The land developer loan default racket

Did you read about the developer who had to default on a 5.3 million dollar loan for a project in Denver? What of that? Poor guy has to give back his $5.3M play toy if he can’t pay for it, is that what you’re thinking? He bit off more than he could chew maybe? Hardly.

Particular real estate schemes vary in their complexity, but here’s what happens in a nutshell. Developer sets up a Limited Liability Corporation to shield himself and his colleagues from financial risk. This entity receives financing from the banks and passes the money on to the participants, the brokers, builders, and management. This pays for the land, the labor and the overhead, being the developer’s cut. Whom the developer chooses as participants might also be considered his cut, since the money goes to who he says.

The point is, the money goes. By the time the project is defaulted to the tune of $5.3M, the money is already spent. By that I mean the money is already earned/gleaned/pocketed. It’s not like defaulting on an auto loan and having your car repo’d. Sure the banks get to repossess the project, but the profit’s already been squeezed from it. The bank will put the property on the market, sell it for a fraction of what it’s worth, and take a loss. Their loss is applied against the bank’s income, so in essence since they pay less in taxes, the taxpayers pay for that deficit. The national deficit grows by an amount that the developer and his friends have pocketed. Some of it went for laborers and materials and local fees, certainly, but the management percentage, that’s theirs. And whoever provided the labor, or sold the materials, or received the fees won too.

And who buys the project from the bank? The next developer, who gets to do another number on us all.

I’ve seen developers at city meetings, tanned, one hand in their pocket of some loose fitting slacks, soft leather loafers, big smile, they’re the top of the food chain and they know it. But I don’t think there’s any harm in looking closer at how they prey on our economy, on you and I. And if you should chance upon one of them standing on some open space conversing with a partner holding blueprints, and he has to cross the road to get to back to his LX, I’d say give him a scare at least. He may know how to beat the system, but has he got your number?

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Eric Verlo

About Eric Verlo

On sabbatical
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