Private Lender by AAPL Winter 2022 by American Association of Private Lenders

SPECIAL FEATURE: AAPL'S ANNUAL PREVIEW 2021 AAPL CONFERENCE RECAPCONFERENCE & AWARD WINNERS

The Official Magazine of AAPL | Winter 2022

ETHICS What You Need to Know About Discriminatory Lending Page 14

LENDER LIMELIGHT

Noah Martin The Thinker

PROFESSIONAL DEVELOPMENT The Origin Story That Launched the Modern Private Lending Industry Page 56

ADVOCACY AAPL Legislative Action Page 66 WINTER 2022

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CONTENTS

WINTER 2022

06 BA SIC S C hasing Y ield C an Bi te You

10 COMPLIANCE U nder s t anding t he C omplex i t ies of N ew Yor k ’s CEM A Loans

14 ETHIC S D is c r imina te — At Your O wn Per il

30 S TR ATEGY 3 0 D o Long -Ter m Rent als Have St ay ing Power?

3 4 T he Good, t he Bad, and t he Ugl y of Leader ship

3 8 F und Management St r a tegies for 2022

W here to Find Value - Add Inve s t ing O pp or t uni t ie s

24 SALES & MARKETING S hi f t ing t he Sales Par adigm

60 OPER ATIONS U nder s t anding t he Ent i t lement s Por t ion of Due Diligence

66 ADVOC AC Y G r as sroot s E f for t s Make Inroads Agains t Legisla t ion Impac t ing Pr i va te Lending

42 C A SE S TUDY 4 2 P r i va te C api t al a t Wor k 4 6 S ome T LC Tr ans for ms Por t land Home

18 MARKET TRENDS

50 LENDER LIMELIGHT T he Thinker wi th N oah Mar tin

56 PROFESSIONAL DEVELOPMENT T he Or igin Stor y T ha t L aunc hed an Indus t r y

74 CONFERENCE REVIEW 74 12 t h A nnual C onference Highlight s

8 2 Tes t imonials 8 6 A wards

92 RESOURCE GUIDE 98 L A S T C ALL F rom H ere to T here and Bac k Again

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FROM THE CORNER OFFICE

GREETINGS AND A HAPPY NEW YEAR! For your quarterly update on what’s happening at your friendly American Association of Private Lenders (and something is always happening), read on for the CliffsNotes.

EDDIE WILSON CEO, AAPL

LINDA HYDE

Managing Director, AAPL

KAT HUNGERFORD Executive Editor

INTERROBANG SOLUTIONS Copy Editing

DAVID RODRIGUEZ Design

CONTRIBUTORS

Larry Andelsman, Katie Bean, Daren Blomquist,

Alex Breshears, Arthur Budimir, Kat Hungerford, Linda Hyde, Beth Johnson, Steve Kuptz, Kemra Norsworthy, Chris Ragland, John Sherritt

COVER PHOTOGRAPHY J&C Creative Co.

Private Lender is published quarterly 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 aaplonline.com/subscribe.

BACK ISSUES

Visit aaplonline.com/magazine-archive, email PrivateLender@aaplonline.com, or call 913-888-1250.

Our 12th Annual Conference was a runaway success across every metric, and the subsequent buzz has been thrilling to watch. We hosted a record 25+ sessions and networking activities, attended by more than 660 folks from across the globe and supported by 65 sponsors. The collaboration and conversations we witnessed as attendees came together to discuss pressing issues and plan pivotal business dealings for 2022 made this event everything we hoped it could be for the private lending industry—and more. Be sure to check out our Conference Recap starting on page 74. And, importantly, save the date for our 13th Annual Conference scheduled for October 19-21, 2022, at Caesars Palace Las Vegas. Although the annual conference takes the lion’s share of the limelight, AAPL is hard at work the rest of the year providing value to our 550+ members and the private lending industry as a whole. We try never to forget our humble beginnings (read our origin story on page 56) while also keeping a steady eye on supporting and safeguarding the industry’s future. Education // We are expanding the mandate of our Education Committee. With the help of ad hoc subcommittees to tackle specific projects, be prepared to see expansions to our designation courses (aaplonline.com/courses), in addition to our newly launched online Certified Private Lender Associate course. We’re also offering expanded/updated business resources and more of the in-depth information you’ve grown to depend on through our webinars, magazine, and quarterly all-member meeting. Ethics // Last year we launched our Ethics Portal at aaplonline.com/ethics to provide additional guidance on our Code of Ethics and industry best practices. This tool provides ever-expanding learning opportunities, which our Ethics Committee will continue to grow. We’ve also listened to your feedback and will be launching a “best practices” webinar/workshop series. Advocacy // Check out page 66 for the conversations we started with Capitol Hill policymakers at our annual Day on the Hill. We’re already seeing traction with the CFPB on HMDA and have follow-up work to do to revise bankruptcy SARE case statutes. We also learned key strategy recommendations that will inform our tactics as we continue to address policy impacting our industry in 2022.

For article reprints or permission to use Private Lender content including text, photos, illustrations, and logos:

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.

LINDA HYDE

Managing Director, American Association of Private Lenders

www.aaplonline.com

WINTER 2022

BASICS

Chasing Yield Can Bite You

lenders may work with inexperienced operators who will accept the higher rates offered due to lack of choice.

C omplex lending scenarios outside of the lender’s comfort zone.

Some of these complex and “difficult to lend” scenarios with higher inter-

Here’s how to avoid serious missteps when ROI appears too good to be true. by Alex Breshears and Beth Johnson

est rates—transactional funding, gap funding, or horizontal construction

financing, for example—generally fall outside a new lender’s wheelhouse.

O pportunities that are scams or

“too good to be true.” Less expe-

rienced private lenders who operate

independently may lack the resources

or the industry knowledge required to t’s no secret there’s a lot of capital chasing yield right now. With historically low interest rates in

the U.S. for a few years, many invest-

ments are seeing diminished returns.

As a small or new private lender, you may often battle it out against larger, institutional capital offering super-low interest rates to your best borrower prospects. On the other hand, keeping your reserves in a CD at a bank often yields returns well below inflation, especially with the current economic outlook in the U.S. Given these choices, individual investors and investment managers may feel desperate. Wanting to at the very least keep up with inflation and at best find ways to keep money growing faster than increases to cost of living, many are on the hunt for high-yield investments. And, often they don’t fully consider or appreciate the risks that may accompany those higher returns, which also aren’t guaranteed! So, where does all this leave you? 6

PRIVATE LENDER

Unfortunately, it can result in chasing yield that bites you if you don’t carefully consider the risks associated with the potential reward.

detect loan opportunities that appear

BEWARE OF THESE BITES

qualifiers like credit or experience.

Here are some challenges small private lenders can face when they try to play against the larger, institutionally backed private lenders who can offer lower interest rates, higher loan-to-values, and more competitively structured loan products: J unior lien loans with higher yields.

“too good” on paper. They are unable

to navigate the more subjective underwriting associated with a borrower’s character rather than other tangible

PLAY OR PASS? The last point, in particular, is all too common with individual pri-

vate lenders seeking higher returns. Beware of deals where you have the

“opportunity” to make $100,000 on a

Most lenders will not lend outside of first position, so yield chasers tend to lend in junior liens where it’s less competitive. If these aren’t underwritten carefully, you could have little equity buffer to protect your investment.

$200,000 loan in an 18-month period.

N ew or less experienced operators.

ture were offered by the real estate

It’s no surprise that the best rates are offered to seasoned and experienced borrowers, so new private

Or, one in which you’re offered a 30% return for a loan period of 90 days.

Those opportunities may sound amaz-

ing. But, in both cases—which are true examples— the terms and deal strucinvestor, not the lender. This is red

f lag No. 1. Private lenders should set

their own rates and terms based on the

deal rather than allow the borrower to drive the negotiations. Additionally, neither deal offered a personal guaranty. Both deals however, offered significantly higher rates of returns than private lending standards—some in excess of 50% cash on cash return. Here are some questions to consider if you are confronted with a private debt offering that just seems too good to pass up: Trust your gut. If the deal feels

really solid, then why might you be seeking a second opinion? What is your gut telling you?

Q uestion the rate of return. In our

current competitive environment, why would this investor offer you

such enormous rates of return when interest rates are at all-time lows?

Unfortunately, unbelievably attractive

A sk “why you?” Really seasoned

ual lenders to cut corners, sometimes

investors know where to go for cheap capital, so what do you offer that other private lenders don’t? And is that differentiation truly worth the extra costs to the borrower?

D on’t skimp on underwriting. Are

you sure you know how to underwrite this deal to make sure you are protected before the loan funds?

B eware the Smooth Talker. Is

the person presenting this offer to you just an excellent salesperson, or do they have the street credentials to back up their proposal?

loan opportunities tempt some individ-

with disastrous effects. The temptation to remove some barrier to entry for a

borrower might seem a feasible alternative to offering a lower rate. The

barriers you remove must be chosen wisely, and they often are unique to a particular property or borrower. Be sure to follow these best prac-

tices to protect yourself against deals seemingly too good to be true:

C hallenge the borrower to answer

tough questions about why they are willing to give up a large amount of profit to have you fund the deal.

WINTER 2022

BASICS

A lways require a personal guaranty (PG)

and verify the borrower(s) has enough net worth to make a PG worthwhile.

Ensure there is sufficient equity

buffer to protect you in case the project goes sideways.

Engage legal counsel to advise you

on usury laws. Enormous interest rates may sound great on paper, but they could be usurious and not stand up in court, if contested.

I f you wish to move forward, retain an

attorney well-versed in private lending to prepare your loan documents.

THE BOTTOM LINE In the current economic environment with historic low interest rates and an onslaught of institutional capital chasing yield, private debt opportunities presented to small, individual private lenders with unbelievably high rates of return should be reviewed with the utmost caution. The competitive real estate investing environment over the past several years has also impacted profit margins. So, as attractive as these proposals of extremely high double-digit returns may sound, less experienced lenders should also be hearing alarm bells. Resist the temptation to latch on to these deals. Instead, go for more traditionally safe investments with yields that fall into the range of private lending standards within your market. Above all, ensure you stay within the usury rates defined by your state (and the state the property collateralized is in, if applicable) so you don’t find yourself in financial or legal hot water. ∞ 8

PRIVATE LENDER

ABOUT THE AUTHORS ALEX BRESHEARS Alex Breshears is a private money lender, short-term rental owner and manager, LP investor in syndications, and private lending fund manager. Alex started a private lending company, Infinite Road Investments, in April 2020, funding first lien and second lien positions for residential property in the Hampton Roads, Virginia, area. She also started an educational Facebook group called Private Lending Lessons, which offers weekly educational lessons, daily posts for discussion, and opportunities to network with other investors about private lending and various projects that may need funding. Breshears is also passionate about financial education and independence for female investors. BETH JOHNSON Beth Johnson is co-founder and managing partner of Flynn Family Lending, a family-owned private lending business offering creative financing solutions throughout the state of Washington. Before getting into private lending, Johnson spent 20 years in the tech and telecom industries managing all aspects of corporate training and communications, while investing in real estate on the side. As a real estate investor, she and her husband have experience in wholesaling and flipping, preferring to invest in small multifamily properties.

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COMPLIANCE

UNDERSTANDING THE COMPLEXITIES OF NEW YORK’S CEMA LOANS CEMA transactions can reduce refinancing costs in New York, but private lenders must be diligent about following the process. by Larry Andelsman

PRIVATE LENDER

New York state imposes a tax on the recording of a mortgage on real property located within the state, otherwise known as mortgage tax. In addition to the tax imposed by the state, New York City, Yonkers, and various counties impose local taxes on mortgages recorded in those jurisdictions. The mortgage recording tax is calculated as a percentage of the principal loan amount and applies to new mortgages made for acquisitions, construction loans, and refinances. The New York state mortgage tax is the highest in the nation and imposes an enormous burden on the borrower. As a general overview, in New York City, for all properties where the mortgage amount is less than $500,000, the mortgage tax rate is 2.05%. For a one, two, or three-family home or individual residential condominium unit where the

ong-term rentals

have exploded in the

private lending space

during the last several years.

mortgage amount is $500,000 or more, the rate is 2.175%. Properties of all other types where the mortgage amount is $500,000 or more are taxed at the rate of 2.8%. The mortgage tax rate outside of New York City

Private lenders entering the New York

on all properties is 1.05%, except for West-

must understand and be able to handle

(1.3%), and the City of Yonkers (1.8%).

market who want to be competitive

chester County (1.3%), Rockland County

CEMA, a unique regulation pertain-

Let’s consider an example. For a six-unit

ing to long-term rental assets. There are no CEMA regulations in other states, and lenders can face unex-

pected roadblocks and delays due to a lack of familiarity with CEMA.

