BUSINESS STRATEGY
IRA APPROACH
China’s Investment Slowdown
The Evolution of an IRA Investor
LEGISLATION More Private Lender Legislation Looming
The Official Magazine of AAPL March/April 2019
LENDER LIMELIGHT
Greg Hebner It’s a Lender-ful Life MARCH/APRIL 2019
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CONTENTS
MARCH/APRIL 2019
06 BUSINESS S TR ATEGY
14
06 Pu t t ing Economic Cyc le s I n to Per s pec t i ve by B obby Mont agne
10 Tear ing Dow n W hile Keeping Pr o f i t s Up by D ebbie Fales
14 C hina’s I nve s t men t Slowdow n by J ef f Levin 18 F i t t ing Soc ial M e dia I n to Your B u s y Day by Chr is sey B reaul t
22 LOAN SERVICING
C over Your A s s e t: H ow to M oni tor t he C olla ter al on Your L oan
by Chr is Ragland
28 IR A APPROACH
22
T he Evol v ing M en t ali t y o f an I R A I nve s tor by Clay Malcolm
32 LENDER LIMELIGHT
I t ’s a L ender- f ul L i f e wi th Greg H ebner
38 C A SE S TUDY: A GUT TED DEAL 40 MANAGE & LEAD
32
40 Demy s t i f y ing Tr a demar k s & C opy r igh t s by Jack ie Stoughton
46 A nal y zing Your C ompany C ul t ur e by Chr is sey B reaul t
52 GOVERNMENT REL ATIONS 56 LEGISL ATION
56 Enhanced Private Lending Legislation Looming by Kellen Jones
60 10 Key Step s in Ad voc ac y
62 LEGAL
66
A r e Your Tr u s t Dee d I nve s t men t s C omplian t? by Melis s a Luc ar, E sq.
66 L A S T C ALL C hanging At t i t u de s — O r N o t? wi th N oelle W heeler
MARCH/APRIL 2019
3
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www.RollinsConsultingGroupLLC.com or 386-562-3016 PRIVATE LENDER
FROM THE CORNER OFFICE
In the last edition of Private Lender, I urged
you to get involved in your state and federal
legislatures. Being leaders in this industry is about
more than the balance sheets of our businesses and
R. MICHAEL WRENN
how we conduct day-to-day operations. Leadership
Chairman, Affinity Worldwide
EDDIE WILSON
is also about building a place for ourselves at the
LINDA HYDE
creating influence among our clients, colleagues
CEO, Affinity Worldwide
vanguard of a growing market and industry and
Managing Director, AAPL
CHRISSEY BREAULT
Editor in Chief, Marketing & Member Services Manager, AAPL
TIM DRAPE
Senior Account Manager, AAPL
KELLY SCANLON Copy Editor
SPRINGBOARD CREATIVE Design
CONTRIBUTORS
Chrissey Breault, Debbie Fales, Kellen Jones, Jeff Levin, Melissa Lucar, Clay Malcolm, Bobby Montagne, Caleb Olsen, Chris Ragland, Jackie Stoughton, Noelle Wheeler
COVER PHOTOGRAPHY Elizabeth Trujillo, BlushPix
Private Lender is published bi-monthly by the American Association of Private Lenders (AAPL). AAPL is not responsible for opinions or information presented as fact by authors or advertisers.
SUBSCRIPTIONS
Visit www.facebook.com/aaplonline or email PrivateLender@aaplonline.com.
and the many others who impact our livelihoods. As an association, we put our money where our mouth is—and we got
involved! On Feb. 21, 2019, we attended our inaugural Day on the Hill.
We visited with the offices of several senators on the Senate Committee
on Banking, Housing, and Urban Affairs as well as the Senate Committee on Finance. We set the stage for our voices to be heard and our views to be recognized.
During our meetings, we discovered that legislators don’t have a clear understanding of our profession or the need it fills. That’s a problem. Our relative anonymity will sunset as our industry grows. We cannot
afford to let regulators make up their own minds about who we are and what we stand for.
As Kellen Jones states in his article “Enhanced Private-Lending Legislation Looming”: “The best way to avoid overregulation is through disciplined execution and industrywide integrity.” We believe that through our
ethics and advocacy we can maintain our place in this industry for the betterment of all involved.
BACK ISSUES
Visit www.issuu.com/aapl, email PrivateLender@aaplonline.com, or call 913-888-1250.
For article reprints or permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail PrivateLender@aaplonline.com or call 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is prohibited. www.aaplonline.com Copyright © 2019 American Association of Private Lenders. All rights reserved.
LINDA HYDE
Managing Director, American Association of Private Lenders
The American Association of Private Lenders is an Affinity Worldwide Company. MARCH/APRIL 2019
5
BUSINESS STR ATEGY
Putting Economic Cycles into Perspective You’ll see opportunities when you know how to read between the lines. by Bobby Montagne
You’ve experienced the ups, downs and lateral movements of several economic cycles. One of the lessons that longevity in the market has taught is the need to look at economic cycles dispassionately. Although real estate in the long run is a good bet, understanding where we are in the market cycle by focusing on the current numbers and trends can help you identify the best investment opportunities.
READING THE LINES We all intuitively believe we understand cycles and have an idea of where we are in the current situation. We share opinions and personal experiences to rationalize why we won or lost our last deal—and why it‘s likely we will win our next one. The fact is, economic and real estate cycles are dynamic. We cannot predict them to perfectly time our buys and sells. History doesn’t repeat itself exactly, although it does leave clues. If we pay attention to them, we can position ourselves to be aggressive or defensive with our real estate market bets.
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PRIVATE LENDER
Howard Marks has written a book called Mastering the Market Cycles. To borrow Marks’ words, “[T]here’s usually a line that stretches from lower left to upper right” (on a y and x axis) and “another line fluctuates up and down around it.” Imagine Marks’ fluctuating line as a great pendulum in the sky oscillating back and forth with its center point directly above the normalized longterm economic growth line. The oscillation is caused by the sum of all market participants’ decision-making. It ultimately fuels supply and demand in the marketplace, including its excesses and corrections. Most real estate cycle charts have home prices going up
REAL ESTATE CYCLE & FACTORS
f luctuating line economic growth line
the y-axis and time across the x-axis. The same is true for U.S. economic growth charts. Historically, the data in these charts show that, over time, economies tend to grow, company profits increase, and real estate markets rise in tandem with the growth of the economy.
The fluctuating line is influenced by a plethora of factors— time of year, federal interest rate, weather, the duration of “bull” or “bear” markets, and so on—but nothing more than the sum and substance of people behind all the decision-making. The psychology of the market is utterly unpredictable.
The economic growth line has an intrinsic magnetic pull, which economists call “mean reversion.” Essentially, even with short-term shifts in the market, the pendulum will always return toward the growth line, which is the long-term average of all datasets.
The speed and force of the swing is proportional to the distance it traveled away from the line. The higher the pendulum rises above the line, the lower it will fall below the line, causing either a slight correction or a complete meltdown, as we saw in 2008.
MARCH/APRIL 2019
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BUSINESS STR ATEGY
HERE’S HOW MARKS EXPLAINS THE MOVEMENT OF THE MARKET-CYCLE PENDULUM:
“[P]ositive events and increased profitability lead to greater enthusiasm and optimism” causing the pendulum to swing up …
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PRIVATE LENDER
“[I]mproved psychology encourages increased activity” causing the pendulum to swing higher …
“[T]he combination of positive psychology and increases in activity, further pushes prices higher increasing risk” causing the pendulum to swing even higher …
“[I]nevitably this cycle takes on the appearance of being unstoppable and this appearance causes asset prices and the level of activity to go too far to be sustained” causing the pendulum to top out ...
The built-up force comes careening back toward the straight line crossing it entirely and descending into negative territory where it continues to dive until the energy caused by the excessive rise is absorbed by the corrective downs.
If you have a feel for the pendulum’s position above or below the line, you will know whether it is wise to be aggressive or to hold back.
current news and sensationalism into perspective.
This isn’t to suggest you try to time the real estate market, hopping in when you think it’s rising and making a quick exit when you anticipate an imminent fall. That behavior fuels the psychological herd mentality and causes extreme excesses and crushing corrections.
We’re near the high point. The pendulum has swung above the line and is beginning to swing the other way.
The best strategy is to understand generally where we are in the cycle (up or down and by relative magnitude) and adjust your aggressive/defensive behavior accordingly. Great opportunities exist in even the worst markets. The trick is to be a first mover (aggressive buyer) when the pendulum bottoms outs and cool and calculated when the pendulum begins to peak on the upside. That’s easier said than done, even for the most experienced and dispassionate investor. Headlines, especially those that focus on opinions rather than reporting data, reflect market psyche. Sharing this philosophy with your borrowers and investors can help them put
WHERE ARE WE NOW?
While the pace of real estate growth has slowed, prices are still rising. The pendulum is surely above the line, and it’s going to swing back. “When?” is the unanswered question. The return to equilibrium should not be consequential, because it doesn’t have enough upward momentum. The optimism that caused the recovery is not out of hand. In fact, many would argue that we have a disciplined recovery; therefore, the velocity of the pendulum as it swings back will in no way be as disruptive as the one we experienced in 2007 and 2008.
WHAT SHOULD YOU DO? Pay attention to the pendulum using objective and subjective indicators relative to your local market. Examples of measurable data points may be days on market and negative deviations in sale versus list price. Subjec-
tively, pay attention to the psychology of market players. What do real estate agents report that buyers are doing and thinking? What are customers hearing at their open houses? After a down market, how do you recognize a positive trajectory shift? Looking back at the real estate crisis, the markets began to recover in 2009. At that point, only a few determined we had hit the bottom and the market was going to recover.
The world is filled with opportunities if you can avoid getting dragged down by negative psychology and have the courage to be a first mover. ∞
ABOUT THE AUTHOR
TRUST THE STRAIGHT LINE Focusing on mean reversion can help you stay rational about the market. The straight line has a magnetic pull that will always draw the pendulum back to it. Owning real estate over many years has always been a winner. During the last downturn, some felt we were way below the economic growth line and focused on investing capital while the market was in that position. That being said, even if you buy when the market is above the line, the economy will continue to rise. History tells us that over time, you’ll be fine.
BOBBY MONTAGNE Bobby Montagne is the
founder of Walnut Street
Finance, a leading private lender in the mid-Atlantic
and member of the American
Association of Private Lender’s Education Advisory Committee. Walnut Street Finance is the
sponsor of the Walnut Street Finance Fund II LLC, a $30
million private lending fund
offered under SEC Rule 506. It allows investments as low as $50,000 and provides a preferred dividend of 9 percent with no fees.
MARCH/APRIL 2019
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BUSINESS STR ATEGYÂ
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PRIVATE LENDER
TEARING DOWN WHILE KEEPING PROFITS UP b y Debbie Fales
Being deliberate about the deconstruction phase of building pays dividends in multiple ways.
R
eal estate investing
transforms
neighborhoods,
breathing new life into
rundown homes and revitalizing communities. House flipping not only reduces neighborhood blight but also extends the overall
reach of home ownership, transforming lives.
But, do you realize there’s even more positive change that can come from house flipping? And that it will still contribute to your bottom line?
An often-overlooked part of the rehab process where you can make a positive difference is the deconstruction phase.
DECONSTRUCT CAREFULLY Instead of filling up dumpster after dumpster, be methodical and considerate about the deconstruction process. You might be surprised to learn just how many building products can be reused or recycled. According to ConstructionBusinessOwner.com, the most common recyclable construction
materials are concrete, wood, drywall, asphalt shingles, asphalt pavement, metal and cardboard. Disposing of these materials mindfully can make a material difference to the environment and your profit margins. These items typically account for 70 to 95 percent of discarded material at a residential or commercial site. Even beyond these basic building materials, easy-to-remove items such as doors, hardware, appliance and fixtures may be salvaged for donation or reused during the rebuild or on other jobs.
