There are many names for short-term private money loans. Some are familiar, like hard money loans, short-term bridge loans, or private money loans. One name that is not used as often but makes sense is “rescue capital”. Rescue capital refers to emergency funding, typically offered as preferred equity, that steps in when traditional financing falls through, particularly in real estate transactions. It’s a financial lifeline for investors facing a sudden gap in their funding. Rescue capital is an appropriate name for a loan that a borrower needs when their lender promises to fund their acquisition loan – and then backs out at the last minute. 

The Unpredictability of Financial Markets

With the unsettled state of the financial market and its rapidly rising interest rate environment, having a lender back out at the very last minute is unfortunately becoming more and more common. Real estate investors should understand that there is no such thing as an enforceable commitment to fund a loan. All Term Sheets and/or Commitment Letters always have some escape clauses built in. 

The Problem with Loan Commitment Letters

Banks are notorious for assuring their clients that they have approved their property acquisition loan and then, at the very last minute, telling them that they are so sorry, but they have just discovered a problem and now are not willing to fund this loan. This leaves their borrower up the creek without a paddle. In such scenarios, rescue capital becomes crucial. It not only saves the deal but also helps maintain the investor’s credibility and financial stability.

Their financing contingency probably has expired, and the borrower/buyer now stands to lose 100% of their earnest money deposit. Because of the way that loan commitment letters are written, there is always some way for a lender to back out of a deal. This is morally indefensible, but legally it is something that works and puts a buyer/borrower in an untenable position that could lead to a project failure or foreclosure.

Montegra Capital’s Experience with Rescue Loans

At Montegra Capital, we see this scenario often. We closed a loan for a borrower whose bank lender – 10 days before the closing date – informed their client that their appraisal office didn’t like the rental schedule in the office building that was the subject of their commitment letter. The bank had been working with their client for over three months on this prospective loan and pulled the plug just days from closing. This is a prime example of where rescue capital is indispensable.

Because of the very short time frame needed for a “rescue loan”, using a private money lender is typically the best solution for the buyer/borrower. Private money lenders specialize in quick financing solutions, often providing funds within days, which is essential in a rescue capital scenario. Because of the regulations imposed by state and federal regulators, institutional lenders like banks can’t underwrite and close a loan in less than two weeks. 

Reputable private money lenders can move fast – assuming they are “direct lenders”,that they have the money under their control and do not have to go out and find the funds needed for a loan.  Private money lenders can make quick decisions followed by rapid closings. In cases like these, the term “rescue capital” is accurate. This rapid close private money loan saves the real estate investor’s earnest money and saves the deal.

The Importance of Due Diligence

It is important that the real estate investor has done enough due diligence to make sure the private lending firm they are using is a legitimate firm and one that has a reputation for keeping its commitments. There are firms that prey on unsophisticated borrowers and will keep the underwriting deposits but not fund the loan at closing. It’s vital to conduct thorough research, perhaps consulting with financial experts, before selecting a private lender for rescue capital. 

Checking the reputation of a private money lending firm with attorneys, CPAs, bankers, and Realtors in the community is the best way to make sure the real estate investor is working with a reputable firm and will not get an unpleasant surprise at the closing.

Rescue capital serves as an essential tool for real estate investors facing funding challenges, particularly in unpredictable capital markets. It offers a rapid solution but requires careful consideration and due diligence.

 If you have questions about a bridge loan request, or to learn how we can help you with a commercial real estate (CRE), multifamily, or residential private capital loan, contact Montegra today at 720-513-2657.