How do you structure long term financing?

[Kevin Kaczmarek]

Calling all private financing guru's!

I am wondering what type of programs do you offer your investors to get long term financing? Do you amortize over a period of time with a balloon? Go interest only for a period of time? What makes up your financing program that allows for repeat financing?

We have interested parties, and I want to make sure I structure a win-win scenario. Your thoughts and comments are greatly appreciated

[Bill Gulley]

Kevin, while there several risks of financing, the primary risk is the interest rate risk. This is managed by repricing opportunities with short term financing. Private investors don't have an efficient secondary market to roll loans over at par or for a premium to recover cash like the institutional lenders can.

Consider building your loan portfolio as you would a bond portfolio, with a maturity distribution of amounts due at different periods. As loans become due, you have available cash to relend, be that as a modification and extension of that loan or collecting monies and making a new loan.

Your maturity distribution will depend on the amount of money you have available to lend. The more you have, the longer it can work in one loan, to an extent. The maximum term I have ever made was 7 years, most were at 3 years and a few under 3 years. With this in mind, having a one year balloon with an option to extend for a year can be made with terms of committments being less than 5 or 7 years.

You'll have X dollars to work with since you can't tap into the federal reserve. While it will be impossible to keep amounts renewing in like amounts, you'll need to keep amounts sufficient to actually create new business, be that making a loan or acquiring existing paper. Your average loan amount should be your target for liquidity.

The maturity distribution should take into account the lending risks associated with transaction and interest rates too. A higher risk loan should carry a higher rate but also should be as short as possible without putting the borrower in any greater difficulty in meeting the obligation. Actually, 12 months or one years is too short for purchase money, as the borrower will need to refinance. Requiring a payoff in 12 months means the borrower has to apply before the balloon date to obatian financing and will be restricted to the purchase price for the refi instead of the current market value. So if your borrowe must rely on a refi after a rehab for example, 15 months is better allowing 90 days for financing.

The only type of financing under 12 months should only be construction financing and transitional loans when an end loan will be placed.

In a nut shell, private investors are in no position to make long term financing available, meaning 15 to 30 year obligations, even at adjustable rates. There needs to be a stop because individual investor needs will change and much of the earnings can be wiped out if forced to sell a note at a discount. Working with private investors will take you into the realm of personal investing and estate palnning, because you will need to work in the best interest of your investors. Good luck....