MARCH/APRIL 2019
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BUSINESS STR ATEGY
REDUCE, REUSE, RECYCLE We know what you might be thinking—that recycling all these products sounds like a hassle. But in many cases, there are systems already in place for processing these building components. For instance, asphalt, concrete and rubble are often recycled into aggregate or new asphalt and concrete products. Wood can be recycled into engineered-wood products like furniture as well as mulch, compost and other products. Many metals are also in high demand. Often, having these materials retrieved is as simple as calling your local waste hauler and scheduling a pickup. Check with your waste management representative to see if separation is even necessary or whether your hauler will pick up a load of mixed materials.
LOCATE LOCAL RESOURCES As green building practices gain popularity, it is becoming easier and easier to find homes for your discarded and surplus
“By recycling or reusing materials on-site, you can significantly reduce your overall expenses by avoiding purchase and disposal costs.”
DEBBIE FALES
construction materials. To find a recycler near you, visit the Construction and Demolition Recycling Association (CDRA) for a searchable directory. In addition, many cities now have stores that accept and resell donated surplus building materials and appliances. For instance, Habitat for Humanity runs “Habitat ReStores” which are retail outlets where quality used and surplus building materials are sold at a fraction of regular prices. There are also many independently operated nonprofits with a similar mission. In Baltimore, specifically, Second Chance salvages and resells reusable building supplies, providing job training and employment resources to those in need in the region.
BOOSTING THE BOTTOM LINE If safeguarding the environment and supporting your local
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PRIVATE LENDER
ABOUT THE AUTHOR
community doesn’t provide enough motivation to participate in recycling efforts, consider the potential financial benefits to you. By recycling or reusing materials on-site, you can significantly reduce your overall expenses by avoiding purchase and disposal costs. These savings can add up quickly. Keep in mind, too, that your donation of recovered materials to qualified 501(c)(3) charities may also provide a sizable tax benefit. As you can see, taking a deliberate approach to the deconstruction and building process pays dividends in multiple ways. Reusing and recycling as much material as possible not only reduces your environmental impact but may also provide support to community-based organizations in your area and produce significant personal financial savings. ∞
Debbie Fales serves as
the communications and marketing director for
Navigator Private Capital
(NavCap), a private lender offering fix-and-flip and
buy-and-hold financing. NavCap serves several
states (Maryland, Virginia, Delaware, Georgia,
Minnesota, Wisconsin) and Washington, D.C.
NavCap is rapidly expanding its geographic footprint and growing its lending
portfolio. Contact Debbie at info@gonavcap.com or (443) 603-0193.
MARCH/APRIL 2019
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BUSINESS STR ATEGY
China’s Investment Slowdown Will America’s real estate market be affected? b y Jeff Levin
14
PRIVATE LENDER
O
ver the past
several years,
Chinese inves-
tors were quite
active in the U.S. real estate market. Both the commercial
and the residential sectors benefited from the healthy appetite of Chinese institutional and individual investors. Early last year, however, the bloom began to come off that rose. Much of Chinese investing has now shifted to Europe and other parts of Asia. You may have noticed some worrisome stories about the Chinese slowdown. The concern is that, along with rising interest
rates, a continued shift of Chinese investment away from U.S. shores could trigger a crisis for the American real estate market. The good news is, there is no cause for that kind of alarm. Assuming China’s economy continues to struggle in 2019, it should simply contribute to what already appears to be a modest decline—in many cases a soft landing—for U.S. real estate prices.
CHINA’S APPETITE FOR U.S. INVESTMENT Just a few years ago, China had a huge appetite for U.S. assets. The cycle began in 2014, when the Chinese government relaxed the rules governing cross-border investments. This relaxation was part of a concerted effort to expand Chinese investment overseas— not just in real estate, but also in manufacturing, technology and infrastructure—to promote its One Belt One Road strategy. Such investment was a means to increase Chinese influence in global and regional trade. Less than a year later, China’s central bank shocked markets when it devalued its currency, the yuan, by nearly 4 percent to the U.S. dollar. Spooked by this, many Chinese investors started buying assets overseas
to protect their wealth. The high-water mark for direct investment by Chinese investors into U.S. markets was 2016. Asset purchases and other investments across all sectors peaked at a stunning $46 billion. For the U.S. real estate market, Chinese buyers became the top foreign purchasers, nudging Canadian buyers out of the top spot. In terms of residential real estate, more than two-thirds of Chinese buyers paid for property in cash, often above the asking price. Many bought homes purely as an investment vehicle, leaving them vacant but well maintained. But, what goes up usually comes down. Starting in 2017, Chinese authorities reversed their loose policies on capital outflows to prevent the value of the Chinese yuan from dropping even further against other reserve currencies. The impact of this clampdown hit overseas real estate investing rather quickly. In 2017, U.S. commercial property purchases by Chinese investors declined by nearly 51 percent when compared to 2016. Residential purchases declined 18 percent. In addition to individual investors cooling on American real estate, the large institutional money pulled back too, including the most active buyers from 2016 like Anbang Insurance and Wanda Group.
In 2018, there was an even deeper cutback. In the first half of last year, Chinese investment in the U.S. was down an astonishing 90 percent compared to the same months in 2017. David Firestein, the founder of the China Public Policy Center at the University of Texas, called the drop “probably unprecedented” in an interview with The Week. During the third calendar quarter of 2018, Chinese conglomerates sold off more than $1 billion worth of commercial real estate in the U.S. while purchasing only $231 million, according to the Wall Street Journal.
2019 OUTLOOK
analysts expect the yuan to devalue against the
dollar by another 10-12 percent this year. This
means that a U.S. prop-
erty with a nominal pur-
chase price of $500,000 today would cost a
Chinese buyer between
$540,000 and $545,000 after accounting for the yuan’s expected lower
purchasing power. With property prices already
peaked in many markets, continued yuan devaluation makes U.S. acquisitions far less attractive.
02 T rump Administration
Worries // The trade war
currently playing out
between the U.S. and
It’s a good bet that Chinese investment in U.S. real estate will continue to shrink in 2019, due to three big issues:
01 Weaker Chinese
Currency // By the end
of 2018, the yuan was
down another 5.7 percent against the U.S. dollar. This year it faces even more pressure from a
combination of factors.
These include the Chinese domestic monetary stimulus, a slowing growth rate,
the trade war with the U.S.
Chinese governments is worrisome enough. But
with far fewer headlines,
regulatory agencies under this administration have become tougher too.
Chief among these is the Committee on Foreign
Investment in the United States (CFIUS), the U.S.
regulatory body charged with policing foreign
investment, which is much more hawkish. Several major deals involving
Chinese investors were
and a diminishing currentaccount surplus. Most
MARCH/APRIL 2019
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BUSINESS STR ATEGY
canceled due to CFIUS
“The concern is that, along with rising interest rates, a continued shift of Chinese investment away from U.S. shores could trigger a crisis for the American real estate market. The good news is, there is no cause for that kind of alarm.”
concerns. The combination of regulatory barriers and a harsher political spotlight has led many Chinese investors to conclude that the U.S. market is more trouble than it’s worth.
03 C ooling Chinese
Economy and Stock
Market // Recent Chinese
data have disappointed
investors. Retail sales hit a 15-year low, industrial production dipped to a
3-year low, and auto and home sales are soften-
ing, despite new tax cuts designed to stimulate growth. The Chinese
stock market began to
chill last August after the
Shanghai Composite lost
8.5 percent of its value in a single day. For the 12 months ending Feb. 4,
2019—the Chinese lunar
calendar year—the Shanghai Composite Index was
down 18 percent from the prior 12-month period, its worst plunge since 2008.
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PRIVATE LENDER
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CHINA SNEEZES— DOES AMERICA CATCH A COLD? Certainly China is the largest holder of U.S. debt, carrying more than $1.1 trillion in U.S. Treasurys as of last November. Right now, China needs liquidity to support its efforts to stabilize its economy. They trimmed their holdings of U.S. Treasurys by $63 billion year over year, down by more than 5 percent. That could have a knock-on effect on mortgage
interest rates—the selling off of Treasurys puts more supply into the bond market, raising rates. At the macro level, the Federal Reserve is already planning two interest rate hikes for 2019, up from its current 2.5 percent benchmark funds rate. Continued increases in borrowing costs are probably going to halt or reverse the upward momentum of home prices. With that said, a leveling off of home prices is not the same as a crisis. In this environment, the U.S. housing market is likely to experience a soft landing, not
Simple | Innovative | Fast
some scary contagion or crisis for the American economy. A reduction in the pace of home price appreciation is a good thing for buyers in markets that are already overheated. Price normalization may lift the number of deals in total. The overall economy will also provide a tail wind to the housing market because workers are seeing wage gains, especially income earners in the lower 25th percentile of wages. That will boost demand for lower-priced homes. The inventory of homes for sale remains at historically low levels in comparison to the population, a result of the drought of new single-family housing starts in the years following the Great Recession. Finally, consumer spending is expected to remain strong throughout 2019, another reason for a soft landing. So, while it bears watching how things play out in China, there’s no reason to worry about the American real estate market catching any kind of a cold from way across the Pacific. ∞
Our pioneering approach as a residential commercial lender in today’s market offers a fresh perspective on delivering innovative solutions and helping our customers achieve their investment goals. We provide a wide variety of financing options, designed specifically for today’s real estate investor. Contact Angel Oak Prime Bridge today for financing solutions created to take your business to the next level!
ABOUT THE AUTHOR
JEFF LEVIN Jeffrey Levin is a bestselling author and the founder and
president of Specialty Lending Group (SLG), a boutique
private real estate lending company servicing the
Washington, D.C., metro area. Prior to launching SLG, he
was the co-founder and CEO of iWantaLowRate.com and
Monument Mortgage. Levin is
a recognized authority on real
estate investing and a frequent lecturer and panelist.
He is a member of the
American Association of
Private Lenders and serves on its Education Advisory
Committee. He is the author of the Amazon best seller,
“The Insider’s Guide to Private Lending,” which details his
experiences in private lending and advice for individuals
looking to get into the business. Levin earned a B.A. degree
from the American University
in Washington, D.C., and lives on Capitol Hill with his wife, Dunniela, a Canadian trade
lawyer, and his two sons, Jack and Charlie.
www.aopbconnect.com | 888.209.1333 MARCH/APRIL 2019
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BUSINESS STR ATEGY
FIT TING SOCIAL MEDIA INTO YOUR BUSY DAY b y Chrissey Breault
15-minute marketing ideas that can take your business to the next level
Have you ever had 15 minutes here and there and weren’t sure how to use them to grow your business? You know those moments where you have just enough time to do one smaller task before you have to jump on that client call or need to leave for your kid’s activity? What usually happens is that you end up scrolling through your favorite social media site. Instead, consider these ideas to fill that “spare” time. You may just find that they add up to substantial business growth!
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PRIVATE LENDER
MAKE A LIST OF WHAT SOCIAL SITES ARE BRINGING YOU THE MOST TRAFFIC To make this list, log in to your Google Analytics and click on the links to follow this sequence: Acquisitions/All Traffic/Referrals.
in that section, click on the LinkedIn link to discover a breakout of the top posts that brought people to your site. To help better understand what people are interested in, write out your top 10 posts and the number of traffic clicks from those images to add to your list of top social sites. You can also track traffic from Twitter, your newsletter and all the places where you might have content except Facebook. Right now, Facebook is the only program that won’t give you more information other than the number of people who came to your website.