NY STATE MORTGAGE TAX

multi-family residence with a mortgage

the New York state mortgage tax.

In lieu of a traditional mortgage refinance, where the existing mortgage is canceled/ satisfied and a new loan is originated, a New York Consolidation, Extension, and Modification Agreement (CEMA) allows a lender and a borrower to combine any existing note and mortgage with any new note and mortgage issued by the new lender into one consolidated loan obligation. In accordance with the foregoing, the existing mortgage is assigned from the prior lender (assigning lender) to the incoming lender (new lender).

Section 255 of the New York Tax Law allows a borrower to avoid paying mortgage tax on the unpaid principal balance of the existing loan and to pay tax on only the new indebtedness issued by the new lender. As an example, where the existing mortgage has an unpaid principal balance of $3,000,000 on which mort-

gage tax was initially paid and the new lender is providing a cash-out refinance in the amount of $3,500,000, the borrower will pay mortgage tax on only $500,000—an $84,000 savings if the transaction is in New York City.

UNDERLYING COLLATERAL

amount of $3,000,000, the following mortgage tax will be imposed: New York City.....................................$84,000 Westchester/Rockland County.................$39,000 Nassau/Suffolk/Upstate......................$31,500 As a result of the tremendous tax imposed,

Before we dive into CEMA, let’s review

WHAT IS THE CEMA?

the CEMA transaction is essential to all private lenders originating in New York.

The documentation necessary to assign, modify, and consolidate a mortgage is formulaic and cumbersome. At the outset, the new lender’s closing attorney must review the mortgage schedule in the title commitment to determine which documents must be obtained from the assigning lender to complete the CEMA. WINTER 2022

COMPLIANCE

Initially, new lender’s counsel will communicate with the assigning lender’s counsel to draft the Assignment of Mortgage and Allonge and to obtain copies of all mortgages, notes, mortgage assignments, and allonges contained in the mortgage schedule for review (underlying collateral). Moreover, since there are often prior CEMA transactions in the mortgage schedule, the underlying collateral must be provided for each layer in the chain of mortgages. The underlying collateral is reviewed for, among other things, accuracy as to the parties, loan amounts, and dates and to ensure there are no breaks in the chain of assignments (and allonges to the notes). Failure to obtain the complete and accurate underlying collateral comes with serious consequences that could result in the unenforceability of the mortgage being made by the new lender. To complete the CEMA, the assigning lender must provide all original notes, allonges, mortgages, and mortgage assignments for each and every mortgage listed in the title commitment at closing. This can be a lengthy process depending upon the speed at which the assigning lender and its counsel are willing and able to cooperate. Location and retrieval of the original underlying collateral could take days or weeks, varying with each transaction. In the commercial mortgage-backed securities market, notes are often transferred from initial lenders to secondary market buyers, as lenders bundle mortgages together and sell them as income-producing investments to institutional buyers. Since it is an industry standard practice to maintain promissory notes separately from the rest of the mortgage loan

PRIVATE LENDER

documents, when a mortgage loan is sold or its servicing is transferred to another mortgage loan servicer, the mortgage loan file and the note are both shipped to the new owner or servicer. As a result, promissory notes may be misplaced or lost. New York case law generally requires the production of the note and mortgage to establish a prima facie case for a judgment of foreclosure and standing for the mortgagee in a foreclosure action. In the event of a missing note, New York counsel must request and review a lost note affidavit from the existing lender. Recent case law has indicated that courts will highly scrutinize the circumstances and facts surrounding the lost note and the lender’s lack of possession of same. At a minimum, the lost note affidavit should contain the following:

DILIGENCE IS KEY As you can see, the CEMA is a complex process. It is a time-consuming process that cannot begin once a file is clear to close. Best practices must include a realistic, deal-specific timeline to complete the CEMA process. Lenders should engage its processing/closing team with New York counsel at the earliest opportunity to move the file to closing as diligently and quickly as possible. ∞

ABOUT THE AUTHOR

01 A signed and notarized statement

that the physical note has been lost.

02 A clear statement of the amount, interest rate, and repayment terms of the loan, the date the original note was signed, and the proper legal names of all parties involved.

03 A description of the circum-

stances surrounding the loss, using as much detail as possible.

04 S tatements describing the acts taken to search for the document as well as any specifics about its unavailability.

05 A representation that it has

full rights and title to the note, which it cannot now produce.

LAWRENCE ANDELSMAN Lawrence Andelsman, Esq., is the

founder of Andelsman Law, a boutique law firm dedicated to representing

lenders, developers, and investors in a

wide variety of real estate transactions. Throughout his career, Andelsman

has successfully closed thousands of

private lending and real estate investor transactions across New York City’s

five boroughs, Long Island, and New Jersey. His practice is known for its intimate knowledge of the market for one-to-four family residential

properties, which is built on his more

than 25 years of personal experience as a real estate investor and attorney.

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WINTER 2022

ETHICS

Discriminate—At Your Own Peril Companies that tolerate discrimination—whether in the workplace or in lending—risk legal and reputational consequences. by Kemra Norsworthy

he U.S. Equal Employment

inate against someone on the basis

(EEOC) enforces federal laws

gin, or sex. This law also protects

Opportunity Commission

prohibiting discrimination against a job applicant or an employee

during a variety of work situations,

including hiring, firing, promotions, training, wages, and benefits.

AAPL’s own Code of Ethics takes this a step further: Members may not discriminate against any party based on their status as part of a protected class. This higher standard encompasses employees, clients, partners, investors, etc., and uses federal definitions of discrimination (employment, lending, and other civil rights) to apply to these expanded parties.

DISCRIMINATION BASICS Several federal laws currently address discrimination, including: T itle VII of the Civil Rights Act of 1964 makes it illegal to discrim14

PRIVATE LENDER

of race, color, religion, national oriemployees against retaliation for going forward with a claim regarding discrimination in the workplace. T he Pregnancy Discrimination

Act is an amendment to Title VII that expands the protections regarding

“sex” to include prohibiting sex discrimination on the basis of pregnancy, childbirth, and/or a medical condition related to pregnancy or childbirth. T he Equal Pay Act of 1963

(EPA) prohibits sex-based wage discrimination between men

and women who perform equal work in the same workplace.

T itle I of the Americans with Dis-

abilities Act of 1990 (ADA) makes it illegal to discriminate against a

qualified person with a disability from employment or during employment. These laws are the basis of how the EEOC enforces discrimination in the workplace. Court law interpretation and amendments to these laws are evolving. Many of the state laws currently in place are similar to federal civil rights laws but may offer additional protections against employment-related discrimination—federal law is the minimum standard. Almost all states have adopted discrimination laws related to employment, with protection against discrimination based on factors such as race, gender, age, marital status, national origin, religion, or disability. If

T he Age Discrimination in

a state does not explicitly state their employ-

Employment Act of 1967 (ADEA)

ment protections against discrimination,

protects employees or future

the individual who is reporting the discrim-

employees who are 40 or older from

ination would refer to federal law regarding

discrimination in the workplace.

the type of discrimination in question.

CHANGING TIMES Under the fair employment practices law, employers cannot discriminate based on pregnancy, childbirth, pregnancy-related conditions, race, color, sex, age (40 and older), religion, national origin, disability, sexual orientation, or gender identity. Specifically, employers cannot refuse to hire, promote, discharge, demote, terminate, or harass employees. In the lending industry, these laws apply whether for an employer or for a lender lending to borrowers and other service industries. In the private lending industry, some investors may believe that because the funds (money) are their own, they can lend to whomever they want. Some private lenders or investors who use their own funds discriminate from the person or even the location of the property (redlining). Federal law and AAPL do not distinguish whether discrimination is happening based on the source of the funds being used, just as a privately owned business can’t discriminate on who they hire just because they are using their own money to do so. If the result is that a member of a protected class is not receiving a loan from your company based on a quality unique to their protected class, it is discrimination. (See Susan Naftulin’s article regarding redlining and discriminatory lending practices at aaplonline.com/ ethics for more detailed information.) The one with money does not get to bypass the ethical way to lend. Each state has its own laws that define discrimination and the consequences to

the employer for not following through or for turning a blind eye. The consequences range from fines from the state, loss of business from clients, and even reputational damage. AAPL, in turn, may suspend or permanently revoke membership, among other repercussions. Basic discrimination laws are the same; however, private lenders are scrutinized by the association and peers because our industry historically has not always been the best in this area. In banding together as an association, we have collectively decided to work together

to provide credibility to the industry and to show how we benefit real estate investors. Discrimination in any fashion in our industry does not achieve this objective and will not be tolerated.

BEWARE OF ONLINE REPERCUSSIONS For those still not won over by “it’s the law” or “our industry will not tolerate it” or “it’s the wrong thing to do,” social media prevents instances of discrimiWINTER 2022

ETHICS

nation from being brushed under the rug. Those traditionally seen as powerless in these situations—individuals—may now tell the world directly about their experience. Reputations are earned and lost because word of mouth these days occurs more online and instantly than it does in person. And in these cases, the mantra “all publicity is good publicity” is simply not true. Companies that have been in the social media limelight due to discrimination grievances include Google, Amazon, McDonald's, Bloomberg and a long list of others. Even though these are large companies, they still lost revenue and took a hit to their reputation. Some people still boycott these companies. Being small does not allow a company to hide from the consequences of discrimination. All companies, large or small, must be diligent about nondiscrimination practices. In fact, smaller companies face steeper repercussions; the vacuum left by their fall is much more easily filled by competitors and their services than it is for the global giants mentioned previously.

PREVENTION No one walks around thinking “I’m discriminating against this person because they belong to this class I don't like.” Instead, discrimination tends to arise out of the following kind of thinking: “ This kind of borrower is so

much easier to work with, so I’ll focus my marketing on them.”

“ I always seem to have issues when

I lend in this neighborhood, regard-

PRIVATE LENDER

less of the borrower, so I’m just not going to lend there anymore.”

“ If I’m not targeting an individ-

ual specifically with my words/

actions, it’s not hurting anyone.” The list of how discrimination can present itself is endless. So how do you prevent it?

01 I dentification // Ask yourself if, at any time during and in any aspect of your professional dealings, you

find yourself saying “no” to people

Every company, regardless of what kind of hiring, work, lending culture, and criteria they have or how well they think their policies protect them from discriminatory outcomes, should periodically review. Set a benchmark. Create a list of checkboxes, questions, etc., to run through, and be brutally honest and detailed in answering. It’s easy to slowly adapt to something that evolves over time—it gradually becomes your “new normal.” Do not let a culture of discrimination become yours. ∞

who, if put together in a room, could fall into a protected class. It doesn’t

matter if you are saying “no” to them for different reasons, and you can replace “saying no” for “acting in

any way different than you do for

ABOUT THE AUTHOR

people not in that group” and have

it hold true. This is discrimination, includes both words and actions,

does not have to be on purpose to be discriminatory, and can be “some-

thing you’ve always done and no one ever had a problem with it before.”

02 Review and Replace // If you

can say “I do the above, but I didn’t realize I was doing it,” figure out

where the practice is originating.

Is it an unintended consequence of XYZ process? Mitigate the cause,

whatever it is, and then periodically

revisit to ensure discrimination hasn’t unknowingly cropped up again.

03 S TOP // If you can say, “I do the

above and it’s intentional, but [reasons I’m justified],” STOP. You are in the wrong. You are not acting ethically. There is nothing that can justify

how you are acting. Your intentions do not outweigh the end result.

KEMRA NORSWORTHY Kemra Norsworthy is the founder and CEO of Bull Funding, a Seattle-based firm that provide private lending for commercial investments.

Kemra's team has more than 40 years of combined industry experience.

They've acquired a depth of practical knowledge and understanding by

working with a broad set of projects

and clients as well as through a variety of economic cycles.

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MARKET TRENDS

WHERE TO FIND VALUE-ADD INVESTING OPPORTUNITIES by Daren Blomquist

ousing supply gradually began to increase in the

RISING INVENTORY AND SLOWING HOME PRICE APPRECIATION E xisting Homes For Sale

second half of 2021,

both in the larger retail market and

N ew Homes For Sale

E xisting Home Price Appreciation

2,000,000

25%

erty market—as predicted in a July

1,400,000

20%

The inventory of existing homes for

1,200,000

15%

1,000,000

10%

Supply also increased in the distressed real estate market, with the number of

completed foreclosure auctions in third quarter 2021 up 16% from the previous

quarter and up 89% from a year ago to a new pandemic-era high—although still 68% below pre-pandemic levels.

This gradual increase in supply is starting

plined real estate investors to ramp up

acquisitions in 2022—and to do so at price points that pencil out to profitable deals. 18

PRIVATE LENDER

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Aug-20

Jun-20

Apr-20

Mar-20

Sources: NAR, Census bureau

The median sales price for existing homes increased 13.3% in September 2021, still a torrid pace, but well below the peak home price appreciation of 23.6% in May 2021.

