Promissory Note: Deed of trust LATER and INDIRECT investments?

2 Replies

Hi,

Who knows if it possible to issue a secured promissory note to a private lender and :

- invest in real estate securities through private equity funds (vs. typical direct investments) ?

- mention in the promissory note that the DEED OF TRUST (that will secure the lender) will be issued LATER and every time investments are made with the borrowed money ?

Many thanks in advance,

Marc

@Marc Hellin

A deed of trust is an instrument that secures real property to a promissory note. In what you propose, you will have no ownership of real property so there will be no deed of trust. Investors in real estate syndications typically receive either limited partnership interests, or membership units in an LLC, both of which are securities, not real property. The real estate is owned by the entity issuing the securities interests.

Even in the extremely rare case of a fractionalized Interest where each investor appears on the warranty deed, you would not be able to pledge the real property in a deed of trust because in doing so you would be putting the interests of the other investors at risk and you wouldn’t have the authority to act for the interests of the other investors.

So, the only security you can offer as collateral would be your ownership interests in your investments. While these type of loans are rare, when they are done the money is advanced only when the ownership units are purchased, not in advance. The units are then assigned to the lender as collateral.

As a practical matter these type of loans are available only to people with a mid seven figure net worth and only as a fraction of their net worth, if the loan is an arms length transaction. If your favorite uncle wants to give you your inheritance early, without paying a gift tax, then this may be viable.