CHECK YOUR TOP POSTS IN YOUR FACEBOOK BUSINESS PAGE To access this information, go to your business page. Look for the tab on the top of your fan page that says Insights and click on that button.
You’ll see a list showing which social site is generating the most referral traffic to your website. Each site is linked to a breakdown of the actual posts people clicked on to reach your site.
Then start tracking the activity from your Facebook posts. You could use a Word document, but you might find it easier to set up a spreadsheet. At the very least, write the information out on a piece of paper.
If your top referral source is LinkedIn, then when you’re
After you’ve logged in to your Facebook business page
Insights, review your posts and answer the following questions: W hat were your top five
posts for the week?
Did someone share your
CHECK WHAT’S GOING ON WITH YOUR TWITTER ACCOUNT
W hat time of day were
they posted?
W hat day of the week
were they posted?
W hat was the topic or
message of these posts?
To see what’s happening with your Twitter account, click the Notifications link. This is where you’ll be able to view your recent activity.
D id you add a video,
When reviewing your notifications, consider the following:
The more you check your Insights, the more you’ll start to see patterns emerge. You’ll start to see what type of content speaks more to your followers and what posts create more engagement with your potential customers.
D id someone new follow
photo or ask a question?
you? Click over to their profile and decide whether you want to follow them back. Look through their tweets and retweet one of their posts or comment on one of their tweets.
blog post or promote your products? Hit the Reply button under their post and thank them for sharing. Adding a personal note is a nice touch to show that you’re listening and not just automating everything.
UPDATE YOUR LINKEDIN PROFILE We all get busy. Sometimes we get so busy that we forget to add what we’re working on to our LinkedIn profile. Your LinkedIn profile is important because if someone is following through with their
due diligence and researching you, your LinkedIn profile will show in the search results. This may be one of the first places where a potential borrower or partner will first learn about you. Make sure that your information is up-to-date. To update your information, go to the Edit Profile section (you’ll see the edit pencil next to all the sections) and ask yourself these questions: D id you recently add a
new product or service? Add it to your profile under the Project section.
D id you write a
guest post or article? Add the link in the Publications section.
MARCH/APRIL 2019
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BUSINESS STR ATEGY
H ave your services
changed? Update that in your Summary section as well as in the Experience section.
FIND NEW PEOPLE ON INSTAGRAM TO FOLLOW Searching for people who do the same work as you is a great way to see how others are using Instagram. Run a search for your company’s keywords in the search feature and see who comes up. Also make some notes about what hashtags they’re using. You may discover some of your strongest hashtags by checking out what
others who are doing the same type of work as you are using.
C HECK YOUR NUMBERS IN YOUR SOCIAL SITES AND SET MONTHLY GOALS FOR EACH ONE Today’s customers want to build connections with their favorite companies. The question is, how do you make sure your social media efforts have the right impact on your target market? It’s a simple answer. Data. It’s impossible to know for sure whether you’re making the right business decisions unless you are measuring your performance though key
performance indicators or metrics. Being able to understand your KPIs will help you set goals and ultimately help your customers. The trouble is that most people don’t realize that measuring your social media metrics goes beyond “likes.” Although there are countless metrics to measure your social media efforts, the most important for most companies include: W hether people hear
about/see your brand.
H ow often people engage
with your company.
T he rate of engagement
that turns into a conversion.
T he overall impact on your
customer base.
Bluestone Capital is a commercial real estate investment firm specializing in bridge and structured financince, as well as mezzanine debt on most asset classes. We provide simplified and creative capital solutions to meet your time-sensitive needs.
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PRIVATE LENDER
Get into the habit of checking your numbers at the end of every month. You’ll be able to track what’s growing and what needs a little help. You will be able to create SMART goals once you have analyzed each of your outlets.
HAVE A MINI BRAINSTORM SOCIAL SESSION Is there one social site that you’ve been meaning to give a little attention to help you grow your followers? Start by looking at the top content on that site, and make notes about what’s connecting with your fans. Next, list five ideas that you could
implement to help you create or find more of the type of content your fans want to see more of. Since you’re keeping this exercise to 15 minutes, there’s no time to judge your ideas. Just keep writing down everything that comes to mind.
cool things you’ve done. Then make a quick to-do list of what you want to work on next. ∞
ABOUT THE AUTHOR
READ AND COMMENT ON ONE OF YOUR FAVORITE BLOGS Take the entire 15 minutes to really read articles—not just scan them—and think about your comment. What could you say to really add to the conversation and reflect your company’s core values and services? If you can’t add to the conversation, move on to the next post or another site. It’s OK if it was posted a couple of weeks or a month ago. The point is to spend some time crafting your comment so that you can contribute to the conversation and maybe even start a connection with your favorite contributor.
CHRISSEY BREAULT Chrissey Breault is the
marketing and member
services manager for the American Association of Private Lenders (AAPL). Before joining AAPL,
Chrissey worked in county
government as a communications expert. Her more than
15 years in communications and marketing started in the hospitality industry with Hilton and Marriot
brands. For more than seven years, Chrissey managed
midmarket hotels along the East Coast and the Deep
South. She holds an associate degree in hospitality and
travel from Bradford School
REMEMBER HOW MUCH YOU ROCK
in Pittsburgh, Pennsylvania, and holds certifications in Adobe Web Design and volunteer management.
Take a moment to think about how far you’ve come and all the
MARCH/APRIL 2019
21
LOAN SERVICINGÂ
PART 2 OF A 6-PART SERIES
COVER YOUR ASSET How to monitor the collateral on your loan
22
PRIVATE LENDER
by Chris Ragland
THIS IS THE SECOND ARTICLE IN A SIX-PART SERIES THAT COVERS ASSET MANAGEMENT AND THE DISPOSITION OF DISTRESSED LOANS.
W
hen you make a
private
loan, you
give the borrower capital
and then kick back and wait to get repaid at the end of
the loan term, right? If you
are in the private lending industry, you know that is never the case. At least, you should know. Without some sort of oversight, you could lose your asset on the deal. More so than raising capital and attracting borrowers, proper collateral monitoring throughout the course of a loan is the most crucial aspect of a private lending operation. It keeps projects on track and provides early clues of a looming loan default.
Collateral monitoring serves three main purposes:
01 I t keeps construction
progress on track to ensure the finished project will achieve the estimated After Repair Value (ARV).
02 I t protects against loss
of collateral by casualty.
03 I t protects the lender’s lien position on the collateral.
THE DRAW PROCESS The first article in this series discussed estimating the ARV of the property during the underwriting process. A clearlydefined draw process that gives the borrower continued funding throughout the course of the loan allows the lender
MARCH/APRIL 2019
23
LOAN SERVICING
“More so than raising capital and attracting borrowers, proper collateral monitoring throughout the course of a loan is the most crucial aspect of a private lending operation.” to control construction progress, ensuring that the target property value can be achieved. Once the borrower completes a portion of the construction, they submit a draw request for the completed work. This draw request includes receipts for materials and labor, an inspection to confirm the work was completed within the scope of the budget and photos of the work performed. Perhaps, most importantly, lien wavers signed by the party performing the work, when applicable, are required to avoid the imposition of a mechanic’s lien on the property. But it also pays to be proactive— time is of paramount importance in any successful real estate investment. Rather than waiting for the borrower to submit draw requests, it’s important to monitor how many days have passed since
24
PRIVATE LENDER
the last draw request. Monitoring the frequency of draws and following up with borrowers who fall behind on the draw schedule will help keep construction on track. A delay in the first draw may indicate the borrower is having permitting issues, which can sometimes make or break a project. Awareness of issues the borrower may be facing at all phases of the project helps you anticipate and react to potential problems with a loan.
Both the lender and the borrower benefit by conducting an appraisal or Brokers Price Opinion (BPO) midway through construction on the project. A BPO provides an extra level of assurance that both the project is on track to reach the estimated ARV and the budget is adequate. It gives the borrower time to course correct, if necessary. Remember, if the borrower has to come out of pocket or is unlikely to make money on the project,
the lender incurs a greater level of risk because the borrower may decide to abandon the project altogether. It’s important to look ahead and monitor maturity dates for loans in your portfolio. Certain loan buyers won’t permit a loan to go past maturity without an extension in place. If a loan must be extended, the lender typically will collect extension fees or raise the interest rate on the loan to the default rate. A loan that goes
past maturity and requires one or more extensions is an indicator of increased risk to the lender. Once the project is complete and the property is put on the market, it’s wise for the lender to monitor the listing price to assess how it compares to the ARV.
INSURANCE If your asset is wiped out, you could take a major loss on the property if you don’t have
MARCH/APRIL 2019
25
LOAN SERVICING
insurance. Though insurance premiums are paid in advance at the time of loan closing for the term of the note, the renewal can sneak up on you and your borrower if the term of the loan must be extended. Sophisticated private lenders will stipulate that a lapse in insurance on the property equates to a default on the lender’s deed of trust. However, the lender should have a forced-placed insurance process in place to minimize the likelihood of a policy lapse. Just as the lender monitors the borrower’s draw schedule, they should also monitor the status of the borrower’s insurance to help avoid a policy lapse. Remember, protecting borrowers from themselves also serves to protect your investments. So, send out reminders to borrowers when the deadline for renewal approaches. Doing so at intervals of, say, 30 days, 15 days and one day before expiration should give the borrower ample time to renew the policy or obtain a new one. Once the project is complete, a builders risk policy is no longer suffi-
26
PRIVATE LENDER
cient, so the borrower must change the policy from a builders risk policy to a fire dwelling policy, which also saves money on the premium while the property is being marketed. If the borrower fails to renew the insurance policy on the property, don’t stand around fiddling while Rome burns. At that point, it is critical for the lender to force-place a policy on the property immediately. That always incurs an additional premium but, unfortunately, the borrower must shoulder that extra cost.
TAXES It’s been said that only two things in life are certain. As with an insurance policy lapse, a tax default also should signal a loan default according to the deed of trust. It also could mean extra fees for the borrower, or even the lender. Not only that, if taxes on the property become seriously delinquent, the county can place a tax lien on the property, which is superior to any lender’s lien. For any lender servicing a high number of loans, it’s useful to use a third-party platform to monitor the status of property taxes. They can provide
monthly updates to the lender and even send out letters to borrowers who are approaching the deadline to pay taxes on the property or who are past due. Automating this process provides an added layer of security and simplifies collateral monitoring for the lender.
THE BOTTOM LINE
ABOUT THE AUTHOR
CHRIS RAGLAND Chris Ragland is the chief
Properties that end up as Real Estate Owned properties (REOs) can cost lenders a great deal of time and money. And, quite frankly, they’re a pain in your portfolio. Prevention is the best remedy for the problem. To reiterate, preventing REOs starts during the underwriting process before the loan is even closed. But, the process of prevention is ongoing. Loan servicing is not just about money in and money out. Lenders should always futureproof their investments with a comprehensive process to monitor project progress from start to finish. In the end, it protects your bottom line. ∞
operating officer of Noble Capital, a private invest-
ment firm specializing in real estate. He is responsible for
the day-to-day operations of Noble Capital, as well as for
spearheading the expansion of
existing and new business lines for the company. He hosts The
Noble Capital Radio Hour, a talk radio show produced by Noble Capital. Chris spent 15 years
building firms that specialize in loan servicing, loss mitigation, full service brokerage,
insurance, management,
maintenance, rehabilitation and REO disposition.
Pre cis ion
Pr o fe
alty y Lo
Integrity
Relia bili ty
er m o t s Cu Care
al ion ss
Innovativ e Our Services Include: • Online Portals • Multi-lender Loans • ACH & Direct Deposit • No Note Minimum/Maximum • Property Taxes & Insurance payments • 1098’s, 1099’s, and CA 593-I’s • And more! Contact For More Information.
