Fall 2003 • Issue 11, page 8

Borrowing From a Private Money Lender

By Harkey, Dan*

Court-appointed receivers and bankruptcy lawyers often administer/represent entities with a need for real estate financing, but their estates/clients cannot meet institutional underwriting standards. The primary credit decisions of mainstream institutional lenders are based upon (a) the potential borrower’s credit, (b) the potential borrower’s rating in a FICO scoring system, and (c) the potential borrower’s income. Without prime credit, loans from such institutions generally are not available. But a potential loan derogatorily classified as sub-prime by institutional lending sources is, in many cases, considered to be a prudent lending transaction by private money lenders.

Private money lender underwriting focuses primarily upon the protective equity in the real property to secure the loan and, to a lesser extent, on the borrower’s credit history. The circumstances surrounding a potential borrower’s decision to file bankruptcy, or the placing of a receivership over a potential borrower’s real estate assets, is taken into consideration by the private money lender. Most institutional banks simply decline outright to make such loans.

In many cases a court-approved private money loan is one alternative where a debtor-in-possession loan or a cram-down loan is needed, and such loans can usually be funded in a timely manner. Oftentimes the needs of such borrowers are unique. Receivers and bankruptcy lawyers working with a private money lender have the flexibility to structure a loan in such a manner to accomplish a troubled borrower’s specific objectives.

A successful example of a privately funded loan is as follows:

A receiver for a failed real estate investment concern with 5600 investors was faced with administering seven disparate real properties throughout California encompassing a total of 3,500 acres. There was no cash in the estate. The properties were all designated for residential development. Each property had its own site/zoning/economic complexities; all had varying stages of property tax foreclosure threats. Given this profile and the fact such properties were in a receivership, the properties were not bankable among traditional lenders.

The receiver turned to private lending. The estate obtained court approval to borrow $6.0 million on the properties in a series of loans tailored to each property to (1) fund the receivership estate, (2) pay delinquent property taxes to preserve the properties, and (3) allow the receiver enough time to prepare for sale and market the properties.

Interest-only loans with a five-year term were structured. The receivership estate set aside sufficient loan proceeds to make the interest payments and to pay property taxes for two years. The receiver was able to sell the properties and repay these loans, with one exception, within the two-year period, and the seventh property was sold (via conventional means) and the final loan was paid off within three years of the lending transaction (the interest payments on the final loan were kept current with the use of non-refundable deposits from the prospective sale). These private-money loans allowed the estate to operate while the properties were preserved and protected for investors and ultimately sold for their best market values.

Additional information is readily available to receivers and counsel needing money for troubled entities. A booklet entitled “Private Money Lending Overview” may be downloaded from www.pointcenter.com, under the Broker Education section, and DVD and VHS presentations on private money lending are available by request from www.pointcenter.com/pmbooklet.

*MR. HARKEY is president and founder of Point Center Financial, Inc., a private money lender with a $25 million monthly loan volume for many types of sub-prime real estate loans. He is also president and founder of Escrow Professionals, Inc., National Financial Lending, Inc. and Investment Data.