RETREAT IN RETAIL FLIPPING RETURNS

estate investing. The benefit of buying

distressed properties with more value-add potential is evident when comparing

so-called home flipping profits in the

larger retail market to returns for investors who resold renovated foreclosure homes purchased on Auction.com.

Home flipping profits in the larger retail

to ease some of the upward pressure on

home prices and sets the stage for disci-

May-20

Jan-20

Feb-20

Dec-19

Sep-19

Oct-19

Nov-19

Jul-19

its highest level since October 2008.

Aug-19

inventory for those two months was at

Jun-19

August and September 2021. New home

200,000

Apr-19

nearly 13-year high of 379,000 in both

Maty-19

tory of new homes for sale reached a

Mar-19

that level through September. Inven-

Jan-19

million in July 2021 and remained near

Feb-19

sale increased to an 11-month high of 1.3

Housing Inventory

2021 article in this publication.

Home Price Appreciation

in the narrower distressed prop-

Many of the deals will be found in the distressed property market, where investors are more likely to adhere to the “buy low” axiom, key to profitable real

market dropped to a 10-year low in the second quarter of 2021, according to

ATTOM Data Solutions. The second

quarter 2021 average gross flip profit of

The retail home flipping data reflects the influence of the iBuyers. Properties flipped in the second quarter—meaning they were sold for the second time within a 12-month period—were originally purchased by the flipper at 88% of the estimated full market value on average. That 12% discount below full market value was the lowest purchase discount for retail home flippers as far back as data is available (Q1 2008).

RETURNS RISING FOR RENOVATED FORECLOSURES In contrast, investors who resold renovated foreclosures in the second quarter of 2021 originally purchased the property at foreclosure or bank-owned (REO) auction for 61% of the estimated full “after-repair” market value on average, according to an analysis from Auction.com. This bigger discount reflects the more significant renovation needed to return these properties to

VS. RENOVATED FORECLOSURE RESALES R etail Avg Gross Flip Return

R enovated Foreclosure Avg Gross Flip Return*

Renovated Foreclosure Average of Days to Resell

R etail Flip Avg Days to Resell

600

80% 70%

500

60% 400

50%

300

40% 30%

200

20% 100

Avg Gross Flipping Returns

The retail home flipping numbers include the high-volume flipping by iBuyers such as Opendoor, Offerpad, and Zillow, the latter of which exited the home flipping business in November due to the “unpredictability of forecasting home prices.” The iBuyer version of home flipping often involves purchasing properties at close to full market value and relying heavily on home price appreciation, along with relatively light rehab, to sell at a (hopefully) higher price a month or two down the road.

INVES TOR RETURNS: RETAIL HOME FLIPPING

Avg Gross Flipping Gains

$67,000—which does not include any renovation or holding costs—translated into a gross flipping return of 33.5%, the lowest since the first quarter of 2011.

10%

0% Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

* G ross flip gain is the difference between the purchase price and resale (flipped) price, not including any renovation or holding costs. Gross flip return is the gross flip gain as a percentage of the purchase price.

retail condition. The properties were resold for 105% of full market value on average, a 44-point increase that represents the biggest value added by distressed property renovators since first quarter 2018, which is as far back as the Auction.com analysis goes. The new high in value added by distressed property renovators translated into an increase in average returns for renovated foreclosures, counter to the trend in the larger retail market. In the third quarter of 2021, renovated distressed homes resold for an average price of $264,989, a gain of $111,445 from the average purchase price at foreclosure auction or bank-owned (REO) auction. That gain represented an average 73% return on the original purchase price—not including holding costs and rehab costs. The 73% average gross return was the highest as far back as the Auction.com data is available: first quarter 2018 , as noted above. It's important to note that the rising returns with renovated foreclosures came with more significant renovation than the renovation

typically performed with retail home flips. This is evident in the average days to resell a renovated foreclosure, which was 312 days on average for all renovated foreclosures resold between first quarter 2018 and second quarter 2021. Compare that to the average days to resell a retail home flip, which was 173 days on average during the same period. This data demonstrates that the best home flipping returns typically come from properties purchased in the distressed marketplace that have plenty of value-add opportunity. Distressed property deals allow an investor to purchase at a discount below after-repair market value and add value through renovations rather than relying heavily on home price appreciation to generate profits. So where should investors be looking for distressed property deals in 2022? Although distressed supply is gradually rising nationwide, the supply situation is more favorable in some local markets and submarkets than others. Here’s where investors should be looking for the most distressed deals to emerge in WINTER 2022

MARKET TRENDS

2022—both in terms of geography as well as in terms of loan type and value band.

VALUE-ADD OPPORTUNITIES BY STATE Nationwide, foreclosure inflow into the Auction.com platform increased 48%

in third quarter 2021 compared to the

States with the highest level of

previous quarter and was up 64% from a

foreclosure inf low relative to pre-

year ago. Despite the quarterly and annual

pandemic levels were Vermont, Maine,

increases, foreclosure inflow, which is pre-

Connecticut, Wisconsin, Oklahoma, and

dictive of the volume of properties brought

Kansas—all above 50% of pre-pandemic

to foreclosure auction in the following

levels. States with the most foreclosure

six months, was still just 23% of pre-pan-

inf low were California, Texas, Florida,

demic volume in third quarter 2019.

Illinois, Ohio, and Missouri.

Q3 2021 FORECLOSURE INFLOW TRENDS Q3 Foreclosure Inflow: Percent of Pre-Pandemic (Q3 2019) Levels

27% WA 2% OR

47% CA

16% AK

16% MT 10% ID

23% NV

32% HI

VALUE-ADD OPPORTUNITIES BY LOAN TYPE Mortgages backed by the government-sponsored enterprises Fannie Mae and Freddie Mac accounted for 33% of all foreclosure inflow in the third quarter, the most of any loan type tracked by Auction.com. 20

PRIVATE LENDER

31% WY 31% UT

13% AZ

22% ND

23% MN

12% SD

63% KS 75% OK

21% NM

76% WI

47% IA

20% NE 23% CO

204% VT

18% TX

46% MO

17% IL

28% MS

25% OH

49% IN

16% TN

34% AR

34% LA

25% MI

42% KY

25% AL

13% PA 34% WV

124% ME

12% NY107% CT

13% VA 20% NC

17% GA

16% FL

Mortgages insured by the Federal Housing

Foreclosure inflow on VA-insured

Administration (FHA) were in second

mortgages increased to 31% of pre-

position, accounting for 29% of all foreclosure inflow, followed by privately held mortgages (26%), mortgages insured by

pandemic levels in the third quarter, the most of any loan type, followed by FHA-insured mortgages (25%) and

the U.S. Department of Veterans Affairs

GSE-backed mortgages (23%).

(8%), and mortgages insured by the

“I’m looking at the median-priced-and-

U.S. Department of Agriculture (4%).

below properties and FHA,” said Tampa,

FHA SDQ

8.00

6.00

4.00

2.00

315

415 Q1 -16 Q 216 Q 316 Q 416 Q1 -17 Q 217 Q 317 Q 417 Q1 -1 8 Q 218 Q 318 Q 418 Q1 -19 Q 219 Q 319 Q 419 Q1 -2 0 Q 220 Q 320 Q 420 Q1 -2 1 Q 221 Q 321

-1 5 Q1

215

0.00

Source: Mortgage Bankers Association

SERIOUSLY DELINQUENT R ATE BY LOAN T YPE BEFORE & AF TER GREAT RECESSION A ll Loans SDQ

Conventional SDQ

FHA SDQ

12.00

10.00

8.00

6.00

4.00

2.00

310

410

-1 0

210

-0

0.00 04

More than 80% of properties brought to foreclosure auction in the third quarter of 2021 had a credit bid of $200,000 or below, and about 50% had a credit bid of $100,000 or below. The credit bid is the amount owed to the foreclosing lender that often acts as the minimum reserve

10.00

VALUE-ADD OPPORTUNITIES BY VALUE BAND

Conventional SDQ

12.00

“The numbers are showing that’s where inventory is going to be,” said Kearney, referring to FHA-insured mortgages. “If you have the most supply on that loan type, that’s where we’re going to target for pre-foreclosures, foreclosure auctions and REOs.”

A ll Loans SDQ

-0

By contrast, SDQ rates on conventional loans spiked 256% between third quarter 2007 and fourth quarter 2009, when they peaked at 9.83%. During that same period, SDQ rates on FHA-insured mortgages increased 70% to a peak of 9.42% in fourth quarter 2009. The Great Recession started in December 2007 and ran through June 2009.

& AF TER PANDEMIC RECESSION

Data from the Mortgage Banker Association shows SDQ rates on FHA loans increased 240% between first quarter 2020 and fourth quarter 2020, when they reached a peak of 11.19%. Meanwhile, SDQ rates on conventional loans increased 204% from first quarter 2020 to third quarter 2020, when they peaked at 3.95%.

SERIOUSLY DELINQUENT R ATE BY LOAN T YPE BEFORE

Florida-based real estate investor Lee Kearney, noting that seriously delinquent rates on FHA-insured mortgages spiked much higher than SDQ rates on conventional loans following the pandemic-induced economic shock, counter to the trend following the economic shock leading to the Great Recession in 2008.

Source: Mortgage Bankers Association

WINTER 2022

MARKET TRENDS

price at which the lender is willing to sell the property at foreclosure auction.

pandemic, up from 45% in second quarter

The share of foreclosure auctions with credit bids below $100,000 is up from 47% in third quarter 2019, prior to the pandemic, but it has been shrinking over the last year, down from 55% in second quarter 2021 and down from 64% in third quarter 2020.

Still, the share is down from 53% in the

Meanwhile the share of foreclosure auctions with credit bids above $100,000 has been steadily increasing during the

not buying. This will more than likely be C

2021 and up from 36% in third quarter 2020. third quarter of 2019, prior to the pandemic. The lower-priced skew of distressed properties also fits well into Kearney’s investment thesis for 2022. ”I’m looking to buy where institutions are and D class assets as well as luxury assets that do not fit the rental model,” he said.

market economics at Auction.com. In this role, Blomquist analyzes

BY CREDIT BID VALUE R ANGE 100% 90%

$ 50 - $100k

11%

$ 100 - $200k

$ 200 - $300k

11%

10%

11%

and forecasts complex macro and $ 300-$500k 3%

11%

4% 7%

26% 31%

31%

60%

31%

32%

31%

33%

32%

33% 28%

28%

27%

26%

29%

30%

29%

5% 11%

the marketplace and greater industry to provide value to both buyers and

sellers using the Auction.com platform. Blomquist’s reports and analysis have

31%

29%

31%

been cited by thousands of media

outlets nationwide, including all the publications such as The Wall Street

30%

28%

Journal, The New York Times, and USA TODAY. He has been quoted in hundreds of national and local

20%

major news networks and leading

30%

10%

32%

50% 40%

microeconomic data trends within

$ 500k

80% 70%

DAREN BLOMQUIST Daren Blomquist is vice president of

PROPERTIES BROUGHT TO FORECLOSURE AUC TION $ 0 - $50k

ABOUT THE AUTHOR

22%

2018-Q1

22%

20%

21%

20%

2018-Q2

2018-Q3

2018-Q4

2019-Q1

2019-Q2

2019-Q3

2019-Q4

2020-Q1

PRIVATE LENDER

29%

33%

29%

publications and has appeared on

27%

25%

2021-Q1

2021-Q2

22%

many national network broadcasts,

including CBS, ABC, CNN, CNBC, FOX 2020-Q2

2020-Q3

2020-Q4

2021-Q3

Business, and Bloomberg.

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CONNECT WITH US (949) 379-2600 90 Discovery Irvine, CA 92618 https://geracilawfirm.com/ • https://geracicon.com/ • https://lightningdocs.com/ WINTER 2022

SALES & MARKETING

Shifting the Sales Paradigm Private lenders can use these five tips to accelerate their mastery of the sales process—and close more deals. by Arthur Budimir

PRIVATE LENDER

ooner or later, everyone realizes the importance of knowing how to sell.

It is a vital skill, and the sooner you learn the fundamentals, the better and easier your life will become. The best way to acquire any skill is through personal repetition. You can expedite the learning curve if you approach the process with the right perspective and intentions. Here are five tips to assist you in shifting your paradigms about sales and accelerating your mastery of the sales process.

