The company’s loans are anticipated to be for the purpose of business and investment. These loans can be for the construction of Single-Family or Multi-Family Residences, Short-Term purchases, Fix-and-Flip (Rehabilitation) loans, Rental Property purchase and seasoning. Loan funds for development and construction are typically held in construction reserve and disbursed according to a line item disbursement schedule. From time to time the company may make other business purpose loans to facilitate the company’s and customers’ objectives. The company does not plan to make any consumer purpose loans.
Loans may also be made to businesses or investors helping them to achieve strategic business investment goals to acquire, season, or renovate an existing structure. To control the quality of the collateral given to secure the Mortgage Loans, the Manager expects to utilize the following guidelines and procedures:
- All loans must be secured by real property.
- The security instrument (typically a Deed of Trust) for each loan must be recorded with the company named in first position in the office of the county auditor where the real property is located.
- A lender’s policy of title insurance is required in an amount equal to the face amount of the Mortgage Loan.
- Fire and hazard insurance is required on all improved property.
- The company must be named as an insured on all insurance policies.
Loans are to be secured by real property. Further security may be provided by personal guaranties, additional real property collateral or the borrower’s additional liquid assets. The type of property that will likely secure most of the company’s loans will be 1-4 family detached homes and townhomes. The typical single-family project is anticipated to be a new house on a developed building lot in a residential zone. Currently, the primary target home is in the lower to mid-range price point for single-family new construction. The company does not plan to finance high-end homes but may originate, underwrite and close them on a case-by-case basis. The company does not currently target multifamily apartment buildings, commercial or condos but may originate, underwrite, and close them on a case-by-case basis.
At its core, Trueline Capital makes asset-based Mortgage Loans. The decision to lend is primarily based on the equity and value of the property being posted as collateral, versus on the borrower’s credit. The company typically requires, in connection with any such Mortgage Loan, a written opinion of value, typically an appraisal from a qualified real estate appraiser located in the same area as the subject real estate. The importance of an accurate and thorough appraisal report is foremost to the company and the loan to value standards apply to properties where existing buildings (if any) are in average or better condition, typical for a given market area, and located where sales activity and occupancy levels allow reliable market value estimates.
The company believes it has built an effective program for collateral (property) evaluations. The Manager sets forth minimum guidelines internally and are responsible for developing their own policies and procedures for evaluations that are commensurate with the well-being of the company.
A large portion of the loans originated by the company will likely come from development opportunities sourced by the Manager via three different marketing channels: 1) real estate agents and brokers 2) mortgage banks and brokers and 3) home builders directly. The Manager has created a referral network in the company’s primary lending markets area by building upon and extending, the relationships in these existing channels. The referral network and the Manager’s relationships within the primary market area are expected to be A KEY competitive advantage for the company.
Approving real estate loans for construction, rehabilitation and acquisition and development (A&D) is generally a less automated process than the approval of conventional home loans. It requires considerable knowledge of the builder, the local real estate market, and the various risks associated with this type of lending. The company utilizes established guidelines including the project size or loan amount, the location, the appraisal results, the experience and financial strength of the builder, the marketability of the project, and the current economic conditions in determining whether or not it will approve a construction loan.
One of the primary considerations is the loan-to-value ratio (LTV) and loan-to-after-repair-value (LTARV). The company intends to typically limit the LTARV ratio to 65% or less, and up to 75% LTV on properties without a construction reserve. Approved loans may contain one or more characteristics outside of the company’s general written guidelines if the Manager concludes that the overall risk of the loan is acceptable to the company.
For each loan, the company creates a loan file containing the documentation that the company deems necessary to underwrite and secure the loan. The typical loan file includes a promissory note, deed of trust, loan agreement, assignment of project agreements, environmental indemnity, personal guaranty, title insurance policy, opinion of value, evidence of hazard insurance and other documents deemed necessary by the company. Each Loan agreement has, as one of its terms, a date by which the Loan must be paid in full. In its discretion, the company may renew or extend the Loan beyond that date at the request of the borrower. A renewal or extension request requires a loan file and payment history review and may require a new appraisal. The payment of an extension fee and/or modification of loan terms may also be required.
The borrower’s credit report and repayment ability are also analyzed but at a less stringent level than conventional mortgage lenders. The company believes that this does not create an unacceptable risk because the company requires more collateral than most lenders and borrower defaults will be addressed more aggressively. The company typically maintains a separate credit file for each borrower that is updated periodically and with each loan request. A credit file may include a financial statement, recent tax returns, credit report, entity documentation, builder application and contractor information, some of which may not be available or practical in every case. Along with each loan request, the Manager on behalf of the company attempts to evaluate the borrower’s experience, financial strength, credit history, integrity and investment level in the company.
The company plans to service all loans in its portfolio and has established written policies and procedures for loan set-up, payments, payoffs, insurance tracking, construction draws, delinquencies, assignments, and the general ledger balance. Draw requests from the contractor are typically submitted on a monthly basis. Prior to funding, the company requires a third-party construction inspection to be completed certifying that the work associated with the draw is complete. Lien releases from all major subcontractors performing labor, services or supplying materials for the project are required as well.