A Loan We Declined: Walking Away from Risk in Southern Utah

Situation

One of the loan brokers Actium had developed a relationship with recently approached us regarding a real estate investment loan opportunity secured by twenty residential building lots, located near St. George, Utah. The borrower was a home builder looking to build out the lots, and the broker told us that the loan to value ratio would be 50% – an attractive LTV to us. We decided to investigate further.

Due Diligence

Making the investment even more attractive, we found that the area of the collateral was experiencing strong growth. Unfortunately, we also found out that the 50% LTV ratio proposed was a function of the owner of the subdivision pledging twenty lots to us if we lent the full price of ten lots. This caused some concern for us at Actium, as the borrower was not making any investment with their own money. In our experience, when the borrower has no “skin in the game”, there is a much higher chance of default and loss. This development presented a problem.

Decision

Upon this discovery, Actium made the borrower an offer. We gave the borrower options regarding what we were willing to do, but required the borrower to either make a cash down payment for the lots or to pledge additional collateral. As neither of these options were acceptable to the borrower, Actium passed on the real estate investment opportunity given the borrower was not putting anything at risk themselves.