What is Special Situations Lending?
www.arrivatollc.com – Arrivato LLC has the inner circle relationships to help bring capital to what the industry commonly calls Special Situations Lending. These are typically opportunistic loans that are non-bankable, but are backed with compelling reasons to provide a loan.
In most situations, a handful of our Ultra-High Net Worth Families are attracted to these scenarios because they understand the “story” deals and common sense. At the same time, I caution you not to confuse this with venture capital based on an idea or speculative situations such as securing capital to qualify for another loan.
The key term is identifying an alignment of interest between the borrower and private family capital. This means the investor must feel comfortable with the historical performance, collateral that can be quickly monetized to provide security for the investor if the borrower does not perform. And in exchange for taking the risk on the “story” the investor earns a compelling return on his capital and participates in the upside.
Since we are within key ultra-high net worth and family office circles, we have connectivity to personal relationships that allow us to discreetly get things done with a level of trust.
Let’s look at some interesting real-world special situations that we see on a regular basis. Let’s look at real estate initially since this makes up the majority of the market followed by some general business scenarios.
(1) There was a seasoned real estate operator who had a strongly performing property under contract for acquisition. Normally this would be a vanilla conventional loan scenario. The property had all long-term NNN leases with national type companies, except for one tenant. This tenant was in the marijuana industry. This one tenant disqualifies the borrower from securing a conventional loan and even 99% of private equity money. The good news was that this tenant agreed to be re-located, however the borrower was left with only 10 days to close on the purchase. There was a private family that provided an $11 million loan and the borrower brought $7 million to closing. The borrower was able to re-tenant that unit and eventually refinance into a conventional loan.
(2) There is another scenario where the son of a very wealthy real estate family decided to go out on his own. The patriarch of the family was in the late 70’s and the son wanted to take further control of the family’s portfolio. The family patriarch resisted those attempts and the son decided to pursue his real estate strategies outside his family entity. Although the son is well-qualified financially and has a strong track record within his family, banks viewed him as a brand new entity without a track record. There was a private family who decided to work with this gentleman and became his private banker to build the foundation of the new entity.
(3) A third scenario is quite interesting. A young gentleman sold his technology company at a young age after massive early success. He soon had seller’s remorse. He decided to enter the real estate industry and spent $13 million of his own cash to build a luxury house on speculation. His inexperience in real estate created two challenges. He built a very bland product for the price point and was asking too high of a sales price for the house. It sat there for a very long time. In the meantime, his former company fell on hard times because current ownership could not perform. He re-acquired his former company at a significant discount. Now this gentleman experienced a cash crunch following the acquisition of his old company and the balance of his funds tied up in the unsold luxury home. He needed short-term cash for operations. The unsold house was an available asset to collateralize. The private family and their advisers believed if the subject property had to be sold on a fire sale basis, it would at least sell for $7 million. The private family provided a loan using that asset as collateral for $3.5 million.
There are some further examples of a few scenarios outside the real estate market that can be considered special situations.
(4) There was a company that executes trades within the equities sector to fill or offset orders. This company does not initiate any trades themselves, but they fill or offset transactions made by other parties. They were seeking capital to increase their capacity. The showed a solid revenue history and evidence to grow revenues with expanded capital. The principals personally guaranteed the loan behind the strength of their Personal Financial Statements and agreed to evenly split all company revenues. All the funds are secured and insured by a major financial institution and the company’s revenues are received on the same business day. In this scenario, the company had a proven historical model that fell outside traditional lending models, the investor had the security of the individual’s personal financial strength, security of the funds provided, and at the same time, participated equally in the upside.
(5) There was an interesting scenario involving a specific type of niche well in the oil industry that was income producing on their property. There was an immediate need for a second well, but the owners had virtually no additional cash to allocate towards completing a second well. The property owner requested 100% of the capital ($7 million) in exchange for the investor to acquire the existing well and complete the additional well that would nearly triple current production. The proposal allowed the investor to own 100% of the two assets that had long-term contracts with multiple credit worthy off-takers. The property owner agreed to pay back the capital within one-year. The investor took a 95/5 split of revenues until they were paid back with further claw back provisions based upon reaching specific return hurdles. This represents another situation where the investor had secured collateral with a physical asset and contracted historical revenues to provide 100% of the capital, and also participates in the majority of the upside for the long-term.
(6) Here is a scenario involving an online consumer lending company that had a three-year history with a large book of loan receivables that they currently manage across multiple portfolio. The business was at a stage where they wanted to scale up rapidly, but lacked the capital to invest back into their business. The company was seeking a credit line, so the investor acquired their entire loan portfolio, split the future revenues at 50/50 and earned a 13% preferred return on their capital.
As you can see, special situations capital covers a number of diverse scenarios when someone is not in the position to secure capital in a conventional manner or through most vanilla non-bank private lenders.
The above-mentioned scenarios are examples that provide the investor with security if the borrower fails, certainty to execute, while also offering the investor a compelling return, and participation in the upside for taking the risk as we mentioned earlier in this article when most typical lenders hands were tied by guidelines.
We welcome you to contact us anytime to discuss a scenario.