From the BiggerPockets Blog

 BiggerPockets Blog »

Jump to Forum View All

Click a category below to view different forum categories.

BiggerPockets

General Info

BiggerPockets Q&A, Site Questions, & Announcements

1523 topics, 14446 posts — Last Post 04/23/14, 11:00PM

BiggerPockets Exclusive PRO Area

118 topics, 844 posts — Last Post 04/23/14, 08:28AM

New Member Introductions

10985 topics, 86554 posts — Last Post 04/23/14, 11:21PM

Real Estate Success Stories

398 topics, 6209 posts — Last Post 04/23/14, 10:06PM

General Real Estate

General Real Estate

Buying & Selling Real Estate

5992 topics, 47211 posts — Last Post 04/23/14, 11:01PM

Renters

650 topics, 5861 posts — Last Post 04/23/14, 07:39PM

Get Foreclosure Help - Help Stop Foreclosure Forum

317 topics, 2561 posts — Last Post 04/23/14, 08:28PM

Home Owner Association (HOA) Issues & Problems Forum

238 topics, 1611 posts — Last Post 04/23/14, 04:02AM

Do it Yourself

658 topics, 6316 posts — Last Post 04/23/14, 09:50AM

Reviews & Feedback

Real Estate Deal Analysis and Advice

3709 topics, 29744 posts — Last Post 04/23/14, 10:00PM

Real Estate Guru, Book & Course Reviews and Discussions

1139 topics, 11599 posts — Last Post 04/23/14, 10:59PM

Ask About A Real Estate Company

743 topics, 7344 posts — Last Post 04/22/14, 11:25PM

Real Estate Investing

Real Estate Strategies

Wholesaling

5636 topics, 43959 posts — Last Post 04/23/14, 11:14PM

Rehabbing and House Flipping

3352 topics, 31098 posts — Last Post 04/23/14, 10:55PM

Real Estate Development & New Home Construction

554 topics, 4694 posts — Last Post 04/22/14, 09:17PM

Innovative Strategies

705 topics, 6044 posts — Last Post 04/22/14, 04:06PM

Tax Liens, Notes, Paper, & Cash Flows Discussion

867 topics, 6692 posts — Last Post 04/22/14, 08:22PM

Rent to Own a.k.a. Lease Purchase, Lease Options

699 topics, 4937 posts — Last Post 04/23/14, 08:00PM

1031 Exchanges

143 topics, 1062 posts — Last Post 04/22/14, 03:21PM

Foreclosure Investing

General Foreclosure & Pre-Foreclosure Forums

1691 topics, 11313 posts — Last Post 04/22/14, 09:26PM

HUD, VA, and Tax Sales

416 topics, 3103 posts — Last Post 04/23/14, 02:29PM

REOs

1217 topics, 10603 posts — Last Post 04/23/14, 08:46PM

Short Sales

1539 topics, 13154 posts — Last Post 04/23/14, 08:25PM

Landlord & Tenant Forums

Landlord & Rental Property Questions

7249 topics, 71172 posts — Last Post 04/23/14, 11:10PM

Mobile Homes & Mobile Home Park Investing

639 topics, 5144 posts — Last Post 04/23/14, 07:57AM

Investor Basics

Starting Out

7733 topics, 60684 posts — Last Post 04/23/14, 11:26PM

Investor Psychology

431 topics, 6107 posts — Last Post 04/20/14, 06:04AM

General Real Estate Investing

4730 topics, 37325 posts — Last Post 04/23/14, 09:36PM

Real Estate Investor Marketing

1738 topics, 14148 posts — Last Post 04/23/14, 08:20PM

Commercial Real Estate

Commercial Real Estate Investing Forum

1413 topics, 9012 posts — Last Post 04/23/14, 11:23PM

Multi-Family and Apartment Investing

1123 topics, 9393 posts — Last Post 04/23/14, 09:28PM

The Business of Real Estate

Real Estate Technology and the Internet

Real Estate Technology, Social Media & Blogging

644 topics, 4911 posts — Last Post 04/23/14, 04:03PM

Business Basics

Goals, Business Plans & Entities

833 topics, 7585 posts — Last Post 04/23/14, 08:58PM

Real Estate Finance & Legal

Financial, Tax, and Legal

Tax, Legal Issues, Contracts, Self-Directed IRA

2802 topics, 20136 posts — Last Post 04/23/14, 06:57PM

Property Insurance

311 topics, 2057 posts — Last Post 04/23/14, 01:20PM

Personal Finance Discussion

330 topics, 2754 posts — Last Post 04/22/14, 12:06PM

Loans, Mortgages, Credit Lines

Private & Conventional Lending Discussion

2852 topics, 19845 posts — Last Post 04/23/14, 10:36PM

Creative Real Estate Financing

1221 topics, 8857 posts — Last Post 04/23/14, 11:21PM

Crowdfunding Real Estate

35 topics, 463 posts — Last Post 04/19/14, 06:24PM

Real Estate Professionals

Real Estate Professionals

Real Estate Agents

1217 topics, 8026 posts — Last Post 04/23/14, 07:59PM

Bankers, Lenders, and Mortgage Brokers

442 topics, 1931 posts — Last Post 04/23/14, 09:04PM

Contractors

269 topics, 1690 posts — Last Post 04/22/14, 07:33AM

Local Real Estate

Local Real Estate

