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Tried this on another board but got nothing. Probably not Dr. T's expertise, but I think he knows everything, so worth a try:


Developer has one LLC that owns the property for the development local government want to invest in. This LLC mortgaged (when in default on previous mortgage)to a mezzanine financier for significantly more than needed to pay off previous mortgage.

Meanwhile, another property owned by a different LLC associated with the developer had been sold in a foreclosure auction. It was repurchased during an extended redemption period at a date suspiciously close to that of the mezzanine financing for the other LLC.

Is it legal to take financing to one LLC, written into the mortgage for that property, and spend it for another property by a different LLC? (Both LLCs are shell companies for the developer, of course, but they are set up as legally different with different managers of record.)

Thanks.
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Tried this on another board but got nothing.

You got nothing? Or, you got a response that wasn't what you wanted to hear?

irasmilo contributes a great deal to the Tax Strategies board. Why do you dismiss his reply so casually?

rv
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irasmilo contributes a great deal to the Tax Strategies board. Why do you dismiss his reply so casually?<i/>

His analogy was incorrect. It may be that two LLCs loosely connected to a parent company can transfer funds legally, but that is not the same an individual refinancing the house and buying a new property. Here financing was given to one LLC with what apparently was a belief that the money would be used for the specific project. It is unclear to me that they would have any right to foreclose on the other, but that's way over my head. I remember Ira from long ago and he helped me with tax stuff, but I think he misunderstood the issue.
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Lokicious,

You wrote, His analogy was incorrect. It may be that two LLCs loosely connected to a parent company can transfer funds legally, but that is not the same an individual refinancing the house and buying a new property. Here financing was given to one LLC with what apparently was a belief that the money would be used for the specific project. It is unclear to me that they would have any right to foreclose on the other, but that's way over my head. I remember Ira from long ago and he helped me with tax stuff, but I think he misunderstood the issue.

I think in general one LLC could transfer funds to another LLC through several legal means. One would be a promissory note; another would be an equity purchase; another might be issuing a special dividend to the parent company with the proceeds sent to the other LLC as part of a capital injection. Funds get transferred between subsidiaries of conglomerates using mechanisms like these all the time.

However, the terms of the Mezzanine financing might call for the funds to be used for a specific purpose or for the LLC to maintain certain capital levels. I don't know if there are any laws broken here; but from the financier's viewpoint, that may not matter. What matters is if financier believes the funds were misappropriated or if they were used in a way that violates the terms of their agreement.

Given the personal guarantee you had previously mention, I suspect the financier knew what the money was being used for. By requiring the personal guarantee, it gives the financier the right to pursue both the owner and all of his LLCs' assets - not just the one with this property.

If you want make sure nothing funny is going on here, call the financier, tell them you are investigating this guy and ask them if they were aware of what you've found...

- Joel
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Thanks Joel,

Only thing that might fit here would be promissory note and B could not possibly pay back A except by selling property it bought back from bankruptcy (cash flow is still probably negative, which is why it went belly up in the first place).

J. Edgar's boys are actually interested. We feed them tips when we find something, but I don't like feeding bad tips, so I prefer some consultation first. I think this is probably one of those, here's what I've got, up to you to decide if it is anything.
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Lokicious,

You wrote, J. Edgar's boys are actually interested. We feed them tips when we find something, but I don't like feeding bad tips, so I prefer some consultation first. I think this is probably one of those, here's what I've got, up to you to decide if it is anything.

Man. The Feds? Maybe you should consider writing some of this stuff down and creating a book. Seems like several people have done well with that post-Enron and post-Lehman, etc.

Anyway, let us know if anything comes of this.

- Joel
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Man. The Feds? Maybe you should consider writing some of this stuff down and creating a book. Seems like several people have done well with that post-Enron and post-Lehman, etc.

These guys are a dime a dozen. Everybody, except City Hall and the local press, knows he's a crook (and maybe some in City Hall, too). The Feds know, but they've a lot on their plate, so those of us trying to work the political end sometimes are noticing things that might be illegal and pass them on. I think if they can get something to allow for searching the books, they'll pounce. But, as we know, a lot of stuff that should be illegal isn't.
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Hi Loki,

Both LLCs are shell companies for the developer

You have seen the shell game! Joel is absolutely correct, the financier would hold the key as to how the money could be used and may or may not put it in the "actual" contract. Which shell is it under? -

Those finance companies have literally hundreds of "affiliate" companies under the parent company a good portion are just legal entities, meaning no actual employees. They all have the required managing members, officers etc. depending on the structure but really just serve a booking entities where a loan may be booked in one, collateral may sit in another, and checks may be written by still a third. The money can get from one to the other legally.

So if I understand the scheme here, It would come down to what was written into the mortgage for that property - If it is specific in the mortgage or agreement that the money can only be used for XX, then it may be violating a loan covenant to redeem the other property but the money can get from one to the other with the stroke of a pen. And if the financier "understood" the redemption was going to happen he probably does not even care about the covenant. He has the personal guarantee which may encompass the two LLC's so it is just money from one pocket to the other....
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Thanks Dr. T. Wonderfully lucid, as always. There is nothing in the amended mortgage with the mezzanine financier specifying how the money is to be used. I may check the original mortgage again, which looked conventional when I glanced at it. I'll still pass a bunch of stuff on to the boys in gray, but I won't make a big deal about this. Politically, that there is nothing specifying the money be spent on the "tax incentive" project is added dynamite to the mortgage itself. The financier is never going to get the money back from the personal guarantor/developer—they made a stupid investment.

One more question about the wording on the foreclosure documents: at the date the foreclosure notice was published, $X million was owed on the Note “including interest on the amount due of $Y thousand per diem and all costs of collection.” The word "including" confuses me. Does interest continue to accrue during the foreclosure process (sale was about 2 month later)? What about during the redemption period (it took about 8 months after the sale until redeemed)?

Thanks.
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Oh, this is going to dig up memories.

From the bank side - Preforeclosure, there are accounting rules based on what the loan is rated. If the loan is rated "doubtful" or "loss" {two grades where full repayment is not expected} the bank stops accruing interest for regulatory purposes {cant count the interest as income cause it likely won't be realized income so the rules stop to make sure the "future is clear"}, however, interest can still "accrue" sorta behind the scenes so that if the borrower catches up he doesn't get a free ride.

Once it goes into foreclosure - clearly a bank can't count on accrued interest as income so again on the books it does not accrue. The bank wants to get its money and the loan had accrued some interest before the loan went into default (when the borrower was 30-60-90 days delinquent) so that is put in there. Again, the borrower has the right to redeem up to foreclosure and so to prevent a free ride a bank will still accrue the interest that would be required to catch up, it is just not recognized on the books as interest income during foreclosure.

d(Interest Income)/dT
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Again, the borrower has the right to redeem up to foreclosure and so to prevent a free ride a bank will still accrue the interest that would be required to catch up, it is just not recognized on the books as interest income during foreclosure.

Michigan allows redemption after sheriff's sale within a certain period, in this case extended. (The story is even stranger than that. I'll send you the whole thing privately, when I'm done writing it up.) Does that mean the actual amount that was needed to redeem would be the original principal as of date foreclosure notice was posted or that principal plus accrued interest for, in this case, almost a year from the time the notice was posted and 9 months after sale (law says to redeem pay back loan in full plus costs)? In writing it up, it there isn't accrued interest, I'll just drop the information about per diem interest.

You folks sure inhabit a strange world. This is going to be a novel, and this part is only one chapter.
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