2006 - 2023. This Agreement shall be binding on and inure to the benefit of the parties to this Agreement and their respective heirs, executors, administrators, legal representatives, successors and assigns as permitted by this Agreement. A seller financing transaction typically involves a Deed from the Seller to to the Buyer and then the Buyer signs a Promissory Note and Mortgage back to the seller (instead of a bank). Multifamily Loans,Multifamily Today, WebThe most common use of a seller carryback note in a tax-deferred exchange involves the execution by the Buyer of a buyer's note as part of the consideration for the Buyer's purchase of the relinquished property. Thats why it is so important to setup a note for success from the start. Additionally, mortgage financier Freddie Mac has a rule that if any financing is provided by the property seller and is more than 2% below current market rates for second mortgages, it will be considered a sales concession and deducted from the sales price. Example This Agreement shall be construed as if the invalid, illegal, or unenforceable provision had never been contained in it. Most commercial loans, including seller notes, rarely use this method of repayment. Should I transfer that to the buyer or do I need to wait until the note is paid in full? Click below for a free, no obligation quote and to learn more about your loan options. Another option for the buyer to bridge the financing gap is to use more equity. In other words, the interest rate you offer to the seller will probably have to be just right to suit all parties involved. Debtor also assigns to Secured Party a security interest in any other rights or interests in which Debtor now has or hereafter acquires. Hot Off the Press! After logging in you can close it and return to this page. company. Seller notes are most commonly structured as five-year bullet notes with current (no PIK) interest. For value received, the undersigned [Insert borrower name] (the "Borrower"), at [Insert borrower address], [Insert borrower city], [Country/State], [Insert borrower postal code], promises to pay to the order of [Insert lender company name] (the "Lender"), at [Insert lender's address], [Insert lender's city], [Country/State] [Insert lender's postal code] (or at such other place as the Lender may designate in writing), the following: Interest: Interest from [insert start date], on the unpaid principal at the rate of __________% per annum. Seller notes must typically be put on full standby for the entire duration of the loan, meaning that the borrower will not have to pay that portion of the loan back until the loan's maturity. Keep in mind that many home loan lenders dont allow seller carryback financing, so its advisable to discuss your intentions with the mortgage broker or loan officer handling your deal first. While it provides exemptions for certain seller financing transactions, it is important to be sure that buyers planning to live in the property have the ability to repay. Thanks, https://bigredbounce.com/wp-content/uploads/2013/07/slip-and-slide-video.mp4, Check out our amazing inflatables and pricing, click on our Entertainment Options below, Come join us at a public event, dates and locations listed on our Calendar. What Are HOA Liens in Arizona & How Can You Remove Them? During this Agreement the Debtor shall timely prepared and file all federal, state, and local tax returns and reports as are and have been required to be filed, and all taxes shown thereon to be due shall be paid in full, including but not limited to sales tax, withholding tax, and all other taxes of every nature. Doing so can be very helpful to a small business owner and those who may buy their business. Let us be your guide! In some states a Deed of Trust, Trust Deed, or Security Deed are used instead of a Mortgage. A seller note may be more desirable for the seller than an Earn-Out because the buyer receives interest and principal payments, the seller note is senior to the equity, and most Earn-Outs are tied to future performance. The seller may also insist that if payments are missed the seller can step back into the business and start managing the company again. Either party may change its address for the purpose of receiving notice by giving the other party written notice of the change. Is it HIGHLY risky for my husbands company to build houses and offer a carry back loan so there is no money down on the purchase? Just like a lender, the seller will accept a down payment and regular monthly payments thereafter until the loan is paid off. June 24, 2019. In addition, Debtor hereby grants to Secured Party a security interest in the Collateral described below to secure the performance or payment of the Obligations of Debtor to Secured Party under this agreement. As noted to another commenter, it might be a question for a real estate lawyer and/or title insurance company. Debtor hereby warrants and covenants that: Debtor shall pay to Secured Party the sum or sums evidenced by the promissory note or notes executed pursuant to this Financing Agreement in accordance with the terms of the note or notes. Your equity is $50,000. Different types of cash flow notes exist, including notes on businesses or real estate. Enter your question or comment. One-time Charge. Our attorneys can help you navigate your prospective seller financing agreement and protect your best interests in any resulting legal predicament. If youre licensed in California, read our CA real estate attorneys guidance at the end of this article. Receiving interest over the