Local Real Estate Networking & Recommendations

2016 topics, 11756 posts — Last Post 04/23/14, 10:03PM

Americans & International Real Estate

162 topics, 568 posts — Last Post 04/14/14, 11:19AM

Foreigners Buying in the USA

62 topics, 409 posts — Last Post 04/10/14, 06:27AM

Canadian Real Estate

65 topics, 439 posts — Last Post 04/22/14, 09:27AM

Marketplace

Real Estate Marketplace

Real Estate Marketplace

15083 topics, 54133 posts — Last Post 04/23/14, 11:33PM

Real Estate Events and Happenings

168 topics, 2606 posts — Last Post 04/23/14, 10:05PM

Off-Topic

Off Topic

Off-Topic

2907 topics, 32444 posts — Last Post 04/23/14, 10:18PM

Housing News & Real Estate Market

920 topics, 8391 posts — Last Post 04/23/14, 02:43PM

BiggerPockets Real Estate Investing Summit

97 topics, 1752 posts — Last Post 04/23/14, 04:51AM

BiggerPockets Resources

Forums » Private & Conventional Lending Discussion » Private money lending and CA usury law

Private money lending and CA usury law

15 posts by 5 users

Signup

Rehabber · Simi Valley, California


As a rehabber, I'm willing to borrow money at more than the usury-limited rate of 10% (I live in California). I have seen posts in the past indicating that private money can be loaned at higher interest rates if the borrower is a company (we have an LLC). However, I have done a bit of searching online and I have been unable to find applicable California law that would corroborate this, other than if the company already has $2million in assets and has a previous working relationship with the lender.

Does anyone know if it is true in California that a loan can have more than 10% interest as long as it is a company (LLC) borrowing the money, regardless of the company's asset value or previous relationship with the lender? If so, can you please point me to the corresponding law explaining it?

Thanks for any assistance!



SFR Investor · Orange County, California


There are several exceptions to the California usury limit, especially when it involves real estate.

http://ag.ca.gov/consumers/general/usury.php

http://www.yourlegalcorner.com/articles.asp?cat=biz&id=97



Rehabber · Simi Valley, California


Thanks for the reply, Mitch. This is great!

I looked over all the laws, and I did find an exclusion that might be the exemption I have seen others refer to. It only applies if a person makes a commercial loan no more than once in a 12 month period, though. This would rule out using an individual investor's funds on more than one property per year, which seems limiting.

Other than that one, I didn't see anything that would be a general exemption from the usury law that I could use. We're not real estate brokers, or pawn shops, or any of the other things that would automatically exempt us. I guess there was one other thing, which was the "shared appreciation loan", but that would mean sharing profit, which I'd rather not have to do in every case.

I guess maybe we can just limit the interest rate to 10% and not worry about the usury law, but then I'm not sure if that would be competitive with other Flippers.

I feel like I'm missing something. Or maybe everyone else is just ignoring the law because really, the Flipper is the borrower and as such, they're not going to report the person they're getting money from.



Rehabber · Santa Clarita, California


Originally posted by Mike G.:
I feel like I'm missing something. Or maybe everyone else is just ignoring the law because really, the Flipper is the borrower and as such, they're not going to report the person they're getting money from.
From the flipper's side, you are right. If you are willing to pay more than 10%, you are risking nothing, only the lender and why would you complain unless you never wanted them to lend to you again.
That said, it is the responsibility of the lender and the risk of the lender to charge more for loans here in CA unless it is made using a DRE license.

I often pay higher than 10%, but often it is from a private investor whom I have borrowed from in the past and have a working relationship with.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Rehabber · Simi Valley, California


Okay, so it seems like I kind of came to the right conclusion/understanding.

Thanks for the response, Will!



