What are some of the "Challenges/problems" that can present themselves with this solution?

Refinance commercial property Jim and Suzanne had purchased a property in their old neighborhood because they knew of the need for low income housing for the area. They purchased the property for $500,000, and spent $ 300,000 and two years of their lives renovating the property. They are renting it at capacity now. The property has gross rents of $300,000 per year, and net operating income of $180,000 per year. Jim is a very experienced real estate investor, and he knew that his best chance for him to recoup his capital investment was to approach the banks after the property was "proving" itself. He approached the banks with the following scenario: Loan Request $ 800,000 Net Operating Income $ 180,000 Estimated Value (based on what Jim considered very conservative 9% CAP rate) $ 2,000,000 Projected Rate 7.5% Projected Term 240 months Estimated Payment $ 6,404.71 or $ 76,856.60 per year Debt Service Coverage 2.34 In normal lending environments this is a very conservative and safe loan of 40% loan to value. However, right from the start, he ran into obstacles. The lenders were not happy that the property was a former hotel, converted into an apartment building with only studio units. The loan was also small, which cut down the number of potential lenders to the local lenders. However, the local lenders do not like to lend to clients who are out of state, and therefore unlikely to have much of a banking relationship. Basically, their choice was narrowed down to a private money lender at a rate of 11.5% and 5 points, and at least 30 to 60 days to close. Their loan was also decreased to $500,000. After closing costs their net cash would have been $ 465,000, and their payment would have been $ 5,785.50 per month and the loan would be due in 5 years, at which time they would have to refinance the remaining balance of $ 415,443. Loan Solution Jim and Suzanne opened an account with Goldman Sachs under the Kinetic JBO agreement. They had approximately $ 1,200,000 in securities. Kinetic then placed their insurance instruments on the account and were able to provide a credit facility of $800,000 at 2.5%. The loan has no cost, and was closed within a week. Jim and Suzanne plan to pay this account down at the same pace the real estate loan required through the cash flow of the property. At that pace the loan will be paid off in 12 years. Meanwhile, the assets they pledged will stay on track for their investment strategy. In the meantime, if commercial real estate lending does improve, they can pay the line down at anytime with no prepayment penalties, and still have the amount available if they wish. Over the next 60 months not only will they save over $250,000 in interest, they will also have the additional $300,000 cash with which to invest in other projects.

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1) There is a challenge to find a tax question.

2) From your loan solution: "Jim and Suzanne opened an account with Goldman Sachs under the Kinetic JBO agreement." One challenge/problem I see is that Goldman Sachs was just charged with fraud by the SEC. Does that count as a challenge/problem?

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