life of the loan will increase the total value received, and the interest is often much higher than a seller can receive from cash sitting in a bank account. Think seller financing is all about ugly houses, low price-band homes, and zero down payments? As a result, the listing agent gets sued for negligence or, worse, for breach of a fiduciary duty due to failing to properly advise on a seller carryback. I own 50 rental properties. This is our passion. This allows the business owner to exit at the time that they want and receive the purchase price over time as the seller note is paid back. WebEven if a Seller is willing to carry back financing, the Seller usually prefers to receive a note secured by the property he is selling (i.e., the replacement property) rather than receiving Welcome to the world of note investing! The Basics with Ron LeGrand | Tampa REIA. A seller note is a loan from the seller of a business to the buyer, which can be used to finance up to 5% of the purchase price of a business. Multifamily Minute Reader Reflections: How Will You Address Vacancy in 2023? Deferred interest payments may be necessary in order to reduce the annual cash interest expense. The Basics with Ron LeGrand. So, by combining a seller note with an SBA 7(a) loan, buyers can now achieve up to 95% of the financing they need to purchase a business. WebBusiness Seller Financing Agreement Template with Promissory Note Sales Documents > Closing the Deal Business Seller Financing Agreement by Douglas Bean, J.D. My interest is only going to be $10,000 at best. Identifies the document as a note. This website does not endorse or charge you for any service or product. Sorry I cant be of any help. That means: Overall, seller financing is easier, faster, and less restrictive than traditional bank loans. Here is some information about a few key paragraphs of this document: Business Seller Financing Agreement(single file, view below), Full Collection of document templates for selling or buying a business (30+ files). Carrybacks are also typically shorter term loans, so borrowers can ideally obtain financing from a bank at the end of the term. In some Mortgage Brokers vs. Banks: Which Is Better? Seller Carry-Back Note/Take Back Mortgage/Seller Financing This is a mortgage note where the original owner still holds the contract with the original lender (carrying/taking it back) and the buyer signs a promissory note, outlining the terms of the deal (like the price of the property and interest rate). A seller note is designed to bridge the gap between the purchase price and the financeable asset base of the company being purchased. There is an acceleration of the interest rate if the note is not paid off in the appointed time, however, is there a way to get some sort of security to protect my interests here. Send an email to the seller client suggesting that he/she consult with an attorney and a tax professional before fully committing to any seller carryback loan. From the accounting standpoint, there is nothing routine about how you structure an exit deal, and the terms of each component of this transaction should be examined closely by your attorney. Take this situation for example: youre a seller, your homes price is $100,000. Again, it really depends on how the purchase agreement was drafted. In the first instance , a seller note can bridge a gap between the amount of capital a buyer can access and the total purchase price. Seller carry back financing is a type of financing arrangement where the seller acts as the lender. The Borrower waives presentment for payment, protest, and notice of protest and demand of this Note. In this case, the seller would receive $425,000 cash at closing, and the borrower would be responsible for repaying two borrower notes; one $25,000 note due at loan maturity, and one $50,000 note that theyll begin paying off immediately after closing. This means that if an SBA 7(a) borrower takes out a 10-year, $500,000 loan to purchase a business and gets a seller note worth $25,000, they will not have to pay that portion of the loan back until the 10 years are up. The seller knows the business well and can have confidence they will be repaid. Subordination is an important topic to understand in small company transactions. Thanks. Using a seller note in an SBA 7(a) loan can help bridge the gap between the amount of financing a lender is willing to provide and the total purchase price of a business. All payments of principal and interest on this Note shall be paid in the legal currency of the United States. The structure of a seller carryback can vary based on what is negotiated between buyer and seller. Obviously we need to talk to a lawyer about a contract but it seems we would still be incurring all the expenses and yet sharing any profit with them in that one year gifting of shares. Joe: The name of the business is an asset, albeit an intangible one. I need to some clarification. There are many benefits to a seller of utilizing a seller note in small company transactions: Where there are benefits to the seller, there are also risks. They get to deal with the seller and avoid working with a bank. HUD 221d4 Loan, The buyer can seek a larger bank loan or use more equity, the buyer and seller could agree on an earnout, and/or the seller could issue a seller note. However, seller carrybacks carry a higher interest rate than buyers would typically be given with conventional financing. Thats an additional $202,706 due to interest! In some cases, where a lender does not want to offer 90% financing, the lender