"Syndicated Loan" - is this a thing?

Question

Hi everyone,

I've asked a similar question a while back, but I don't believe I clearly defined my goal and I am now re-asking with more clarification...

Here's my goal: get a loan from multiple individuals that sums to the amount I need. Use the loan to purchase a property with cash and follow the BRRRR strategy where I ultimately pay the private money loan back after performing a refinance into a conventional 30yr fixed loan.

Example: create a loan of $100k where 5 individuals each lend $20k. The loan could be an interest only payment, 12% interest, and 1 year balloon.

What's the best way to create a loan like this?

Here are my thoughts, please let me know what you think :

• Create a multi-member LLC where each lending individual owns a % equity of the LLC proportional to the amount of money they transfer to the LLC
• Create a business checking account where LLC members deposit their money
• The LLC lends the money for property purchase and the LLC has a 1st position lien on the property
• The LLC operating agreement defines that if I do not fulfill my responsibilities of loan payback and 75% (or some value) share of the LLC decides to foreclose on the property that the property will be foreclosed upon, sold, and the profit will be dividing among the LLC members proportional to their equity in the LLC

What is wrong with this idea? I am calling this a syndicated loan as it reminds me of syndication, but I'm not promising a return based on an asset performing - I'm just setting up standard loan terms. The goal is to pay the loan back in 7 months or less when I refinance into a conventional bank-backed loan.

Any advice would be very much appreciated!

Thanks,

Nicholas

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Nicholas Morgan · Answer

Thanks for the information, I will definitely look into the fractionalized mortgage.

My new plan is to switch from pooling funds and pursue an HML as you mentioned. My hope was to learn the groundwork of syndication now so that I can scale into larger properties as I progress, but it seems it's most cost-effective and simpler to go the typical HML route.

Thanks,

Nicholas

Nicholas Morgan · Answer

Hi Jeff, thanks for the input. I am definitely determined to purchase the property in mind, but I want to ensure I'm doing it legally. I appreciate your insight into the situation.

I plan to use an HML or a private lender who can front the total sum (either $66k or $80k depending on how we structure things).

I do think that if I could get a process setup where I can pool funds then I could do much more business moving forward. Even if it costs more money up front to get the proper legal docs/structures in place, I believe all of that will pay for itself moving forward. To be fair though, I'm not fully aware of all the fees and rules for syndication yet so I may be mistaken.

Thanks,

Jeff S. · Answer

You seem bound and determined, @Nicholas Morgan, and don’t want to believe that just because what you are trying to do is easy, that it’s also legal.  It’s not, unless you register as a syndication and follow some strict guidelines.

What you are doing is creating a mortgage pool.  That is, a group of investors pool money into a fund, held as an LLC, and the fund manager, you, lends it out.  Many of the larger private/hard money lenders operate like this (sort of) and they must all be syndicated.

Since the LLC is the lienholder, not the individual investors, they have no recourse to the properties and can’t individually foreclose.  As the managing member, do you see a conflict of interest loaning money like this to yourself?

You might read this thread, where a similar scenario was proposed by someone else.  It received similar answers:  How to physically collect money from private investors

Nicholas Morgan · Answer

Thanks for the replies! I was hoping since it was a simple loan structure and full payout it wouldn't be the same as a normal security/syndication deal.

I'll still pursue private lending from a single source, but I think if I can get a structure like I mentioned setup legally I could do a lot more in the future. I have quite a few contacts who want to invest $20k or so but at the moment don't have any one person interested in a large sum like $100k. For my current deal I'll pursue a typical private money/hard money lender.

Any advice for locating an SEC lawyer? Should I find one in my state (Ohio) or are the rules consistent throughout the country?

Thanks!

Nicholas

John Corey · Answer

In my opinion. You are pooling funds and creating something that requires SEC registration. Speak with a lawyer who focuses on security registrations.

Taylor L. · Answer

From a syndicator's perspective, this just looks like a different way to set up a syndication. You still appear to be selling a security.

For reference, when we syndicate a property we have a similar setup, in that investors buy units of the controlling LLC and earn a return passively. The SEC doesn't care that the LLC holds a lien position, they care about how the investors are being solicited and compensated.

Just find someone who will lend you the $100k in a straight up private money loan. There are a lot of such lenders out there. Definitely talk to an attorney.

"Syndicated Loan" - is this a thing?

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