(800) 646-3445
noteservicingcenter.com MARCH/APRIL 2019 27 newacct@noteservicingcenter.com
IR A APPROACH
The Evolving Mentality of an IRA Investor The attractiveness of IRA investing may depend upon the age of the investor. by Clay Malcolm
Any person may simultaneously be two investors. On the one hand, someone may be purchasing assets with tax-advantaged money (i.e., held within a Traditional IRA, Roth IRA, 401(k), health savings account, etc.). On the other, they may be purchasing with personal money (i.e., nonretirement funds in a checking or savings account).
As you may know, one of the biggest advantages of a selfdirected account is that you can exercise your own investment expertise and combine it with tax advantages. This is true whether the account is originating a note, buying an existing note or a fraction thereof, or investing in an entity that is making loans. Does that mean the investment strategy for both these sources of investing is the same? Often, the answer is “no.” What is the difference between an IRA investor and a personal funds investor? The short answer is time, or at least the perception of a timeline because of the nature of the rules attached to tax-advantaged accounts. As an investor gets older, the contrast between IRA investing and personal investing tends to be less dramatic, but the interaction of time with asset selection and account
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PRIVATE LENDER
rules is always influencing the decision-making process.
YOUNGER INVESTORS For a younger investor, the benefit of an IRA may seem a long way off. In a Traditional IRA, the account holder, with a few exceptions, must wait until at least age 59.5 to take a nonpenalized distribution of any of the cash or assets in the account. Because the wait seems so long, a younger investor may be more interested in investing with personal funds than with tax-advantaged funds. The earnings from these personal investments are more immediate. The investor interacts with the earnings as they come in, including spending the earnings or reinvesting them— and certainly paying taxes.
Traditional IRAs, HSAs and 401(k)s do have one avenue for immediacy: the tax deduction the investor gets for making contributions. Assuming this younger investor has established some cash in a tax-advantaged account, there seem to be some factors at play that influence their asset selection. It is a common perception that younger investors will opt for more risk. That may be a logical assumption, but there are some competing perceptions. One is that you need to be more careful with tax-advantaged account investing because it is “for retirement.” The thought that this money must be treated with care or the investor will be left out in the cold in old age is prevalent.
Whichever risk tolerance paradigm reigns for a particular investor, there are a few factual elements for the thoughtful investor at this age. First, the compounding effect of investment returns being tax-deferred has the most power for the younger investor. A riskaverse approach that provides consistent returns may very well produce excellent longterm results. A risky approach that provides one or two big wins can set the account up for more flexibility later. Second, the younger investor may not need cash earnings. This may mean that a growth equity investment or a longterm debt instrument with interest-only payments could be more attractive than they
might be for an older person. And, last, the choice of a Traditional or Roth IRA may be a more relevant consideration at this point. An investor who is not in a high tax bracket at this age may sway toward a Roth because they do not need a deduction and because their tax bracket later (when they are going to take distributions) may not be lower than it is currently.
MIDDLE-AGED INVESTORS Investor who are between 45-70.5 years old have different time considerations when choosing an investment strategy. Investors in this age range
demand more thought about tax-advantaged accounts due to the 59.5 age threshold. Retirement accounts are only part of a person’s total financial picture, and when distributions without penalty become available, a person’s personal and IRA finances often become more intertwined. A prominent consideration at this point for the account holder is to assess the need for distributions. In a Traditional IRA, when the investor is 59.570.5 years old, distributions may be taken, but they are not required. Therefore, the account can continue to create earnings and compound, and/ or it may be time to start taking
MARCH/APRIL 2019
29
IR A APPROACH
money or assets out. This determination will likely affect the investment strategy. One of the advantages of debt assets in an IRA is the ability to determine cash flow and the period over which that income will persist. It is a common strategy for an IRA to originate a note or notes that produce payments that align with the account holder’s personal cash needs. Principal and interest payments are made to the IRA, and then the account holder establishes a periodic distribution from the
account. In a Traditional IRA, these distributions are taxable, whereas they are not if the account is a Roth. Investors in this age group are also likely to be thinking about their risk profiles. If the preference is to be a little more conservative, the investor may look for debt that has significant collateral attached to the note. Remember, an IRA does have some restrictions in terms of the assets the account can hold. It may be prudent, therefore, to avoid allowing
collectibles as collateral for a loan. While allowing collectibles as collateral is not a prohibited transaction in and of itself, collectibles received by an IRA will need to be liquidated in the event of default.
OLDER INVESTORS There are often more strategy adjustments being made to account activities and investment preferences for account holders over age 70. Certainly, the risk consideration for
investments, mentioned previously, is front and center. It is common to see account holders opt for investments with lower return and less risk as they get older. As for account changes at this age, remember that the ability to make contributions to a Traditional IRA cease at 70.5. And, distributions (known as RMDs or Required Minimum Distributions) begin to be mandatory on an annual basis at least. For Roth IRAs, these rule changes do not occur. RMDs, of
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PRIVATE LENDER
“As an investor gets older, the contrast between IRA investing and personal investing tends to be less dramatic, but the interaction of time with asset selection and account rules is always influencing the decision-making process.” course, can be satisfied using the periodic distribution strategy stated previously. It’s good to plan ahead to satisfy RMDs without having to dramatically reorganize investments. For those who would like to have control over distributions without RMDs, a Traditional to Roth conversion is a possible strategy. The tax event associated with a conversion changes the status of the account from pretax money to post-tax money. And, since the IRS has collected its tax due, RMDs are no longer a factor. Interestingly, the ability to continue to contribute to a Roth and the fact that RMDs are not mandated allows for a generational
wealth angle that some account holders take advantage of. As mentioned previously, taxadvantaged accounts are only a portion of an individual’s overall financial picture. As one gets older, however, these accounts are often a larger part of the picture. That said, for some account holders, the account can become an inheritance for that person’s beneficiaries. Because an IRA generally bypasses probate, it can be an attractive tool to pass wealth along. Coming back to a Roth IRA, as opposed to a Traditional, the Roth allows the account to persist without being chipped away by distributions. Also, the idea that investment returns would necessarily need to be timed out
can be disregarded. Not only would the account holder not have to satisfy RMDs, but an account’s assets (in this case, existing debt instruments or equity) do not need to be liquidated to be passed along to the account’s beneficiaries. Those assets can continue to produce earnings for the account even after that original account has become an account of the beneficiary or beneficiaries.
ABOUT THE AUTHOR
Investors using their personal funds may also change their preferences over time, but the interaction of age and an IRA’s rules produces a varying landscape for choosing investments. Yes, the core ability of tax-advantaged accounts to participate in private lending is for everyone. But for those of us working with account holders of various ages, everyone does not have the same goals for an investment. Certainly, this view changes due to external factors such as economic conditions and competing asset possibilities. For an investor who has a level of comfort with a certain asset class, however, often the changes in preference have to do with time. Fortunately, self-directed accounts allow for the flexibility to address account holder needs throughout their lifetime. ∞
Direction IRA Inc., a self-
CLAY MALCOLM Clay Malcolm is the chief
development officer at New directed IRA provider that
assists nearly 17,000 clients across the U.S. He oversees
most avenues of marketing, teaches continuing profes-
sional education and informal classes and webinars, and facilitates the training of
business development and
client relations teams. Malcolm has more than 20 years’
management experience in
various roles and draws upon his teaching background to impart knowledge about
self-directed IRAs to current and prospective clients.
Malcolm received his bachelor of science degree in
communications from
Northwestern University.
newdirectionira.com/education.
MARCH/APRIL 2019
31
LENDER LIMELIGHTÂ WITH GREG HEBNER
32
PRIVATE LENDER
IT’S A
Lender-ful LIFE
The Greg Hebner Philosophy by Caleb Olsen
MARCH/APRIL 2019
33
LENDER LIMELIGHT WITH GREG HEBNER
Meet Greg Hebner, a man who chose to stop worrying about mistakes and embrace that growing—both as a person and as a business professional—involves constantly expanding and pushing boundaries. The best way to do this, Hebner believes, is to put yourself in new places and situations. He and his business partner, Jan Brzeski, are the managing directors of Arixa Capital. Among other responsibilities, Hebner oversees Arixa’s lending platform. Loan origination, underwriting, closing and servicing all fall under his umbrella. Since Arixa’s loan programs skew toward innovative and unique packages, Greg spends a lot of time structuring creative, one-ofa-kind loans to find the best solution for each client. He encourages people to approach opportunities and ideas with an open mind. Maybe that’s why he says everyone should visit a country, at least once, where the citizens don’t speak English. “When you visit a non-Englishspeaking country, it forces you out of your comfort zone and to really explore,” said Hebner. Pushing your comfort zone to its limit is a key factor for
34
PRIVATE LENDER
personal growth, but so are the people you choose to include in your life, Hebner said. “I surround myself with people who inspire and help me think outside of my own sphere of vision,” he said. “You want people to push you outside of your comfort zone, challenge your view of what’s possible and help you see the full range of possibilities that are available if you set big goals and put yourself in a position to achieve them.” Over the past few decades, Hebner has contributed to the success of major companies around the nation. But, a recent personal development continually shapes his current outlook on life: He and his wife, Irlan, now have a son, Matthew, who is 20 months old. “The birth of my son and becoming a father is my proudest moment to date. It’s hard to imagine life without him in it. I hope I can give him the opportunity to find his path to happiness and success, whichever way he defines it,” Hebner said. Back at work, Greg is fortunate to explore new and creative ways to push himself every day. “I don’t have a lot of days that are the same. I enjoy variety and keeping things interesting, so I try not to fill my day with
meetings or scheduled calls, so I have time to react to opportunities or needs that arise,” he said. As one of the largest independent private lenders in the U.S. that hasn’t sold any part of its platform to a larger institutional partner, Arixa leverages Hebner’s creative thinking to differentiate itself from competitors. “I get excited to work closely with the talented clients we have—whether they’re designers, architects, builders or any part of the ecosystem,” he said. “I hear their plans and dreams and see their visions go from a piece of paper to an actual building or structure. Being part of this process and seeing the final product come to life still gives me the biggest thrill.”
GETTING STARTED Greg knew he was made for real estate investing when he bought his first house when he was in his early 20s. By the time he was 30, he held executive positions at fast-growing companies and was purchasing single-family homes through a commingled equity fund. He learned how to make real estate investments through the first fund that he formed. “I
learned a lot, and a lot of those investors are now invested in our Arixa Funds and appreciated how I went about managing this small fund,” he said. Greg credits much of his success and work ethic to his late father, Jerry Hebner, who passed away at age 58. “My father grew up in a family that didn’t have much,” Hebner said. “He was truly the definition of a self-made man. He challenged me both academically and athletically, and he told me that my only limits are those I set for myself.” Not only did Hebner learn what to do from his father, he also learned what not to do. “My father worried too much—all the time—about what could
“In some ways, we run our business like Jimmy Stewart from “It’s a Wonderful Life.” We want to be part of a community and meet the people we lend to. We really want a relationship with them and to build mutual trust.”
MARCH/APRIL 2019
35
LENDER LIMELIGHT WITH GREG HEBNER
WHAT MAKES GREG HEBNER TICK? THIS OR THAT
ANDROID OR APPLE? PEN OR PENCIL? COMEDY OR MYSTERY? REALLY CROSSWORD OR SUDOKU? NEITHER, NO TIME FOR PUZ ZLES!
CUBED OR CRUSHED ICE? POOL OR POKER? I PLAY BOTH—AND AM NOT VERY GOOD AT EITHER. I’D PROBABLY CHOOSE POOL AS IT COSTS ME LESS MONEY!