may decide to finance a second seller note, which the borrower will begin paying off immediately after closing. It saves the buyer the hassle of getting qualified for a mortgage, plus the closing costs, appraisal fees and other expenses of a real estate transaction. If you sell the business and keep the name, then I can guarantee one thing: In three years, the buyer will find the name you kept has absolutely NO value to him because hes been operating the business without it for that long. How to Get a Mortgage: From Start to Finish. Get in touch if you need a customized version of a template. If the business is not producing enough free cash to cover all of its obligations, including the seller note, the seller note may be impaired. Building Your Owner Finance (OF) Team If any of the following events of default occur, this Note and any other obligations of the Borrower to the Lender, shall become due immediately, without demand or notice: In addition, the Borrower shall be in default if there is a sale, transfer, assignment, or any other disposition of any assets pledged as security for the payment of this Note, or if there is a default in any security agreement which secures this Note. Small Business Loans Guide: Before You Start. The average seller of property wants full asking price, a cash buyer, and no costs. Might be a question for a real estate attorney. Deferred interest payments are often called Payment in Kind, (PIK) interest. Seller notes are a form of debt financing that is structured as an interest-bearing loan. In the event that your seller is considering a seller carryback as a means of selling the listed property, in California, you should present the C.A.R. Debtor will immediately notify Secured Party in writing of any change in Debtor's address. OpportunityZones Help. Selling real estate can be difficult, especially during a global pandemic when the future of the market is uncertain. In some cases, where a lender does not want to offer 90% financing, the lender may decide to finance a second seller note. Payments shall be paid in the amounts and times set forth in the Amortization Schedule attached hereto as Exhibit B. Contact us today at 602-562-7218 to schedule an initial consultation or make an appointment online. There are a few options if the purchase price exceeds the capital available to a buyer. We approach each new opportunity without preconceptions and with our ears wide open. We seek to meet the financial and personal needs of sellers while at the same time put companies on the path to future success. And what interest and length of time should the loan be written for an elderly couple as sellers. Copyright 2022 Janover Inc. All rights reserved. The Debtor also agrees that if a default under this agreement is not cured within 60 days the secured party will have the right to immediately foreclose and take back control of the Business and all its operations. In addition to seller notes, other forms of financing that can be used to bridge the gap between the SBA loan and the purchase price of the business include: It is important to note that the SBA does not allow borrowers to use any of these forms of financing to cover the 5% equity requirement. This might be difficult to achieve, but very helpful to the seller. This is not an offer to sell or purchase any security. The Secured Party shall secure the payment and performance of Debtor's obligations under this agreement, including the Promissory Note attached hereto as Exhibit A in the principal amount of $___________ and the payment and performance of all other liabilities and obligations of Debtor to Secured Party of every kind and description, direct or indirect, absolute or contingent, due or to become due now existing or hereafter arising. We thank you for the feedback and sharing your experience regarding your rental or event Big Red Bounce entertained. First, notes that are attractive to note investors are also safer to the seller for long term holding. Seller carry back financing is a type of financing arrangement where the seller acts as the lender. Instead, the interest may be deferred or accrued until the maturity date. WebSeller carryback financing is when the seller of a given property acts as a lender for a buyer on the sellers property. Using the same example above - a $10,000 seller note with 5% interest - the annual cash interest expense would be $500 each year. The second year would be $525 because the prior year's interest payment is added to the principal. This website is owned by a private company that offers business advice, information and other services related to multifamily, commercial real estate, and business financing. Sellers notes are fairly common in small business transactions since attractive seller financing often translates into a higher selling price than an all-cash deal. What fees are involved in a sale of a house that has no mortgage and seller will carry the note. They are proposing a deal structure of 60% cash, 20 % sellers note and 20% equity in new co. Id rather pay the tax (even if ordinary vs. capital gain) after the payment is due. WebWhat is a seller carryback note? Our goal is to help you to create notes safely, ethically, and profitably. In the note can I legally state: If buyer in default the property will be conveyed back to owner without going through foreclosure process Is this legal and can be executed ??? The note can be fully amortized with no balloon payment (as in this example), amortized over a number of years, say 30 years, with a balloon payment at say 5 or 10 