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December 8, 2021 – The Debtor filed a motion seeking authority to access up to $12.0mn of debtor-in-possession (“DIP”) financing which is to be provided by prepetition lender Hankey Capital, LLC ("Hankey" or the "Lender”), with the financing to be used to cover expenses in respect of a property located at 944 Airole Way, Los Angeles, CA 90077 (the “Real Property”) [Docket No. 66] and to see the Debtor through a sale of that property. The Real Property is the famous/infamous Los Angeles megamansion "The One" with DIP lender Hankey the largest of secured lenders and owed $123.8mn in respect of prepetition debt.
The Debtor argues that it is sitting on a comfortable $148.2mn equity cushion, but that even if its own valuation is a bit off (say by $75.0mn), it has "more than substantial funds to pay all allowed claims in full." Notwithstanding that apparently very plush equity cushion, the Debtor was not able to interest any third party lenders, although undoubtedly a few of the 15 potential lenders marketed used the opportunity to do a bit of on-site diligence at The One. In the end, the DIP lending role fell to Hankey Capital, the most exposed of several secured lenders (who have otherwise fought amongst themselves as well as with the Debtor, but apparently have nonetheless acquiesced to Hankey's role as DIP lender), with Hankey in line for 8.5% interest on the loan and a 1% facility fee.
The Debtors' motion outlines what it believes to be the pecking order amongst its three largest secured lenders with Hankey Capital's $123.8mn followed by Inferno Investment Inc.'s $20.9mn (although the motion notes that as to this loan "Subordinated to Hankey per Subordination Agreement (2nd Position). Claim being investigated and not deemed allowed") and then YOGI Securities Holdings, LLC's $27.2mn ("Junior to Inferno (3rd Position). Claim being investigated and not
Hankey touts itself as "a private direct lender originating bridge financing in the 3 million to 100+ million dollar range secured by real estate located in California. We specialize in time-sensitive and value-added deals underserved by banks and other traditional capital sources. In addition, Hankey Capital offers structured finance solutions (including Debtor in Possession financing), totaling over $500 million in recent deals. Currently, Hankey Capital has over $850 million in loans on its balance sheet."
Yogi Securities Holdings is led by doctor-turned-real-estate-investor Joseph Englanoff who has accused Hankey of manipulating the sale process for its own benefit.
The motion notes, “The Real Property requires some work to be fully completed, which the Debtor believes will cost approximately $5-$10 million. However, even in its current state of near-completion, the Real Property can be and has been marketed for sale. The Debtor believes that the Real Property has a current fair market value of approximately $325 million in its “as-is” nearly complete condition.
Based on…information available to the Debtor regarding alleged unsecured claims, the Debtor believes that the overall pre-petition claims asserted against the Debtor total approximately $182.6 million, with approximately $179.2 million of such claims allegedly secured by the Real Property and approximately $3.4 million in unsecured claims. Thus, the Debtor has approximately $145.8 million of equity in the Real Property. Even if the Real Property sold for substantially less than $325 million, for example $250 million, the Debtor would still have $70.8 million of equity in the Real Property and more than substantial funds to pay all allowed claims in full.
Pending a sale of the Real Property, the Debtor needs additional funds to pay certain expenses, which are set forth in the Budget attached hereto as Exhibit ‘3’ and include expenses related to, among other things, insuring the Real Property, the maintenance and upkeep of the Real Property, and the uninterrupted provision of utility services to the Real Property, all of which are essential to the Debtor’s efforts to protect the estate against loss and market and effectuate a sale of the Real Property as soon as possible for the highest price under the circumstances. The Debtor will suffer immediate and irreparable harm if the Debtor is not able to pay the expenses set forth in the Budget, pending a final hearing on the Motion.
Not including the Debtor’s existing alleged secured lender creditors, the Debtor contracted approximately 15 potential lenders seeking proposals for debtor in possession financing. The Debtor also reached out to Hankey, Inferno, and Yogi (i.e., the Debtor’s alleged senior secured lenders) seeking proposals for debtor in possession financing. The Debtor was unable to obtain sufficient financing from sources other than the Lender on terms and subject to conditions more favorable to the Debtor than under the Loan Agreement, likely because putative lenders were not willing to lend to a debtor without regular income and substantial liens on assets without obtaining liens to protect and secure claims arising from postpetition financing. Indeed, no putative lender contacted by the Debtor was willing to provide financing on an unsecured or even administrative priority basis. All potential lenders required a first priority lien on the Real Property (junior only to valid real property tax liens) to secure any debtor in possession financing.
