The term "hard money loans" gained their name based upon the circumstances surrounding the request, not the lender or the loan terms. The typical hard money borrower has explored and exhausted all sources of conventional debt and equity and has discovered that their circumstances just do not support conventional financing for one or more reasons including: problems with developer’s background or credit; unwillingness or inability to personally guaranty; title or entitlement issues; high leverage sought; only a short-term bridge required; tertiary market; or simply has to close very quickly., The pricing quoted by a hard money lender is usually appropriate for the particular circumstances and properly matches the real risk.

Mountain Funding, LLC, a private hard money, bridge, mezzanine and equity provider, specializes in funding value-added commercial projects, as well as land development.

"Land lending and equity investment has been our strong suit since we started in 1993," said Peter Fioretti, CEO of Mountain Funding. "Today, we see land financing as perhaps our best opportunity for growth and yield, with limited competition as land continues to be difficult for most institutional lenders to underwrite. Our focus is to continue to increase our land platform throughout 2006 and beyond."

While the nature of the business does require hard money lenders to hold relatively firm stands on their lending criteria, the simple truth is that the "hard" part is the loan itself, such as a difficult borrower, a difficult project and/or difficult circumstances surrounding the transaction.

"We refer to these difficulties as ‘hair,’" explains Fioretti. "Every request is unique, requires understanding, dissection and reconstruction in order to make it workable."

The "hair" encountered is often incredible and sometimes even comical. Putting aside the extreme examples (such as hand-written loan requests from state penitentiaries, ostrich and catfish farms, stadium tailgating concessions, and financing of independent nations seceding from Texas), there are several consistent themes running through the typical request, one or more of which are usually present:
• Money is needed quickly, often within a week and almost always within a month.• The borrower has little or no cash equity, and is either unable to raise a reasonable amount or is unwilling to sacrifice a substantial equity interest in his project to an equity investor. The borrower may have a troubled credit history, which may include personal and corporate bankruptcies and other litigation (even criminal), and may be non-bankable.
• The borrower has been trying to arrange the loan for several months, and has been close two or three times. Sometimes the borrower was simply misled by a disreputable lender or broker, but usually the borrower was stubbornly holding out for an unrealistically cheap loan.
• The project has problems or questions, possibly dealing with environmental; zoning and/or approvals; location; litigation; feasibility; valuation, etc.
• There is no obvious exit strategy for the loan.

A More Expensive Option
As explained earlier, what makes hard money loans "hard" are the circumstances surrounding the request, not the lender or the loan terms. If the loan is simple or easy and worthy of cheaper pricing, the borrower would not have to seek out a hard money loan in the first place. The typical hard money borrower has unsuccessfully explored and exhausted all sources of conventional debt and equity. The pricing quoted by a hard money lender is usually appropriate for the particular circumstances and properly matches the real risk.

Hard money loans are priced to market like any other loan. If the same deal was being priced by Wall Street, it would be priced similarly but would not be labeled as "hard money," simply because of the status of the institution doing the quoting.

Hard money loans are usually a blend of debt and equity risk, but are priced higher than conventional debt and cheaper than the cost of equity. Relatively few transactions actually fit, but hard money lenders are trained to identify those that do and competitively price them. Once a borrower recognizes that they are candidates for a hard money loan, they will seek additional quotes and, inevitably, the competitive proposals will be priced very similarly. Therefore, the borrower’s final decision should be based on: (a) the reputation of the lender and its ability to close; (b) the conditions of each proposal (e.g. recourse vs. non-recourse); and (c) the chemistry between the principals.

All hard money loans include: (1) monthly interest (or preferred return in the case of preferred equity) at rates which usually range from 11%-15%; (2) closing fees; and sometimes; (3) exit fees and/or profit kicker. If the project cannot support monthly interest payments, the lender may include in the loan amount an adequate reserve or prepayment for interest. The combination of interest and fees quoted by a hard money lender will reflect the lender’s perceived risk of the transaction, based upon the many factors that directly affect risk. This may include borrower qualifications, experience and credibility; borrower equity; level and quality of personal guaranties; loan-to-value and loan-to-cost ratios; market strength; entitlement status; exit strategy; project track record; development risk; and speed of closing.