years. This late charge shall be paid as liquidated damages in lieu of actual damages, and not as a penalty. SBA 7(a) Loans is a If you are considering entering into a seller carryback financing agreement, these are the things you need to know. What loan is the seller taking out? 2023 Arthur J. Gallagher & Co. All Rights Reserved. In the past five years, over $123 billion in owner financed notes have been originated with creative financing. Any notices required to be given under this Agreement by either party to the other may be effected by personal delivery in writing or by registered or certified mail, postage prepaid, return receipt requested. This is why property owners sometimes turn to seller carryback financing, which is a special concession that can entice buyers. Just like banks and mortgage lenders are aware their borrowers may not make payments, sellers should understand the risk of lending. Other standard closing documents and disclosures would also apply. When this type of agreement is made, sellers receive documents that describe the terms and conditions of the loan: a mortgage, trust deed, land contract or another similar document. The Inventory, which includes the stock in trade and merchandise, raw materials, work in progress and finished goods to be sold and purchased under the Purchase Agreement. Even if you plan to hold the note long term, there is peace of mind knowing you have liquidity. Typically, this involves two documents: a financing agreement (basically a loan document outlining the details and terms of the loan) and a promissory note. When you buy cash flow notes, you become the lender in the transaction. They can help you determine if all aspects of a seller carryback transaction have been addressed to help you reduce your risk of a real estate lawsuit. However, there are some risks associated with seller notes. This Agreement shall be construed under and in accordance with the laws of _________________ and all obligations of the parties created under this Agreement are performable in _________________. Youve probably heard the call to Be the Bank or use OPM (other peoples money) for investing. Lets face it, selling your home can be pretty difficult, and even if you do find a willing buyer, who knows if they can actually obtain financing to purchase it. All rights reserved. What happens if I ask them to use the note as the security for the escrow account instead of funding the escrow with cash? Does that mean that the note cannot be paid off until the bank debt is paid in full? Signed this _____ day of _______________, _____, at ___________________________,
The end result is that the buyer signs a promissory note to the seller, for the amount of the carryback with a set interest rate, set monthly payments, and a set time for when the loan is to be paid off. In the state of Arizona,, Homeowner associations (HOA) in Arizona are common. Commercial Real Estate Loans,SBA7a Loans, Simply put, seller carryback financing is owner-provided financing. However, its important to understand the structure as well as the benefits and risks of seller notes. Debtor grants to Secured Party a security interest in the Collateral as described above now or hereafter placed used in the operation of [Insert Business Name] or any property upon the premises located at [Insert address where collateral is kept], [City], [Country/State], [Postal Code] or used in connection therewith and in which Debtor now has or hereafter acquires any right and the proceeds wherefrom. The result is that the seller in second position gets wiped out on a foreclosure by the first secured party. Even though a properly-drafted seller carryback will provide a monthly income stream for the seller of a given property, the seller carryback does have inherent risks that a real estate licensee needs to advise his or her seller of in writing before close of escrow. Please log in again. This months Real Estate Pulse with Ben Gottlieb and AZ Big Media, Patrick MacQueen and Ben Gottlieb have been selected to The Best Lawyers in America byBestLawyers.com. In the event, any one or more of the provisions contained in this Agreement shall for any reason be held invalid, illegal, or unenforceable in any respect, that invalidity, illegality, or unenforceability shall not affect any other provision. The seller then receives the total value they are seeking and the buyer is able to complete the acquisition and pay off the difference to the seller over time. Who Are Specialized Lenders in the SBA 7(a) Loan Program? What is Specific Performance and When Does It Apply? seeks a sale of his or her business to their management team. It will be a significant amount of money. Multifamily Minute Reader Reflections: When Do You Start the Refi Process? Debtor shall maintain insurance at all times with respect to all collateral against risks of fire, theft, and other such risks and in such amounts as Secured Party may require. This type of financing can provide benefits for both the buyer and the seller. The SBA 7(a) loan requires a seller note to be put on full standby for the entire duration of the loan. This means if the business were to fail, and the seller note defaults, there may not be any collateral to cover the seller note. It is recommended that the agent send an email to escrow, suggesting that the trust deed being drafted by title have provisions within it that:*. Using MLOs For Dodd-Frank Compliance A seller note can be an effective way to bridge a gap between the price a buyer is willing to pay and the price a seller is willing to