FAVORITES
PHYSICAL ACTIVITY?
BASKETBALL
SPORT? NFL IS FAVORITE TO WATCH, BUT LIVE NBA GAMES ARE STILL THE BEST TO ATTEND.
PLACE YOU’VE TRAVELED? I’LL LIST MY TOP THREE—BORA BORA, KYOTO AND THE HILLS OF THE NORTH ISLAND OF NEW ZEALAND.
BUSINESS BOOK? STILL REFER TO JACK WELCH’S “STRAIGHT FROM THE GUT” MORE THAN ANY OTHER.
MOVIE? I’M A BIG MOVIE WATCHER, SO I’M STRUGGLING TO NARROW IT DOWN TO 10.
GUILTY PLEASURE? A GREAT OLD SCOTCH ON THE ROCKS AFTER A LONG DAY ALWAYS SEEMS TO DO THE TRICK.
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PRIVATE LENDER
go wrong. I think this self-induced stress was a major part of what took him away so soon,” he said. Greg took his father’s lessons and influence to heart. He set big goals for himself, and he decided never to put limits on his capabilities. Soon after graduating from the University of Illinois, Greg applied for Harvard Business School and steadily charted a self-made path of his own. “When I decided to apply to Harvard Business School, my friends and colleagues thought I was crazy,” Hebner said. “They thought I was wasting the application fee, which seemed like a lot at the time. But I remembered what my dad told me and applied to just one school—Harvard— and was accepted. Without my dad’s words of wisdom, I wouldn’t have even filled out the application.”
NOT TO WORRY Hebner tries to keep work-related anxieties to a minimum. That’s not to say he approaches lucrative opportunities without a plan—quite the opposite, in fact. Hebner’s lending approach takes time, energy, research and dedication. His ability to thoughtfully craft unique lend-
ing packages and put all parties involved in a place of success requires an advanced skill set. But, he knows frittering away mental energy on things outside his control detracts from his goals. Hebner has honed a simple yet effective personal philosophy over the years: At the end of the day, there’s no use worrying about things outside of your control. He goes so far as to believe that you shouldn’t even fret over things that are within your control once you’ve made a final decision. “I maintain a healthy perspective that most things will work themselves out,” he said. “It is easy when running a company to let the pace and intensity— and it is very intense—overwhelm you.” Greg encourages entrepreneurs and professionals, especially those who are in the early stages of their careers, to approach new ventures and endeavors without letting the fear of making mistakes slow them down. “Try more things and don’t be too worried about how they turn out,” he said. “I was too afraid to take chances and make mistakes when I was younger, and I waited too long to take my turn as an entrepreneur. I wanted everything to be aligned, thinking there was a
right time to start a business or a family, not realizing time was my greatest friend.”
career, Greg is just as down-toearth and inspired as he was in his early 20s.
Today, this frame of mind keeps him confident and level-headed when he weighs big decisions.
“At this point in my life, I’m motivated, to be sure,” he said. “I’m using the platform available to me, along with the skills and relationships that have been built over the past 25 years to their full benefit.”
“There can be hundreds of decisions to make and constant demands on your time and energy, but all you can do is your best,” he said. “Stay positive, be OK to make some mistakes—just not ones you can’t recover from—and try to be the best influence on those around you.”
LOOKING FORWARD Despite the success he’s experienced during his professional
Though perseverance, hard work and luck all have their places in any major success story, Hebner knows that one of the biggest factors behind his accomplishments is the simple fact that he finds joy in his work. His advice for anyone starting a professional career: “Don’t follow the money, but rather find something for
which you have a real passion, and genuinely enjoy doing. If you find this, all the other aspects of success will follow. If something stops being enjoyable or you lose your passion for it, it’s time to find something else to do. Time is the one resource you will never get back and never have enough of. You should never waste it on something that’s not meaningful or doesn’t bring you joy.” ∞
ABOUT THE AUTHOR
CALEB OLSEN Caleb Olsen is a writer in Kansas City working for a marketing
firm called Rivet. His work has
Learn more about Greg Hebner and Arixa Capital at ArixaCapital.com.
been published in newspapers, magazines, radio and TV. He is studying for a master’s degree at UMKC and performs improv comedy in his free time. Find Caleb on LinkedIn,
calebolsen.com, or by emailing calebwolsen@gmail.com.
MARCH/APRIL 2019
37
CASE STUDY A GUT TED DEAL
A GUTTED DEAL A gutted, post-war bungalow was slated for rehab into a 2-story, lake-access jewel in a growing Detroit exurb—until the lender walked away.
T
he borrower’s son, a licensed real estate agent,
found a gutted, post-war bungalow languishing on the MLS. He knew it could be a perfect first
rehab for his mom, “Helga” (not her real name).
Her best friend was an experienced contractor, and her family owned a couple of lumberyards in the area.
Here was a home whose only redeeming feature was the land it sat on. To command top dollar, they would need to expand the ground level, add a second level and rebuild the detached garage using near-luxury fixtures. Once the rehab was complete, the overall square footage would increase from 960 to 1,800. The deal was structured as a 50-50 split between the borrower and her contractor friend. Her son would receive the commission for both the purchase and the sale. The contractor would perform
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PRIVATE LENDER
all the work at cost, with no added fee, and was tight with the planning commission. And, due to Helga’s lumberyard connection, many materials were going to cost wholesale, not retail. Their margins were fat, even with the cost of the loan. The exit strategy was pretty simple: fix, flip, get paid. The margin was about double what a “civilian” would have made.
SUMMARY OF OPPORTUNITY Green Block was poised to fund 75 percent of the purchase and 75 percent of the rehab for an ambitious new investor. A conservative comp of $280,000, nearly triple the purchase price, was attractive to all the involved parties. The underwriting was strong, the title clean, the mortgage and note written. Everything looked great, until…
OUTCOME Green Block worked on this deal for roughly three weeks until the night before closing, when they received an email from Helga. Her email made several accusations. It also displayed a profound ignorance of the process and her responsibilities. After Green Block responded to her accusations and reiterated the information they had shared two-and-a-half weeks earlier, they told Helga they
would no longer fund the loan—not because she questioned them, but because it was clear that she wasn’t paying attention to details. If she missed how much the loan would cost, they reasoned, how could they trust her to manage the rehab appropriately? It was the perfect deal. Almost.
Lender // Green Block Inc.
LTC // 75%
Client/Borrower // “Helga” (her name has been changed)
Credit Score Considered // No
Location // South Lyon, Michigan
Borrower Experience // Inexperienced, but partnering
Architecture Style // Bungalow Originally Built // 1949 Loan Amount // $141,250
with an experienced contractor
Interest Rate // 16.5% Length of Loan // 12 months
LTV // 128%
MARCH/APRIL 2019
39
MANAGE & LEAD
DEMYSTIFYING TRADEMARKS & COPYRIGHTS Knowing the difference between the terms can help you protect your business. by Jackie Stoughton
We’ve all heard the terms “trademarks” and “copyrights” a million times. But what do they actually mean? Trademarks and copyrights are two of the three types of intellectual property (the third is patents). They may seem similar, but they cover two totally different aspects of owning your unique creative work (aka your intellectual property).
TRADEMARKS What Is a Trademark? A trademark is a word, phrase, symbol, logo or design (or combination of any of those) used to distinguish the source of goods or products from one company/person from those of someone else. Think of trademarks as protecting your overall brand. Trademarks are used to protect the trademark owner from
40
PRIVATE LENDER
someone else using a name, symbol, logo, etc. that is so similar that it could cause confusion. Basically, if everyone could use the Starbucks logo and brand name, it would cause a lot of confusion over authenticity, right? So, trademark law protects against potential confusion or fraud. Trademark Symbols You know about trademarks from seeing two main types of symbols—™ or ®—after a name or logo. These two symbols mean different things.
“If you are using a name you feel is at risk for being copied or stolen, you can start using the ™ symbol today.”
The ™ symbol means that a person or company is claiming they own the rights to that particular trademark. By “claiming” to own the mark, that person or company is telling the world they believe they are the originator of the brand name or logo. You can use this symbol to establish what is called a “common law” right to the trademarked name, just by using the name in commerce. Anyone can use the ™ without formally registering the trademark. You can use the ™ to put others on notice that
you believe you are the owner of this mark. You should first do a quick search of trademark names to make sure no one else is already using it. Throwing up the ™ symbol after your name or logo isn’t a bulletproof protection. You’re just saying that you think you’re the real trademark owner. But if Starbucks comes knocking on your door, you’re probably going to lose. On the other hand, if you’re using the ™ symbol for three years and someone else started using the name one year ago, the fact
that you were using it for longer could be good evidence that you’re the “real” owner. The ® symbol designates a registered trademark. In the U.S., trademarks are regulated by the United States Patent and Trademark Office. Someone who is using the ® symbol went through the formal process of applying for a federally registered trademark. You can only use this mark once you’ve been granted the trademark. Even though you have some protections with just the ™
mark, with a federally registered trademark, you have greater protections. Basically, if there is ever a fight with someone else over your mark, you would have greater legal protections if your mark is registered. Applying for a Trademark If you are interested in applying for a trademark, check out the U.S. Patent and Trademark Office for more information on procedures and fees. Your chosen trademark will have to meet several criteria for the
MARCH/APRIL 2019
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trademark to be granted. The formal trademark process can be lengthy and complicated, so it is a good idea to consult with an attorney to help you with the process. If you are using a name you feel is at risk for being copied or stolen, you can start using the ™ symbol today. Doing so will put others on notice that you are claiming ownership over the name (or logo, symbol, etc.). You can always register later for a formal trademark, if you wish.
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COPYRIGHTS What Do Copyrights Protect? Copyrights protect your work product or content. So, very generally, for a book—the name of the book would be trademark protected and the content of the book would be copyright protected. In the case of a blog, the name of the blog would fall under trademarks
and the content (blog posts, photos, graphics, etc.) would fall under copyright. Copyrights give the creators or authors the right to control the copying of their work. This means they have control over things like copying, creating derivative works, selling copies, reprinting or displaying the work. Others can do these sorts of things only if you’ve given them your permission or have given them the copyright.
When Work Is Copyright Protected In the U.S., your original work is automatically copyright protected from the moment it is created or published. You don’t need to formally register your work. This does not mean, however, that your work won’t be stolen or used without your permission. You have greater protections when you formally register your work for copyright protection. And, before you can sue for
copyright infringement, your work must already be registered with the copyright office. There is just one copyright symbol—the © symbol. You can use this symbol whether you have formally registered your work for copyright protection or not. Using the symbol along with your name or business name and the year(s) of publication lets others know that this is your unique work product. You should also include a short copyright statement on your works. Although you have greater protections with a formal copyright, it doesn’t necessarily make sense to register everything for a formal copyright. If your work is more likely to be stolen and used for a profit (such as works of art or graphics that could be easily
printed on things like t-shirts or prints), then your work might be more appropriate for copyright registration. Other types of work might be less likely to be stolen and repurposed for profit. So, consider your work product before looking into registering for copyright protection. How to Register If you are interested in copyrighting your work, visit the U.S. Copyright Office website at copyright.gov for more information. Generally, registering requires three things:
01 Your completed
application form,
02 A nonrefundable filing fee and
03 a nonreturnable deposit (which is a copy or copies of your work to be “deposited” with the copyright office).
You can apply either online (through the electronic Copyright Office, or eCO) or using paper forms (through the copyright office website). ∞
Reproduced with permission from Jackie Stoughton, “What You Need To Know About Trademarks And Copyrights” (Jade & Oak, 2016). Disclaimer: The information in this article is for general informational purposes only and is not legal advice. This article does not create an attorney-client relationship. The author is not liable for any losses or damages related to actions of failure to act related to the content in this article. If you need specific legal advice, consult with an attorney who specializes in your subject matter and jurisdiction.
