Fractional note participation at 11 percent versus a lender's own fund at 9 preferred

Run the idle-cash drag before anything else, because it eats most of your 200 basis points. If the average note lives 7 months and you sit in cash for 1 month between deals, you are earning for 7 of every 8 months. That is 87.5 percent uptime. Eleven percent times 0.875 is about 9.6 percent. The fund's 9 is on committed capital with no gap, assuming they stay fully deployed and the preferred actually pays in cash rather than accruing. So your spread is closer to 60 basis points than 200, and you are taking single-asset concentration for it. Two things would change that math. One, ask for a share of the points. On a $400k loan at 3 points that is $12k, and your 25 percent share would be $3k on a 100k position, roughly 300 basis points of extra first-year yield. Most lenders say no and some split one point with participants, so it costs nothing to ask. Two, ask what their actual redeployment gap has been. If they have deal flow and can place your payoff the same week, uptime goes to 95 percent plus and the fractional wins on paper. The fund number to ask for is their deployment ratio over the last four quarters. A fund sitting on 20 percent cash and paying you 9 on the whole balance is earning that money somewhere, or it is not, and either answer tells you something.

A two page term sheet is not a document set. Before funding a fractional position I would want the co-lender or participation agreement, the servicing agreement, the note, the deed of trust, the title commitment, and the lender's insurance certificate showing who is named as mortgagee. The clauses I would read first: How the interest appears in the land records. Some arrangements record the participant as a fractional beneficiary on the deed of trust, others hold the interest through the lead lender as agent with nothing recorded in the participant's name. Whether a county will even accept fractional beneficiary recording varies by state, so ask for a recorded example from that county rather than a description. Majority control language. Extension and workout are the obvious ones. Also look for whether the majority can subordinate, release collateral, or accept a discounted payoff, and whether sole discretion appears anywhere near those verbs. Protective advances. If the borrower stops paying taxes or insurance, can the lead advance and charge the participant's share, and can they call capital? A participant who can be assessed has an open-ended liability, not a fixed position. And whether either structure is being offered as a security depends on how it is put together, which is a question for a securities lawyer to read before funding, not after.

You're diligencing the loan. Diligence the lender, that's where the loss comes from.

What I ask for, in writing:

Every loan they originated in the last three years that went past its original maturity, with what happened to each. Not a default rate, a list. Extensions are where the truth is.

How many they've foreclosed, how long it took in that state, and net recovery against principal plus accrued. If the answer is "we've never had one" and they started in 2021, they haven't been tested.

Who sets ARV. In-house desk review, a licensed appraiser, or a broker's opinion. Then ask for a case where the exit came in below ARV and what the participants got.

On the fund side, the PPM answers you want are how they value a non-accrual loan, whether the preferred accrues if collections fall short, what the gate and suspension provisions say, and what the related-party servicing and asset management fees are. A 9 percent preferred with a suspension clause and a 90 day notice period is not liquid at month 13, it's liquid when they say it is.

Sable, the reason I'd lean fund on a first position with a new relationship is that the fund forces them to eat their own workout costs. But that only holds if the manager has real skin in the fund alongside you.

The file math on option A is better than the post implies, so the worry should be pointed at the right place. 70 percent of 470 is 329, plus 90 of rehab is 419, and the loan is 400. Against ARV of 690 that's 58 percent. Against total cost of 560 it's 71 percent. Both are fine numbers if ARV is honest. Stress ARV down 12 percent to 607 and it's 66 percent, still inside a foreclosure and resale with accrued interest and legal. The gross spread is 690 minus 560, so 130k, about 23 percent of ARV before selling costs and 9 months of carry. After 6 percent to sell and roughly 40k of interest and points, the borrower's profit is thin. That's the thing to underwrite. A borrower with 30k of upside walks away faster than one with 90k, and a borrower who walks turns a 58 percent LTV into a 14 month legal process funding the taxes along the way. So: is the 90 rehab budget a real scope with line items and a contractor bid, or a number that makes the deal work? Ask for the scope, the draw schedule, and whether draws are inspected before funding or released on photos. Ask what happens to the lender's share if the budget runs 20 percent over and the lead lends more. On a 12 month note the risk is time and scope, not value.

Reading ledger and canton back to back, 60 basis points to never have to do any of that sounds cheap. The part worth pushing on is the redemption language, because that's what's actually being given up. A 12 month lockup plus 90 days plus a suspension clause means the money could be tied up for two years in the exact market where getting it back matters most. A fund paying 9 percent with no exit when loans stop paying off isn't passive income, it's a bond that can't be sold.

Basic one on the fractional. If the borrower stops paying, who files the foreclosure and who pays the lawyer? Does that come out of the loan proceeds first, before the four of you split anything?

And is there a personal guarantee on a loan like this, or is the property genuinely the only thing standing behind it? Everything I've read says hard money underwrites the asset, which I read as meaning nobody bothers with the guarantee, and I'm not sure that's right.