BUILD THE NEED If you read any sales book or participate in any sales training, you’ll realize they all essentially boil down to a sales process dependent on the same four principles: D iscover E ducate Recommend C lose

The problem? Everyone skips the first step—that’s why you normally despise the typical salesperson! Discovery is the most important step in the process. It is the step when you ask the prospect questions to discover their “why.” You are attempting to get at their core motivations. But you need to go several levels deeper than simply asking questions. You need to build the need. Building the need requires asking a series of open-ended questions to help the client realize they can benefit from a product before that product is even brought up.

Think about the standard sales experience. The salesperson tells you about the product first and then gives you a list of reasons why it will change your life. But now your guard is up because the salesperson went into sales mode. When you start by building the need, you discover the prospect’s pain points. Then, and only then, can you provide your product or service as the solution. Practical Do’s for Building the Need

Here are some examples of how the “discovery” step can play out in a private lending exchange:

Any guesses? The first is easier to guess. It’s consistency. Especially in the art of sales, consistency is very key. To be successful in sales, you need to stay consistent in areas such as: T he sales process M arketing Results D rive Reliability

Without consistency, you will

“ I would love to help fund your deal! Before we go over those details, can you please share with me your prior experiences using private money?”

have everyone guessing, includ-

“ I would like to know more about your business. If money was not an issue, how many deals would you like to complete in the next 12-24 months? What is your vision for your business?”

be almost impossible. That second

“ Tell me a little bit more about your portfolio. Apart from this fix-and-flip deal we will be working on together, do you also have rental properties? Do you have any free and clear properties? What are your long-term plans for those?”

ing yourself and your clients. Consistency is also vital because without it, the second characteristic will characteristic is a strong mentality. Why is having a strong mentality so important in sales? Because sales is a psychological battle. You need to be prepared to lose many more times than you will win. You need to be prepared for rejection time and time again and not to take it personally. You need to get out of your own head and into the mind of your prospect to understand their thoughts and perspective. You need to

NURTURE 2 IMPORTANT CHARACTERISTICS A good salesperson has many attributes; however, if you have the following two, you’ll have enough of a foundation to start developing the rest. Here they are: C__________ A S_ _ _ _ _ M _ _ _ _ _ _ _ _

be mentally present and fully focused on the interaction, rather than on distractions such as what you want to say next. Without these two characteristics, you will never achieve mastery in sales. Sure, you may possess other strong attributes and be above average. But to be the best, you need to be reliable (consistency) and have perseverance (a strong mentality). WINTER 2022

SALES & MARKETING

self with the appropriate value, and do not diminish or discount it. Talk

SELL VALUE, NOT PRICE

about the value for as long as pos-

The natural anchor in any sales conversation is price. The customer will always gravitate towards the price. The mistake many salespeople make is to do the same—and then try to justify it. That is a terrible approach, and it rarely works. In any transaction, the value of the product must be greater than the price exchanged for the product. So, focus on “value”—sell the value of your product or service. Sell your-

sible, before disclosing the price for your product or service. As a general rule, the earlier in the conversation price is brought up, the

Practical Do’s for Selling Value

Here are some practical examples of how to talk about value in the private lending space: “ Regardless of what may be most important to you in this deal—speed, bringing the least amount of money to the table, having

more it diminishes the value; the later

the lowest possible monthly payments—we

in the conversation price is brought

will make sure we give you the best of all!”

up, the more it adds to the value. If you

“ I can see that price is important to you.

add enough value throughout the conversation, and your product becomes the solution to their pain, they will pay whatever price necessary to attain it.

It is for us as well, but beyond that, I will make sure we take care of you throughout the entire process to ensure you get the best possible yield out of this opportunity.”

PRIVATE LENDER

“As hard as it may be to believe, the sale will be there more often when it isn’t the primary focus.” FOCUS ON BEHAVIORS

you focus on the behaviors of the sales process, while staying genuine and authentic, the sale flows naturally as a byproduct.

As a salesperson, whenever you focus on the sale, you lose all credibility. But, when

Behaviors are KPIs (Key Performance Indicators) that you fully control and can properly monitor, track, and adjust.

In other words, focusing on the behaviors allows you to control what is within your power. But, if you focus on your desired result (the sale), you won’t develop to the next level. As hard as it may be to believe, the sale will be there more often when it isn’t the primary focus.

THINK OF SALES AS THE ULTIMATE FORM OF CUSTOMER SERVICE Understanding that sales is the ultimate form of customer service rather than the absence of it requires a 180-degree mindset shift. Most salespeople look at sales as

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WINTER 2022

SALES & MARKETING

THE FORMULA As you work to develop stronger and more effective sales skills, remember: T hese paradigm shifts take a lot of work. T his is not an exhaustive list. T hese five tips will work with any sales style or approach. Apply these tips to your own company or circumstances. The beauty of sales is there isn’t a universal formula for success. So, create the formula that works for you—and reap the benefits! ∞

the opposite of customer service. In fact, most salespeople detest customer service, thinking it gives the client the upper hand and is generally a waste of time because it doesn’t make them any money. Although logical, this approach only “benefits” you in the short term. In the long term, not serving your customer will kill more sales than it will save you in time. Think about that for a second, and then take it a step further. Sales is a form of customer service. What is bad customer service? Selling someone a product that falls below their expectations. What is good customer service? Selling a product that is in line with the expectations of the client. What is the best form of customer service? Selling someone a product that will exceed their expectations. In other words, it is selling a product they didn’t 28

PRIVATE LENDER

realize they needed because it solved a problem they didn’t even realize they had! Now, you have a customer for life. Practical Do’s for Practicing

ABOUT THE AUTHOR

Customer Service

“ I love your deal, and I’m looking forward to working with you on it. I’m not sure whether you know this or not, but we can do multiple deals at a time (insert your own niche here). Let me show you how we help your business scale by creating a long-term relationship with us.” “ I know this deal is very important to you, but your reserves may be a little low. We want to make sure you have enough liquidity. Those rentals, as well as the free and clear properties you told me about earlier—have you considered refinancing those to lower your monthly payments or doing a cash-out to take advantage of all that equity? Let me show you what that would look like.”

ARTHUR BUDIMIR Arthur Budimir has been working with Cogo Capital & Secured Investment

Corp since 2019, under the tutelage of Lee Arnold. He has rapidly scaled up

during his time with the company due

to his more than 10 years of experience in sales and sales management. As an account executive for Cogo Capital,

he is solely dedicated to forging new

relationships with like-minded lenders

to accelerate the continual growth and expansion of the company.

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STR ATEGY

DO LONG-TERM RENTALS HAVE STAYING POWER? Many factors are driving the trend, but private lenders must also understand the risks. by Chris Ragland

efore we get into the

latest loan craze in private

lending—long-term rentals

(LTRs)—let’s review how we got here.

able to make a quick transition into the space after the Great Recession of 2008.

IN THE BEGINNING

For years the focus in lending was around

single-family fix-and-flip loans. The focus on this product hasn’t been a few years in the making; it’s straddled decades.

The fix-and-flip concept has matured so rapidly it has become a part of pop

culture. With dozens of television shows ranging from competitive flipping to

finding the perfect home for newlyweds,

it is safe to say that America knows about house flipping.

Behind the television shows, private lenders can tell you what’s really happening. Lending, of course! Most single-family residential flipping is being done with private money. It’s how many private

lenders got their start. It’s also how so many conventional loan brokers were 30

PRIVATE LENDER

How these loans are funded has changed over time. Perhaps “in the beginning” is too strong of a phrase, but if you met with private lenders for a loan shortly after 2008, it sure felt like the beginning. Many lenders were doing syndications and acting as go-between brokers. It would take time for lenders to grow to a level where they could quickly and easily fund loans on their own. Getting there required substantial capital and, generally, the direct or indirect control of that capital. Naturally, this led to the rise of more efficient small balance sheet real estate funds. With the advent of loan buyers in the space around 2015, lending became supercharged. The

same capital could not be used to fund loans monthly as opposed to yearly. But the hunger for more lending always creates more supply. Yield demand remained strong, and fix-and-flip loans were increasingly difficult to find and fund at higher rates. Enter new construction loans. It was the same asset class—single-family residential—but now the demand for housing coupled with the lack of traditional construction lending created a new subcategory for private lenders in new construction. That construction has been largely focused on infill development of new homes. The private lending industry has been slow to evolve in a single direction since the spread of residential new construction lending. There has been significant interest in projects in which the end borrower is building multiple homes at once, in either small communities

or with condos or townhomes. And, as the affordability crisis for homeowners spreads from city to city, there’s been interest in tiny homes. Naturally, there is always some interest in moving into commercial real estate development. But there is little industry alignment when it comes to what’s next. Until now.

barriers conspire to keep borrowers from

WHAT’S NEXT?

the private lending industry is upon

For the longest time we have seen borrowers complete renovations on single-family homes only to bemoan selling the asset. Clearly there are situations when the economics demonstrate the prudent path would be to keep the property and turn it into rental property. But, several

that scenario: trapped equity borrowers need to fund their next deals, high interest rates from their fix-and flip-loan that prevent cash flow, and, finally, a lack or limited amount of traditional bank lending. Once again, until now.

WHAT’S DRIVING THE TREND?

The golden age of long-term rentals in us. Macroeconomics in the U.S. are creating more favorable conditions for landlords to expand their portfolios. Savvy investors are learning how to generate cash flow, create long-term appreciation, and often tax incentives. This new subcategory of the single-family residential loan is spreading like

wildfire through the private lending industry. There has always been a demand, but only recently—with the advent of loan buyers and a lower cost of capital—has there been a possibility for the supply to manifest.

To understand whether this product has staying power, it’s important to dissect what’s behind the demand for long-term residential real estate investment loans. There is another asset class that Wall Street investors are incredibly familiar with that looks a lot like the “landlord loans” you see private lenders pushing into the markets: mort-

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WINTER 2022

STR ATEGY

“ The similarities between traditional 30-year MBS and the new long-term rental landlord loans (LTRs) in the private lending industry are striking.”

gage-backed securities (MBS). If that doesn’t ring any bells, how about collateralized debt obligations (CDOs)? Yes, we are talking about the debt-investment instruments in the subprime mortgage business that

tional 30-year MBS and the new long-term rental landlord loans (LTRs) in the private lending industry are striking. Further, when you follow the money and learn exactly who it is that is aggregating, selling, and ultimately carrying the LTR landlord loans, the similarities are uncanny.

contributed largely to the collapse of the global marketplace in 2008.

The major differences, of course, are the loan-to-value ratios and underlying credit criteria backing these loans. That may provide a sigh of relief, except that both of those are eroding rapidly.

If you didn’t read that last sentence twice, or at least lean forward in your chair, then you weren’t working in the financial sector in 2008. The similarities between tradi-

LTRs are likely here to stay for the time being. But it’s important to know that the capital supply could shift away quickly. Investment funds that are either aggre-

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PRIVATE LENDER

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In addition to regulatory risks, there is always market risk. Demand for singlefamily homes may be at an all-time high in America, but that’s not always the case. Does LTR as a loan product have staying power in the private lending industry? The verdict will remain out for some time. But it does look promising for a variety of reasons. We must pay attention to regulatory and market risk, but we should also be watching exactly who the ultimate purchaser of this paper is. What are they doing with that investment, and how could that potential impact us all? ∞

ABOUT THE AUTHOR

gating and/or holding the paper for yield are often opportunistic and responsive to the market. Meaning: Should another asset class with higher returns, or even the same returns with lower risk present itself, capital could exit the space quickly. More than ever it’s important to consider partnerships. If not in the official legal capacity, at least strategically. Consider pairing your fix-and-flip loan buyer with your long-term rental product. The same buyer may be able to offer a single closing product creating efficiencies not just for the lender but also for the borrower. Consider a closer alignment with your loan buyer. There are numerous examples of actual partnerships in

the private lending space now between lenders and loan buyers. And, finally, consider keeping your own capital on hand. You just never know when you will need to fund that loan yourself. There are potential risks associated with an LTR product that we haven’t seen before. This is the first large-scale product that involves, in some capacity, a consumer for the long term. Although the consumer is a tenant of the borrower, they are still involved in the process. And in an increasingly regulated field, all lenders must consider what that may mean to their clients. We saw this firsthand with the eviction moratorium as a health and safety response to COVID-19.

CHRIS RAGLAND Chris Ragland has managed real estate-

related businesses for the past 20 years. Whether its brokerage, disposition,

insurance, management, finance, or

development, Ragland has exposure to

all aspects of real estate. His favorite role to play is investment mentor. An active investor and principal in several real

estate-related ventures, Ragland continues to grow his portfolio of properties while he builds up those around him.

In addition to his real estate activities, Ragland serves on several boards for

nonprofits and is also active in the startup community in Austin, Texas.

