Structuring HML business with outside investors

[Brian Borchert]

Hello, 

I'm starting a hard money lending business and I am struggling with my business structure. Let me give you the lay of the land as I've intended to set it up and the issue that I'm having.

We've formed a stand-alone LLC that will act as the intermediary between the hard money borrower and the hard money lender. Our intention is to match one investor with one borrower and not to create a revolving pool or fund. The LLC entity would hold the executed Promissory Note, Loan Agreement, Mortgage Instrument, and Personal Guaranty with the Borrower. Investors would only be afforded a return on their money from the interest on the loan and we would make our cut on a little additional interest and the points on the loan. Not a get rich quick scheme but something more to grow with over time.

My predicament is - what sort of document do I execute with the investor to: (1) memorialize the terms of the investment; (2) inform them of the risks associated with the investment; and (3) alert them that when there is a cash call for an underwritten deal that they are accountable to wiring funds?

We do not want this to be an equity interest arrangement that the Investor would be an owner in the LLC entity. The arrangement would just be that the Investor gets 10% or 12% of the interest on the loan and that there is potential that their money could be locked up longer if there is a loan extension or a deal goes sideways and foreclosure proceedings are necessary. I don't think a Subscription Agreement document would apply because that implies that the Investor has an ownership stake. Any thoughts or advice on this issue? Thanks so much.

[Derek Dombeck]

We use a servicing agreement with our investors. The notes and mortgages are from Best REI Funding to the borrower to prevent our customers  from going around us to the underlying investors. At each closing, we assign the notes and mortgages to the lender, so they own the note immediately. We get paid the points and interest spread for underwriting and servicing the loan.