Hard money loans to business entities

[Rob Beland]

Can somebody @Ann Bellamy  please explain why hard money lenders only lend to business entities and not people? I'd specifically like to hear about any Massachusetts laws/regulations. Thank you. 

[Ann Bellamy]

I'd be happy to explain, @Rob Beland, and @Josh Caldwell, actually, we care a lot.

First, let me reiterate that I am not an attorney, and this is not legal advice.  It is simply what I have been told is the case and I believe to be so.  I have had multiple conversations with my multiple local attorneys, and they have spoken to the people at the banking commissions in both NH and MA.  

SAFE Act and Licensing

Since the advent of the SAFE act, residential lenders are required to be licensed.  So why don't hard money lenders simply get licensed?  Some do.  But the definition of "residential" differs slightly by state.  There are exceptions to every rule, but for the most part, the requirement stands.  And one of the requirements for residential licensing is that you must have been in the residential mortgage business for x years, I forget how many.  Since I've never been interested in lending to homeowners, and I started lending because I was a real estate investor, not because I wanted to sell residential mortgages, I of course don't have that residential experience, nor do I wish to gain it.  I wish to lend only to businesses, not to consumers.  

Commercial loans are one of the exceptions to the requirements.  Again, I understand this is not so in all states, so do not take this as advice!!!!  Anyway, one of the ways we insure that we are not making residential loans is by lending only to companies along with other steps we take to make sure the deal is strictly commercial.  If I were to lend on a shopping center that you wanted to buy in your own name, I'm still going to lend to you only if you take title in an entity.  Again, part of the process of ensuring that this is a commercial transaction.  I admit that I am overly conservative.

An offshoot of this, is that in many states, NH among them, the purpose of the funds also controls whether it must conform to residential guidelines.  So take that same shopping center.  Let's say you own it free and clear.  You want a mortgage on it to pay for your kids college tuition.  This is a household use, and means the loan must conform to residential standards in NH.  Since I don't do residential loans, I won't do that loan.  

We are very careful to view every loan request to meet the state requirements, and if there is even a whiff of residential, I'm out.  I never try to restructure the deal to make a residential deal into a commercial deal.  

Examples of this are:

"I'm going to buy it as an investment and rent it to my mother"

"I used to live in it when I was a kid and now I'm buying it from my aunt's estate and making it a rental property."

"I want to buy it to rent out and then eventually retire and live in it."

Are there local lenders who will lend to you personally?  Of course.  Either they are not doing enough loans that they think it's ok, or they don't know how strict the SAFE act is, or they just figure it doesn't apply to them, or their attorney is not knowledgeable.  This is why I advocate to new lenders to be sure to find an attorney who does lots of private lending transactions.  They stay up on this stuff for the lenders' benefit.

Homeowners

I'm not interested in lending to non-business people, nor are most hard money lenders.  All of my business, both in the properties I hold and the loans I make, are centered on business transactions and decisions made using rational business standards.  I'm not interested in working with consumers on home purchases.

Licensing

Some will say that lending only to entities is simply a misguided effort on the lender's part to avoid the licensing requirements.  Because of that, I have had multiple lengthy conversations with multiple attorneys.  And they in turn have had multiple conversations with local banking commissions.   All have yielded the same results, and so I structure my deals according to what the banking commissions and attorneys say in my states.  

Recourse

This does not remove the requirement for personal guarantees. All partners must still personally guarantee the note. In fact, most banks and mortgage companies that make commercial loans still require personal guarantees. Non-recourse is mostly reserved for the big guys with syndications and for self-directed IRA accounts.

Rob, I hope this partly at least, answers your question.  And Josh, I hope this explains why we care, and why personal recourse is separate from the borrowing entity requirement.   I'm sure there are still plenty out there who lend to individuals in spite of the law.