I'm searching for a major bank that would write a letter of credit on a $14 million dollar real estate development loan. My client is wishing to construct a golf resort on unencumbered land.

The obvious question here is….. Does your client have $14 Million in cash?

In essence the letter of credit will serve as a guarantee for the other loan, right? It really is similar to walking into a bank and requesting a line of credit for $14 million. Then you got to start thinking …. If the original lender was not willing to lend without an LC, what would make the second lender want to do the credit without one or something similar in the form of collateral?

As I stated, the land is unencumbered, which is the actual collateral for the loan and it is appraised well in excess of the amount of the loan. The original lender is a specialty lender, and in order to offer the rates they do, this is their preferred method of doing business.

Actual numbers would help, but for what I gather the collateral available is a second mortgage on the land. I guess one could argue it really is a first mortgage since demand on the letter of credit would payoff the loan and put the bank in first position. {assuming that the specialty lender is willing to give up his claim for drawing on the LC}

However, the risks associated with the deal do not change. You are essentially taking a risk using land collateral so appropriate loan-to-values come into play. In addition, the biggest risk is the inability of your client to perform or even worse that the project is a bust and your client can’t get permanent financing. This specialty lender has very low risk due to the LC, and all of the risk stays with the Bank.

Therefore, my initial statement of “It really is similar to walking into a bank and requesting a line of credit for $14 million. “ stands. Something like this would work if we were talking about your client’s project qualifying for the issuance of municipal bonds because of the type and location of the project. Then I can see how having a bank issue an LC as a “credit enhancement” for the bonds would work in order to get the low muni rates. I have seen this being done in those situations, but would like to know what kind of rates and structure this specialty lender can charge for going through the trouble of using two lenders.

Anyway those are my comments, I just want to make sure that you are aware that strict underwriting will be performed on this deal. It is not a case of the land is worth this much so give me an LC based on the equity.

One of the companies that I represent is ***************. They are a discounter of standby letters of credit. What that means is, if you can obtain a LC from a major bank, they will fund that LC (with a bank to bank transaction). The reason the bank would want to do this is that they get to collect the maintenance fees (normally about .375 to .75 basis points) plus a renewal fee, annually.

The reason the client will want to do it is that our rate is 100 bp over LIBOR, so when you put that together with bank add on's his rate should be about 5%. The lender charges 2% and I add 1% as a one time fee. If you keep the loan over 1 year, you simply pay small renewal fees, but I am not paid again unless the original loan goes up.

This is a terrific program for developers because if it is set up correctly you can use it over and over... as a revolver. No need to go get every project completely underwritten. It is also usually pretty simple to increase the loan amount, as long as you have assets to back it up.

Here are the items that the funder will need in order to process the request to fund an LC
A Standby Letter of Credit (a Bank Guarantee will NOT work) from an A1/P1 rated bank.
The bank contact information. My guy will call the bank to verify that the LC is real and to arrange the transfer of funds.
A simple one page description of the project and a list (with contact information) of the principals.
The fee agreement with the borrower and the breakdown of fees due the brokers (be prepared to include overnight or wiring instructions).
Remember, the whole transaction is a very simple bank to bank wire transfer transaction. So long as there is a good bank providing the LC, my guy will fund it. They are contractually obligated to fund about $10B of these a month. Once they have the above items, it takes about 7 business days +/-.

Funding LC's is the ONLY thing that this group does. What they DON'T do is issue them, so make sure they already have it in place as if they were accepting the funds from the bank.

The main benefit in using these guys is that the interest rate will be far below (normally a couple points below what the bank would charge if the customer accepted the funds from them) bank rates. The bank benefits because they don't have to draw down funds against their own account, yet they get to make maintenance fees. Yes, the cost of funds for the first year is about equal with the banks money, due to broker fees, but after that the only fees will be small annual maintenance fees and interest... far below bank rates.

Debbie:

My head hurts! So the bank issues the LC to be used as collateral for another facility {funded by your lender}.

Where is the bank's collateral?

The bank is going to have to underwrite the credit exposure.

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Debbie described exactly how the deal is going to go down once we find a lender willing and able to do the
LOC. The problem we've encountered is that the one principal(also the developer and also the original contact) on the loan we're trying to get approved for a LOC has no working relationship with a bank. Hence the original "cry for help" on my part. But I am now realizing my own short-sightedness in not seeing that there are other principals(silent) on this deal with whom we might be able to arrange the deal around. I've been trying to honor the "silent partner" status of said principals, but if they want this to go thru, it's time to pull out all the stops. All y'all's feedback has been appreciated, thanks!