Can you loan your own IRA funds or borrow money to close a deal if you can’t raise enough from equity investors in time to close? Usually not.
Most conventional and agency debt lenders won’t allow subordinate debt that remains in place after their loan closes — even if it’s your own IRA funds and it’s unsecured debt. They will allow “equity” investors, but they won’t allow debt.
Your SDIRA, however, won’t allow you to earn asset management fees on an investment you actively manage.
What are your options? Here are eight things you can do:
- Change your SDIRA interests from debt to equity and forego all management fees on the percentage of the property owned via your SDIRA. Only do this with the assistance of ERISA counsel, as the consequence of doing it wrong is that your entire SDIRA could be disqualified. Your ERISA counsel will need to review your offering docs and insert relevant provisions to conform to ERISA rules.
- Wait until you raise the equity from other investors to close on the loan.
- Find a bridge lender or community bank lender who doesn’t care about your subordinate debt and refinance later into agency debt after you raise the money to take out your SDIRA loan. Their terms may not be as favorable as agency debt, but it will buy you some time to raise the money.
- Find a preferred equity investor who will take out your SDIRA debt in exchange for a priority, fixed return class in your LLC; they’ll want forced sale rights. Lenders will typically allow this without requiring the preferred equity investor to be underwritten as long as they don’t have voting or takeover rights.
- Find another syndicate or fund that will joint-venture on the project and provide the funds needed to close. You’ll essentially be selling them a piece of the equity in your deal and they’ll have to be underwritten on the debt. This will require inserting a JV entity in your organization chart and giving up some of your share of the deal. You can find some other syndicators who might be interested if you attend our Clients-Only Masterminds.
- Admit one or more co-GPs to management who can raise the money to take out your loan in time to close. You can meet some other syndicators or fund mangers who might be interested if you attend our Clients-Only Masterminds. You’ll have to give them some of the Asset Manager’s earnings and a share of the Class B profits.
- Sell a portion of the ownership as tenant-in-common interests to someone who needs to do a 1031 exchange. You will be giving up some ownership in the deal, as TICs require that profits be split at the property level, so you won’t be able to get a share of profits from the percentage of the property owned by the other TIC; also, their ownership has to be commensurate with the percentage of the equity they provide.
- Sell the project as-is to someone else.
