Doing the Impossible - A Caveat Loan Funded By A Family Office

An impossible second mortgage / caveat loan

This is probably one of the hardest deals we did, and we were able to do it, because of the family office we work with, who were able to provide urgent funding, and underwrite the deal!

The client had $45 million in assets, with first and second mortgage bank facilities (the assets were cross collateralised) for a total amount of $35 million. The client urgently needed $1M to save their business to solve for an urgent cash flow situation. Which is a typical scenario we see in our private lending deals.

Urgent funds for an urgent situation.

If the client didn’t get this $1M for two months, they were going to lose their business and all their assets! The $1M was critical to their free cashflow situation, and the bank wouldn't help them due to them being in default.

The banks didn’t help

The clients bank at the time was reluctant to give them more funds because the client did not meet their serviceability requirements, and was in default! This is typical of banks, that even with adequate security, if a client doesn't meet their serviceability requirements, they can still deny business owners funding when they need it most!

Other lenders couldn’t help

Furthermore, no private lender was wiling to give them a second mortgage loan or caveat loan, as they were essentially already double layered with their cross collateralisation loans with the bank!

Typically most second mortgage and caveat lenders, like the secondary debt mortgage position to be made available to them, and typically this is achieved via a deed of priority from the bank.

But if a borrower’s bank will not provide a deed of priority as was the case in this situation, it makes things very hard for a borrower to secure a second mortgage loan or the financial claim of the first mortgage holder. Each of the states in Austarlia have different laws about this.

Furthermore the bank themselves, were trying to threaten the client from taking a caveat loan, even though legally the bank couldn’t block them. This added further disappointment to the situation, as we were trying to provide liquidity to salvage the client situation.

The solution using a caveat loan.

Because we worked with a family office, and because the borrower came from a trusted referral. The family office was happy to provide the emergency funding to the business owner as a caveat loan. The only reason we were able to do the deal, and others weren’t, was because the family office had the capacity in a worst-case scenario to underwrite / pay out the banks first and second mortgage to preserve the equity in the assets.

Serious financial backing

Working with a family office has a major difference when compared to working with other lenders. Other lenders can only afford to lend for the second mortgage or caveat amount, and can't underwrite a deal, as such they must take less risk. Versus working with a family office who can afford to underwrite a whole deal, to preserve equity and take on the additional deal risk in order to fund it!

In our dealings with the bank we were able to demonstrate to them, that the client was backed by a family office, which eased the pressure on the client from the bank taking further action against them.

To learn more about our second mortgage / caveat loans click here.