Case Study February 2012

A non-profit organization with a $3.2MM bond at a 1% interest rate was experiencing cash flow difficulties. The bond was secured by the organization’s facility, which was improved as a unique, single purpose building. The lender insisted upon ever-greater amounts of principal reduction and fees that eventually led to a confrontation.

The complexity of the bond included, among other burdensome covenants, the necessity of writing letters of credit on an annual basis. Fees and expenses attributable to the LCs, increased costs well beyond a market mortgage rate.

The lender obtained an appraisal of the facility that was substantially higher than the amount of its bond/loan. The borrower obtained its appraisal at a value substantially less. The parties were deadlocked. A bankruptcy proceeding that included cram down litigation was speculative at best. The appraisals were very far apart on an asset that was nearly impossible to appraise because of its unique single purpose nature.

The solution was in the principal of “Net Present value”.   The concept allowed a win/win circumstance by giving both parties what they required as their core negotiation term. The lender wanted to preserve principal and the borrower wanted a market mortgage term at their appraised valuation with a fixed pay rate they could budget.

The lender agreed to reduce all fees and expenses to an amount not more than that amount equal to the market interest rate on $2.4MM for a period of no less than 3 years. This was critical to the organization. In that time, they would have the ability to fund raise without lender demands that impeded their mission. Both parties came away with what they needed to succeed.