WINTER 2022

STR ATEGY

The Good, the Bad, and the Ugly of Leadership Anyone can claim to be a leader, but the key question is this: Will your team—and success for your business—follow? by Linda Hyde

PRIVATE LENDER

roles, creating internal silos. This means each employee neglects (or can’t see) the importance his or her work plays in achieving overall company and departmental objectives. Low morale // Another possible consequence of poor leadership can be employees feeling uncertain about the company and their jobs. Poor communication—or complete lack of it—contributes to this issue. When overly critical managers demean or demoralize well-intentioned employees who make mistakes, the resulting negative environment may cause those employees to shut down emotionally. This can create cognitive gaps within the team, giving rise to the belief they only “like” and listen to the people who look and think just like them.

ood leadership is like the

light, permeating into every

aspect of the business. Poor leadership, on the other hand, is like the shadow, darkening many areas of the organization. What is the cause and effect of poor versus good leadership? What impact will your business have with a poor leader at the helm? How can good leadership impact results? What qualities do employees look for in a good leader?

Effective leadership is critical in virtually any type of for-profit or service-based organization. When company managers lack the ability to provide clear direction, positive coaching, support, and motivation for staff, organizational culture

and morale often suffer. Poor leadership can have several other negative effects on the company and staff as well.

POOR LEADERSHIP BREEDS FAILURE Synergy // Poor company and departmen-

“ You don’t lead by hitting people over the head—that’s assault, not leadership.” — DW I G H T E I S E N H OW E R

tal leadership inhibits the development of synergy. Effective managers coordi-

nate tasks within their departments and

promote an atmosphere that encourages idea sharing and discussion. They get

employees aligned to pursue shared goals. Poor management may result in more fragmented departments and work

Lack of communication and engagement // It is important for employees to feel they have a voice and that it is being heard from the top down. Likewise, they want to stay informed of decisions and activity within the company. Too often, a poor leader is unable to communicate WINTER 2022

STR ATEGY

effectively, which means important information that needs to be passed along falls instead on deaf ears or may be missed completely. The same can be said when there is a lack of understanding from the leader’s perspective. This all leads to decreased engagement from staff, impacting the overall business and goals.

THE BENEFITS OF GOOD LEADERSHIP On the other end of the spectrum, good leadership can motivate and invigorate a company’s culture. Good leadership gives everyone in the company the confidence they are under the guidance of someone who is credible and knowledgeable. Strong, focused leadership inspires people to try new concepts and venture into unknown territories that will develop both their personal and their professional skills. By giving the team proper guidance, you will gain their trust and loyalty. How can a leader make a positive impact on a team? Diversify your team // Diverse teams feel less comfortable, and that’s why they perform better. In numerous studies, diversity both inherent (e.g., race, gender) and acquired (experience, cultural background) is associated with business success. Although an idyllic atmosphere may be difficult to achieve, employees nevertheless recognize the many strengths and talents that diversity brings to the workplace, and they gain respect for their colleagues’ performance. Workplace diversity preserves the quality of employees’ relationships with their co-workers and their leaders. 36

PRIVATE LENDER

Take off your rose-colored glasses // Many leaders have unrealistic thoughts and expectations of what goes on within their organization and what it looks like to be successful. Good leaders engage with their employees to set realistic expectations and attainable goals for success together. Engagement is an emotional commitment to the overall organization and its goals when leaders take the time to forge an emotional bond with their employees. A leader should always have his or her finger on the pulse of the business through communication with the team. Remove titles, positions, and authority // Position, titles, and authority are often confused with leadership. However, leadership is not an actual position or title. Whether you’re the president of a country or a chief executive officer, your title does not make you a leader. All a title does is make you a senior executive. Leadership happens when people allow you to influence their lives. It’s only when your influence causes people to work toward a shared vision that you become a leader. Leadership is more about influence and relationship than it is about control and giving orders. Influence can be changed by perceptions, relationships, and trust.

HEADING TOWARD THE GOOD END OF THE SPECTRUM

you’re going to make a difference, you will need to sharpen your leadership skills. This means improving your influence and relationship with all your employees. The bottom line is that all leaders lead in either a good direction or a bad direction, and the spectrum runs from exceptionally bad to exceptionally good. Although this direction may not be understood or consciously chosen, quite fortunately, we are all human and thus have the power of choice. We can consciously choose to adjust our actions to always lead in a direction that raises our performance and success in managing people. Treating your employees with respect and appreciation for their performance will give you the results you are looking for in your business. ∞

ABOUT THE AUTHOR

LINDA HYDE Linda's deep expertise in business management, operations, and

The best leaders don’t lead from position. Nor is leadership attained by exercising control over others.

customer service have provided AAPL

Leadership is the empowerment of oneself and others toward a shared vision. If

is best-known for her refreshing

with a solid foundation from which to thrive. Serving as managing director for both AAPL and Think Realty, she directness—and love of polka dots.

WINTER 2022

STR ATEGY

FUND MANAGEMENT STRATEGIES FOR 2022 With some creativity, flexibility, and patience, the challenges of 2021 can become opportunities for your fund in 2022. by Steve Kuptz

ost major metro

markets have seen steady price and

income growth in 2021, particu-

larly in the residential sector. For-

tune Magazine recently reported:

“Instead of creating a housing bust, the pandemic helped spur one of the most competitive—and tight—housing markets in recorded U.S. history. Between August 2020 and August 2021, home prices soared a record 19.9%—dwarfing the previous biggest 12-month price jump (14.1%), which came in the period leading up to the 2008 meltdown.” The saying goes that “a rising tide floats all boats.” That certainly was the case in 2021 for many borrowers.

CHALLENGES AHEAD Looking forward to 2022, your borrowers will be faced with 38

PRIVATE LENDER

some, if not most, of the following challenges:

Shrinking margins. This is due to a

Building material cost increases. According to a recent National Association of Home Builders study, the cost of building materials has risen 13% year-to-date in 2021.

particularly in the fix-and-flip space

Increased labor costs. The competition for skilled labor is intense in every industry. Nationwide, 92% of contractors say they have had “moderate to high levels of difficulty” finding skilled workers, according to the U.S. Chamber of Commerce’s quarterly construction report released Sept. 22.

ter to Lowest Level Since 2000; Prices

Entitlement, permitting, and inspection delays. These are due to municipal hybrid work schedules. The strong possibility of rising interest rates, although the timing is uncertain. The Federal Reserve is currently divided over when to raise rates, but the operative word is “when,” not “if.

combination of the foregoing factors, throughout most major metro markets. An August 2021 report from the ATTOM national real estate database reports: Home Flipping Rate Falls in First Quar-

on Flipped Homes Drop, Leading to Smallest Profit Margin in 10 Years. iBuyers scaling back, or ceasing

operations, and dumping product back on to the market. Zillow will

stop buying and renovating homes and cut 25% of its workforce, according to multiple national media sources. These borrower challenges will result in some, if not most, of the following challenges for your private lending fund in 2022: R ehab/construction holdback balances insufficient to complete the work proposed.

be asking you questions. As the fund sponsor, your challenge—and your opportunity—will lie in how creative, flexible, and patient you will be. Your investors will be looking for transparency and creativity as you continue to provide consistent returns on their investments.

advance the additional funds necessary to complete the project and execute the exit strategy you originally envisioned during the initial loan underwriting phase. This should also result in additional earnings to the fund in the form of points and modification fees as you restructure.

lar 30-year fixed loan will rise to 4%

Let’s focus on the silver lining to borrower challenges first:

Bankers Association’s recent forecast.

Rehab/construction holdback bal-

Timing is everything, so the sooner you meet with your borrower, identify cost increase issues, and restructure the loan, the sooner you will get to your exit strategy. No one’s interests are served by unwanted delays in the rehab/construction process.

E xtension requests due to a combi-

nation of the foregoing challenges.

P roblems and delays for borrower

exit strategy because there should

be a reduction in the qualified buyer pool in the case of rising interest

rates. The average rate on the popuin 2022, according to the Mortgage Static or decreasing valuations

on your underlying security.

THE SILVER LINING The investors in your fund are read-

ing the same things you are and will

ances insufficient to complete the

work proposed. Fortunately, most of

you will have flexibility to restructure your loans in this scenario, at least in the near-term. The significant rise in real estate values over the past 12 months, particularly in the residential space, should leave you with sufficient equity to

Extension requests due to development or rehab/construction delays.

It’s not a matter of if, but when, some of your borrowers will approach you for loan WINTER 2022

STR ATEGY

term extensions due to pandemic-related delays. Again, a proactive approach is necessary. Meet with your borrower early and often. Assuming there is enough equity in the transaction, the loan extension should result in additional earnings in the form of both points and modification fees and additional interest earnings. The challenge arises if there is not sufficient equity to extend the loan. In this situation, first pursue cross-collateralization with other borrower assets or contribution of additional borrower equity. Foreclosure should be your last course of action for cooperative borrowers. Exit strategy impacted by rising interest rates. Like the situation

PRIVATE LENDER

addressed above, rising interest rates may result in payoff delays and extension requests. Your strategy and options should be similar to the narrative above. Static or decreasing valuations

on your underlying security. This

should not be a challenge in most metro markets in 2022. As we get later in the year and into 2023, stagnant valuations could become an issue. You’ll need to closely monitor valuations in 2022 to ensure continued compliance with your loan documents and loan-to-value representations to your investors. Effectively determining valuation is a challenge in any market. The well-docu-

mented shortage in appraisers will make timely valuations a challenge. Consider alternative methods such as hybrid appraisals, desktop appraisals, drive-by appraisals, broker opinions of value, Zillow, Redfin, and LoopNet searches—as well as your local market knowledge. Turning to opportunities with investors: Your investor reporting will become more critical in 2022. Transparency is key with investor communication. As we all know, bad news does not get better with time. You need to understand each of your markets and product types well. At the earliest indication of challenges, be proactive with your borrowers and open and transparent in communications with your investors.

As mentioned, with a bit of creativity, flexibility, and patience, challenges can become opportunities. As challenges arise with a particular product type, perhaps consider a shift in lending focus. The decline in fix-and-flip opportunities is well documented, but there are still plenty of opportunities in the private lending space. Here are some “value-add” lending options for you to consider:

your borrower. Many longtime owners have properties in need of rehab, repair, and market repositioning to take advantage of increasing rental rates in their market. A 3- to 5-year loan can provide the dollars necessary to bring the property condition up to market and stabilize it at the new market rents. Once stabilized, you may be able to bring in conventional debt financing to replace your loan.

Build up or out. In many major metro markets, the average sales price per square foot still exceeds the cost per square foot to build. Building up or building out can create additional value, assuming your borrower isn’t overbuilding for the market. Driving your neighborhood and doing background market research will give you a good indication of this strategy’s potential.

In terms of options for your investors, consider creating separate funds targeted to specific product types or lending and investment parameters. Here’s a three-fund strategy to consider:

ADUs. The national affordable housing

crisis is well documented. Many older urban areas are designed with alleyloaded garage access. These areas are excellent opportunities for building rental ADUs over the garage, providing much needed affordable housing. The property owner gains additional income, increasing their ability to afford the property. Zoning law changes. Similar to the

previous point, many cities are reevaluating their zoning laws in an effort to incentivize more affordable housing. For example, borrowers/developers in several California cities can now build ADU and junior ADU units “by right” in neighborhoods previously zoned for single family. Income-producing multi-family and

commercial property. In some ways, this

is a larger fix-and-flip, with your exit strategy being conventional debt financing for

F und One. This is a lower risk,

non-leveraged fund targeting the traditional fix-and-flip, acquisition bridge, and value add, rehab/construction loans with 6- to 24-month terms. This fund would provide investor returns in the 6% to 7% range.

ing problem loans from your existing funds or from others. This fund would provide double-digit investor returns. Again, 2022 will likely be another year filled with challenges and opportunities. Creativity, flexibility, and patience will yield the strategies you’ll need to meet the challenges head on—and turn them into opportunities. ∞

ABOUT THE AUTHOR

F und Two. This is a slightly higher risk,

leveraged fund targeting income-producing multi-family and commercial properties with 3- to 5-year terms. This fund would provide investor returns in the 7% to 8% range, assuming you can fix the cost of your fund leverage in the 4% to 5% range. This fund also provides a bit of an inflation hedge as the income increases on the underlying security. F und Three. A higher risk, non-lev-

eraged workout fund targeting distressed properties and defaulted loans, this fund requires patient investors, which is likely the case for most of your current investors. This fund is in essence the “bad bank” positioned to take on the difficult task of loan workouts or foreclosures by purchas-

STEVE KUPTZ Kuptz is a founder and managing

principal of Trinity Mortgage Fund,

a Southern California and Coloradofocused private lender.

Kuptz has more than 40 years of

experience in commercial real estate, specializing in real estate finance, accounting, and taxation. He is a

Certified Public Accountant and holds a Chartered General Management Account designation.

