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A Promissory Note Catastrophe

The story:

A real estate developer in 2005 optioned five older, contiguous beach front hotels in Florida. He planned to redevelop the combined sites into one large, magnificent luxury hotel. In late 2007 he obtained a $ 35 million loan from an east coast Real Estate Investment Trust (REIT) that was secured by a first position mortgage on the five older hotels and their land. He used the borrowed funds to purchase the five hotels. A prominent Florida attorney closed the loan and purchase transaction. During 2007 and 2008 the developer worked on obtaining architectural drawings, land use permits, building permits, and engaging contractors.

The sequence of events:

By mid 2008, the real estate market nationally, and in Florida particularly, had crashed; property values ​​had declined approximately 35% and were continuing to drop. Bank lending had been discharged-up. A hurricane had stuck the Florida coast and destroyed the five old frame hotels. The, to add to the misery, the developer declared bankruptcy due to the failure of the subject project and other projects in his portfolio.

The REIT lender was holding a $ 35 million promissory note that was in default, the borrower had declared bankruptcy, and the hurricane had destroyed the hotels on the collateral property. As the lender was preparing to start foreclosure proceedings it discovered the Florida attorney that closed the loan and purchase transaction had failed to obtain an assignment of the hazard insurance policies on the five hotels. The ownership of the wind damage insurance claim of $ 20 million was in dispute. An errors and omissions insurance claim against the closing law firm's carrier issued.

The Promissory Note Questions:

The REIT needed to determine its damages. The question was what was the pre-2008 Fair Market Value of the $ 35 million note, and what is the post-2008 FMV? What amount of value has the promissory note lost? How do…

Read More…. by Lawrence Tepper

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