Fident Capital secured $6.6MM of Joint Venture Equity for the off-market acquisition of a non-performing note. The loan, secured by over 50 acres of land in the Spring Valley submarket of San Diego County, held a $41MM unpaid balance.
The borrower defaulted several years ago, but foreclosure stalled with a 2011 bankruptcy filing of the original lender. A nation bank, the finance provider to the original lender, acquired the note as part of the bankruptcy proceedings.
The Sponsor seeks to foreclose upon the property. After gaining fee title, the Sponsor will sell a portion of the site, already entitled for residential use, thereby recapturing about 80% of the project’s required equity. The remainder of the site will likely be re-entitled from primarily commercial uses into residential lots, providing substantial upside.
Fident Capital identified an opportunistic equity partner specialized in distressed situations who has purchased over $1.3B in assets since 2008, primarily in non-performing and sub-performing notes. The equity partner provided 95% of the equity. The Sponsor, in addition to acquisition and management fees, earns a 24% profit split above a 10% preferred return and 43% profit split above a 20% IRR.
The project faced considerable challenges. First was the need for speed. The bank executed another contract keeping the Sponsor’s offer in second position as a fallback. After nearly a year-long sales process the Sponsor was required to conduct all due diligence parallel to the other buyer, hoping they would step away. When they did, only 1 week was allowed to complete the closing, which included execution of a joint venture operating agreement.
Additional challenges included a litigious borrower and complex entitlements. Furthermore, due diligence uncovered more significant site constraints than originally anticipated. However, through research, creative planning, and the Sponsor’s considerable entitlement experience all parties gained comfortable with the risks of the project.
Fident’s early identification of a partner skilled in note acquisition greatly mitigated execution risk and sped up transaction velocity. The project’s returns, in excess of 100% return on cost, also provided offsetting rewards and motivated all parties to creatively problem solve.