Real Estate Lender · Chicago, Illinois


This is not legal advice. I am not a lawyer but this is what my lawyer says to do.
Any state's laws can typically be "imported" on a per deal basis. Contracts have a clause that says "This contract shall be under the laws of X state"

Find an out of state lender and draw up the note and mortgage under his state laws if they have commercial exemptions like most do.

All that said, you really just need to find a lender to trust you. Usury laws are virtually never enforced except on a complaint from a borrower. You are the borrower. So if the lender understands that under no circumstances would you complain or cooperate with an investigation, he is really under no risk violating the law, as a practical sense.
You can also structure deals as low interest with a percentage of profits kicker with a cap.



Rehabber · Simi Valley, California


Hi, Eric.

Thanks for the ideas. I was actually thinking of one of those (percentage of profits with a cap) after reading about the shared appreciation exception in the legal code. Good ideas, and I think you and Will are right - it would mostly boil down to trust between the lender and us anyway.



Rehabber · Santa Clarita, California


One of the easiest ways to give yoru lender a "warm and fuzzy" is to include in your note the following: Borrower understands that this note is in excess of the state usury laws and hereby agrees to perform to the specific notes of this agreement. Furthermore, this loan is not primarily for personal, family or household purposes, but for business purposes only.

Disclaimer: This is NOT legal advice and the wording was not written by an attorney. It is for infomational purposes only.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Rehabber · Simi Valley, California


Another excellent idea - thanks, Will!



Rehabber · Santa Clarita, California


One final thought: Usury laws are exempt in CA and many other states if a licensed broker is involved in the transaction.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Real Estate Investor · Springfield, Missouri


Well, Happy Holidays! IMO, the best way would be to build in lending opportunities into your LLC for a private lender to become a member and lend the money through the capital account. If properly drawn, there is no doubt that it is a commercial loan and the collateral is held by the LLC and assigned to that lender.

Drafting any clause that is contrary to state law may well be worthless as many rights, especially consumer rights or protections provided by law can not be relinguished by the consumer or individual even if by agreement. And, the fact that a borrower agrees to pay an amount over the usury rate is a violation of the lender, not the borrower.
An example of this is when a corporation, say a small cell phone company, incorporates penalties in their contracts that require additional fees for collections of a late payment. Usually under state law, late fees will have some cap and making additional charges in connection with such a payment will be viewed as part of the late fee. The consumer can not waive such rights.
Even by paying the fees.

I have also seen where usuary laws were violated that the lender ended up owing a fine to the state, but never had to remit overages to the borrower, especially when the loan had been paid off and the borrower was long gone.

Will is absolutely right that in a private lending arrangement, where no compliance audit is performed by the state that if a borrower never complains, it may go undetected. But borrowers die, they become incapacitated and others may end up standing in their place to wind up business, so from the lending side, it would not be wise, IMO, to simply have a usurus note.

State law should be investigated with peripheral laws as well, references to usury within any state may include tax law, commerce and other secured lending requirements where they may become applicable. So I suggest you see your attorney.

Any lender that does business in another state must abide by that state law, where the collateral resides, the home office is irrelevant. Think about it, Bank of America may have its national or international headquarters in one state, but the loans they make elsewhere are written to conform to the state law where the loan is made, and with real estate loans, that means where the collateral is located.

As to a shared appreciation arrangement, I'd suggest going back to the LLC suggested. If you have a formal partnership, that may also work out for you. To do any shared appreciation agreement in connection with a loan or subject to a loan being made, you will still be in viloation as the Truth In Lending Act requires all loan expenses or other charges made in connection with the loan be computed for the APR, and it will be generally be the APR that any usury rate will be applied to. Ahh, but this is a private lender and the TIL may not apply, ahhh, but, if the private lender is in the business of lending money, it may very well apply.

Without a doubt, IMO, the best way is for the lender to be in the LLC as a very limited member, make a contribution to capital and receive the applicable profits, a small rate of interest and his principal back. Good luck, Bill


Financexaminer@real estate investor dot com


Rehabber · Simi Valley, California


The suggestion to have a private money lender be a partner in the LLC does not seem feasible to me, unless you create a different LLC for each property. Maybe creating a new LLC each time is a reasonable solution in another state, but it doesn't seem realistic here in California. Forgetting the potential legal fees, just creating an LLC costs $800 here.

And then there is the timing issue. I wonder if it would even be possible to arrange everything quickly enough. From the time the offer was accepted, you'd have to present the opportunity to the lender, get them on-board, file the LLC, get the EIN and documentation from the state, setup a bank account, deposit the funds, and then wire the money before close of escrow. As a flipper, we need to close fast, so our offers generally specify a closing time of two weeks. Maybe it would be possible to move this quickly somewhere else, but I don't think this is even remotely possible in California. If I'm wrong, I'd love to hear from others how this could work.

