Note Purchase and Private Shelf Agreement

Note Purchase and Private Shelf Agreement: What You Need to Know

When it comes to financing your business or commercial property, there are several options available. And one of them is note purchase and private shelf agreement. In this article, we’ll explain what note purchase and private shelf agreement are, how they work, and their benefits and drawbacks.

What is Note Purchase and Private Shelf Agreement?

Note purchase and private shelf agreement are two separate but related concepts in the world of commercial real estate financing.

Note purchase is a transaction where a lender (also known as a note buyer) purchases an existing promissory note from the original lender or borrower. In simpler terms, it’s like buying a loan that’s already been made. The note buyer pays a discounted amount for the loan, and they take over the right to collect the payments from the borrower.

Private shelf agreement, on the other hand, is a type of financing arrangement where the borrower establishes a line of credit with a private lender. The borrower can draw from this line of credit as needed, up to a pre-determined limit, without having to go through the process of applying for a new loan every time. Private shelf agreement is also known as a commercial paper program.

How Does Note Purchase and Private Shelf Agreement Work?

As we mentioned earlier, note purchase and private shelf agreement are separate concepts. However, they can be used together to achieve a specific financing goal.

Let’s say you’re a commercial property owner who needs to raise capital for a new project. You currently have an existing mortgage on the property, but you don’t want to refinance it because you’d lose your favorable interest rate. You also don’t want to take out a new loan because the process is time-consuming and you need the capital quickly.

Here’s where note purchase and private shelf agreement come in. A note buyer can purchase your existing mortgage note from your lender, giving you a lump sum of cash upfront. You then use this cash to establish a private shelf agreement with a lender. This line of credit allows you to draw down funds as needed, up to a pre-determined amount. You can use this money to fund your new project without having to go through the process of applying for a new loan every time.

Benefits and Drawbacks of Note Purchase and Private Shelf Agreement

Note purchase and private shelf agreement have several benefits:

– Speed: Note purchase and private shelf agreement can be quicker than the traditional loan application process.

– Flexibility: Private shelf agreement gives borrowers the flexibility to draw down funds as needed, which can be helpful for projects with unpredictable timelines or expenses.

– Favorable interest rates: Note purchase can help borrowers keep their favorable interest rates on their existing loans.

However, note purchase and private shelf agreement also have some drawbacks:

– Cost: Note buyers typically purchase notes at a discount, which means borrowers might receive less cash than they would get if they refinanced their loan.

– Risk: Private shelf agreements can be riskier than traditional loans because the borrower’s creditworthiness is continually evaluated, and the lender can reduce or eliminate the line of credit if the borrower’s financial situation changes.

– Complexity: Note purchase and private shelf agreement can be complex, involving several parties, negotiations, and legal documents.

Conclusion

Note purchase and private shelf agreement can be useful financing tools for commercial property owners and businesses. However, these arrangements are complex and require careful consideration. Before pursuing note purchase and private shelf agreement, it’s essential to speak with a financial expert who can help you evaluate the pros and cons and determine if it’s the right choice for you.