Trust Deed Investing Explained

The three roles in a deed of trust

In states that use deeds of trust, three parties are typically involved. This structure differs from a traditional mortgage, which usually involves only two. Once executed, the deed of trust is recorded in the public land records, which puts others on notice of the lender's claim, or lien, against the property.

The neutral trustee is a defining feature of this arrangement. Because the trustee holds title in trust, the lender generally has a more direct route to the collateral if the borrower defaults, subject to state law and the terms of the loan documents.

• The borrower, or trustor, pledges the property as security for the loan.
• The lender, or beneficiary, provides the funds and holds the right to repayment.
• The trustee, a neutral third party, holds legal title in trust until the loan is repaid and can act if the borrower defaults.

Lien priority: first and second position

When more than one loan is secured by the same property, the order in which the deeds of trust are recorded generally establishes priority. A first-position trust deed holds the senior claim and is generally repaid first from any sale or foreclosure proceeds. A second-position trust deed sits behind the first and is repaid only after the senior lien has been satisfied.

Because of this ordering, second-position loans carry greater risk. There is less value available to them if the property's price falls or if the costs of enforcing the loan accumulate. Lenders weigh lien priority carefully when deciding how much to lend and on what terms, and it is a core reason first- and second-position loans are analyzed differently.

Collateral and protective equity

The strength of a secured loan depends heavily on the collateral behind it. Protective equity refers to the cushion between the outstanding loan balance and the value of the underlying real estate. The larger that cushion, the more room there is to absorb a decline in value or the costs of enforcing the loan before the lender's principal becomes exposed.

Lenders assess collateral using appraisals, valuations, and analysis of the local market. These are informed estimates and judgments, not certainties. Property values can move, and a cushion that appears adequate at the time a loan is made can erode over time if market conditions change or if the property is not maintained.

Whole trust deeds versus a pooled fund

Investors can gain exposure to trust deed lending in more than one way, and the structure shapes the risk. Holding a whole trust deed means investing in a single loan against a single property, so the outcome depends entirely on that one borrower and that one asset.

A pooled, or fund, approach spreads capital across many loans. In Evoque's structure, accredited investors purchase Notes issued by the Fund rather than owning individual loans, and the Fund holds a portfolio of trust deeds. Pooling is intended to reduce the impact of any single borrower defaulting, but it does not remove risk. It introduces reliance on the manager to select, underwrite, and service the loans, and an investor's outcome depends on the performance of the overall portfolio and on the terms of the Notes.

• Whole trust deed: exposure to one borrower and one property, with concentrated outcomes.
• Pooled fund: exposure spread across many loans, with reliance on the manager and on portfolio-level performance.
• In both cases, the collateral, lien position, and enforcement process still drive results.

Default, foreclosure, and timelines

If a borrower stops paying, the deed of trust is what allows the lender to pursue the collateral. Depending on the state and the specific loan, this may proceed through a nonjudicial foreclosure conducted by the trustee, or through the courts.

Foreclosure is not instant. It can take months or longer, can involve legal and carrying costs, and can be affected by borrower bankruptcy, redemption rights, and local law. During that period, the loan may not generate income, and the eventual recovery depends on what the property actually sells for. For a second-position lender, recovery is further constrained because the senior lien must be paid first.

How this relates to Evoque Fund

Evoque Fund offers promissory Notes through a private placement under Regulation D, available only to accredited investors. The offering commenced on July 7, 2023. The Notes are not registered under the Securities Act of 1933 and are sold in reliance on an exemption from registration. A Form D for the offering is on file with the SEC through EDGAR.

The Fund's strategy centers on first- and second-position trust deeds secured by mixed-use and multifamily real estate, applying the concepts described above, including lien priority, collateral analysis, and protective equity. To learn more about how the Notes and the underlying strategy work, you can request the offering overview through the contact form.

Risks and limitations

Investing in private real estate debt involves substantial risk, including the possible loss of the amount invested. Consider at least the following before requesting information:

• Borrower default: borrowers may miss payments or fail to repay principal at maturity. A default does not ensure recovery, because the lender must then rely on the collateral, which takes time and may not cover the full amount owed.
• Collateral and valuation risk: real estate values can decline, and appraisals are estimates that may prove inaccurate. If property values fall, the protective equity cushion can shrink or disappear, placing principal at risk.
• Foreclosure timeline and cost risk: enforcing a defaulted loan can be slow and expensive, may be delayed by borrower bankruptcy or legal challenges, and may not fully recover the amounts owed.
• Subordination risk on second-position loans: second-position trust deeds are repaid only after the senior lien, so they carry a greater chance of partial or total loss when collateral value is insufficient.
• Illiquidity and no public market: the Notes are private securities with no public trading market. Investors may be unable to sell or exit when they wish and should be prepared to hold for an extended and uncertain period.
• Reliance on the manager and changing conditions: outcomes depend on the manager's underwriting, servicing, and portfolio decisions, and past market conditions or prior loan performance do not predict future results.

Frequently Asked Questions

What is the difference between a trust deed and a mortgage?

Both secure a real estate loan, but a deed of trust generally involves three parties, including a neutral trustee who holds title until the loan is repaid, while a traditional mortgage typically involves only the borrower and the lender. The process for enforcing the loan after a default can also differ from state to state.

Do investors own the trust deeds directly with Evoque Fund?

No. Accredited investors purchase promissory Notes issued by the Fund. The Fund, in turn, invests in a portfolio of trust deeds. Investors hold the Notes rather than the individual loans.

What does protective equity mean?

It is the cushion between the outstanding loan balance and the value of the collateral property. A larger cushion can help absorb declines in value or the costs of enforcement before a lender's principal is exposed, though it does not eliminate the possibility of loss.

Who can invest in the Notes?

The Notes are offered only to accredited investors through a Regulation D private placement. They are not registered under the Securities Act of 1933 and are sold in reliance on an exemption from registration.

Continue learning

Explore more Evoque Fund investor education on private real estate lending, secured note strategies, and how the Notes are structured.

Important information

For accredited investors only. Evoque Fund, LLC offers promissory notes through a private placement under Regulation D. The Notes are offered only to investors who qualify as “accredited” under applicable SEC rules. Nothing on this page is an offer to sell or a solicitation of an offer to buy any security; any offer is made solely through the Fund’s confidential offering documents.

This page is educational and is not investment, legal, or tax advice. It does not describe specific returns, fees, or terms. The SEC has not approved or endorsed this offering. Requesting information does not create an investment account, reserve or accept you into the offering, confirm your accredited status, or obligate you or the Fund in any way. Review the Fund’s SEC Form D and offering documents, and consult your own advisors, before making any investment decision.