As for the shared appreciation mortgage, the law in California seems to be quite clear that any of the money that comes from the appreciation of the property is not counted as part of the interest rate. Mind you, I'm not a lawyer, but the Civil Code specifically refers to this in a number of places.

As for Will's comment about the broker involvement, he is correct in that if the broker arranges the deal, it will be exempt from the usury law. However, I have read that it can't just be a broker signing off on it, because that likely wouldn't hold up in court; it would have to be the broker actually negotiating the terms of the loan. So I've read, but I've obviously never tested this and can't point to a specific case.



Real Estate Investor · Springfield, Missouri


Hi, yes, but I didn't mean form seperate LLCs or even one to lend out of, not at all. Your existing LLC that owns the property to be purchased (I assume) would admit a member, that member would provide the capital. If you're using an individual lender, that's an option, if it's an organized HML type, that might be harder.

A member can be admitted that has no voting rights, no management rights and can be limited in any respect that you desire. They can be passive and make contributions, receive any per cenatge of profit even up to a dollar limit, interest and principal. Sorry I didn't break that down.

I didn't read the CA statutes. I understand what you're saying about the two, but I was saying that if the shared amount was ONLY on the condition of making a loan, the finance department might look at it as a LOAN CONDITION, and not just a shared appreciation....I don't know if CA specifically is saying a loan with shared appreciation is not interest, it obviously is a benefit and consideration to make a loan, a cost of borrowing the money, almost the definition of interest.

Again, the individual lender would be admitted to the existing LLC, don't need to make new ones, and after the loan is paid off, take them out of the LLC, or they could remain dormant until the next loan. You could have a dozen such members. You would also need to make them feel warm and fuzzy, like providing them with a hold harless and indemnification covenant and limiting their liabilty....I'm talking about individuals here.

I have not read CA statutes again, but the SAFE Act really means that the Originator/broker will do the entire loan, and there is also the CFPA requirements too. As a seller, you may not dictate any terms or interest, that's on the way I believe. This being applicable to loans secured by residential property, so the commercial loan excuse may not fly. This is why making the individual lender a member makes it clearly a commercial loan to the company. The company owns the property and there is no deed of trust to the lender, the security agree,ment is in the Operating Agreement, among owners. That's really why I suggested you see an attorney, this is not a do it yourself thing to construct. By any means, Good Luck....


Financexaminer@real estate investor dot com


Rehabber · Simi Valley, California


Bill, sorry I misunderstood your original suggestion, probably because the idea of having additional members in my company causes a knee-jerk fear reaction. :)

Okay, getting over that reaction, are you saying that the private money lender, as a member of the LLC, would make a capital contribution to the company rather than a loan? And then upon the sale of the property, that member takes a distribution of the entire amount of their initial contribution, plus whatever additional percentage we agreed to? I wonder what happens if we break even on the property or even lose money. In that case we still want to pay the lender their interest, but now if we do that I wonder if it would be considered a loan at that point and not a capital contribution.

A couple other concerns I'd have with that approach: because their money is now technically the company's money (as a result of it being a capital contribution), it is exposed in the event of a lawsuit; also, like you said, it is not secured against the property with a deed of trust. I would think this method would be less desirable to a potential lender. Or am I incorrect in this analysis? I hope I'm not coming across as a contrarian here, I'm just trying to consider the possibilities. And I really appreciate the ideas you and others are putting out.

As for the California laws regarding the shared appreciation... From my interpretation it says that any additional funds made beyond the fixed interest rate (which must still be less than the 10% usury limit) that are tied to the appreciation (or profit) from the sale of the property are not counted as additional interest for the purpose of the usury law. There are some restrictions to qualify for this exemption, such as the borrower not being an owner-occupant, and specifying on the Trust Deed that it is securing a shared appreciation loan.



Real Estate Investor · Springfield, Missouri


Yes I think you have it! The security agreement can be filed to the capital acount of the member. The loan is made to the company...but I think you have the idea.

If I loan money to the company, it has no bearing on any profit of loss, I still am owed the P&I. Shared profits would come from the profit.

Your operating agreement covers the issues of participation, security for dbets owed to memberds, escrows, death, incapacitation, etc. In fact, as a lender/member, they could be better secured than with a standard deed of trust and having to foreclose in the event of default. The property can be assigned within the company to any capital account...bang...done! It's a UCC filing and you can file a lien on the property...that's why I suggested you contact your attorney. Good luck...and Merry Christmas!


Financexaminer@real estate investor dot com




Sign up