ABOUT THE AUTHOR
JACKIE STOUGHTON Jackie Stoughton is a licensed attorney from Pittsburgh,
Pennsylvania. Through her company Jade & Oak, she
provides legal information and resources for small
business owners and bloggers. Blogging for several
years, she has helped many
online businesses that weren’t addressing the legal parts of their businesses, such
as FTC disclosures, use of images, sharing content,
contracts, etc. Jackie decided to shift her own business to offer legal advice through free blog posts and email
courses, plus paid resources such as her eBook, legal
guides and customizable
legal statement templates.
MARCH/APRIL 2019
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MANAGE & LEADÂ
Is It Fair Use?
A guide to the fair use statue of copyright law
Fair use is covered under section 107 of US Copyright law. It allows for some uses of copyrighted works without obtaining permission, as long as that use is considered fair. Some of the uses include education, research, commentary, criticism, news reporting and satire.
WHAT IS FAIR USE? HOW FAIR USE IS DETERMINED?
To determine if a use would be considered fair, the law requires consideration of four factors detailed in the fair use statute. Each of the factors must be considered separately. Fair use is then evaluated by weighing all of the factors and determining if the balance supports fair use.
THE 4 FACTORS
NATURE OF THE ORIGINAL WORK
CHARACTER AND PURPOSE OF THE WORK
F actual Work, Published Work
N onprofit, Educational, Personal Use, Research, News Reporting, Commentary, Criticism, Transformation Work
F iction, Creative Work, Unpublished Work
AMOUNT AND SUBSTANTIALITY OF THE PORTION USED
C ommercial, For Profit, Entertainment
EFFECT OF USE ON THE POTENTIAL MARKET OF THE ORIGINAL WORK
S maller Amount, Portion Used Not Significant to Work
S maller Amount, Portion Used Not Significant to Work
L arger Amount, Heart of the Work
L arger Amount, Heart of the Work
REMEMBER:
No single factor is decisive of fair use. Only a federal court can determine whether a particular use is fair under law. Courts judge fair use claims on a case-by-case basis. For more information visit copyright.gov/title17
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MARCH/APRIL 2019
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Analyzing Your Company Culture 7 Questions to ask yourself about job satisfaction and employee intention by Chrissey Breault
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C
an you paint a picture of
your company as one that
listens and validates
employees’ opinions?
Rewards hard work? Creates an enviable work culture?
Uncovering ways your company culture misses the mark can lead to improvements in productivity, overall work-life balance—and your bottom line. Job candidates choose a company because of the culture, not just the paycheck. It’s not a fad that will fade away. A Columbia University Job Satisfaction report found:
1 3.9%
job turnover rate at companies with a rich culture
4 8.4%
job turnover rate at companies with poor culture
6 4%
of all employees feel their companies do not have a strong work culture
Culture has a direct relationship to your company’s
“Uncovering ways your company culture misses the mark can lead to improvements in productivity, overall work-life balance—and your bottom line.”
sure all employees feel heard and that they are being communicated to clearly. Com-
munication has consistently proven to be a real issue at
many companies, leading to
poor employee engagement. A Gallup Workplace report notes that:
E ngagement is highest
success. Your employees’ experience should reflect the one you’re trying to provide your customers. But, how do you know whether you have that rich, thriving company culture? Are your core values aligned with the customer experience you are trying to achieve?
motivation here, leaders. You
To start, ask these seven questions.
chairs and an in-office water-
can set up a comfortable working environment with a coffee maker, water fountain, sup-
portive chair and decent desk
space. Don’t crowd people, or the safety risk will kick in.
Does this mean you have to
have space-level ergonomic fall? Nope. Just treat your
employees well in a space
where they can feel comfort-
IS YOUR OFFICE ENVIRONMENT COMFORTABLE?
able getting to work.
among employees who have some form of daily communication with their managers.
E ngaged employees
report their manager returns their messages within 24 hours.
65 percent of employees
who don’t feel they can approach their manager with any type of question are actively disengaged.
One way to conquer the
hurdle of employees being
able to deal with managers is with an anonymous feedback system. Weekly, biweekly or
IS YOUR COMMUNICATION EFFECTIVE?
even monthly, have employees
creative, we have to satisfy
This is simple. The best way
wants to measure. Don’t think
safety needs. It’s understand-
munication is effective is to
Based on Maslow’s Hierar-
chy of Needs theory, before we can be innovative and
our basic physiological and able that we need air, food
and water, right? But we also
need to feel safe from threats,
to find out whether your com-
complete a short survey about
job satisfaction, happiness and anything else the company
ask. Integrate feedback into
your company’s culture. Make
even perceived threats. This
seems obvious, but find some MARCH/APRIL 2019
47
MANAGE & LEAD
you can skirt around anonym-
You need to think about both
back system to work, anonym-
well-being of your employees.
ity. If you really want the feedity is a vital component.
the physical and the mental
You don’t have to have a gym on-site, but what would it
hurt to create an opportunity that’s similar? Research and
HOW CAN YOU HELP YOUR EMPLOYEES’ WELL-BEING?
consider offers like rebates for
This includes everything
and allowing paid half days for
from encouraging a work-life balance that helps diminish
stress to paying for a comprehensive medical care plan.
local gyms, offering on-site
yoga classes (even if they’re
taught by another employee),
employees to visit the doctor.
Happy, healthy employees are productive employees—and that’s good for everyone!
LIQUIDITY SOLUTIONS FOR PRIVATE LENDERS Smith Graham Investment Advisors is a dedicated strategic capital partner for private money lenders throughout the United States. Our platform helps lenders, like you, raise capital by efficiently selling loans. Since 2009, we have successfully transacted in over $1.5 billion of whole loan purchases.
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PRIVATE LENDER
recognizing your employees
ARE YOUR EMPLOYEES ALIGNED WITH COMPANY VALUES? Start this step in your hiring process. Recruiting and hiring should focus not just on whether the candidate can literally get the job done. You should also be evaluating whether the candidate is a match culturally and values-wise. Your company culture means nothing if your employees don’t live it. Be sure to clearly communicate the company values—and do it often. Hang the list in common spaces throughout your office, and remember to pull the core values into every discussion about how the company is doing. Employees who live and breathe your company culture become ambassadors who spread your messages. They help you find other great candidates who are cultural matches for open positions. Ensuring that your employees are on board with the company values starts from the leader and trickles down.
now? If the answer is no, this is your first mandatory fix.
Employee recognition programs are crucial to a thriving culture. SHRM/Globoforce surveys
found that companies with employee recognition
programs have workers who report:
2 8.6%
lower frustration levels, and
4 8%
higher engagement levels When asked what
management could do
to improve engagement,
SHRM/Globoforce surveys found that:
5 8%
of employees said “give recognition” Even more effective is an
employee recognition pro-
gram that supports your company values. It’s important to
be specific so employees know exactly what they’re being
valued and rewarded for. So,
it’s probably best to dump the
HOW DO YOU RECOGNIZE YOUR EMPLOYEES? Actually, let’s take a step back to ask: Are you even
meaningless “employee of the month” labels or promises of
MARCH/APRIL 2019
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MANAGE & LEAD
parking spots that will never
to get a better grip on what
nurture it. Collaborate with
If you want to have a thriving
employees who have truly
for their efforts.
tunities for innovation and
ask yourself the right ques-
be used. Instead, reward
lived by a company core value
they would consider a reward
with their work on a specific
Have fun with the awards!
box project, an open-source
ARE YOU LIMITING YOUR EMPLOYEES?
Cash is always good, but they
Many employees, mostly
Think outside the box and
entrepreneurial spirit. A Cre-
don’t all have to be cash.
offer a paid day off, a mas-
sage, a trip to a game, lunch, or even a home cleaning ser-
vice. Listen to your employees
creativity. Adobe has made a name for itself with its Kick-
project or a particularly helpful customer service experience.
those spirits to build oppor-
millennials, report having an ative Live Jobs Report found
that 60 percent of millennials put themselves in that camp.
LOANS
can run experiments to come up with ideas for helping the company. Google came up
with the 20% Program, where time is left for more creative “passion projects.”
ARE YOU ENCOURAGING COLLABORATION AND FRIENDSHIP? You might think that
workplace friendships are
ing the whole picture. Work
relationships matter to quality of life. And you, as a leader,
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PRIVATE LENDER
ABOUT THE AUTHOR
20 percent of an employee’s
case, then you’re not see-
50
the answers. ∞
program where employees
a distraction. If that’s the
3rd Flr
tions and be honest about
Instead of writing that off,
FIX ’N FLIP
6125 Washington Blvd
organizational culture, simply
cookout. Your employees
don’t have to be best friends
forever, but positive work relationships are an excellent step toward a vibrant culture.
CHRISSEY BREAULT Chrissey Breault is the
marketing and member
services manager for the American Association of Private Lenders (AAPL). Before joining AAPL,
Chrissey worked in county
government as a communications expert. Her more than
15 years in communications and marketing started in the hospitality industry with Hilton and Marriot
brands. For more than seven years, Chrissey managed
midmarket hotels along the East Coast and the Deep
South. She holds an associate degree in hospitality and
travel from Bradford School in Pittsburgh, Pennsylvania, and holds certifications in Adobe Web Design and volunteer management.
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MARCH/APRIL 2019 51 Applied Business Software, Inc. 2847 Gundry Avenue, Long Beach, CA 90755 sales@absnetwork.com
GOVERNMENT REL ATIONS
THE PATH FORWARD The members of American Association of Private Lenders’ Government Relations Committee are your first
responders when it comes to tracking legislation and prioritizing, strategizing and executing advocacy efforts. Meet the committee that will help serve as a unified voice for the private lending profession by making an impact on state and federal legislation/regulation where it impacts private lending the most.
CORT CHALFANT
Cort Chalfant is the manager of Nexus Private Capital. He is a seasoned executive in multistate real estate acquisitions, asset management, leasing, development and commercial debt transactions. He has a
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PRIVATE LENDER
demonstrated track record of excellence managing and directing a diverse range of real estate projects and affiliate operating companies.
Investments, the senior vice president at Rancho Sahuarita Companies, and the acquisitions and asset manager at Holualoa Companies.
Cort’s core competencies are synthesizing complex business opportunities, threats, resources and conditions into winning strategic plans; financial underwriting; and mentoring high-performing teams. He is a skilled negotiator of legal contracts, leases, ordinances and agreements and has a solid understanding of mortgage and capital markets, syndications and capital formation.
Cort has an MBA from the University of Arizona, where he graduated first in his class (tied), and a BBA in finance from the University of Delaware.
Prior to his tenure at Nexus Private Capital, Cort was the vice president at Coast Range
MIKE FALLOT
Mike Fallot is the CEO and co-founder of MM Lending, where he oversees all lending activities. Mike enjoys working with new and experienced real estate investors to structure financing that achieves their goals. He has more than 15 years’ experience in the private lending business and first-hand experience with the boom-andbust cycles of real estate. Mike is a graduate of the University of Louisville, and previously served as a partner with a regional CPA firm. He is board member of the Kentuckiana Real Estate Investors Association, past president of the Louisville chapter of Finan-
cial Executives International, a member of the Louisville Rotary Club and on the boards of several nonprofits.
MELISSA LUCAR, ESQ.
MATTHEW GUNTER
Matthew Gunter is assistant general counsel for RCN Capital. Matthew’s focus is in licensing compliance, mortgage finance transactions, foreclosures, REO property and tenant management, real estate closings, title clearing, bankruptcy management, business litigation, contract management and lobbying/lobbying management. He received his bachelor’s degree in political science from California State University Long Beach and a J.D. from University of Connecticut, School of Law. He presently practices in the Connecticut state and federal courts.
