"Syndicated Loan" - is this a thing?

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"Syndicated Loan" - is this a thing?

Nicholas Morgan
Cincinnati, OH · Member since 2018 · 85 posts · 29 votes

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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    Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    the attornies fee's will be far to much to raise such a small sum 100k.. 

    google fractionalized mortgages or deeds of trust what ever is used in the area you are working in.
    and see if they are legal. in some states they are Like California.  In Oregon they are Not.. for instance.

    only stipulation is a real estate broker has to do the disclosures for you ( CA law)

    Also you may want to just turn this into a TIC situation  were everyone is on title.

    but in reality 100ik in the big picture is simply a very small amount of capital.  And just getting  a loan form  HML or someone like that is probably the easiest and most cost effective.
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    • Taylor L.
      Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
      6y

      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.

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    • John Corey
      London · Member since 2019 · 722 posts · 386 votes
      6y

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

      0Reply
    • Nicholas Morgan
      OP
      Cincinnati, OH · Member since 2018 · 85 posts · 29 votes
      6y

      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

      0Reply
    • Jay HinrichsBusiness Member
      Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
      6y
      the attornies fee's will be far to much to raise such a small sum 100k.. 

      google fractionalized mortgages or deeds of trust what ever is used in the area you are working in.
      and see if they are legal. in some states they are Like California.  In Oregon they are Not.. for instance.

      only stipulation is a real estate broker has to do the disclosures for you ( CA law)

      Also you may want to just turn this into a TIC situation  were everyone is on title.

      but in reality 100ik in the big picture is simply a very small amount of capital.  And just getting  a loan form  HML or someone like that is probably the easiest and most cost effective.
      Podcast Guest on Show #222
      JLH Capital Partners51 Review
      WebsiteView Page
      1Reply
    • Jeff S.
      Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
      6y

      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

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    • Nicholas Morgan
      OP
      Cincinnati, OH · Member since 2018 · 85 posts · 29 votes
      6y
      Originally posted by @Jay Hinrichs:
      the attornies fee's will be far to much to raise such a small sum 100k.. 

      google fractionalized mortgages or deeds of trust what ever is used in the area you are working in.
      and see if they are legal. in some states they are Like California.  In Oregon they are Not.. for instance.

      only stipulation is a real estate broker has to do the disclosures for you ( CA law)

      Also you may want to just turn this into a TIC situation  were everyone is on title.

      but in reality 100ik in the big picture is simply a very small amount of capital.  And just getting  a loan form  HML or someone like that is probably the easiest and most cost effective.

       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

      1Reply
    • Nicholas Morgan
      OP
      Cincinnati, OH · Member since 2018 · 85 posts · 29 votes
      6y
      Originally posted by @Jeff S.:

      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

       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,

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