Investment partnership in development land gone wrong - what options are available.

OK, so two brothers buy land valued at €2.4m with a variable 100% interest-only loan in 2005, currently there's 6 years to go on the loan. The land is currently valued at €400k and brother no. 1 does not have the means to develop the land. Everything was set to to be a 50:50 deal between the brothers and the loan is joint and several. The financial status of brother no. 2 is unknown (this is a hypothetical question posed) but can be considered to be consistent with a chosen plan for the first brother.

What options are open to said first brother? He has the assets available to swallow a land sale and full loan repayment but it would hurt. The loan is at 4.75% so is hurting his cashflow as long as he's carrying the debt.

Both are J&S liable so there is no exit clause for full loan liability. Paying IO is painful and is likely to be deferring the inevitable problems with paying the capital. Bank may not do a deal if it is clear to them that brother 2 has the means to service/repay the full debt. If it were me I'd be going to a good accountant/negotiator and putting together a plan to deal with this prior to the 6 year maturity date.

I am confused. Is this an exam question?

Or if it is a real life situation...

On whose behalf are you asking the question?

When they bought the land, what did their agreement say about development and the cost of development?

The two brothers need to sit down with each other and agree a plan.


Brendan

Yeah it's a case study question, not real life. Best of a worst case scenario that I can see would be to sell now as the cash flow hit is so punative, relative to any assumed appreciation in the land value. Just wondering if there's something I should consider.