Melissa Lucar, Esq., is an associate in the Securities and Corporate Department of Geraci LLP. She represents financial service companies, private companies and high net worth individuals in corporate finance and securities matters. Melissa also ensures compliance with all applicable federal and state securities laws and advises clients on how to organize and structure their business. Prior to joining Geraci, Melissa represented clients in a variety of tort liability cases, where she handled discovery, pleadings, wrote settlement briefs, made court appearances and conducted depositions. Melissa graduated from the University of California, Davis School of Law. She was chosen for the Trial Practice Honors Board for her excellence in trial advocacy and competed in Moot Court. She was also an
editor of the UC Davis Business Law Journal and received the Editor in Excellence award. She participated in the law school’s Prison Law Clinic, worked for the Orange County Public Defender’s Office, clerked for the Legal Aid Foundation of Los Angeles and was a Legal Fellow to Commissioner Hochschild at the California Energy Commission. Melissa also has a bachelor’s degree from the University of California, Irvine, where she graduated with a triple major in economics, psychology and social behavior, and criminology.
than 15,000 unique alternative investments under custody and more than one million clients. Ted works with investment sponsors and advisors in California, Oregon and Washington who are looking to take advantage of a growing demand for alternative investments.
CHRIS RAGLAND
TED PARKER
Ted Parker has more than two decades of experience in the global capital markets, including Fidelity Investments, Charles Schwab and his current role as a senior vice president with Millennium Trust Company. Millenium Trust Company is a custodian with $26 billion in assets under management, more
Chris Ragland is the chief operating officer of Noble Capital, a private investment firm specializing in real estate. He is responsible for the day-to-day operations of Noble Capital, and he spearheads the expansion of existing and new business lines for the company. He hosts The Noble Capital Radio Hour, a talk radio show produced by Noble Capital. Chris spent 15 years building firms that specialize in loan servicing, loss mitigation, full-service
MARCH/APRIL 2019
53
GOVERNMENT REL ATIONS
brokerage, insurance, management, maintenance, rehabilitation and REO disposition.
JOHN TEDESCO
John Tedesco is the senior vice president of development for Appraisal Nation. During the past 8 years, he has help lead the company to record growth. The company has been recognized the past three years in a row on the Inc. 5000 list. In 2018, Mortgage Professional America named John to its Hot 100 List for the 100 leaders reshaping the American mortgage industry. Under his leadership, Appraisal Nation added a strong focus and new products for the
private lending industry. The company has evolved to the number one valuation provider in America for private lenders doing over 120,000 appraisals annually. John travels to more than 50 conferences each year and is a featured speaker at private lending events across the country. Previously, John raised more than a billion dollars in development for public-private capital projects, taught capital development at New York University, served as a city
Our knOwledge and experience
sets us apart 54
PRIVATE LENDER
manager in a New Jersey municipality, and as chief development officer for a national children’s charity. Back home in Raleigh, North Carolina, John was elected to lead one of the largest education systems in America, serving 170,000 children, and 18,000 teachers with a $1.5 billion budget. He served as president of the North Carolina Center for Education Reform and was nominated for North Carolina State Superintendent. ∞
HUNDREDS OF REAL ESTATE INVESTORS ARE LOOKING FOR FUNDING ON PRIVATE MONEY LENDING GUIDE EVERY DAY. Today they see your competitors. They could be connecting with you instead.
MARCH/APRIL 2019
55
LEGISL ATION
ENHANCED PRIVATE LENDING LEGISLATION LOOMING The industry must take a leadership role in shaping it. by Kellen Jones
Private nonconsumer lending has been largely ungoverned—anyone wanting to lend a friend enough money to flip a house should be able to, right?
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PRIVATE LENDER
THE GAME HAS CHANGED It’s no longer just a few local private money lenders making small loans on single-family homes. Big money is now attracted to the model because of the collateral-backed security and typically attractive returns. With more participants and more money involved, legislators are now considering regulation using more traditional financial sectors as comparable examples of how private lending could be governed. The 2008 mortgage crash spurred regulators to ensure that banks could not write blank checks to unqualified borrowers. Dodd-Frank aimed to create more transparency in the financial system. Whistle-blowers and consumer-protection groups in many states are addressing payday lending laws too. Although private lending has been historically linked to mortgages, payday lending, crowdfunding and other technology-based lending platforms have legislators and regulators scurrying to find ways to keep lenders in line.
“Although private lending has been historically linked to mortgages, payday lending, crowdfunding and other technology-based lending platforms have legislators and regulators scurrying to find ways to keep lenders in line.”
grossed into the loan amount, the rate can sometimes enter the twenties. Regulators comparing this structure to federally insured bank rates may see this cost of capital as exorbitant, even though this is a best-case scenario for project sponsors and borrowers when compared to equity.
HOW DID WE GET HERE? NOT AN EASY COMPARISON Let’s set the stage. Countless funds, REITs and private lenders are making loans at terms ranging from prime bank rates to 100 percent or more per annum. Each raises money differently, and those trying to avoid trouble do so under state and federal regulation frameworks. How they place capital as loans and equity is also governed, typically by the state where the transaction is completed. Usury laws, lien-instrument types and foreclosure procedures vary greatly by state. Some private lenders stay in the single-family residence space and are licensed as mortgage companies Others are nonconsumer commercial lenders and rely on the local commercial lending laws where they write checks. The lengths
of terms fluctuate, but they are typically much shorter than what banks offer. Origination and other fees differ as well. By rule, private lenders usually price and structure loans based on risk. If risk were all there was to consider, however, the industry would be relatively easy to regulate. For an example, let’s look at a short-term national private lender. Gauging local market indicators and many other risk factors, the lender underwrites with intense scrutiny and then prices its loans as an equity alternative. Borrowers with time constraints and challenging situations apply for capital that typically would be best structured as a partnership. Rather than taking 50 percent or more of a project’s equity (and thus half the profits), the lender makes loans at rates ranging from 12 percent to 18 percent annualized with terms of 18 months or less. When fees and required reserves are
Crowdfunding and technologyenabled capital-raising efforts drew attention when the kickstarters of the world were joined by platforms like Sharestates or AlphaFlow. These real estate crowdfunding platforms present investment opportunities to accredited investors. Rather than providing complementary gifts to startup sponsors, this model generates financial returns for investors. To the Securities and Exchange Commission (SEC) and other regulators, the model looks much like selling unlicensed securities in need of further protection measures. Crowdfunders have a well-defined quality standard for the loans it puts on its platform, but all crowdfunders are not created equal. The quest to appropriately regulate an industry that takes
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LEGISL ATION
so many new forms commenced with lightning speed in 2012 with passage of the JOBS (Jumpstart Our Business Startups) Act. This legislation was fiercely opposed by the SEC and many traditional transactional attorneys. The financial industry’s prevailing opinion was the JOBS Act was named to give politicians on both sides of the aisle reason to support it. The legislation defined capital-raising efforts for developers, public and private companies, and funds. It allows deferment of registrations
required under the SEC Act of 1954 and provides an on-ramp for emerging companies and those preparing to go public. The Jobs Act has five major provisions. It:
01 D irects the SEC to
remove the conditions prohibiting marketing and general solicitation for those raising money under Rule 506-D.
02 Creates legislation akin to Regulation D that contemplates cap
amounts of $50 million instead of just $5 million.
03 A llows intermediaries
like online broker dealers or new categories of lightly-regulated crowdfunding platforms to raise money for small amounts from several investors for a single purpose.
04 E stablishes higher
thresholds before companies are required to register under SEC Acts. (The amount of capital will stay the same, but the law increased the limit of record shareholders from 500 to 2000. No more than 500 of the record shareholders can be non-accredited. This doesn’t include employees who are paid in interest under exempt compensation plans.)
05 P rovides relief through
offering activity and reduces ongoing disclosure. Any company with total revenue less than $1 billion can maintain EGC (Emerging Growth Company) exemptions for five years. Now,
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PRIVATE LENDER
companies are free to test the waters with institutional (accredited investors) to determine the interest in their offering before filing. The industry and regulators are still uncovering the JOB Act’s impacts. So far, the major effect seems to be the emergence of many more crowdfunding platforms and among emerging growth companies (EGCs). More companies will try to go public using this on-ramp because it saves costs and eases some of the Dodd-Frank and Sarbanes-Oxley requirements. Another space affected by the JOBS Act is peer-to-peer activity. Although this sector is more a predecessor to crowdfunding than private bridge lending, regulators have a hard time defining peer-topeer activity. The peer-to-peer model rightfully earned its billion-dollar annual market share. But, with no major recourse or security on peer-topeer loans, potential problems will draw yet more regulatory scrutiny to the lending industry. The fear of potential problems still plagues the crowdfunding sector. In the comfort of their own homes, accredited investors get regular emails from these platforms. Deals
sometimes look too good to ignore—“Developer Seeking 2nd Mezzanine Equity to Complete High-Rise Condos in Staten Island With a Guaranteed 20% Return.” The technology allows investors the freedom to quickly and conveniently make their own decisions. But, what happens when a deal goes south? Who is responsible to ensure that these financial platforms aren’t just enticing accredited (but unsophisticated) investors with high promised rates of return?
SHAPING THE LEGISLATION When (not if) a contingent of poorly executed crowdfunded loans or equity deals default, regulators will become more serious about buttoning things up. So far, it is all about sexy deals on sexy platforms with very little history or data to suggest anything other than success. But, when crowdfunding and other online capitalraising efforts eventually invite more scrutiny, the door to more regulation of private lending will get kicked open further. So far, most legislative efforts have focused on the raising of money, whereas the placement of money seems to receive less scrutiny. Regulation of both components is probably inevi-
table—and there is a place for win-win regulation. The industry, however, needs to take a leadership role in proposing commonsense solutions. Institutions tirelessly supporting legislation calling for less transparency are helping write a recipe for disaster, much like the one that culminated in 2008. Investors have a right to feel that someone beyond their adviser has their back. When investors lose hard-earned money because an alluring deal was bad to begin with, someone should have to answer, be it an inexperienced crowdfunder or a genuine bad actor. The traditional approaches of impacting legislation by writing representatives or joining other lenders to hire a K Street lobbyist may work, but it has not in most nontraditional financial sectors since 2008. The damage to traditional sectors was so deep, and so rooted in greed and misconduct, that legislators are rightly wary. They do not want to be on the approving end of lax regulation that enables another type of crash. Most politicians are not trained in finance—especially nontraditional finance. So, they form opinions based on the rare, negative experiences of some vocal constituents. Some politicians do understand there is a place in the industry for higher-risk/higher-reward financial models. They also
realize technology has made these alternate models inevitable. They know that a healthy level of freedom combined with strict guidelines, where needed, will enhance the industry. There are between 8 and 9 million accredited investors in America. They are the private lenders’ partners. Private lenders who ethically and responsibly manage that wealth for a return should earn market share and continued confidence. Earning confidence from financial allies makes them natural political partners. The best way to avoid overregulation is through disciplined execution and industrywide integrity. If private lenders want to continue to self-govern, they must lead an effort to expose errors that hurt those partners—the investors—and lead to reactionary and poorly crafted legislation tailored to failures in other finance sectors. Private lenders who damage the industry’s reputation by gouging or intimidating borrowers increase the risk that all private lending will be regulated like its peer industries. Because of the complex nature of our industry, educating Congress would be only possible with the support— financial and political—of those we ethically serve. The
best way to protect the industry is by making loans that protect investors and enable borrowers to succeed and by enlisting their help in maintaining our business models. ∞
ABOUT THE AUTHOR
KELLEN JONES Kellen Jones is CEO and
founder of FundingDatabase, which has developed a
comprehensive loan and investor management
platform (idealSUITE). Jones is a fintech expert with particular affinity to private lending technologies.
