting market value. They just want a quick resolution.
You should also ask for a personal guarantee, though many developers keep their asses covered.
Remember, developers are a dime a dozen. There are more opportunities out there to get burnt then to make a buck, from developers trying to borrow privately.
Most are not good at all disciplines- financials, council negotiations, legals, marketing, and project management. All these areas can sink a project.
[Another good thread Acey might be 'what happened to the Merlin IPO?'
]I'll repost what I wrote in that other thread at the end, and pad it out a bit with some background below.....
a good friend of 10 years who has leant me money and vice versa several times over that period started a property company in Brisbane in 2001. They hit on a couple of gold mine opportunities, one in particular in 2002....everyone was after it...600 acres 25km north of Bris cbd.....lendlease delfin, stocklands, devine, dennis family from Melbourne, AV Jennings, Mirvac, Peat and Co from Perth, etc etc..... it was a farm across the road from a new lendlease delfin planned community that broke a lot of sales records....
anyway, the two old bachelor farmer owners took a shine to my friend and sold it to her, rather than the stiffs in suits...... she had done alright in a couple of earlier deals buying property on the Brisbane River in West End, flicking them for quick profits but still needed to borrow for the deposit. A long settlement was negotiated, and after a few weeks, she had bought the land for $22 million. Within 2 months she was made 3 offers over $35million. About 12 months ago she entered a JV. The offers still come in. The last was $80 million.
That was a springboard to go on a buying spree. The boom hadn't hit Bris full on yet. So over the next 18 months, several distressed half completed projects were bought, as well as some blue chip properties- cleveland point, Brisbane River sites at west end, south brisbane, and on and on. Even two 600 acre+ coastal sites fronting Hervey Bay...land bank stuff for retiring baby bomers....
Anyway, to cut a long story short, I trusted her. I was lending significant money from the beginning unsecured. I just thought that there was no way they could get into trouble with an $80 million piece of dirt behind them.
As it turns out, they have not had DAs approved as quickly as they would like, plus they have grown rapidly and have high operating costs....a freshly renovated office, expensive consultants etc etc.
But the thing that hurt them most is that they had borrowed from private investors at seed capital rates 50%-120% pa. They had intended to retire these loans with new institutional loans once they got their prospectus released at the beginning of the year. However, the beginning of the year saw reduced sentiment for property. Getting institutions to take an interest wasn't as easy as had been planned. Nevertheless, operating and holding costs were ongoing. More high interest private loans had to be taken. Although now the lenders weren't that naive. They are financiers who insist on security. So now we have a situation where the equity of this company has been eroded dramatically through 12 months of continuing high interest borrowing. Some of the properties are on the market. And the original private investors, me being one, have been told prospectus loans will be forthcoming any week now, which will allow original investors to be paid out.
Meanwhile, creditors and secured lenders have been screwed around, and litigation is mounting. The credit rating of the company has been damaged. The directors are spending more time and money in court than getting projects finished, in addition to explaining all the ASIC alerts appearing against their string of companies.
To try and get to the bottom of what is happening is one of the most frustrating things I have ever been through. This woman is/was a good friend, and yet fear, delusions of grandeur, and a stubborn will are distorting her judgement, or are they? I have been trying to get my money back for 5 months, and keep getting a new excuse. I know some of the excuses are real though. The frustrating thing is that I know she is paying out people who can damage the company name. I have yet to threaten that. And with every week that passes, I am faced with the point that their equity is eroded a bit more.
My loan only has a personal guarantee, but there is significant property holdings within the directors' names. Though if they were wound up, it would all probably go into the holding company pool.
You are probably all thinking that she is no friend if she is jerking me around like this. I have considered my options:
- get litigous and send a letter of demand against the personal guarantee, while there is still reasonable equity.
- hold my breath and let them trade out of it with the loans they say are coming.
- forget talking to lawyers, and just threaten to go to the media with other investors to complain about their behaviour. (there is around $15 million of private investor money in the company.)
Last week's drama was a Supreme Court appearance to quash an underworld figure (it turns out) who my friend jerked around on a short term loan. The legals are consuming the cash flow. And the underworld guy is now up to all sorts of erosive dirty tricks, as the court ruled against him.
I have spoken to media friends and am now seriously considering the legal angle. However, if the company is damaged further, and they go down, a lot of people are going to get hurt. It truly is a moral dilemma. It is difficult to know which way to go. But the behaviour of my friend has disappointed me beyond all belief. I shall never trust her again. And will finish with her if/when I get my money back....
Funnily enough, I was also approached by another developer who was trying to develop a block of land held by a liquidated developer called Iezzi Constructions. This company had been around for 30 odd years, and went down in June this year. The founder, an ageing Italian, had found a new young girlfriend with expensive tastes. And the guy's sons' property acumen amounted to an interest in Gold Coast beach penthouses, maseratis, ferraris, and porsches. No wonder this 30 year old company went bust.
Anyway, this is another story that I didn't get burnt on, but learnt a few tricks to protect myself from. To be continued.
________________________________
original post.........
I currently have money invested with a reasonably new startup, established by a good friend. And they are having difficulties.
Keep these things in mind:
- no matter how honest the developer, ignorance, the unexpected, and market forces can still get them into positions where your money is placed at extreme risk.
- as others said above, institutional lending is generally available for non marginal projects. I have heard some lenders are prepared to lend all construction money based on 30% presales in some locations.
- seed capital interest rates can be 5-10% per month, mezz finance can be 20% pa. THat is a lot of interest to be paying if the market turns significantly.
- my final word to you, and my most profound, is to NEVER EVER lend money unsecured. The banks don't do it, and neither should you. Anyone who approaches you to borrow, without offering you security, does not respect you. You must do you research and find out the details of the mortgages on the property, the current valuations, and write into your contract that no further borrowing can be taken out against the property you use as security. Always get a good solicitor to review the loan agreement.
If the developer is liquidated, the administrators pull hefty fees, then the first lender, secured creditors etc. If the property market has softened a little, there will be little left for a second mortgage lender. The administrators are happy to let the property go as quickly as they can. THey don't care about getting market value. They just want a quick resolution.
You should also ask for a personal guarantee, though many developers keep their asses covered.
Remember, developers are a dime a dozen. There are more opportunities out there to get burnt then to make a buck, from developers trying to borrow privately.
Most are not good at all disciplines- financials, council negotiations, legals, marketing, and project management. All these areas can sink a project.
