OPM & Notes

[Joshua Andrews]

This post is for you more seasoned transaction coordinators out there. Any feedback is appreciated!

I'm a newer note investor, picking up a few deals (performing and non performing). I have started sharing what I'm doing with friends/family business acquaintances and they have expressed interest in getting involved with me. They mostly have small amounts to invest, starting at about 10 - 30k.

After speaking with a mentor and someone I highly respect, I will at some point be using collateral assignments to basically borrow money from these individuals. However, I have more interest from these folks than I have assets to collateralize, and I can see this increasing in the future.

My Question:

Is there a method of utilizing OPM you've seen that might be helpful in this situation, specifically with notes?

My goal is to give these folks a fair return, while giving me some form of ownership on the notes purchased, with as little recourse as possible. Any thoughts on something like this?

- Josh

[Dion DePaoli]

The collateral assignment suggestion here is not really a good idea.  Collateral assignments would mean the lender would have privilege to take over the asset in case of default by you.  Based on the audience to whom you are speaking that seems like it would take one problem (your default) and replace it with another (a defaulted underlying loan).  If the folks who are investing do not work with loans, they will struggle to get their money out, if they have to.  That is aside from the potential issues you will face with priority of their contributions since the capital the investors contribute seems a bit small.  If you average $10k per investor you will be putting in more than one investor into any asset of 'normal' size and if we approach median property values and the associated loans, you will have many.  You can certainly prorate this, but you will need some pretty lengthy disclosures.  And I am not sure you fully understand what it all means.  (ergo the question I suppose) 

There is more detail here that matters but the security issue is also going to be a problem.  You are selling an investment to the public, whether you know them or not, they are still protected.  Since I didn't see what your investment plan has been or might be with them involved it is hard to comment on a better way to structure this.  One of the ways would be form an investment structure that qualifies for security registration exemption.  Let it be known, this quickly gets into complicated stuff and details will matter.  A lot.  It is not just about recourse, redemption and other capital management ideas come into play.  

This becomes a whole different enterprise and I am not sure you fully understand it just yet.  There will be disclosure requirements.  There might be registration requirements.  There will be accounting requirements.  Depending on total capital raise their may be audit requirements.  The best analogy I could give you would be you go from running your own investment business to now being an investment fund where you manage the asset investments plus the reporting requirements to the investors.  The path here takes you from being a note investor to being a capital manager.  

The problem here is you want to 'stay in the deal' instead of letting them (the investor) take all the rights of the whole loan.  You might just think about letting them buy the loan from you and get out of the asset clean and simple.  That way their risks are their own and so are yours.  That is probably best way for you to approach this all right now until you understand more about the asset class and are prepared to really structure this sort of enterprise properly.