Natick Investment Project

This website will NOT function properly with mobile browser view, please switch to desktop site view (three vertical or horizontal dots), or use full function browser

Current Funding Status:

Tranche A: 75k/400k Committed

Tranche B: 0/450k Committed

Default Procedure & Risk Management

This component details the concrete, contract bound mechanics designed to address worst case scenarios, and when explored together with the LTV and Capital Risk Profile page of this website, prospective investors can gain a comprehensive understanding of the full risk management and downside protection mechanisms offered by this investment.

I. Mechanical Default Triggers

As with other construction based or construction adjacent investments, one of the greatest risk vectors of this project is execution risk. Unlike most construction based investment however, this investment was designed to minimize the impact upon investor capital should things go wrong, by employing hard coded, deadline based mechanical triggers which would unwind the entire project according to strict contractual provisions:

  • A total of 10 deadline based default triggers are specified under the Contract, 9 assigned to the project stage 1-9, and 1 for project maturity.
  • Stage 1 deadline is set at 30 days following full funding of Stage 1 Funding Principal, that the project shall unwind if Closing does not occur within said deadline due to inability to close.
  • Stage 2 deadline is set at 6 months following Closing, that the project shall unwind if the Borrower is unable to obtain project green light and demolition permit before the deadline, likely due to extensive and unforeseen permit and planning complications.
  • Stage 3 deadline is set at 10 months following Closing, that the project shall unwind if the Borrower is unable to provide proof that municipal foundation footing inspection has been passed by the Town of Natick for the Property before the deadline, indicating serious issues are present with excavation and site work required for foundation works.
  • Stage 4 deadline is set at 14 months following Closing, that the project shall unwind if the Borrower is unable to provide proof that municipal basement slab inspection has been passed by the Town of Natick for the Property before the deadline, indicating that serious issues exist preventing the timely completion of all basement/foundation related works (as the slab pre-pour inspection is the very last required step in the basement/foundation completion process).
  • Stage 5 deadline is set at 18 months following Closing, that the project shall unwind if the Borrower is unable to obtain satisfactory report from the Attorney engaged Independent Inspector for the Property before the deadline, confirming that all load bearing framing, roof, exterior sheathing, windows and doors have been completed. No reasonable issues should prevent the completion of this stage before the deadline except gross incompetence of the Borrower.
  • Stage 6 deadline is set at 22 months following Closing, that the project shall unwind if the Borrower is unable to provide proof that rough plumbing, electrical and applicable mechanical and gas inspections has been passed by the Town of Natick for the Property before the deadline.
  • Stage 7 deadline is set at 25 months following Closing, that the project shall unwind if the Borrower is unable to provide proof that rough framing and insulation inspections has been passed by the Town of Natick for the Property before the deadline, giving full green light to cover interior and start finish works.
  • Stage 8 deadline is set at 28 months following Closing, that the project shall unwind if the Borrower is unable to obtain satisfactory report from the Attorney engaged Independent Inspector for the Property before the deadline, confirming that at least 90% of the above grade wall and ceiling paint are completed, signaling roughly 35% completion of the interior works.
  • Stage 9 deadline is set at 32 months following Closing, that the project shall unwind if the Borrower is unable to obtain satisfactory report from the Attorney engaged Independent Inspector for the Property before the deadline, confirming that at least 90% of all floor and tile works have been completed, signaling roughly 70% completion of the interior works.
  • Finally, the last deadline is set at 36 months following Closing, for the actual project completion marked by successful exit, that a willing buyer has purchased the finished property thus allowed the full borrowed amount plus interest to be fully repaid.
  • All deadlines can be negotiated, but ONLY with the unanimous consent of all Lenders involved, without such consented exception, the contractual default shall govern.

The stage 1 default is the only pre-Closing default contemplated under the master Contract, as such, it is uniquely governed under Article VII 7.2.6 of the Contract and shall result in unwind as follows:

  • All Unreleased Stage 1 Funding Principal shall be returned to non-defaulting Lenders without deduction and without interest;
  • Deposit Principal of non-defaulting Lenders shall be returned;
  • Any Deposit Interest accrued and any incremental costs shall be recovered from the Collateral Reserve Escrow.
  • The project shall be deemed terminated unless the Parties unanimously agree in writing to re-attempt Closing under the same mechanics.

It should be noted, that the hard coded project level deadlines as described above already accounts for all possible delays and common issues, except for:

  • Impossibility to execute due to Act of God, which I myself will propose the termination of the project through the Majority Consent clause, whereby Lends holding at least 70% of the project stake must consent to the Borrower initiated termination proposal for the project to unwind.
  • Borrower incapacity, which is protected by the Borrower incapacity clause, stating that if the Borrower should fail to provide the required monthly progress update for more than 2 months, the project shall unwind.
  • Gross incompetence of the Borrower to execute, which is the actual worst case scenario, impossible to detect without regular Lender initiated or Agent initiated site inspections coupled with discretionary judgment, all of which are rejected by design under this project’s legal framework. That’s where the deadline based default triggers come in, forcing the project to unwind within 4 months intervals if the deadlines are not met regardless of circumstances, with the Collateral Reserve and the favorable real time LTV serving as the downside protection for all Lenders involved.

Reference: Loan Commitment and Escrow Agreement, Article VII, Article IX, 9.6, 9.7.