Kuptz received the Certified Fund Manager designation from the

American Association of Private

Lenders and currently serves on the

organization’s Education Committee.

WINTER 2022

CASE STUDY

PRIVATE CAPITAL AT WORK BEFORE

Here’s how one Maine entrepre-

neur is building affordable housing for his community and changing

perceptions one house at a time.

With funding Toorak Capital Partners provided, a 22-year-old developer in Maine has used $1.4 million across five loans to rehabilitate, improve, and deliver affordable homes for 12 families in Westbrook, a suburb 7 miles west of Portland. AFTER

PRIVATE LENDER

s city centers across the country become increasingly

SEEING OPPORTUNITY EARLY

unaffordable, homeowners are looking further afield to find affordable housing options. The COVID-19

Growing up in Windham, Maine, Andrew Maley (the developer)

pandemic has only made this problem worse as the flight from

remembers nearby Westbrook as the mill town with a reputation

city centers, combined with new migration patterns, continues

for being smelly and stinky—a place people generally tried to avoid.

to raise prices on homes that were previously accessible to those

Although the mill wasn’t entirely shut down, Maley realized mills

with lower incomes.

weren’t going to be around forever. He also believed places like West-

In parts of Maine, where the waitlist for Section 8 housing can be

brook had tremendous promise for new housing and revitalization.

up to five years, local real estate entrepreneurs are working with lenders to renovate and reposition existing housing to meet growing

“I grew up seeing this place going through changes every single day and knew it was definitely one of the places to be,” says Maley.

demand—and improve their communities in the process.

Lender // Toorak Capital Partners Borrower // Andrew Maley Amount Borrowed // $1.4 million Project // Five 1- to 4-unit properties serving 12 families, all located within a 2-mile radius in Westbrook, Maine, a suburb

about 7 miles west of Portland; the 04092 ZIP code has a median household income of $55,000 annually/$4,600 monthly.

Results // The average initial value of the homes was $320,000; after repair, the average value is expected to increase to

$431,000—affordable within the market. After rehabilitation, the average mortgage payment for the homes is expected to be approximately $1,073 per month, or $494 per unit per month. This represents 11% ($494/$4,600) of the median household income per family, well below the 30% affordability threshold determined by HUD.

Property Type

Units

C ity

State

Zip Code

Original Principal Bal ance

2-4 Unit

Westbrook

04092

$360k

$380k

$420k

$425k

$560k

85%

75%

2-4 Unit

Westbrook

04092

$224k

$274k

$295k

$365k

76%

75%

2-4 Unit

Westbrook

04092

$270k

$280k

$330k

$345k

$440k

78%

75%

SFR

Westbrook

04092

$137k

$169k

$237k

$185k

$340k

74%

2-4 Unit

Westbrook

04092

$288k

$310k

$3338k

$340k

$450k

85%

$1,278k Total

$1,362k Total

$1,598k Total

$1,590k Total

$2,155k Total

80% Avg.

Principal Lent To Date

Orig Max Loan

Apprasal Amount

Appr asal Fixed

As Is LTV

As Repaired LT V

Monthly Mortgage

Monthly Mortgage per unit

Median Household Income

Median Household HHI

Mortgage/ Unit/Med HHI

$1,433

$478

$55k

$4,608

10%

$995

$497

$55k

$4,608

11%

$1,164

$582

$55k

$4,608

13%

70%

$624

$55k

$4,608

14%

75%

$1,147

$287

$55k

$4,608

74% Average

$1,073 Average

$494 Average

$55k Average

$4,608 Average

11% Average

(3% rate, 80% LTV,

30y term)

WINTER 2022

CASE STUDY

When he turned 18, Maley got into real estate. While he was looking for areas where he could focus his efforts, he went back to the town that had caught his attention years prior: Westbrook, Maine. Still a little rundown, it had a lot of housing stock that was older, in need of lead abatement, or general renovation and remodeling. Maley started wholesaling, doing general contracting projects, and working on flip homes before solidifying his focus on affordable housing. “Affordable housing is how I got started. Where I'm headed is toward doing more of it,” Maley said. “You're helping out the community and helping families—local families—that are coming from overseas into the country, land on their feet.” The 1- to 4-unit homes he identified were initially valued at $320,000 average; after repair, they are expected to be $431,000 on average, affordable within the market. All the properties are located within the 04092 ZIP code, which has a median annual household income of $55,000

BEFORE

($4,600 per month). After rehabilitation, the average mortgage payment for the homes is expected to be approximately $1,000 per month, or approximately $500 per unit per month. This represents just 11% ($494/$4,600) of the median household income per family, so it is well below the 30% affordability threshold determined by HUD.

MAKING IT WORK Maley constantly looks for renovation opportunities and owns other companies that support his affordable housing efforts, including a wholesale network he uses to find distressed prop-

AFTER

erties to fix up for the community. He pours the profits back into affordable housing. “We just did one that was mold-damaged and where the floors were buckled; in short, the whole place had to be remodeled,” Maley said. “After we turned it over, the neighborhood loved it. Everybody was happy not to have the rundown house in

PRIVATE LENDER

the neighborhood. Turning that over and then turning it into affordable housing for people was great.” Working as a three-man team and leveraging his electrical background, Maley handles the construction. His partner takes care of the office paperwork. Maley pulls in other contractors to help with projects as needed. Despite his small team, there is no lack of demand for renovations, given the challenging situation with affordable housing stock. “There's actually a 5-year waitlist for Section 8 and affordable housing in our community,” Maley said. “When we finish renovating a property and market it to the government, I have around 150 to 200 people reach out in one day, and it gets filled immediately.” Maley communicates with local housing authorities and

BEFORE

agents each day to review his inventory and try to find matches for local families in need, even before beginning work on the properties. “Local agents will contact me and say, ‘Hey, do you have a three bedroom, a two bedroom, a one bedroom, or a four bedroom?’ And I'll flip through what we have and tell them. Then they'll have somebody come in and take a look at it before it's renovated. They know what our stuff looks like. And then we'll sign them up and basically get them ready so that when the project’s done, they're ready to sign a lease and move in. Then we'll move onto the next project.” The young developer’s efforts have led to more than just increased affordable housing stock. His improvements to the community have reverberated across social media, leading to changing perceptions of areas people previously avoided. “A lot of the impact has been made on social media, because people know the Westbrook area as being run down and dirty. And after we’ve finished projects in some of the grittier areas,

AFTER

people come in and say ‘Wow, this does not look the same.’ It's mind-boggling how paint, flooring, and a little bit of care can change a property and change people’s preconceived notions about an area.” ∞

WINTER 2022

CASE STUDY

Some TLC Transforms Portland Home

EXTERIOR AFTER

Renovations to an untended home in

a desirable neighborhood of Portland, Oregon, yielded significant ROI.

EXTERIOR BEFORE

A single-family home in a desirable neighborhood of Portland, Oregon, was priced far below market value because it sorely needed rehabbing. The home matched the average age of other homes in the area. An experienced borrower saw the 1,200-square-foot, 2-bedroom, 2-bathroom home near schools and shopping centers as a fix-and-flip opportunity that would yield a 60% return on investment. With renovations, the investor expected to add about $300,000 to the home’s value, and the sale price was anticipated to be significantly above the neighborhood average. The rehab project has been completed, and the property is currently listed for sale. The renovations completely transformed the home, and the borrower anticipates a solid return on investment. ∞

PRIVATE LENDER

BEDROOM BEFORE

BEDROOM AFTER

BASEMENT BEFORE

BASEMENT AFTER

Lender // RCN Capital Loan Officer // Peter Rusconi

Loan Officer NMLS ID # 1975612 (860) 432-9764 Client/Borrower // #1 Firm Foundation LLC Location // Portland, Oregon Architecture Style // Single Family Year Built // 1925

2ND FLOOR LOFT BEFORE

2ND FLOOR LOFT AFTER

Square Feet // 1,854 Loan Amount // $363,600 LTV // 72% ARV LTC // 92%

KITCHEN BEFORE

KITCHEN AFTER

LIVING ROOM BEFORE

L I V I N G RO O M A F T E R

Client Borrower Experience Level // 5 Loan Term // 12 months Anticipated Renovation Cost // $90,000 Credit Score Considered: // Yes Exit Strategy // The borrower intends to sell

the property after completing renovations and is expecting a 60% return on investment.

WINTER 2022

CASE STUDY

Our Mission We make lenders more successful by empowering them to give borrowers the best experience possible.

Credit Buy Box Loan Amount: $75K - $10MM Max Term: 36 months Credit Score: 620 minimum Type: 1st lien 85%**

90%

75%

* SFR is up to $3.5MM * * Value Add purchase : 85% , Cash Out and Rent Stabilize: 75%

Property Type

Loan Purpose

(5 -30 units)

lenders@alphaﬂow.com www.alphaﬂow.com 48

PRIVATE LENDER

(5 -30 units)

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Transparency into the status of loans being reviewed for purchase More efficient way to communicate with your dedicated investment team

STEP ONE

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We'll evaluate loans within 24hr and give you fast feedback.

Receive funds fast! Our customer support team will guide you each step of the way. WINTER 2022

LENDER LIMELIGHT WITH NOAH MARTIN

The Thinker Noah Martin’s philosophy background brings a unique perspective to the lending industry. by Katie Bean

hen first meeting Noah Martin, president of

AlphaFlow, you might

wonder how a philosophy major

who casually mentions Jean-Paul Sartre in an interview ended up

in private lending. But once you get

to know him, you realize Martin con-

stantly seeks to know more about any subject that interests him. So, once he got into finance and lending, he dove in with both feet to learn everything he could about the industry.

THE WINDING PATH TO FINANCE Martin’s eagerness to learn and adapt likely stemmed from a childhood spent traveling the world as the son of a United Nations economist. His father’s focus on agricultural economics took the family 50

PRIVATE LENDER

anywhere there were forests and lumber import/export deals to be negotiated, from Southeast Asia to Africa to Alaska. He was exposed to a variety of cultures and languages—and even some mischievous orangutans during a stay Borneo. “I grew up in that environment, which I thought was normal,” Martin said. “I actually didn’t really know what it meant to be American.” That changed when his father took a job at the U.S. Forestry Service in Washington, D.C., when Martin was a high schooler. “It was my first exposure to apple pie, football, and Coors Light,” he said. Although he was reading books on price discovery theory as a teenager, he resisted his father’s suggestions to study hard sciences in college, instead choosing to major in French literature and philosophy. Martin eventually dropped

WINTER 2022

LENDER LIMELIGHT WITH NOAH MARTIN

the literature and shifted to a combined focus of physics, math, and philosophy. “It was pretty close to halfway through college where you don’t want to be like your parents, but you finally have to admit to yourself that you are,” he joked. Martin continued his path of studies, earning a master’s degree and Ph.D. in philosophy. However, a job opened his eyes to the possibilities in the business world. He answered a Craigslist ad to act as a cultural liaison in New York for a wealth fund that worked closely with companies in South Korea. “I realized I was never going to make in academia what I could make in finance,” he said. Living in New York, Martin had a frontrow seat watching the Great Recession unfold on Wall Street. “It didn’t make sense to me that somehow these structured finance instruments were somehow causing so many repercussions across all different aspects of American society. I was like, ‘What is happening?’” he said. “The way that my brain works, if I don’t understand something, I’m just going to drill into the ground until I do.” Martin read books on finance and lending but also relied on his brother as a resource. “He was experiencing the real estate downturn firsthand as a broker,” Martin said. His brother recognized that fallout from the lending crash would create a need for government lending programs like Fannie Mae to outsource services it was not equipped to handle. So, he started a government contracting company to provide high-touch loan and collateral 52

PRIVATE LENDER

THIS OR THAT ? CROSSWORD OR SUDOKU? M O U N TA I N O R B E AC H ? “They’re both the best natural phenomenon.”

CO F F E E O R T E A? Black decaf coffee

T E X T O R C A L L? Call. “I’m a talker. I’m a people person. Just give me a human voice, please.”

CO M E DY O R M Y S T E R Y ? Comedy. “Especially observational comedy—it’s just so smart, so intelligent, and it’s helpful and reframes, a lot of times, unexpected ways of doing something.”

N I G H T OW L O R E A R LY B I R D ? Early bird. In the past five years or so, he’s started waking up at 5 a.m. naturally with no alarm. His wife jokes that he has an “on” button. “I just pop out of bed. I wake up and I’m ready to go.”

WINTER 2022

LENDER LIMELIGHT WITH NOAH MARTIN

services work. Martin joined him, despite his initial skepticism.

“I was like, ‘I don’t really believe people

could make money doing this,’” Martin said. “It was almost like betting against myself.” The company did, in fact, make money,

and Martin learned about all aspects of mortgage lending. His insights set him on a path to continue his career in the

lending industry, eventually leading him to his current role.

