Defaults: being reasonable can be rational

It may seem clear at first – your tenant (Jeff) signed an iron-clad lease.  Now, he hasn’t paid rent for 2 months.

So, do you go through the time-consuming (and, oftentimes, expensive) process of an evictionhoping you land a new (paying) tenant quickly, or is it more reasonable for you try to fashion a deal — one that never was envisioned in the rental agreement?

Suddenly, what had seemed so clear cut on paper is much more complicated.   

An analogous situation occurred with investors in a scrap metal business for which one of our affiliates raised money several years ago.   

Picture this: in the scrap business, there are machines that can take the front end of a bus and, in moments, reduce it to shards of metal…and fluff (loosely translated to everything besides the metal  (seat cushions, rubber flooring, window glass, etc.).  And, at the outset, we stipulated how much that fluff would be worth.  It was clear on paper.  Our investors were relying on that value to ensure they had plenty of collateral (assets that could be sold) to protect them in case the tenant” — in this case, the company owner  stopped paying them back. 

Well, that’s exactly what happened.  Just as the landlord had options, so did we, and we tried reasoning at first. But it became rapidly clear that payment was not forthcoming. So, on behalf of the company’s investors, we called the loan (demanded repayment of the outstanding principal and interest that was due to investors).  Months later, after the company declared bankruptcy (and we had spent countless hours, paying lawyers to protect our claims on the collateral)our investors received very nearly all the moneys due. 

Once you’ve loaned money, there’s more to the story than meets the eye. 

If you’ve been smart enough to make sure you’ve got two ways to get repaid  through company profits AND through the possible sale of the collateral that secures your loan  how do you know the collateral is safely set aside? Six months into the loan, is it still worth what it did at the start? 

What happens if the company misses a payment? Are you equipped to track down the CFO, or comptroller, or part-time bookkeeper to find out what’s going on? Or you learn that they’ve stopped paying their suppliers…or worse? Have you got the financial resources, the time and the contacts to protect your investment? 

Investing in private debt may seem as unambiguous as rental agreement.  But always look for protections that have been built into the loan agreement  and make sure that, if things go sideways, you’re equipped to take immediate action to achieve the best possible results. Savvy investors understand that it’s not over until the money has been returned. 





In the interest of accessibility, here are some terms that any investor should be familiary with.