Fractionalized Trust Deeds

Sale of Series of Notes or Undivided Interest In A Note

Pursuant to California Business and Professions Code § 10229, private investors may purchase undivided interests in single notes secured by the same property. Referred to in the industry as multi-lender transactions or fractionalized loans, this statute allows brokers to make available the following:

Larger and more secure loans for their private lenders,
The opportunity for lenders to buy fractionalized interests in notes and trust deeds,

Multiple-lender loans are often considered to be more secure than single lender transactions, in that they are more carefully monitored by the California Department of Real Estate. Whether or not a broker meets the “threshold” criteria, once they make or arrange their first multiple lender loan, a report of the transaction must be submitted to the Commissioner of the Department of Real Estate. Included with the submission is a report of trust fund activity and acknowledgement by the broker to submit such trust fund activity reports on a quarterly basis. Additionally, loans made or arranged under the multi-lender law must meet the loan-to-value ratios set forth in the statute.

Multiple lender loans may accommodate up to ten lenders (husband and wife are counted as one) in such loans. The major criteria is that notes or interests of the purchasers must be identical in their underlying terms, including the right to direct or require foreclosure, interest earned, etc. The degree of ownership is determined by the percentage of interest purchased, i.e., if the principal amount of a given note is $200,000, and $40,000 is invested, the investor owns a 20% interest in the transaction.

Multi-Lender Loans Offer Opportunity For Diversification

By investing smaller amounts in a number of fractionalized transactions investors effectively diversify their trust deed investments. Participating in such fractionalized notes gives a lender the opportunity to invest in several notes as opposed to waiting for a single loan that matches the amount of available investment funds. By so doing, investor money can be put to work immediately, thereby benefiting them from the higher returns offered through deeds of trust.
When trust deed lenders spread their investment funds over several trust deeds, as opposed to an investment in a single note, they spread the risk. Even if a loan is in default, chances are that the other loans will still be performing.

Invest Your IRA Contribution

If you have a self-directed IRA account, you can invest your annual contribution in high yielding trust deeds. A number of brokers accept investments as small as $2,000.00.

In Conclusion

Suffice it to say, multiple-lender transactions have become a popular investment medium. For the investor, it allows for smaller investments, more qualified borrowers, more marketable collateral and more predictable cash flow. By investing in several trust deeds, the investor has income from more than one source. Accordingly, if one borrower is late or in default, the investor still has cash flow from other notes.

Leave a Reply