Real Estate Law
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Just to help me establish a background, have I previously assisted you in this matter? (If I recall correctly there was a previous question I assisted with in which the partner was a real estate agent that was attempting to block the opening in order to sell the real property at a personal profit to the detriment of the partnership). Please excuse me if this is incorrect, in an effort to retain some anonymity, customers are identified with letters and number combinations as opposed to names (this is still a public forum and no attorney confidentiality is created through this service).
Yes. I brought this up before, as well but things have changed a bit.
The issue of a breach of contract will still exist when the partner engages in "self dealing" - attempts to do something which benefits himself at the expense of the partnership.
This means that even if he is not expressly trying to sell the property (through whatever mechanism), but is simply obstructing the business to create a personal opportunity, there would be a breach of fiduciary duty.
This does not mean that a "negligent" business act - failing to do something that would be a good idea because they are either of the opinion something else would be better for the partnership, or that the act is not in the best interest of the partnership is actionable; but if it is self dealing, that is always a breach of fiduciary duty.
Regarding the SBA loan, the lenders do not generally monitor the loans so closely as to evaluate the use of the money for the specific use (as a pre-school) to determine whether or not the borrower is in breach of the contract, however, this is a matter of contract (the specific terms of the document you signed).
If the loan terms required that the use of the loan was restricted to the opening of a pre-school, the bank would have the right to demand repayment of the loan. If you and your partner were unable to repay the loan, the bank would have the option of foreclosing on the property (if it was offered as collateral on the loan), in which case the property will be sold at auction - not through a traditional property sale using a realtor and looking for a top price.
Generally, given the cost of doing a foreclosure and the difficulty in recouping full value of the loan plus trustee's fees, most lenders do not actually go through the foreclosure process unless the loan is in default, making it a reasonable business decision to actually foreclose. But this is entirely up to the lender as to what action to take if you are in fact in default (either by breaching the terms of the loan, or by failing to pay).
Actually our loan hasn't closed yet (construction loan). Can I approach the bank and ask them to sell before we foreclose?
Just to confirm: Are you asking whether or not you can ask the bank to foreclose on your property?
No. What I am asking is can we tell the bank that we would like to sell the property? As mentioned the market value of the property is much higher than the loan balance
You do not have to sign the construction loan. (If you already have a loan - SBA or otherwise - for the mortgage or purchase of the property, the only thing you will need to do is ensure that they are paid so that you do not have any deficiency liability).
If you do not want to go through with construction, and wish to sell - I would advise against signing a new loan and simply going into negotiations on a suitable sale of the property with your partner. Taking out a construction loan will incredibly complicate your situation (you will only need to pay off the loan, but if construction starts you will need to deal with contractors, subs, permits, etc.).
Actually the construction is complete and we are waiting for the final occupancy permit.
Are you just refinancing the construction loan?
No. This is the same construction loan. I guess the closing refers to conversion of construction loan to regular loan.
From interest only to principal and interest.
Understood (my apologies, sometimes it can be a little slow to come up to speed through the "chat" forum).
You don't have much choice in converting after completion of construction - it is usually one of the terms of taking out the initial construction loan. However, if you intend to sell, and believe you can do so in a specific time period (say 1 month - just an example), you may be able to negotiate with the bank to get an extension on signing to permit you time to get the property sold on your own terms and pay off the loan prior to signing the final documents.
Can I sell the property before the closing or is closing a must for closing the loan?
This is more a matter of negotiations and business sense as opposed to a legal argument. Your rights and obligations will be dictated by the original contract (it will have a clause indicating when you are required to sign the new loan).
You can sell the property at any time - they cannot force you to keep it. Again, you will need to check the loan documents and see if there is a penalty for early payment. Most SBA loans do not have such a clause, but you need to check your documents specifically to confirm.
There's a prepayment penalty for the SBA loan.
Another issue is my partner is not interested in selling the property and since our LLC is deadlocked, selling could be an issue. On the one hand is not opening the business and on the other hand he doesn't want to sell!
That would be the disincentive for your early payment. You may be able to negotiate it, but if the lender has a pre-payment penalty they will have that leverage over you in the transaction.
Setting aside the lender and their leverage - your partner continues to breach his fiduciary duty by holding your business in a deadlock - you cannot raise money, yet you cannot close the business.
I am ok to pay the prepayment penalty since it's less compared to the gains.
While it may not be practical to file a lawsuit (I do not know, perhaps it is at this point), it is usually a good idea to start documenting the specific issues you are having with your partner (I prefer traditional letters - you can email copies in addition to mail, but a traditional formal letter has a benefit over email), stating the facts of the deadlock, the detriment to the business, and your proposed options to resolve it.
Building this type of evidence will do 2 things (1) it will help bring the failures into stark detail for your partner; and (2) it can act as evidence in any future lawsuit over breach of fiduciary duty against your partner.
OK. If we don't make our payments to the bank and if the property forecloses, how badly would our credit history would be impacted?
Having a foreclosure on your credit history would be a significant negative, but I cannot tell you how bad it might be - the three major credit bureaus have their own proprietary formulas that they keep confidential so it is hard to predict, and different individuals have different "hits" on their credit from things such as foreclosure, bankruptcy, etc. based on their past credit history etc.
Does it impact my personal credit history or the business credit history?
Usually both. If you are a cosigner or guarantor on the loan it will affect your personal credit.
Yes. I signed a personal guarantee but have not signed any collateral. I have credit cards for the business, but they don't show up on my personal credit history. Does it mean that the foreclosure (if it happens) won't impact my personal credit history?
No, if you are a guarantor, it will affect your personal credit history.
Why does my business credit card payments don't show up on my personal credit reports?
You are a guarantor only, not the actual borrower. You only become obligated in the event that the business defaults.
OK. So, foreclosing on the business is not a good option. I need to let my partner know.
That is probably a good idea.
Thanks for all your help.
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