Monday, May 23, 2011

Manhattan Bridge Capital: An Alternative To Lending

The foreclosure process is lengthy and expensive. Governments have enacted laws to protect home owners and their tenants to some extent by making sure the process is dragged out. As with all laws, however, there are unintended consequences. Making foreclosure a difficult process reduces the impetus to lend money in the first place, which has likely reduced the liquidity that would otherwise be available to a number of responsible borrowers. But one company in this business recently engaged in a transaction that appears to simplify the process rather significantly!

Manhattan Bridge Capital (LOAN) provides short-term commercial loans, and is a stock that has been *previously discussed on this site as a potential value investment.

The loans the company issues are generally secured against real-estate assets, which protects the company to a large extent in case the borrower fails to make good. But in one of its more recent transactions, Manhattan Bridge went a step further, as per the following note:

"On March 21, 2011, the Company purchased three 2-family buildings located in the Bronx, New York for $675,000, including related costs, and sold to the seller a one year option to buy back the properties. The buy back option was sold for $3,900, plus a monthly fee of $10,530 payable to the Company by the option holder for the life of the option. We believe that the option holder will exercise the buy back option within the next 3 to 12 months."

This is essentially a loan; the monthly fee can be considered interest, and when the buyer exercises the option, he will really be paying back the loan. But with this structure, if the borrower defaults, Manhattan Bridge just gets to keep the property. No lengthy foreclosure process involving 6 families and a property owner is required!

Loans secured by real estate offer some downside protection for the investor. But in Manhattan Bridge’s case, the investor is offered the opportunity to purchase such loans at a large discount. While the company does not earn a great return on its net assets at the current time, the company is attempting to scale its operations so that it can begin to earn a decent return. In the meantime, investors who buy at a discount to net assets do get a decent return for the price they are paying, along with the downside protection and upside potential that comes from buying a loan portfolio at a discount to face value.

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