Iron Bridge Mortgage Fund was launched on April 1, 2009, and since that day the company has been working closely with its borrowers to support them in their real estate investment activities. As much as the real estate market and our industry have changed over the past seven years some aspects of the private lending business have stayed constant. And one of these constants is the need our borrowers have to keep their projects rolling, which lead us to develop our system of cross collateralization.

What’s amazing to us is how much the real estate market and our borrowers have evolved over the past seven years. For the first three years (2009 – 2011), almost all of the projects we financed were sourced from foreclosure auctions. Then, starting in 2012, the auctions became much more competitive, and many of our borrowers began to source projects from short sale and REO listings. After the REO and short sale inventory dried up in 2013, our borrowers moved into higher value-add rehabs and new construction projects.
However, through all of these changes, our borrowers have consistently strived to maintain two or three projects in process at the same time, but in different stages of completion. For example, project 1 would be recently completed and listed for sale, project 2 would be half way through the rehab process, and project 3 would be in the negotiation process to purchase. Ideally, when project 1 sells, our borrower can recycle profits from project 1 into the purchase of project 3. This allows our borrower to keep the projects rolling and efficiently move his or her subcontractors in sequence from one project to the next (e.g, framers, drywallers, electrical, plumbing, finish work). This efficient allocation of labor between projects builds loyalty with the subcontractors, which in turn provides our borrowers with lower cost labor and a more consistent quality of work. Our borrowers know that keeping projects on time and on budget is critical to achieving financial success. However, another consistent issue we observe is that project 1 often doesn’t sell in time to generate the cash needed to close on the purchase of project 3. If this happens, our borrower not only loses out on the purchase of project 3 after considerable time and effort invested, but the project cycle times are no longer efficiently sequenced, subcontractors find other jobs, and project completion times lengthen.

To help solve this problem, Iron Bridge developed a master loan and security agreement, which serves to cross collateralize all of our projects with each borrower. This cross collateralization allows Iron Bridge to assess the loan to value of all projects with a borrower in aggregate, and move equity from one project to the next as needed, to help keep projects rolling. For example, in the case of our borrower’s planned purchase of project 3 above, if the aggregate real estate value of projects 1, 2 and 3 was sufficient, Iron Bridge could provide the borrower with 100% loan-to-value financing for project 3 today and collect the requisite down payment once projects 1 or 2 were sold. What’s exciting is that this cross collateralization allows our borrowers to move more efficiently from one project to the next, maximizing their cash and equity utilization, which results in more project being completed and a higher return on invested capital for our borrowers.

As a premier portfolio lender and private money partner, Iron Bridge Lending is fluent in the subtleties of private lending, such as this one. If you would like to discuss the benefits of cross collateralization, or other facets of the private lending market, please don’t hesitate to contact us.

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