Posted by Brent_IL on March 05, 2001 at 14:56:41:
As I re-read your post, I see that my response was abrupt. It sounded pseudo Zen-like. What you have said is unarguably correct.
You’re right. The PACTrust holds title, just like an LLC, or a corporation, and just holding title can’t change the financial worth of a property. But, without additional input somewhere, neither can anything else. The present value is the present value. The rest is only funny money.
Again, you’re correct about junior liens. Not all seller seconds are illegal, only undisclosed ones because the junior position presumes there is a first.
I do believe that in the examples you gave, a PACTrust, or equivilent would best serve. With a L/O, all the loans are recorded up-front. If the value isn’t there when it’s time for the lessee to exercise, your second or third is sitting right on top. The new first mortgage lender is going to insist that your lien be paid off, forcing a higher income qualification, more points, et al. This may also skew the banker’s interpretation of LTV. Then, you have to write a new second, one without the benefits of seasoning.
The trust documents give you not only the flexibility to adjust your financing targets as the situation changes, but also the privacy to work it out internally. For me, it is much easier to sit down with the RB, seller, and trustee and say, “We can’t finance the whole thing, 100% cash is out. Can we change the percentages, or the timing of the payout? What’s the fair thing to do?” than it is to ask a first lender, who realizes he’ll be paid off, to finance a weak buyer to 110%.
While a trust, of itself, cannot cure the financial problems facing a property, it makes it easier to deal with them.