Is there such a thing as group loans?

[James Furlo]

Sometimes, I come across a deal where it makes sense to have more than 1 private lender/investor. So far, I’ve had them all on title at different positions.

But instead of lining them all up at different debt positions, is there a way to “bundle” these folks together? It would look like a single collateralized loan to the property, where each investor gets a prorated return (and right to the collateral) and still receives a 1099 as a lender.

I know I’ll need to work with a lawyer to set up, but I’d appreciate any help to point me in the right direction. Is there a name for this type of “group” loan? Or are there any key terms/phrases I can research?

If you have any experience, I’d also appreciate some of the pros and cons. A huge pro is that I can loan on bigger deals. Or, potentially, open it up to more people with smaller minimums. But I’m not sure about the downsides.

Thanks for the help!

[Jay Hinrichs]

Quote from @Jeff S.:

A minor point, @James Furlo, but participation loans are typically loans shared or sold between banks. You’re asking about a fractionalized loan, also called a multi-beneficiary loan. Same thing, different participants.

Fractionalized loans enable many individuals or lenders to be listed on one loan as the beneficiaries, thus sharing the same debt position and with pro-rata ownership. Since loans are considered securities, most states require a security exemption, which can be prohibitively expensive.

At least one state, California, automatically grants licensed CA real estate brokers an exemption without requiring them to go through the expensive registration process.  Here, any licensed CA real estate broker can arrange a fractionalized loan with up to 10 investors who will share the same debt position. There are lots of restrictions but these are extremely common out here. It’s state-specific.

@Jay Hinrichs, from your neck of the woods, can tell you how these can be originated in OR, if that’s where your deals are located.

Fractionalized loans are not legal in Oregon without a security document and blessed by corporate securities I learned the hard way on that one :( Having done HUNDREDS of fractionlized loans when i had my Company in Oregon I had no clue U could not do it in Oregon did not even think to check.. I did a few and someone turned me in :) and sure enough I got a cease and desist and had to pay a fine and spend 20k creating what State of Oregon  calls a Real Estate paper offering !!.   this was my only black mark in 50 years of doing real estate sales and lending.

Many other states its fine though I know they do it a lot in IL and so on and so forth.. But OREGON nope..