The types and amount of fees charged can vary greatly. The following are some of the various types of fees which may be charged, any one or more of which will be included in any loan proposal:
• Application Fee: Payable upon signing a letter of intent or conditional commitment letter, which are typically $5,000-$15,000. In addition, the borrower will always be required to advance a good faith deposit for lender’s third-party costs of due diligence and closing, including legal, appraisal, market/feasibility study, travel, engineering, environmental, etc.
• Commitment Fee or Break-Up Fee: Payable at the earlier of loan closing or borrower’s default of its obligations to close. This fee may range from 2%-5%. Usually included and funded by the lender as part of the loan.
• Extension Fee: Payable by borrower upon notice of maturity extension. Amount will depend on length of extension and general fee structure.
• Exit Fees or Profit Kicker: At higher levels of risk, an exit fee of 1%-10% (either levied on the loan amount or on gross sales) or a share of profits.

The majority of hard money loans have short-term maturities, ranging from 6-36 months. Some lenders will extend for longer periods. Most loans have prepayment penalties if paid back before a minimum hold period.

Most hard money loans require a personal guaranty for repayment of the loan. Some lenders will limit personal recourse and what will be required for construction completion and "standard carve-outs" such as for fraud, misrepresentation, and bankruptcy filing.

The commitment will also refer to (1) exclusivity: the borrower must agree not to solicit other financing; (2) brokerage: the lender will agree to fund the procuring broker’s agreed commission as part of the loan; but to protect against unforeseen brokerage claims, borrower must indemnify lender against any claims for any additional brokerage commissions; and (3) legal issues such as title, survey, governing law, opinions, etc.

Reputable Sources
For the most part, hard money lenders are reputable experienced financial concerns. Most principals of hard money lending firms have successful backgrounds as investment bankers, developers, accountants or lawyers. They recognize that they can only make money by closing loans, and a bad reputation will not help do that. Finesse, however, may not necessarily be their strong suit. As time is their most valuable commodity, hard money lenders will quickly and bluntly lay it on the line. Savvy borrowers appreciate this approach and use it to better focus their financing search.

There are occasional horror stories of loan applicants being mistreated by certain hard money lenders. Applicants have been known to lose money and time, sometimes substantial, during the qualification process. Occasionally, the lender may be at fault. More often, the borrower was unrealistic in his expectations, misrepresented the facts, or misunderstood the conditions and obligations in the executed commitment letter.

Reputable hard money lenders are tough but fair, and experienced in both assessing risk and closing loans. However, a prudent borrower should perform its own due diligence on the lender at a very early stage of the relationship to avoid potential problems.

Hard money lenders fill a niche between conventional lending and private equity capital. Conventional institutional lenders will not finance hard, hairy loans, while equity investors demand very high returns and/or shares of profits. Hard money lenders do not equate "hard" deals with "bad" deals. Rather, they use practical experience and flexible capital sources to see through the hair and help developers seize opportunities or add value to their existing projects. Their funding is best suited for opportunistic, undervalued or other special situations, which are short on time or capital, or have conditions which make them difficult to conventionally finance.

Due to their cost, hard money loans work best as short-term fixes (helping developers get "from point A to point B") rather than as permanent financing. Oftentimes, hard money loans bridge the "equity gap" which may be temporarily missing from a deal, thus avoiding the necessity for a developer to give away a substantial share of his profits.

Prospective borrowers who realistically assess: (1) the availability (or scarcity) of financing for their situation; (2) the limitations and frustrations inherent in conventional institutional financing for non-conventional situations; and (3) the value of speed and frankness, are the perfect customers for hard money lenders. SLDT