Accordingly, the Lender requested that the Debtor provide, and the Debtor agreed to provide, the Lender with the DIP Liens (i.e., a first priority lien on the Real Property and Personal Property) pursuant to Section 364(d), as well as the other protections provided for in the DIP Loan Documents and Financing Orders, as described in the preceding Notice of Motion and Motion, to protect and secure the Lender’s claims arising from the DIP Loan.
After considering the lack of better alternatives, the Debtor concluded, in an exercise of its sound business judgment, that obtaining the DIP Loan and providing the DIP Liens and other protections afforded by the DIP Loan Documents and the Financing Orders is in the best interests of the estate and its creditors.
Importantly, the Debtor is informed and believes that (1) Inferno, the Debtor’s alleged second position secured lender, and (2) Yogi, the Debtor’s alleged third position secured lender, will not oppose the relief requested in the Motion.
Hankey is a prepetition lender. However, the proposed DIP Loan is being done as a stand-alone basis and is based on terms that were better than those offered by other existing and potential new postpetition lenders. Further, the terms of the DIP Loan were the result of arms-length negotiations between the Debtor and the Lender. Thus, any credit extended, loans made, and other financial accommodations extended to the Debtor by the Lender have been extended, issued or made, as the case may be, in ‘good faith’ within the meaning of Section 364(e).”
Key Terms of the DIP Loan:
- Borrower: Crestlloyd, LLC
- Lender: Hankey Capital, LLC
- Commitment: Up to $12.0mn
- Interest Rate: The Interest Rate is a fixed rate of eight and one-half percent (8.50%) per annum, calculated on the basis of a 360-day year and actual days elapsed.
- Default Rate: Five percent (5.0%) in excess of the Interest Rate.
- Maturity Date: The earlier of:
- February 28, 2022 or if Borrower has duly and timely elected the Extension Option in writing, April 30, 2022;
- the closing date of any Asset Sale affecting all or substantially all of the Real Property;
- the effective date of any Restructuring Plan of Borrower confirmed by the Bankruptcy Court; and
- the acceleration of the Loan as a result of the occurrence of an Event of Default
- Use of Loan Proceeds: Loan Proceeds shall be used solely in accordance with the Budget, including for payment of the Facility Fee, Lender’s reasonable attorneys’ fees and costs incurred in making and documenting the Loan, title insurance premiums, escrow fees, the Extension Fee, and the Carve Out and Borrower’s working capital needs and to administer the Chapter 11 Case, including insurance, repair, maintenance and construction costs with respect to the Property. Without limiting the foregoing, no Loan Proceeds or proceeds of the Collateral may be used: (a) to finance in any way any investigation, action, suit, arbitration, proceeding, application, motion, or litigation of any type, provided that the Loan Proceeds may be used to review and investigate claims asserted against the estate, including claims of Lender: (i) adverse to the interests of Lender or its rights or remedies under this Agreement, or the other Loan Documents, (ii) adverse to the interests of Lender under any prepetition financing arrangement with, or equity interest in, Borrower, (iii) for monetary, injunctive or any other relief whatsoever against Lender, or (iv) to prevent, hinder, or otherwise delay the exercise by Lender of any rights and remedies under the Loan Documents, or applicable law, or the enforcement or realization (whether by foreclosure, credit bid, further order of the Bankruptcy Court or otherwise) by Lender upon any of the Collateral; (b) to make any distribution under a Restructuring Plan; (c) to make any payment in settlement of any claim, action or proceeding, before any court, arbitrator or other governmental body without the prior written consent of Lender; or (d) to pay any fees or similar amount to any Person in connection with any Asset Sale (including so-called “topping” or “breakup” fees) without the prior written consent of Lender.