”SOLD” ON ALPHAFLOW Martin now serves as president at AlphaFlow, a technology platform that aims to

connect investors with high-interest real

estate loans from lenders across the country. He had previously worked with CEO

Ray Sturm and was intrigued—though naturally skeptical—as Sturm built up his new venture.

ative examples and the gaps. … I was so

Eventually, realizing how AlphaFlow creates value in the industry, Martin’s curiosity overcame his skepticism. He likens the platform to a Bloomberg terminal, which provides information and attracts customers who want to be “in the know.” AlphaFlow’s platform provides capital, software, and underwriting insights to help its lenders grow their businesses. It also provides a single access point for investors in an otherwise fragmented market.

Once he could see the problems in the

“I was a nonbeliever, and then somewhere along the line, I don’t know how I drank the Kool-Aid,” Martin said. “I just talked to enough people over there that were smart, that were mission driven. They could show me the compar-

impressed with the caliber, the education, and the drive of all the employees.”

industry and how AlphaFlow was solving

them with a stellar team, Martin was sold. He took the plunge and joined the team. At first, Martin said he worried about

not being able to add value because he

doesn’t have a background in coding. He

took time to assess and “map” the organization and how it operated so he could understand the lines of communication and office politics among departments. Doing that exercise allowed Martin to understand where he could add value:

He could support and empower people to see things either from a different point of view or across departments—and to understand the repercussions of their actions and policies on other people.

Martin aims to break down silos and

ANIMAL ENCOUNTERS In his youth, Noah Martin traveled the world with his family, following his father’s job as a United Nations economist. One of the memorable

ensure information is known to everyone in the company because departments can act on insights in different

ways to improve company performance. He facilitates information sharing

by ensuring a “common language”

places he lived was a house on stilts in a rainforest in Borneo, an island in the South China Sea.

among employees from different backgrounds, such as tech and finance.

The family noticed that when they were gone, “bizarre stuff” seemed

Martin said his philosophy background

through their drawers. After talking with groundskeepers in the area,

AlphaFlow, from teeing up discussions

to happen—it appeared someone had used the restroom and gone

helps in various and unexpected ways at

they learned orangutans were sneaking into the house.

to reading long passages of tax code.

“It made me feel like, ‘Oh, it’s cool, we’re part of their group,’” Martin

said. “If we’re important enough for them to make fun of us, then we’re part of their social networks. And that’s cool.” •

MINDFUL ACTION Though he’s certainly a man at home

with his thoughts, Martin realized shortly

PRIVATE LENDER

to leave the outside outside,” he said. “It’s also helped me when I’m sitting with my wife. I’m talking to her, trying to be present with her to learn about her day and what she’s feeling or thinking about. And I don’t want to be thinking about my work at the same time.”

FAVORITES M OV I E: “Altered Carbon. It was so close to the books that I love it.”

P L AC E H E ’ S T R AV E L E D: Sarawak, a national rainforest preserve in Borneo. “It was like being in ‘Avatar.’ The insects are massive, and the animals may be bigger because they’re eating them. It’s such an oxygenated environment that it allows for this almost other-planetary feeling.”

S E A S O N: Fall, which is when he met his wife, Ariel, and they had their first

several dates in the Washington, D.C., area. “I kind of ignored the

season before I met her, and she opened my eyes to it through the

Martin competes in jiu-jitsu tournaments, which satisfies his competitive side and gives him a goal to pursue when he trains. And that’s when the French philosopher comes up. “It’s very Jean-Paul Sartre in the sense of that whole being and nothingness idea. We don’t have an externally imposed purpose on our lives. We have to create our own projects and then pursue them. We give ourselves our own goals, and then we go after them.” ∞

area we lived in and then some of the ways that she got to enjoy it. I got to enjoy it through her.”

G U I LT Y P L E A S U R E: TCBY. “The classic combo of golden vanilla soft serve yogurt with hot fudge. I go there more than I’d like to admit. I only go alone because I don’t want anybody to talk to me about it.” •

after graduating from college that he was prone to ruminating, which took him out of the present moment. He said he would obsess about deals all weekend, even when spending time with his wife and friends. He’s always been energetic, he said, and he played sports growing up. When he first transitioned to a career, he could feel the disconnection between mind and body.

ABOUT THE AUTHOR

“I was not feeling connected to myself in a way that was grounded and helps bring perspective,” he said. He found jiu-jitsu, a form of martial arts, centering. It forced him to focus on the moment because thinking about work on the mat could lead to serious injury. “It’s a really good practice of trying to be present and mindful because you have

KATIE BEAN Katie Bean is a former newspaper and magazine editor who loves telling the

stories of businesses and great leaders. She is based in Kansas City.

WINTER 2022

PROFESSIONAL DEVELOPMENT

THE ORIGIN STORY THAT LAUNCHED AN INDUSTRY AAPL’s roots and the modern private lending industry can be traced to the Great Recession. by Kat Hungerford This article is reprinted with permission from the August 2021 edition of Originate Report.

t is 2009, and the Great

and their mortgage lending practices

federal government has passed

closures on the market gave rise to a

Recession is in full swing. The

came to a standstill, the glut of fore-

the Secure and Fair Enforcement

new wave of investors capitalizing on

and taken control of mortgage

ring a desperate need for capital.

for Mortgage Licensing (SAFE) Act

bottoming-out real estate prices—spur-

giants Fannie Mae and Freddie Mac.

Four investors saw the writing on the wall

Foreclosures are at an all-time high.

Bank bailouts are being approved right and left. And, Congress has just been presented with the initial version of what would become the Dodd-Frank Wall Street Reform and Consumer Protection Act. Risk is high, confidence is low, and only one thing is certain: Uncle Sam’s hammer is about to come down. In summary, it is an inconvenient time to be in the lending industry.

THE ORIGIN STORY

for institutional lenders and forecast the widening gap between borrower needs and banks’ ability and willingness to lend. Those four—Anthony Geraci of Geraci LLP, Jack Rollins of RCG LLC, and Wallace Groves and Tim Brickner of RBC Capital Markets—collectively committed $100,000 to create the National Hard Money Association. Next, they considered ideas about how to move the industry into the mainstream and ensure its continued viability. With the SAFE Act’s passage, hard money lenders for the first time fell under

As banks trembled at early rum-

federal regulators’ purview—and more

blings of sweeping regulatory reform

pervasive legislation was in the offing.

PRIVATE LENDER

A small group of hard money and service provider movers and shakers from across the U.S. huddled in a cramped meeting room at Caesars Palace Las Vegas. First to the chopping block was the “hard money” terminology. The phrase no longer accurately defined the industry’s business practices, and its con-

notations were less than positive after the Wild West lending atmosphere that snowballed into the financial crisis. Out of much discussion came a modern appellation for an ancient vocation: private lending. A new, self-styled name in place, the intrepid group next sought to learn from institutional lenders’ hubris; namely, that the wings of private lenders would be clipped and their operational gap welded shut absent a degree of self-oversight and adherence to established best practices. Identifying the need for structure was straightforward, but administering

it was something else entirely. The group acknowledged that endemic to the profession is that what allows for the demand gap—limited regulation— also makes private lenders’ wholesale identification next to impossible. The question became “How do we provide for the future needs of a trade that, by its very nature, is extremely decentralized?” Today, the group’s participants cannot name who originally put forth the idea, but by the meeting’s end, all attendees named themselves as inaugural members of the first and only (and newly retitled) national association pledging to safeguard the private lending industry. The American Association of Private Lenders (AAPL) was born.

LAUNCHING AN INDUSTRY From its small beginnings, but keeping pace with the aggressive expansion of the industry itself, AAPL has grown to become the oldest and largest trade association for private lenders. It has continued its history of private-lending industry firsts, some of which you may now recognize as trade standards: N ational Conference // Each year

since its debut, AAPL reconvenes at Caesars Palace Las Vegas to continue its mission of supporting best practices. From its humble beginnings, #AAPLANNUAL is today the largest national private lender gathering and continues to be the choice event among industry executives. The association also became the first to host a hybrid conference with both

in-person and virtual attendance, continuing its goal toward increasing inclusiveness and accessibility.

profiles with contact info, company description, images, and video.

C ode of Ethics // AAPL expects its

their marketing materials, members may use the association’s “Proud Member” insignia to publicize their standing. Importantly, AAPL traces the emblem’s usage to ensure only active members gain the benefit of affiliation.

members to adhere to a code of conduct above the minimum standard established by law. This ensures not only that borrowers, investors, and partners can trust members as an extension of the association’s unrivaled reputation but also that the industry can point to the Code—and AAPL’s complaint process—as proof that its internal checks and balances are more than adequate. Today, AAPL remains the public’s only mainstream avenue to report private lender ethics violations. M ember Directory // AAPL’s mem-

ber directory has gone through many iterations, but today it stands as the premier place for borrowers and investors to validate membership and find reputable partners. Visitors filter members by service area, business sector, loan type, and more. Members can create and update their own

M ember Emblem // Throughout

Trade Magazine // Private Lender is the industry’s quarterly source for the latest market trends, executive interviews, and deep-dive exploration of operations and strategy—all targeted at a specifically private lender audience. Available to the public at no cost in both print and digital formats, the magazine serves as a way for all practitioners—whether members or not—to keep up with best practices. G overnment Relations Committee //

Since its inception, AAPL’s Government Relations Committee has had a 100% success rate in blocking the passage of legislation that would prove harmful WINTER 2022

PROFESSIONAL DEVELOPMENT

to private lenders. The committee has defeated three business-purpose mortgage licensing bills in Florida, a 20% sales price tax on flips and later a commercial licensing bill in New York, a licensing proposal for self-serviced loans in Colorado, and a California bill that would have required mandatory COVID-19 foreclosure forbearance absent any proof of hardship. Federally, the Securities and Exchange Commission (SEC) cited AAPL’s comments in support of the expansion of the accredited investor definition, and the Committee is beginning to see traction in its Day on Capitol Hill advocacy efforts. AAPL stands today as the only trade association advocating nationally on behalf of private lenders. Trade Certifications // For members

looking to demonstrate their knowledge and commitment, AAPL’s Certified Private Lender Associate (CPLA) and Certified Fund Manager (CFM) designations are the only private lender trade-specific credentials. Taught by subject-matter experts and active practitioners, CFM is currently available online, with CPLA to follow by the end of 2021. AAPL continues to expand on the coursework with in-person training at its annual conference and select partner events.

I ndustry Awards // While AAPL’s

Excellence Awards model is now ubiquitous among private lender events, the honors program that recognizes a Rising Star, Service Provider and Lender Members of the Year, and Community Impact awardees is the gold standard for distinction among private lenders.

Q uarterly Benchmark Survey // Open

to any active private lending company,

PRIVATE LENDER

the quarterly survey is the first—and to date, only—mechanism of its kind to regularly poll practitioners on benchmark data like loan terms, foreclosure rates, and market-confidence assessments. Survey respondents receive an anonymized and aggregated insight report from the results, with AAPL using the data to support advocacy efforts and measure market change.

We are proud to be an industry trailblazer while maintaining a longstanding reputation for excellence, integrity, and inclusiveness. We look forward to many more years of supporting our members and the private lending profession. ∞

O nline Education & Resource

ABOUT THE AUTHOR

members access to everything from downloadable checklists, templates, and guides to educational video archives, a vetted service provider directory, and compliance center. The dashboard also serves as a central location for AAPL programs through which members can gain industrywide recognition.

KAT HUNGERFORD

B ackground Checks // AAPL is the

Kat Hungerford is executive editor

Portal // AAPL’s online dashboard gives

first private lender trade organization to offer company-level background checks—a process by which members can display a globally recognized verification badge on marketing materials and gain differentiation in the association’s member directory.

CONTINUING THE MISSION Throughout this lengthy journey of firsts, AAPL has held true to its inaugural mission: providing for the industry’s dedication to best practices, instilling oversight processes, and fighting regulatory encroachment. This commitment has safeguarded the private lending profession’s exponential growth and advancement into mainstream acceptance, demonstrating that its practitioners are organized and trustworthy.

of Private Lender magazine and

project development manager at

the American Association of Private

Lenders. She specializes in operations, project management, and marketing. Hungerford also acts as secretary for

the association’s Government Relations Committee, which serves as AAPL’s

advocacy arm in Congress and state legislatures.

AAPL is the oldest and largest national organization representing the private lending profession. The association

supports the industry's dedication to

best practices by providing educational resources, instilling oversight

processes, and fighting regulatory

encroachment. Find more information at aaplonline.com.

