Usury is the charging of interest for a loan in excess of the legal maximum. In California, the amount is set out in the state Constitution. Exemptions to the law are also described in the Constitution, as well as court decisions.
One the of court-established exceptions is for a joint venture. Where the relationship between the parties is a joint venture or partnership, the advance by the joint venturers is an investment and not a loan, and the profit or return earned by the investor is not subject to the statutory maximum limitations of the Usury Law.
In a recent decision, an experienced real estate investor and broker named Don found a commercial property in San Carlos that he wanted to buy. He contacted a hard money lender named Gary- one who specializes in providing money quickly and at high interest rates. He had worked with this lender many times before. They worked out a deal where they jointly took out a standard bank loan for $1.8 million, and the Gary contributed an additional $856,000 hard money, for which Don signed a promissory note at 12%, plus paying $14,000 in ‘points’. Don became a 90% owner of the property; Gary had 10%.
Things went sour, payments were not made, and Gary foreclosed. Don sued Gary, claiming that his hard money loan was usurious. The court said no. It looked at several factors, including:
A. Don & Gary both testified that they considered themselves to be partners.
B. Don was obligated to repay the note that he executed in favor of Gary; this would tend to undermine the conclusion that a joint venture existed. However, the note was not executed in isolation. It was simply one aspect of a larger transaction under which they invested jointly and under which Gary was not assured that the transaction would be profitable.
C. Gary assumed a risk of the loss of capital. Gary was on the title to this property and under his agreement with Don he owned 10 percent of the property. If the venture failed, Gary’s investment could be worth nothing. Clearly, Gary assumed a risk that he might suffer a loss.
D. Gary was not involved in the management of the property, but he was not precluded from involvement.
It seems logical that Gary, being a sophisticated lender, foresaw that his involvement in the deal-signing the bank loan and going on title- would allow him to evade the usury law. He took a huge risk- 10% ownership for 100% liability on the bank loan (As co-borrowers, they are equally liable to the bank, subject to the hope of being repaid by the other borrower). $14,000 in points and 12% interest does not seem unreasonable for this risk exposure.
Junkin v Golden West Foreclosure Service (2009) 180 Cal.App.4th 1150.