Fractional Private Money Loan

[Goretti Fong]

Hi BP, my first post here. Thank you for all your comments in advance.

I have been a SFH buy and hold investor and am considering this private money lending opportunity. The plan is to acquire two adjoining parcels in a prime California neighborhood and build four homes for sale. Land acquisition escrow is estimated to close this month after delays from May, due to issues with the city. Return is at a per annum rate, and payout will only at exit, either at the end of land acquisition and entitlement phrase (Q1 2017) or after construction and sale (Q1 2018). First position loan is less than 70% LTV, the offer here is a second position fractional loan among approx. 10 investors lending different amount. The investment is secured by a notarized promissory note and deed of trust. No personal guarantee will be given. The borrower is structured within a LLC. Planning/permitting and escrow communication is well-documented. Estimates seem to be conservative and pro forma comprehensive. I realize that this will be a high-risk investment but the return is also appealing.

Is this structure and process a standard one?

I am in contact with one other investor of this deal, would it be necessary to be acquainted with most of them? In case of default, each singular note would be treated separately, and priority based on investment fund proportion, correct?

Is it a high concern that personal guarantee is not given?

Wiring transfer of fund will directly go to the borrower (LLC), would it be possible to transfer to escrow for the land purchase?

Any comments would be much appreciated.

[Jay Hinrichs]

http://www.dre.ca.gov/files/pdf/forms/re860.pdf

For fractionalized loan in CA this is the form that must be used...

this is as you may or may not be aware the most vulnerable position a lender can be in.

notary of the docs is standard NOT THE NOTE  just the Deed of trust and offers no special protection other than the person who signed it has been witnessed by a notary.

read the form VERY carefully that the state of CA provides.. suggest you talk with attorney on this.

I normally am not one to advocate attorneys on the west coast for vanilla deals.. but there is a significant amount of risk in this deal.

you will want an intercreditor agreement with the first lender.

See many BP post when these don't go well and they have no agreement up front with first lender.

Also MOST good HML in CA are experts at fractionalized loans.. and can help as well..