Monday, August 22, 2011

R/E Operator Uses Defaulted HELOC, Non-Judicial F'closure To Snatch Control Of 200-Unit NYC Bldg. Out From Under Landlord Current On 1st Mtg Payments

In Jamaica, Queens, The Real Deal reports:

  • In a strategy that many insiders say was highly unusual (and very creative), the Bluestone Group wrested control of a 200-plus-unit apartment building in Jamaica, Queens, by getting its hands on the owner's line of credit. The property owner had taken out both a first mortgage and a revolving line of credit from a regional community bank. While the owner never stopped making payments on its mortgage, it defaulted on the line of credit about a year and a half ago.


  • To recoup the money it was owed on the line of credit, the regional bank sued in State Supreme Court, and won a judgment against the borrower earlier this year. Because the line of credit was secured by the owner's 51 percent stake in the Jamaica apartment building, the bank could have taken control of the property. But banks are often reluctant to engage in messy real estate battles. So when Bluestone got wind of the judgment, it approached the bank to buy the line of credit.


  • Eli Tabak, a principal with Bluestone, said he first learned of the defaulted line of credit through the special assets department at the community bank. Tabak noted that one advantage to purchasing an equity interest is that competing investors are less keen on doing the same, since it's considered a risky play. "People are afraid to buy high in the capital stack, so the paper is not worth that much," Tabak said.


  • Tabak declined to disclose how much he paid. But once he had the line of credit in hand, he was able to foreclose on the equity (rather than the real estate, as most foreclosures do). Bluestone was also able to foreclose much faster than a standard property foreclosure.

  • In mid-June, Tabak held a nonjudicial foreclosure sale in his attorney's office. Such a foreclosure provides fewer protections for the borrower and is less regulated than a standard foreclosure. There were no other bidders.

  • And, as the new owner, Tabak will be responsible for paying the in-place mortgage. The whole process, from buying the debt to foreclosing, took him only about a month.

  • "It's actually much simpler," said Edward Harris, an attorney in the real estate department at law firm Cozen O'Connor. Still, there are downsides to a mezzanine or other equity foreclosures. "You have all the warts, all of the mechanic's liens [and other liens], but when you foreclose on the first mortgage you extinguish most liens and other encumbrances. Some things, like unpaid taxes, survive foreclosure, of course," Harris said.

For the story, see Foreclosing on the equity, not the real estate.

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