- Fees and Expenses: On the Closing Date, Borrower shall pay Lender all reasonable costs and expenses of Lender incurred in the preparation of this Agreement and the other Loan Documents, including attorneys’ fees, which on the Closing Date Lender shall be authorized to advance to itself from the Loan Proceeds. In addition Borrower shall pay all costs of closing this Loan, including title insurance premiums, escrow fees and other fees incurred in closing, and Borrower shall owe Lender a fee of $120,000.00, which is equal to one percent (1%) of the Aggregate Commitment (the “Facility Fee”), which Lender shall be authorized to advance to itself from the Loan Proceeds. From time to time thereafter, upon demand by Lender, and on the Maturity Date, Borrower shall pay or reimburse Lender for all fees (including attorneys’ fees), costs, and expenses associated with the enforcement of rights and remedies set forth in this Agreement and the other Loan Documents.
DIP Budget (see Exhibit F of Credit Agreement, with latter at Exhibt 2 of DIP motion)Background
On October 26, 2021, Crestlloyd, LLC (“Crestlloyd” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Central District of California, lead case number 21-18205. The Debtor, the developer of Los Angeles megamansion "The One," is represented by Levene, Neale, Bender, Yoo & Golubchik L.L.P. Bankruptcy court documents list Lawrence R. Perkins of SierraConstellation Partners LLC as the Debtor's manager.
The Debtor's lead petition notes between 50 and 99 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtor's three largest unsecured creditors as (i) Creative Art Partners ($750,000), (ii) Brandon Williams ($400,000) and (iii) C.G.S. Custom Glass Specialists ($389,904).
According to an article published by CNBC, Nile Niami and his Crestlloyd limited liability company, "have borrowed more than $165 million to build and sell 'The One' [over the past four years], according to property documents."
The article further states, "The largest lender is Hankey Capital, founded by Los Angeles billionaire Don Hankey, which has over $115 million in loans on the property. Yogi Securities Holdings, led by doctor-turned-real-estate-investor Joseph Englanoff, has loaned 'The One' over $36 million. Two other entities, Inferno Realty and Maybach Corporation Holdings, have provided loans of $7 million each."
In March 2021, Hankey issued a notice of default on the property. The Los Angeles County Superior Court placed the property into receivership in July and appointed Ted Lanes of Lanes Management as the receiver.
Auction Pushed Back
An October 14, 2021 Los Angeles Times article published on Bakersfield.com notes the the foreclosure auction scheduled for "The One" was postponed by the Los Angeles County Superior Court until October 27th after "Englanoff alleged that Hankey reneged on an agreement to have the house completed and sold by real estate brokers, and instead was using the auction process to unfairly take ownership of the mansion or hog the proceeds if it is sold to a third party.
Englanoff, a Los Angeles-area physician and real estate investor who lent $30.2 million to Crestlloyd in 2018 through his Yogi Securities Holdings, states in legal filings that he is still owed $22 million.
He said in a declaration that he had agreed to Hankey's proposal to appoint a receiver in July to finish the house so it could get a certificate of occupancy and be sold through a traditional listing… However, he accused Hankey of pushing ahead with the auction for the billionaire's own benefit even after two brokers last month agreed to list the property for $225 million."
According to the LA Times report, Hankey initially provided an $82.5mn loan to the Debtor in October 2018. Hankey subsequently lent an additional $23.5mn to Crestlloyd, and Yogi Securities provided $30.2mn.
Now, the report explains "Yogi also says the subsequent loans and a change to the original profit-sharing agreement invalidated the first priority position for Hankey’s entire debt. In other words, should the house sell, Englanoff argues, Hankey should not see a penny until Englanoff’s own debt is repaid in full."
This is not Niami's first foray into bankruptcy. The Wall Street Journal reported on December 9, 2020 that a company controlled by Niami filed for bankruptcy in respect of a home he built in West Hollywood.
That property was also reportedly subject to foreclosure after "a limited-liability company tied to Canadian investor Lucien Remillard, one of [Niami's] lenders and a longtime partner, filed a notice of default on the property." Lucien's son, Julien Remillard's, Inferno Investment also provided a loan to the Debtor for "The One" in 2015.
The WSJ article also states "One of the property’s biggest lenders is a limited-liability company tied to Joseph Englanoff, a real-estate investor and another longtime partner of Mr. Niami. Mr. Englanoff took control of another of Mr. Niami’s projects, a Beverly Hills spec house with a 'car museum' that was once priced at $100 million," but later sold that property.
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