Lender to Receive 30% of Stein-Brief Profits in Project : Deeds of Trust Disclose Terms of $68-Million Loan

In order to obtain financing to stave off foreclosure and permit continued development of its Monarch Beach project in Laguna Niguel, the Stein-Brief Group has agreed to give its new lender 30% of any net profits it might generate from the project.

Last week, Stein-Brief obtained a $68.25-million loan from Southmark Mortgage Co., a subsidiary of a large Dallas-based real estate and financial services corporation, that allowed the Laguna Niguel developer to restructure its finances.

Stein-Brief refused to say whether Southmark would have any equity interest in the development and David Stein, president of Stein-Brief, emphasized that Southmark was to be “strictly a lender, not a partner” in the project. Stein-Brief has refused to disclose any details of the financing agreement, saying it does not want to discuss publicly “an internal business relationship.”

However, deeds of trust filed at the county recorder’s office in Santa Ana say that in addition to repaying principal and interest on the loan, Stein-Brief has agreed to pay “contingent interest,” described as “equal to 30% of (Stein-Brief’s) net profits from the property . . . . “

Southmark officials were unavailable Tuesday to comment on the loan agreement.

Gary Wescombe, a partner in the Newport Beach office of Kenneth Leventhal & Co., a national real estate accounting firm, said he would have expected Southmark to demand a larger profit participation in the Monarch Beach project, especially because Stein-Brief had previously defaulted on a $49-million loan provided by its former lead lender, Avco Community Developers. “It seems like a low percentage for the risk they (Southmark) are taking,” he said.

Wescombe said he wondered why Southmark feels that the Monarch Beach project will solve its financial problems. “If they had problems before, what is to keep them from having problems in the future?” he asked.

Stein said in an interview last week that he believes it will be beneficial for the Monarch Beach project to have one lender rather than the trio of lenders it had in the past. Lenders, in addition to Avco, included Beverly Hills Savings & Loan Assn. and Western Savings & Loan Assn.

Another advantage, Stein said, is that Southmark has agreed to provide construction funds. He added that Stein-Brief had run out of construction money in December, 1985, when the company defaulted on the Avco loan. Because of the default, he added, the firm could not obtain additional loans for six months, during which time he said he and his partner, Barry Brief, had financed continued operations out of their own pockets to the tune of “millions of dollars.”