Analysis of Multi-Party Transaction

Overview:

On March 30th, 2006, Party A secured an ~$11.5m Construction Deed of Trust for the purposes of developing Property X. On July 2nd, 2010 Party D instructed Party E to initiate foreclosure on the unsold units of Property X. Said property reverted to a Party E reversion entity October 4th, 2010 with a ~$5m credit bid.

 

Transaction:

On December 6th, 2011 Party B purchased the unsold units in Property X from Party D for ~$4m. On February 15th, 2012, Party B purchased the remaining Property X assets at Trustee’s Auction with a ~$1.25m credit bid, bringing his total investment to ~$5.25m. On December 16th, 2011, an investor group formed by Party A announced the purchase of Property Y for ~$7m from Party B. The transaction was to be completed in two phases:

 

  • $4.38m for 970 acres to close on or around December 15, 2011
  • $2.79m for 524 acres to close on or around February 15, 2011

 

Analysis:

We speculate that Party A enlisted the support of Party B to execute a complex property exchange which ultimately sees Properties X and Y reverting to their original ownership arrangements with far less debt in the case of Property X and an appreciation of value and consideration for Party B in the case of Property Y. Should our hypothesis prove correct, Party A regains Property X without encumbrance for the ~$7m purchase price for Property Y and reversion of said property. The prior encumbrance less the purchase price represents an increase in the balance sheet value of the property of ~$4m or ~40%. Party B regains Property Y with a recent sales price valuing it at ~$7m and ~$1.7m in profit if no consideration accompanies the exchange. That profit represents a ~30% 2-month ROI. 

 The entity that loses in this scenario is Party D whose only available recourse against Party A is to foreclose the property and auction it at a steep loss. This holds regardless of the extent of collusion between Parties A and B, although the magnitude of the loss might have been mitigated had they been aware of the non-arms-length nature of the bidders.

 

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