Investor Questions

Following is a list of the most common questions we've encountered. If you have a question that is not covered here, we invite you to contact us and we will get in touch with you as soon as possible.

What is a gap or bridge loan?

In the real estate context, a gap loan, or bridge loan, is a non-traditional loan, secured by the property and not by the borrower's income potential. Bridge loans are usually short in duration, providing a high Return on Investment (ROI) for lenders, while effectively creating a financing bridge from the start to the point where banks are interested.

An example of a situation requiring a bridge loan is a large undeveloped property that was inherited by a family member. The new owner would like to take advantage of the high development potential (known as latent value) by subdividing the land and building homes for sale. The owner approaches the bank for a long-term mortgage to make his dream happen but does not have the income requirements to service a fairly large bank loan. Instead, the bank tells the owner that when the construction is underway and pre-sale contracts are provided, they'll consider a loan.

So a construction loan is required from a separate lender (or in the case of Gap Investors Ltda, a syndicate of lenders) to finance the construction period. In essence, the construction loan is a bridge loan with higher interest rates due to the nature of the loan, providing a bridge to the long term bank mortgage with market interest rates.

What is a syndicated loan?

A syndicated loan is a form of loan that a group of lenders collectively extend to a single borrower. The group of lenders is known as a syndicate.

The borrowing requirements of large-scale real estate development projects are sometimes beyond the funding and credit risk capacity of a single lender. Though there is a single loan agreement, each participant to a syndicated loan maintains a separate claim on, and bears the credit risk for, the portion of the loan that it has provided. These loans therefore enable lenders to achieve greater diversification in their loan portfolios.

How long do I lend out the money for?

Generally the loan terms are for 6 to 24 months. However, the borrower generally introduces pre-sales to prospective buyers, so the principal on the loan could be paid faster, freeing you to move on to a new investment.

How is my investment assured?

A holding corporation is formed for every project, which in turn is the beneficiary of the mortgage lien on the property. This corporation is used exclusively for the individual project and nothing else. As an investor you receive ownership in that corporation commensurate to your level of investment. For example, if the loan is for $1 million, and you invest $50,000 into the loan, you will own 5% of the corporation.

What happens if the borrower defaults on the loan?

If the borrower defaults on the loan, then Gap will initiate foreclosure on the property and the assets will be transferred to the holding corporation that is owned by the investors. In the example above the lender's shares will correspond to a percentage of the property in question. At that point the lenders become the owners and have full decision-making capabilities and may proceed any way they wish.

How do you perform due diligence on a project?

Gap Investors Ltda. performs due diligence on your behalf by requiring from its borrowers all necessary documents including an appraisal from a reputable source, and lawyers verify these documents before we proceed.

Do you use a title search/insurance company?

We require a complete title search and title history on the land for which any project is proposed. We work with reputable, well-known title insurance companies who will appraise the property and verify its title.

What is the minimum and maximum that I can invest?

The minimum investment with Gap Investors is US $10,000 per loan. There is no maximum investment amount.

Can I lend to more than 1 project?

Yes, you can invest in as many projects as are available.

What kind of interest rate should I expect?

Typical interest rates paid to lenders will range between 12 and 24% per annum. Every project is different depending on the risk, amount of collateral and duration of the loan.

How are you able to pay those returns?

Bridge loans are typically higher because they are not conventional bank loans. These interim loans are a means to an end, and involve interest-only payments with the goal of refinancing with the bank once construction is underway. Borrowers are aware that these loans are temporary and are the way for them to get off the ground -- otherwise their project would be nothing more than a dream.

Why doesn't the borrower go to a bank?

Banks are highly risk-averse and have certain collateral and income requirements for their loans. Someone going to the bank looking for a $10 million loan will have to have more than that in property, and possibly over a $1 million in yearly income. The borrowers coming to Gap are typically equity rich but cash flow poor, and aren't interested in having a business partner who will want a majority stake in the profit involved. That leaves gap financing as an attractive choice.

How does the borrower cover the initial payments on the loan?

Most loans will involve a cash reserve -- for example, the first year of payments are held from the borrower, allowing the borrower to concentrate fully on development.

This is why the borrowers come to Gap in the first place -- they typically own a parcel of land and want to take advantage of the great development potential, but they don't have liquidity or the kind of income required to immediately service a bank loan for a development project.

It looks like you are brokering multiple projects. If one project fails does it affect the other loans?

Absolutely not. Each loan is brokered, created and managed independently from every other. Unlike a general investment fund, the funds you provide for the loan are used exclusively for that loan, through a holding company that you will own your share of -- a holding company created and managed exclusively for the purpose of the loan.

Hypothetically speaking, what would happen to the funds I lent to a borrower, if Gap were to disappear?

Absolutely nothing would happen to the funds. The loans that Gap Investors Ltda. brokers are directly between the borrower and the lenders, through a local holding company that you will own your share of. A neutral third-party trustee, registered with the Central Bank of Costa Rica, holds the equity in trust to the lenders for the duration of the loan. During the development of the project funds for the loan will be in a bank account in the name of the holding company, so you can rest assured that your funds are secure, with or without us.

What was the largest project you've been involved with?

We were involved with the Playa del Sol development on the Caribbean coast of Costa Rica, which is an 1,100-acre property with 3 miles of titled beachfront. The plan calls for 500 residential lots in Phase 1, with an additional 1,500 lots in later phases, along with hotels, golf course, and commercial units.

The entire project was purchased by ECI Ltd., a group of investors from the USA, which is going ahead with the development under the name Gran Caribbean.

What is Latent Value?

Latent value is the value possessed by a property which has potential for development because it is currently not employed at its highest and best use. One example is a large piece of land that was purchased long ago when it was rural and now finds itself in the middle of a fast-growing suburban community; this land is better used as a suburban housing development. Another example is an old home in a large lot purchased in the city long ago, a city which has since grown into a metropolis with skyscrapers; this land is better used as a multi-floor apartment building with commercial units on the first floor.

Are you registered with SUGEF, the financial regulator in Costa Rica?

No. SUGEF regulates banks and financial intermediaries, including investment funds that raise money from investors to place investments through their own company. At Gap Investors, a separate, distinct company is formed for each loan, and each lender participates in ownership of this company proportional to their contribution to the loan. Gap Investors Ltda. generates a commission for brokering the loan. Gap is a mortgage broker, not an investment fund.

What is in it for Gap Investors Ltda?

As a mortgage broker, we charge a percentage of the loan in the form of a closing cost upon the signing of the mortgage contract. Just like regular bank mortgages, this closing cost is taken out of the funds disbursed to the borrower. Our closing costs are higher than your typical bank mortgage, because they cover the costs involved in the trust guaranty, escrow fees, borrower broker fees, lender broker fees, legal costs, formation and full management of the loan holding company, loan repayment collections, accounting, reporting -- as well as our profit as mortgage brokers.

How do I get started?

You can get started by having a look at our current projects and filling out our contact form.