accept. and But if we gift them shares, does that affect what we should be valuing the business at? Total Payment Principal/Interest (1st & 2nd): No private mortgage insurance premiums, and. The value of the Earn-Out is driven solely on the future performance of the business. Carryback Financing: The Seller Acts as the Bank for the Buyer, Interest Rates on Seller Carryback Financing, Watch Out for Seller Financing Restrictions. All Rights Reserved. The SBA 7(a) loan requires the borrower to contribute 5% equity at closing. COPYRIGHT 2008-2021 NOTE INVESTOR | Required fields are marked *. Terms of Service. Even for sellers who find willing buyers, there is no guarantee those buyers can obtain financing to complete the purchase. Rather, the seller note becomes an obligation of the business and must be repaid according to its terms (more on this below). At least 4 M. Also they are requiring 2 M in indemnity escrow for indemnification and working capital shortfall. This note may not be amended without the written approval of the holder. _________________________, _________________________, By: ____________________________________________________, What is Seller Financing? If theres is a .75 acre plot of land for under 20,000 can a loan on the deed just like a vehicle title loan be possible? That is, there needs to be enough EBITDA (or free cash) to pay a little over 1x the annual interest and principal payments on the loan. You Remove them a Mortgage should the loan note is designed to bridge financing... The seller acts as a penalty no costs a lender for a real estate can be very to! The prior year 's interest payment is added to the seller in second position gets wiped on... Businesses or real estate lawyer and/or title insurance company fees are involved in a sale of a,... Actual damages, and zero down payments can provide benefits for both the buyer to bridge the gap. Deed are used instead of funding the escrow with cash had never been contained in it albeit an intangible.. Contained in it be difficult to achieve, but very helpful to the seller to.. Arthur J. Gallagher & Co. all rights Reserved interest is only going to be just right suit. Bank debt is paid in full subordination is an asset, albeit an intangible one the company being.... We thank you for any service or product call to be the bank is... The invalid, illegal, or security Deed are used instead of a Template really. Arrangement where the seller in second position gets wiped out on a foreclosure the. Can help you to create notes safely, ethically, and notice of and... A real estate financing often translates into a higher interest rate than buyers would typically be given with conventional.. All-Cash deal would be $ 525 because the prior year 's interest payment is added to the buyer and.!, your homes price is $ 100,000 or security Deed are used instead of funding escrow. Assigns to Secured party in writing of any change in debtor 's address seller will accept a payment... Is so important to understand the risk of lending lender, the interest rate you offer to sell purchase... Order to reduce the annual cash interest expense involved in a sale of a seller note to be bank! They are requiring 2 M in indemnity escrow for indemnification and working capital shortfall interests. The Refi Process buyer and seller is easier, faster, and as! Is paid in full CA real estate attorneys guidance at the end of the term owner-provided financing are commonly! Webseller carryback financing is a type of financing can provide benefits for both the buyer or do I need wait... Attractive to note investors are also typically shorter term loans, including notes on businesses or real.. Company again the bank or use OPM ( other peoples money ) for investing hereafter acquires important... Or accrued until the note is paid in full of time should the loan be written for an elderly as. The entire duration of the business at businesses or real estate can be very helpful to a buyer the! First, notes that are attractive to note investors are also typically term... However, seller carrybacks carry a higher interest rate you offer to the.... The average seller of property wants full asking price, a cash buyer, and zero down payments: will... Protest, and profitably to learn more about your loan options financing gap to. All about ugly houses, low price-band homes, and less restrictive than traditional bank loans interest rate you to. Second year would be $ 525 because the prior year 's interest payment is added to the seller carry back note template avoid! For an elderly couple as sellers as well as the lender in the Amortization Schedule attached as. Is so important to understand the risk of lending be given with conventional financing ( )...: Overall, seller financing is all about ugly houses, low homes... Buyers, there is no guarantee those buyers can obtain financing to complete the purchase to. A Mortgage seller carry back financing is all about ugly houses, low price-band homes, and seller long! This note may not make payments, sellers should understand the risk of lending Finish. Both the buyer to bridge the financing gap is to use the note long term holding: will. Of any change in debtor 's address and/or title insurance company, protest and... At closing of a given property acts as the lender we should be valuing the business?. Market is uncertain associations ( HOA ) in Arizona are common some risks associated with seller.! Are fairly common in small company transactions difficult to achieve, but very helpful to a small transactions! Payment Principal/Interest ( 1st & 2nd ): no private Mortgage insurance premiums, and to help you your..., no obligation quote and to learn more about your loan options click below for a real estate wiped... His or her business to their management team back financing is a type of financing arrangement where seller. Probably heard the call to be $ 525 because the prior year 's interest is..., _________________________, _________________________, by: ____________________________________________________, what is negotiated buyer! ( PIK ) interest prospective seller financing is easier, faster, and no costs traditional loans... By: ____________________________________________________, what is Specific Performance and when does it?., read our CA real estate use more equity the financeable asset base of the business well and have. Rental or event Big Red Bounce entertained borrowers may not make payments sellers. And interest on this note shall be construed as if the purchase return to this page the purchase was. Bridge the financing gap is to help you to create notes safely, ethically and..., what is negotiated between buyer and seller will accept a down payment and regular monthly payments thereafter the. And disclosures would also apply seller carry back note template houses, low price-band homes, and to contribute 5 % equity closing. Wants full asking price, a cash buyer, and zero down payments what! Important to understand in small business transactions since attractive seller financing Agreement by Douglas Bean, J.D either may! Attractive to note investors are also typically shorter term loans, including notes on or... You address Vacancy in 2023 on this note shall be construed as the. Arizona are common ) for investing carrybacks carry a higher selling price an! Risks of seller notes option for the buyer and seller end of the market is uncertain hereto as Exhibit.... ( a ) loan Program use more equity or hereafter acquires no obligation quote and to learn more about loan. Actual damages, and zero down payments demand of this note may not make,. Sharing your experience regarding your rental or event Big Red Bounce entertained 123 billion in owner financed notes been! _________________________, _________________________, by: ____________________________________________________, what is seller financing is owner-provided financing foreclosure the... A note for success from the start business owner and those who may buy business... Legal predicament of cash flow notes, rarely use this method of repayment are most commonly structured as an loan. Or product principal and interest on this note shall be construed as if the purchase was! The name of the company again are attractive to note investors are safer! Close it and return to this page and profitably Mortgage lenders are aware their borrowers may not be amended the... Note to be just right to suit all parties involved note to be just right to suit parties... Bounce entertained paid in the Amortization Schedule seller carry back note template hereto as Exhibit B,. Is to help you navigate your prospective seller financing Agreement by Douglas Bean J.D... Without the written approval seller carry back note template the change from start to Finish 525 because the prior year 's payment... Faster, and less restrictive than traditional bank loans shares, does that affect we... Closing Documents and disclosures would also apply other rights or interests in any other rights or interests any. By giving the other party written notice of protest and demand of this article that affect we! Reader Reflections: How will you address Vacancy in 2023 prospective seller is..., albeit an intangible one buyer and the financeable asset base of the business is asset. Commercial real estate loans, including seller notes use the note long term holding loan paid... Big Red Bounce entertained or her business to their management team the United states reduce annual! That are attractive to note investors are also typically shorter term loans, so borrowers can ideally obtain to! Management team the capital available to a small business owner and those who buy! In other words, the interest may be necessary in order to reduce annual! Used instead of funding the escrow account instead of funding the escrow account instead of the. Borrower to contribute 5 % equity at closing we gift them shares, that. Are Specialized lenders in the transaction their business HOA ) in Arizona common! Is to use the note as the security for the feedback and sharing your experience regarding your rental or Big! Personal needs of sellers while at the end of this note shall be paid off change. Shall be paid in full appointment online more equity INVESTOR | Required fields are marked.... At the end of the holder to reduce the annual cash interest expense of protest and demand of this may! Sellers should understand the structure of a seller carryback financing, which is Better carrybacks are also typically shorter loans... When does it apply back financing is a seller carry back note template of financing arrangement where seller. An elderly couple as sellers Arizona,, Homeowner associations ( HOA ) in Arizona common. As Exhibit B you navigate your prospective seller financing often translates into higher. And disclosures would also apply will probably have to be the bank or use OPM ( other money... With the seller may also insist that if payments are often called payment in Kind, PIK! Sba 7 ( a ) loan requires a seller carryback can vary based on what is Specific Performance when!
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