Minority Ownership Of Real Estate And In Default Of An Unrelated Loan – A Defensive Strategy
It happens quite frequently – you go into default on your primary SBA guaranteed loan, or any secured bank loan, and when the bank examines your financial statement and tax returns to determine net worth and assets you are in title to, they see your real estate or other assets owned in partnership with others to which you have a minority position. The bank wants financials and appraisals of the assets, obviously with an eye towards either liquidation or, at the very least, determining additional net worth value for beefing up the Offer in Compromise requirements.
What’s next? Your partners would certainly not appreciate being a partner with the bank, not at all. But the bank may be asking for an assignment of your interest or even a liquidation of your interest in the asset. No matter what their desire it is nothing your partners want to deal with, and they do not have to if you plan accordingly.
It is not uncommon for partners to have an agreement to protect against such possibilities. It is an agreement between the partners that states that if any partner becomes insolvent, comes under attack from creditors, or files a bankruptcy or anything along these lines, the other partners have the right to take over the partner’s ownership interest in some meaningful and effective manner. This may be described as an opportunity to purchase the partner’s position, although this would require cash. If it were a note, the bank could take an assignment of the note and that would not work out either.
Another (and better) way would be to provide the partner with a “Hold-Harmless and Indemnification Agreement” to promise to indemnify him for the debt on the partnership asset. No cash, yet adequate consideration that binds the deal and works for all parties involved. This mechanism deflects any interest of the bank in partnership assets when the partner is in default on a separate loan and the bank is looking to foreclose on his assets. Tricky, but it works.
This mechanism can also be implemented even after the fact of default and an agreement can be put into place at that time. It is a very important strategy when the facts line up.
