From the desk:Gap Funding / Bridge Lending

Senior lender funds rehab in arrears and I'm 30k short on float

Closing a 3/1 in a working class suburb next week. Purchase 168k, rehab budget 52k, ARV I'm underwriting at 285k. My hard money lender does 85% of purchase and 100% of rehab, but rehab comes as draws in arrears, meaning I pay the subs first and get reimbursed 5 to 8 business days after inspection.

So on paper I'm fully funded. In practice I need about 30k of working capital sitting there to keep the crew paid between draws, and I have maybe 9k after closing costs.

A guy who has funded two of my deals before offered 30k at 12% interest only, 3 points up front, 6 month term. He wants it recorded as a second against the property. That is where I stalled. My senior loan docs have a clause saying no additional liens on the collateral without written consent, and my loan officer hasn't answered me on whether they'll consent. The alternative the funder floated is an unsecured note to me personally, same rate, and he said he'd want a personal guarantee and my other property listed as collateral instead.

What I have: the draw schedule, the senior term sheet, a contractor who wants 40% of his money in the first three weeks.

What I don't know: whether asking my senior lender for consent puts the whole approval at risk, and whether swapping to an unsecured note with my rental pledged is actually cheaper risk for me or just moves it somewhere I can see it less. Cost of the 30k either way is roughly 900 in points plus about 1,800 of interest if I'm out six months, which the deal can carry. The structure question is the one I can't settle.

Answer

2dmitri_v6CapitalPRO6

Read the clause again and tell us the exact wording, because "no additional liens without consent" and "no additional liens" behave differently. If consent is contemplated, asking is the normal path and lenders see it constantly. Some will consent with a subordination agreement they draft, some will price it, some flatly refuse on rehab paper because a junior lienholder complicates their foreclosure.

The thing I'd worry about more than consent is the default trigger. If recording a second is an event of default under your senior note, and you record anyway, your lender can call the loan while you have subs on site. That is the version that ends badly, not the version where you ask and they say no.

On the unsecured note with your rental as collateral: that isn't unsecured, it is secured by a different property. Whoever drafts it should be a real estate attorney in your state, since lien priority and what a deed of trust or mortgage does varies by state. Ask your funder which one he actually wants, because the paperwork is completely different.

4 replies

1raj_mehta14CapitalPRO6

I'm trying to follow the mechanics here. If the second is recorded and the deal goes sideways, the gap guy gets paid only after the hard money lender is made whole out of the sale? So on a 285k ARV with roughly 200k senior, his 30k has room, but only if the ARV holds. Is that the whole reason he wants recorded rather than just a note?

2brandonlee36Passive

Your real number isn't 30k, it's the peak gap between what you've spent and what you've been reimbursed. Build that curve week by week from the contractor's payment schedule and the 5 to 8 day reimbursement lag. On a 52k rehab with 40% front loaded, I'd guess your peak is closer to 22k than 30k, and it happens in week three. Borrowing 30k for six months when you need 22k for eleven weeks is money you pay for and don't use.

That matters because at 3 points the fee is the same whether you hold it three months or six.

3chriswalton8CC1CPRO8

@vellum yes, position is why. The recorded second means he can foreclose behind the senior or at minimum has to be paid at closing to clear title. An unsecured note is just a promise plus whatever the guarantee is worth.

@flint the part I'd want in writing before signing anything is what happens if your senior refuses consent after you've already paid the 3 points. Get the fee contingent on funding.