II. Default Procedures Generally

The master Contract is designed such that all foreseeable post Closing default scenarios are accounted for under Article XII, all of which result in the same set of confirmation and enforcement procedures:

Initiation:

All default procedures are Lender initiated under the Contract due to the lack of Agent monitoring duties. Any Lender may send written notice to the Collateral Agent asserting Default at any time, for any reason.

Confirmation Procedure:

Within 3 days of receiving such Default Assertion Notice, the Collateral Agent is duty bound under the Contract to validate the received assertion against one of the mechanical default triggers as listed above.

The validation process shall return a binary result either validating the Lender initiated assertion in which case the subsequent default procedure shall follow, or, invalidating the Lender initiated assertion.

In the case that the default assertion is deemed invalid through initial Administrative Review, but the Lender insist upon the occurrence of default, the Collateral Agent is then duty bound under the contract to use limited discretion for the purpose of independently establishing factual evidence beyond Administrative Review, in order to resolve the Lender default assertion challenge.

Confirmation Cost Allocation:

As all Agent related costs are generally borne by the Borrower except under default conditions, all costs associated with default confirmation and default assertion are also to be borne by the Borrower directly if proven valid.

However, if the Collateral Agent, in his ministerial capacity and his limited discretionary capacity, determines in good faith, that the Default Assertion initiated by a given Lender is invalid or false, then such costs associated with the discovery and confirmation of such false assertions shall be borne by the Lender who initiated such assertions.

Confirmed Default Notice

In the case that the default assertion is deemed valid by whatever means authorized under the master Contract, an official Confirmed Default Notice shall be sent by the Collateral Agent, notifying all parties that Default enforcement shall commence.

  • All interests shall cease to accrue and become fixed upon issuance of this Notice.
  • All unreleased Deposit Principal together with any unreleased Stage Funds held in escrow shall be returned to non-defaulting Lenders within five (5) Business Days following such issuance, with all applicable interest accrued thereon deducted from the Collateral Reserve Escrow.
  • The Collateral Agent is duty bound to continue with the prescribed enforcement procedures.

Post Confirmation Election of Enforcement Path:

Within fifteen (15) Business Days following delivery of the Confirmed Default Notice (the “Election Period”), the Requisite Lenders (those Lenders holding more than 70% stake in the investment) shall deliver written instructions to the Collateral Agent electing one of the exclusive enforcement paths being either statutory foreclosure, or agent-directed market sale.

Failure of the Requisite Lenders to timely deliver such instruction shall constitute an election of agent-directed market sale unless the Election Period is extended by unanimous written consent of all Lenders.

Agent Directed Market Sale:

As the standard foreclosure is very much self-explanatory, focus shall be given to the remaining enforcement path which is the Agent-directed market sale of the property:

  • Within ten (10) Business Days following election of Agent-Directed Market Sale, the Collateral Agent shall engage one professional appraiser and two licensed real estate brokers for the purpose of obtaining an average price to be used as the listing price for the market sale.
  • The Requisite Lenders must approve or otherwise amend the listing price within ten (10) Business Days following the receipt of the Collateral Agent issued Proposed Listing Price, silence from the Requisite Lenders is deemed as acceptance of said proposed listing price.
  • All subsequent price adjustment or offer approval shall require written approval of the Requisite Lenders, said Requisite Lenders may also elect at any time, to engage with one or more real estate broker, or to return to statutory foreclosure election.

Application of Proceeds:

All net proceeds received from any foreclosure sale, deed-in-lieu transaction, or agent-directed market sale shall be applied in the following order and priority:

  • First, all fees, costs, and expenses of the Collateral Agent arising in connection with any default, unwind, enforcement action, foreclosure, or agent-directed market sale shall be paid exclusively from the Collateral Reserve Escrow;
  • Second, to payment in full of all outstanding Tranche A secured obligations, including all released principal and all accrued and unpaid interest thereon, until such obligations are satisfied in full;
  • Third, only after satisfaction in full of Tranche A secured obligations, to payment in full of all outstanding Tranche B secured obligations, including all released principal and all accrued and unpaid interest thereon;
  • Fourth, to payment of any other amounts expressly payable to the Lenders under the Loan Documents; and
  • Finally, any remaining surplus shall be paid to Borrower, without setoff or recapture.

Reference: Loan Commitment and Escrow Agreement, Article XIII, Article XIV.

III. Other Risk Management Mechanisms:

Title Insurance:

The Borrower is Contract bound to secure title insurance for all Lenders at the time of Closing, and shall pay for associated costs directly.

Collateral Insurance:

The Borrower is Contract bound to secure exposure based collateral insurance once the collateral that could be exposed to potential risks like fire, theft, vandalism or Act of God…etc exceeds estimated $50,000.00.

Deed in Lieu:

The Borrower is Contract bound to execute A Deed in Lieu made to the Collateral Agent as the title holder for the purpose of liquidation on behalf of the Lenders immediately following Closing. This Deed in Lieu shall spring into effect upon Confirmed Default Notice, to assist with the speedy and orderly recovery of Lender funds.

Periodic Updates:

The Borrower is Contract bound to provide written project progress updates at least once every 30 days to all Lenders, with pictures included when applicable, in fact, failing two such updates would constitute a trigger for project level default.

Lender Access:

Any Lender may request access to the project site through the Borrower, as long as such visits do not disrupt construction activities, or results in communications to any workers, subcontractors, or officials. In all cases, Contract bound project default triggers shall govern.

Amendment Lock:

While it is possible to amend the master Contract, separate clauses within said Contract explicitly prohibit any modification that would alter or diminish the position of any party, unless such affected party or parties agree to such in writing.