Locating Gap Funders?

[Yonathan Cabrera]

Hi there, name’s Yonathan (per my profile…) 

I am trying to gain insight on the best strategies to pinpointing investors/lenders that are able to do secure gap funds. 

I have a GC friend in PA trying to request 196k, as a "gap" to supplement whatever the HML cannot cover. 20% ROI, 6 months.
It is secured with
 👇

Controlled Interest: We include our investors as a 51% controlling interest member on the borrower’s operating agreement. This gives them significant control and security.

Joint Venture Agreement with Personal Guarantee: We establish a Joint Venture (JV) agreement that includes a personal guarantee, providing an additional layer of security for our investors.

Memorandum Filing: We file a memorandum in the county where the property is located. This ensures that when the borrower exits, the title company is aware of the JV agreement, further protecting the investor's interests.

I’m just blown away at how hard it is to find people to do this since it quite honestly is a solid deal with the ins-and-outs planned out already. 

Tips? 

[Jay Hinrichs]

very easy to answer this..  Gap funding or junior position funding is highly risky.

your team has no real money in the deal.. PG's are worthless those that have PGs that are worth anything dont need gap funding they have the cash.

this is a play for folks you know well .. not for internet facebook BP etc.. people that do this do it because they know you like you trust you and think your a good operator.

Public has to many other choices that are much safer bet.. its not always about ROI with those with money.. And I can tell you u there will be some that read 20% and all that does to them is scream risk.

[Stuart Udis]

Jay is right, this is generally going to be a fit for the family members who love you the most. The PG is worth as much as the paper its written on. I also question how investors get away with using gap funding. I would imagine most misrepresent their sources and uses when they apply for their financing. I know if I were to send an operating agreement to a lender that reads "LP member will receive return of their capital and 20% annualized return" they would not approve the loan. If it were to read LP member owns XYZ% and will receive a certain percentage of proceeds based on property performance, that's a different story. Preferred returns would even be acceptable but not a straight interest rate play if the lender understands the structure. 

[Yonathan Cabrera]

Quote from @Stuart Udis:

Jay is right, this is generally going to be a fit for the family members who love you the most. The PG is worth as much as the paper its written on. I also question how investors get away with using gap funding. I would imagine most misrepresent their sources and uses when they apply for their financing. I know if I were to send an operating agreement to a lender that reads "LP member will receive return of their capital and 20% annualized return" they would not approve the loan. If it were to read LP member owns XYZ% and will receive a certain percentage of proceeds based on property performance, that's a different story. Preferred returns would even be acceptable but not a straight interest rate play if the lender understands the structure. 

I’m understanding the logic behind not having a certain sense of security and that the borrower (the GC) should reach out to those close to him. 

it’s exactly that, though. He has no one “close” to him willing to do so. 

But I guess an investor must be willing to sit down as we go over the three ways to protect the money they put in… 
just stumped is all I’m saying. 

thanks for the insight!! 

[Chris Seveney]

Best place to find this type of funding is in a group where people lend in this fashion which is essentially unsecured /100% financing

you will not find many to do this except those that are brainwashed by gurus who think it's a great idea

[Stuart Udis]

@Yonathan Cabrera There's nothing marketable about your GC/friends offer. He is securing expensive debt, not debt through a bank, isn't putting any capital into the deal and structuring the equity investment in a highly risky manner without any upside offered to the investor. In addition, committing ~ $200K requires some level of sophistication on the part of the investor and you are more likely to find someone to agree to your terms in smaller transaction sizes, but even that will be difficult. 

Everyone wants to be a GC or GC equivalent these days. Unfortunately most lack the balance sheet to obtain favorable financing, can't afford to put any skin in the game and fail to make a compelling reason for why the investment makes sense or to justify the structure they are seeking. This appears to be a text book case of this.

Assuming this is in fact a good deal, and your friend is a qualified GC, instead of trying to be the lead investor, he should be searching for someone who has the balance sheet to take down this deal on their and be a transactional participant. Perhaps in return they collect an acquisition fee,  collect a construction management fee & share in a portion of the upside. Very different terms than what your friend is seeking but more aligned with what your friend can offer the transaction from an investor's perspective.