Multiple investors/lenders, one deal?

Question

I'm sure this may have been covered in the past but when I did my search I came up empty (probably using the wrong terms).

My situation is as follows, throughout the years of being in REI I've acquired a few private lending partners.   Up until this point, I've always only used one private lender per deal, and mostly for flips.  I'm now looking at purchasing more buy & hold, using the BRRR strategy.  My private lenders are interested in this.

My question is this, many of the properties I'm looking at would require me to use at least 2 of my lenders for one deal. Does anyone have experience with this?  Would love some insight on how to structure this. My concern is having both lenders be equal, rather than having one in 1st position and one in 2nd.

One parameter: I'm not looking to give away equity position.

Jeff S. · Answer

If legal in your state, @Sam Erickson, the easiest way to do this would be with a fractionalized loan.  Here, each lender would have their name on the same note and mortgage along with their percent interest.  The mortgage would then be recorded in first position allowing all your investors to share the same position.

These are legal in California, where they must be originated by a licensed CA real estate broker.  There are also some restrictions on the investment amount.  You can't do this everywhere however, and should check the requirements in the state you want to make your loan.

Alternately, you can do a security registration (i.e. a syndication), but these can be prohibitively expensive and there are also many restrictions on who can invest.

Don Konipol · Answer

@James Destef

The thing you need to be careful about is offering investors the opportunity to invest in a loan, especially one with fractionalized interest, is offering a security as per a ruling by the Securities and Exchange Commission.

As a securities offering, the securities offering must be registered with the SEC (cost prohibitive) unless qualifies under one or more exemptions.

The reason the fractionalized offering works in California is that one type of exemption is an intra state offering, where the property and the investors being offered an opportunity to invest are all located in only one and the same state.  In that case only regulation is by that states securities board or agency.  California securities laws provide for fractionalized notes, with a maximum of nine investor on the note.  Be aware that there are other California code regulations that also must be followed.

Most states would consider the sale of fractionalized interests a securities offering, not have a specific procedure for it other than the general securities offering procedures.  34 states have adopted exemptions for private placements similar to the SEC general exemption for private placements.   Less than 35 non accredited investors, no general solicitation or advertising, etc.

The other 15 states are a hodgepodge of various laws or lack thereof.

One thing almost no one understands that if you are sued by an investor because the investor lost money ( not talking about property foreclosure or liability for deficiency, but about being sued because you did not properly explain risks to investors etc), and you comply with SEC Reg D, you have an affirmative statutory  defense against those allegations.  Absence fraud, almost no lawyer will take the investors suit.  Using any other exemption from registration, you lose the affirmative statutory defense, and are at the mercy of interpretation of securities, trade, and commerce laws by a judge and jury, with attorneys more than willing to represent borrowers who will lie through their teeth about what was discussed before they invested.

Rick Pozos · Answer

Both lenders can be equally in first position but have a different percentage in the loan. One lender may have 62k in the loan and the other may have 50k in your 112k loan. Your lenders should know each other so that they have a plan in case you die or become incapacitated. They will have to become best friends when it comes to liquidating your property if you were not able to perform.

Sam Erickson · Answer

@James Destef for the deal I was first asking about one of my private lenders ending up carrying the whole loan for us.  I have done deals with multiple investors since then but it's been more of a syndication structure where they have a preferred return and equity position.

James De Stefano · Answer

I know this is an old thread, but great questions, answers & info!

I'm curious for OP,  Sam have you had luck with multiple lenders?  I may be using a similar situation in the coming months.

Sam Erickson · Answer

Thanks for the suggestion @Jeff S.

@Rick Pozos thanks so much.  Though I'm not opposed to the lenders knowing each other, it doesn't seem like one more hurdle for putting together a deal.  How are these crowdfunding sites putting together their deals, could this be an option for me just on a much smaller scale?

Multiple investors/lenders, one deal?

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