Jones is also president of Cache Private Capital,
which makes direct loans to
borrowers seeking commercial financing under loans
ranging from $500,000 to
$5,000,000 nationwide. Jones also serves on the Ethics
Committee for American
Association of Private Lending.
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LEGISL ATION
10 01 B RING
LIKE-MINDED PEOPLE TOGETHER.
By joining an association, you engage with people who have common concerns and are working toward specific objectives.
02 IDENTIFY THE
PROBLEMS.
Basically, you want to identify the challenges that stand in the way of your goal.
Key Steps in Advocacy 05 IDENTIFY YOUR
TARGET.
The target of your advocacy efforts should be the person who has the power to make change happen (aka: the decision-maker).
06 DETERMINE
WHICH DECISIONS CAN BE INFLUENCED. Understand the context and
constraints on your target plus the timing of the decision.
09 REPEAT
AND REVIEW.
As advocacy efforts continue,
regularly review the challenges, the objectives, your target and
your method of reaching them.
10 CELEBRATE
SUCCESS!
Advocacy is a process, not one
single activity or one single result. It is positive and inspirational
and brings people together for a
common cause. You have the passion and drive to engage others and
03 IDENTIFY YOUR
STRATEGIC OBJECTIVE.
Your strategic objective should clearly be linked to the programmatic or policy change necessary to address the problem.
07 IDENTIFY
ALLIES.
Who shares your concern and goals? You are likely to achieve the best results when working together.
A APL’s Virtual Legislative Townhall
08 DETERMINE 04 GET THE
FACTS!
You must have accurate facts to work with, so you can analyze them and make a strong case for achieving your objective.
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make people listen!
YOUR METHOD.
Often, the most visible part of a
campaign is the full spectrum of
activities that you implement as your method of advocacy. But that DOES NOT mean it is the most important.
May 1 @ 1:30 p.m. CST aaplonline.com/government-relations
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LEGALÂ
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Are Your Trust Deed Investments Compliant? Your trust deed deal could be a potential sale of securities. by Melissa Lucar, Esq.
N
be subject to state and/or
and solicits private investors to fund either the entire loan or a portion of the loan (fractionalized trust deed investment). The investors, in return, obtain a note and trust deed reflecting the fractional ownership of the note and trust deed held by the multiple investors. The percentage is determined by the amount invested by the investor as compared to the amount invested by all investors.
We see this often in the private lending industry. A broker has a loan that needs to be funded
The broker often retains servicing of the note and is authorized to engage in various activities on behalf of the
ew business agreements are drawn up every
day for a variety of reasons. Frequently, businesses
owners and attorneys craft contracts that may not
appear to be a securities
transaction but may actually fall under a category
of regulated securities and federal securities laws.
trust deed investors, such as acting on behalf of the investors during the foreclosure process, etc. The question then becomes, has the broker (whether an individual or company) engaged in a securities transaction that is regulated by the Securities and Exchange Commission (SEC) or by an applicable state securities regulator? The answer is often yes. Offering trust deed investments to investors may require registration with the SEC or one or more states. If it is not done correctly, it may open up the broker to scrutiny from regulators, or worse, expose the broker to SEC and/or state antifraud and securities regulations, which may include penalties. The Securities Act of 1933 defines a security as “any note, stock, treasury stock, bond, security-based swap, security future, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, note or fractional interest,� and 20 other categories that won’t be listed here. Among other factors, a whole loan or fractionalized interest in loan is considered a security because it is an investment contract that involves risk. Further, generally any evidence of
MARCH/APRIL 2019
63
LEGAL
“Brokers seeking capital from investors to fund loans by arranging trust-deed investments must be aware that such a transaction is considered an offering of securities that must be registered with the SEC and/or a state’s securities regulators unless an exemption applies.”
For private money notes, real estate contracts and investments Designated lender services representative for each lender Servicing of performing and non-performing notes We welcome portfolios of any size Multiple payment options available
Providing peace of mind for over 40 years
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PRIVATE LENDER
indebtedness such as a note is defined as a security. Brokers seeking capital from investors to fund loans by arranging trust-deed investments must be aware that such a transaction is considered an offering of securities that must be registered with the SEC and/ or a state’s securities regulators unless an exemption applies.
COMPLYING WITH SECURITIES REGULATIONS The SEC and every state require the registration of the offering and/or sale of any security, unless an exemption from registration can be found. The most viable option for a broker is to find an exemption from registration, because the registration process is often lengthy and cost prohibitive. However, complying with state securities regulations or exemptions becomes too burdensome when there are investors located in multiple states. The analysis of where the offering must be registered is often focused on where the investors are located. This means that if
you are a broker offering fractionalized interests in loans to investors in multiple states, you must comply with each state’s securities regulations. As you may have realized, having investors from multiple states creates an extremely painful process, at least from a securities compliance perspective. Although some states have identical statutory laws as the SEC, there is very little uniformity among state securities statutes. It is vital to consult with an attorney who is familiar with federal and state securities regulations not only covering securities transactions but also covering securities transactions involving trust deed investments. Fortunately, many states often exempt from registration any loan transactions where there is only one investor on the note and trust deed (e.g., whole loan investment). However, the same may not apply to fractionalized interests or multilender loans. In California, for example, a licensed real estate broker who offers and sells fractionalized interests in notes is considered an issuer of securities but is generally exempt from registration because the broker is licensed. This holds true
provided that the fractionalized interests are sold to 10 or fewer investors.
an informed decision when deciding to purchase the trust deed investment.
Other states, such as Texas, do not have a clear exemption for transactions involving the fractionalization of trust deeds, but they may offer a clear exemption applicable to the offer and sale of whole loans, where the entire note secured by real estate is sold in a single transaction.
In conclusion, if you are a broker arranging trust deed investments with investors located in multiple states, you must comply with registration requirements in each state where your investors reside. Or, find a federal exemption that preempts the application of state law.
Still other states have indirect exemptions that may indirectly exempt fractionalized notes based on the characteristic of the investor, number of investors, location of all investors, size of the transaction, etc. These limitations often require all investors to reside in that one state, or that no advertisements are used, or that there is a limitation on the dollar amount that may be offered and sold within any 12-month period.
It is important to note that many states prohibit the offer and sale of securities to non-accredited investors, unless an exemption applies. Often, exemptions that do allow the sale to non-accredited investors will require the broker to provide disclosure documents to such investors and do not allow the use of general solicitation or advertisements when offering trust deed investment opportunities. Every state is different. It is therefore imperative to speak with a securities attorney who not only understands securities regulations, but also understands the nature of trust deed investments.
Further, if selling to nonaccredited investors, states and the SEC will often require that each non-accredited investor receives a material disclosure package outlining the loan transaction, the risks involved, material terms, fees to the broker and a summary of the proposed investment. These disclosers are necessary so that the investor makes
RELYING ON A FEDERAL EXEMPTION
an issuer to offer and sell securities to investors across the U.S. The main advantage of relying on Rule 506 is that the issuer would be able to offer securities such as trust deed investments in multiple states without having to register the offering in every state where investors reside (Rule 506 preempts the applicability of state securities regulations). However, when using Rule 506, the issuer is required to use disclosure documents, follow certain general solicitation restrictions depending on whether the offering is a Rule 506(b) or 506(c) offering, and file a Form D notice with the SEC, among other things. The best advice is to consult with an experienced attorney who is familiar with securities laws before offering and selling trust deed investments. It is essential to make sure you are complying with securities regulations so that you do not become the subject of an enforcement or investigatory action by the SEC or state regulators. At the end of the day, a few minutes with an attorney could save hundreds of dollars when responding to the SEC or state regulators. ∞
This article is not to be taken or treated as a substitute for specific advice, whether legal advice or otherwise. It does not seek to provide legal advice on any of the issues herein.
ABOUT THE AUTHOR
MELISSA LUCAR, ESQ. Melissa Lucar, Esq. is an
associate attorney in the
Securities and Corporate
Department of Geraci LLP
and focuses her practice in
helping clients raise capital via private placements
offerings and other alternative investments. Melissa also
ensures compliance with all
applicable federal and state securities laws and advises clients on how to organize
andstructure their business.
One of the most frequently used exemptions from securities registration is Rule 506 of Regulation D. Rule 506 allows MARCH/APRIL 2019
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L AST CALL WITH NOELLE WHEELER
CHANGING ATTITUDES— OR NOT? by Noelle Wheeler
There is a difference between being referred to as a “female mortgage broker” versus a “mortgage broker who is female.” The first statement sounds like it’s surprising: “Wow, a female mortgage broker!” The second just refers to the fact that I am female. Subtle difference? Maybe you don’t even see the difference. But having been a mortgage broker who is female the last few decades, I think I can say that my journey might have been different from most mortgage brokers who are male. And some of them may not have been so subtle. The difference might have started out with my own expectation. My plan was always to be a business owner. What drove my motivation was the ability to spend the time I needed with my children. I recall a time before I had children, when I overheard a co-worker asking if she could leave early to see her elementary school daughter in her dance recital. I thought to myself, “What if her boss said no? Although I didn’t even have children at the time, I wanted to do what I could to avoid this predicament. For seven years, I worked toward building up my mortgage experience as a loan 66
PRIVATE LENDER
processor and then underwriter. I quit my job right before having my first child. I immediately started my business from the nursery of our home. Crib on one side of the room, and desk and computer on the other. My daughter on the floor or on my lap while I was working away. I suspect that this is the story of many women, and now for more and more men too. For many women, I think the difference in the journey has a lot to do with their family’s expectations. My dad came from India. His father was very forward thinking and encouraged all his children to study. So, two of his sisters ended up being physicians. My dad had always encouraged me to do and be whatever I could be. My mom was born and raised in Switzerland. Her father encouraged the boys to study, and she was sent to work in a shoe factory after sixth grade. Luckily, she rebelled against that and went to Toronto to carve out her own destiny. Clearly, parents have a huge impact on their daughters, but sheer willpower can overcome obstacles. When I started my company, Nationwide Mortgage, back in 1997, there were markedly fewer women business owners than there are now. When I think back, I laugh at the
fact that I used to dress like a dude, in button-down shirts and slacks. I think I was trying to grab any power that I could. But even then, for example, whenever someone would step into my office, they would inevitably ask if the owner was around because they would like to speak with “him.” As a perfect out to a soliciting salesperson, I would usually just respond, “No, sorry, he is not in.” Attitudes still haven’t changed much toward woman. At a recent conference for commercial mortgages in Los Angeles, I was walking around the booths and came across a middle-aged man in front of his architectural services booth. He sized me up in with my purple skirt, matching suit jacket and heels and said, “I guess you don’t have much use for architectural services.” He might have been surprised to hear that I in fact had a bachelor’s degree in architecture. If I had cared enough, I would have attempted to enlighten him about not judging a book by a cover or a person by their femaleness. My initial interest was that I lend funds to developers and they need referrals to a good architect from time to time. Instead, I gritted my teeth and walked away. Often people are surprised when I say I own my own business. Would that reaction be the same if I was a man? Over 28 years, and 4 billion in loans, I’ve had quite a journey. As a mortgage broker and banker, it has been important for me to have industry role models who are female and male to help me develop the next leg of my business road map. I have found mortgage associations like AAPL a great place to find these movers and shakers and to have a chance to chat with them one-on-one. We all have important woman in our lives. How can we support them and their journeys? ∞
MARCH/APRIL 2019
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WE’RE TRUE TO EXCELLENCE...
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