EstateGuru loans vary in type and you can among other find development, refinancing, construction, and bridge loans to invest in. All loans are backed with real estate and in general with 1st rank mortgage. When you make the decision to invest in debt or loans, it is vital to understand the risks and be aware of how the security issued against your investment will function should something go wrong.
In EstateGuru every loan is built within a direct investment structure. This means that you are lending directly to the company/owner of the property you invest in.
EstateGuru Loan Offers
Development Loans: typically used to develop real estate property. Can include funding for the entire construction cycle and holding costs, until the successful property selling is signed.
Business Loans: on this case, a property backed loan is used to release equity capital and increase the operating funds available to a real estate company.
Bridge Loans: a short-term loan typically used to meet current financial obligations before securing permanent financing, enhancing value or selling an asset.
EstateGuru Debt Ranking & Loan Security
Senior Debt, also known as first-rank debt, is debt that takes priority over other more ‘junior’ debt. It will usually be secured by real estate collateral that is judged to hold more value than the debt and, in the case of default or liquidation, is first in line to be repaid. In the case of EstateGuru loans, senior debt is secured with a first-rank mortgage.
What this means in practice is that, before EstateGuru releases any funds to a borrower, they have to go to the notary office and enter into an agreement to create a mortgage on real estate. This mortgage will be controlled by EstateGuru until the loan is fully repaid. In the case of default or non-payment, this arrangement allows the platform to initiate enforcement proceedings and take possession of the collateral issued against the loan. This real estate collateral can then be auctioned or sold to recover investor funds. This form of secured senior debt is considered the safest for investors, but conversely, it generally comes with a lower rate of return when compared with more risky types of debt listed below.
Subordinated Debt (mezzanine)
Subordinated debt holders are generally provided with security other than a first-rank mortgage. This may vary from second-rank mortgages to equity in the borrower’s business to equipment or other assets. Should a loan go into default, holders of subordinated debt will only be repaid after all obligations to senior debt holders have been met. The higher risk profile of subordinated debt means that investors usually expect better returns on their investments. EstateGuru has only few loans with second-rank mortgage on real estate.
Investing directly into a company with the intention of sharing in profits or revenue might be a good idea if the business or project is successful, but if things go wrong it is important to understand the ranking that equity holders have in the repayment hierarchy. When a company is liquidated, senior debt is repaid first, then subordinated debt. Only once these higher debts have been paid fully can any money or funds left be distributed to direct investors or equity holders.
How EstateGuru Protects Investors?
When a borrower approaches EstateGuru for a loan, the due diligence team proceeds with a thorough risk assessment. They start with the business plan, the borrower track record, and evaluate whether the project meets the platform viability requirements. Once this step is completed, EstateGuru considers the value of the collateral offered. Typically, the collateral against most of the loans offered is usually the property being developed, but EstateGuru also accepts other real estate properties. This is the moment that the Loan to Value (LTV) is estimated.
Imagine the following example: a property may, in theory, be worth €100,000. EstateGuru will only offer a loan for a smaller amount, aiming for an LTV ratio that allows full loan recovery in case the loan payment fails.
As explained above, since EstateGuru secures loans with a first-rank mortgage, this means that EstateGuru investors hold seniority when a borrower goes into default and are first in line to recover their funds from the sale of the collateral. This is why EstateGuru is capable of avoiding losses to investors, even if some of the projects default. Remember that in EstateGuru there’s no buyback guarantee.