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OPER ATIONS ADVOCACY

Understanding the Entitlements Portion of Due Diligence by John Sherritt

Use a step-by-step approach to review and analyze a property’s discretionary entitlements before approving a loan on the property.

subject of the loan being contemplated but also to know the background and experience of the prospective borrower. Failures or deficiencies in due diligence on either the asset or the borrower can and will open the door to the fate of the Medici Bank, which liquidated in 1494.

If you work in the real estate indus-

that is still used to this day as a means

try, you have no doubt heard the

of “checks and balances” to ensure that

term “caveat emptor.” It means “let

errors in their records could be avoided.

the buyer beware.” But have you ever

To fully understand the elements of

heard of “let the lender beware”?

“Those that fail to learn from history are doomed to repeat it.”

WHAT ARE ENTITLEMENTS?

the loan request submitted to them, the

To understand it, we need some

Medici family, as Europe’s wealthiest

historical perspective.

private lender, developed loan under-

In the lending industry, that takes us

writing systems and procedures that

back to the Medici Bank of Florence,

As Winston Churchill wrote:

have evolved into what today we com-

The due diligence process begins once a loan application has been submitted and the private lender’s underwriting team has initially reviewed it. Following that initial

Italy, founded in 1397. At that time,

monly refer to as “due diligence.”

private lenders recognized the caution to

Simply put, due diligence equates to

“beware” of those who sought to borrow

the skill and process of “comprehensive

their money. The Medici family invented

understanding.” Fast forward to 2022, and

story” of the borrower and the project.

the accounting concept of double-entry

today’s private lenders need not only to

Following that interview, the private

bookkeeping known as debits and credits

fully understand the asset that will be the

lender typically sends the borrower a list

PRIVATE LENDER

evaluation, an interview with the borrower and their team is set up with the lender and their underwriting team to “hear the

of due diligence documents that must be

ments, the underwriting team must then

loan underwriting report before making

submitted for review and analysis. In the

evaluate the “conditions of approval”

a decision about the loan application.

world of acquisition and construction

relative to their costs and timeframes

loans for either commercial or residential

as they impact the project’s develop-

01 Determine jurisdictions for approvals

development projects, one of the most critical elements of the due diligence process is the underwriting team’s verification of the “Status of Entitlements.” In the real estate development indus-

ment plan. Then they must incorporate those costs and timeframes into the loan budget and terms to ensure the loan is adequate to enable the conditions of approval to be met by an assessment of

try, the term “entitlements” refers to the

the source and use of funds in the loan.

approvals given by a governing body,

Before a private lender approves a loan

either a municipality or county that has authority over what can and cannot be built within their jurisdiction. Although the exact rules and regulations are different in every state and local jurisdiction across the country, it’s safe to say that each one has its own rules and regulations that grant development rights.

on the property in question, a review and analysis of the status of discretionary entitlements must be completed. All codes, approvals, and conditions of approval must be included in the analysis. The primary objective is to ascertain if all discretionary approvals by municipal agencies have been acquired

These “development rights” are referred

and that agreements exist that provide

to as “entitlements.” In other words, the

reasonable guarantees the approv-

approval granted “entitles” the property owner to do X, Y, or Z on their property. In addition to the review of entitlement documents the borrower provides to the private lender, the underwriting team should first review, in detail, the “Entitlement Conditions of Approval,” with a focus on the expiration period of the entitlement approvals. The underwriting team should then conduct either in-person or online interviews with the appropriate members of the municipality’s departmental staffs, including the

als will remain with the property. A search of public records is required to validate that all representations by seller, engineer, and municipal personnel reflect the actual approvals received. The building rights provided by municipal approvals are instrumental in deter-

on land and development (county or city, state agencies, public utilities, etc.). If the property is in a county,

identify which city’s sphere of influence covers the property. Evaluate whether it can it be annexed to a city.

02 Obtain copies of the following: Tentative Map Conditions of

Approval, Development Agreement, Improvement Agreements, CC&R’s Zoning Code, Environmental Impact Report, Negative Declaration, etc. Review and examine all restrictions and, for each condition, the timeframe and the stage of development when condition must be met. Determine which conditions have been satisfied, and highlight any conditions required for the current status that have not been met.

03 Review all plans, municipal min

utes, and documents to determine which approvals have been received. Analyze the information and decide whether any remaining approvals

mining the property’s value, and their

require a discretionary approvals

existence and survivability must be

process. Summarize all approvals

evaluated in determining the suitability

required to obtain building rights and

of providing a loan for the property.

construct on the property. Identify

A STEP-BY-STEP APPROACH

planning department, the public works

the status of approval for each. NOTE: The procedures enumerated on the following pages provide only general

department, traffic department, and so on.

The private lender’s underwriting team

guidance for the examination of entitle-

Based on the confirmation of questions

should follow the due diligence steps

ments on the property. The components

and issues from those municipal depart-

below and incorporate them into their

of the report will vary from property to WINTER 2022

OPER ATIONS

property. In all cases, the procedures performed should identify and explain the approvals required and received.

04 Verify whether a tentative or final map exists on the property.

a. I f tentative, when does it expire? b. I f final, when do bonds and agreements expire?

05 Examine escrow and purchase

instructions. Determine which approvals are contingencies in escrow. Delineate the status of these approvals and, if not yet received, when they are expected to be approved.

06 Outline all building and devel opment restrictions, such as:

a. Building restrictions. b. A rchitectural restrictions. c. L ot size restrictions, setback requirements.

d. A ny pending moratoriums or development limitations.

e. W hether any prescriptive easements appear to be on the property.

f. Any obligation to grant additional easements.

g. P ublic or private rights of way.

h. E asements and rights of way requiring access for utilities and drainage.

i. O ther restrictions. 07 Identify the document where restric tions are found. Evaluate wheher restrictions can be amended or removed and, if not, whether they cause problems in development. For any easements or rights of way that exist, trace easements to the map of the property. For each easement listed, perform the following:

a. Obtain a copy of the recorded easement.

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b. Trace to the map of the property. c. D etermine whether the ease-

08 Ascertain the documents

and agreements that provide

ment poses any problems in

the development rights.

development of the property.

a. I s there a development agree-

d. D escribe the nature of the rights of way (i.e., if roads, are they improved, can they be vacated or moved, etc.?).

e. D etermine whether easements or rights of way are needed to provide access for utilities and drainage. If so, what is required to obtain

to provide any municipal facilities or maintenance services?

10 Review local jurisdictions as to the local attitude toward

ment? What is the governing

new development.

body? Determine what the

a. G overning body.

rights and obligations are.

b. I s there a vesting tentative map? If so, what are the rights and obligations?

09 Delineate the services provided by the local entity (e.g., police,

(i.e., acquire through eminent

fire, fire insurance rating, trash

domain, at what cost, etc.)?

pickup). Is the developer required

b. L ocal citizens. c. I s there a growth management plan? d. A re there any proposed growth initiatives (governing body initiated or voter-initiated)?

11 Evaluate process and requirements for construction. List and describe.

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OPER ATIONS

a. I s a homeowner’s association required?

b. I s there an architectural committee? Local citizens?

c. Have you obtained all relevant ordinances?

• Subdivision • Building • Park dedication • Underground • Zoning • Solar • Sprinkler requirements • Uniform Building Code (What year? Local amendments?)

d. A re there any unusual or unduly expensive local requirements?

12 Interview the local building

department regarding status and requirements for the property. Person talked with: __________

13 Evaluate project bonding require ments. Does the governing body require subdivision bonds? Will they accept cash? Will they accept a lender’s agreement in lieu of bond? Must lender be local or a special type? Will the governing body allow reasonable partial releases of subdivision collateral as work progresses?

14 Outline zoning and requirements:

General plan zoning, present zoning, potential zoning changes. If GPA is necessary, when may city process an

PRIVATE LENDER

amendment? Will there be resistance

tures, other physical features, or loca-

to rezoning or GPA from neighbors

tions on the land known or believed

or the governing body? Is there a

to have historical significance that

specific plan for the area? Are there

could block future development)?

any affordable housing requirements?

A re there any trees or ecologically

Are there any credits available? Cost?

sensitive areas that may affect development of the area? Will the city

15 Interview the local planning

require donation of land or cash or

department regarding status

cash in lieu of land for open space,

and requirements for the prop-

parks, schools, sewers, or recreation?

erty. Person talked with:

18 Determine name(s) of school district. Is

16 Interview the local engineer

there a school impaction problem? Has

ing department regarding status

an impaction fee or other school fees or

and requirements for the property. Person talked with:

ABOUT THE AUTHOR

Is land subject to traffic generation levels? Fees/costs?

17 Review for any special considerations. Is land in a designated redevel-

opment area? Can we get special zoning, financing, or expediting? Is land in Coastal Zone, subject to Coastal Commission? Is any part of land in a geologically hazardous area? What portion or percentage? Is land being considered for: park? school? freeway? other public use? Will we receive credit toward open space requirements for our recreational facilities? Is land in any special

credits been established? How much? If not, is one under consideration? How much? Are existing facilities permanent or temporary? If temporary, source of funding for permanent facilities?

19 Evaluate subdivision pro

cess and prepare a timetable and critical path schedule:

• How long to receive approval of tentative map?

• How long to have map ready to record?

entitlement industry in both Canada and the U.S.

With his master’s degree in city

planning, Sherritt began his career in the public sector working for

a regional planning commission.

Following that experience, he became the director of development services for two multi-disciplinary civil

engineering firms, first in Edmonton, Alberta, Canada and then in San Diego, California.

His career path included working for

two joint-venture capital firms in San

Diego, providing equity capital to the residential homebuilder industry in

industry with the capital markets,

Plan Amendment?

• O ther subdivision fac-

Has any portion of the land been

record in the land use design and

• How long for General

preserve, fire hazard area, earthquake

Basic Emergency Planning Zone?

Advisors. He has a 30-year track

Southern California. Combining his

• How long for annexation?

ardous dump site, nuclear power plant,

John Sherritt is principal of Sorrento

• How long for rezoning?

zone, such as national forest, wildlife fault zone, designated flood area, haz-

JOHN SHERRITT

tors to be considered?

20 Summarize the findings, describing

experience from the civil engineering which procured both debt and equity financing for substantial residential

development projects, Sherritt brings a wealth of knowledge to the design, entitlement processing, debt and

equity procurement capital advisory

services offered by Sorrento Advisors.

all pertinent information obtained. An opinion must be prepared

classified as a historic landmark, or

regarding the status of entitlements

historically or archaeologically signif-

on the property and the guaran-

icant site? If not, are there any struc-

tee they will remain in place. ∞ WINTER 2022

ADVOCACY

GRASSROOTS EFFORTS MAKE INROADS AGAINST LEGISLATION IMPACTING PRIVATE LENDING Spearheaded by our Government Relations Committee, AAPL wrapped up its third year of legislative activity with some definite wins. by Kat Hungerford

s we continue our grass-

no-holds-barred and transparent

And you know what? That’s OK. You’re

and build strategies for

and where we’re going from here.

ing industry. Until elected officials on

roots mobilization efforts

how and when we talk to policy-

makers, we wanted to provide

you—our constituents—with a frank, 66

PRIVATE LENDER

accounting of what’s happening

First, let’s be honest. Almost no one cares about government relations until legislation affects them personally.

running a busy business in a boomCapitol Hill or state legislators propose something that’s going to cause your world to blow up, there’s not

enough time in the day to put energy into pulling on yet another thread.

A GRASSROOTS APPROACH Grassroots mobilization is a winner for the industry, but it isn’t challenge-free. There are billions of lobbying dollars floating around Capitol Hill. Although hiring lobbyists can be effective in many cases, the price tag to get any kind of traction is extremely high, especially since our interests/efforts are largely single-issue due to the size and exposure needs of our industry. Essentially (as others in the industry have found), you can spend a lot of money to get very little in return. As we moved forward with legislative advocacy efforts, our gut told us we’d get further and gain the early wins we needed by focusing on low-risk, high-reward grassroots outreach. We were right. Grassroots advocacy has: Ensured we focus on what matters to our

constituents (you!). If we can’t mobilize enough interest in outreach efforts, it’s a solid indication this isn’t the fight for us.

A llowed us to begin building relationships and a name for ourselves and our constituents with legislators. When legislators can put a face to an organization or request, you start getting the kind of insider information that can redirect and reinform your entire strategy. See how this played out in our “issues” section that follows. P rovided a platform for our constituents

to tell their stories, making the legislation personal and the impacts believable. Framing issues and outcomes

in context and having the message come from directly impacted constituents gives issues an immediacy and urgency they might otherwise lack (at least in the minds of policymakers). Further, we were able to talk shop with staffers about a strategy for our overall approach during our annual Day on the Hill, confirming our gut was right on the previous counts and providing the following insights as well: Most Capitol Hill legislators will

sit up and listen when their staffer’s phones start ringing off the hook and their inboxes start filling up, especially on niche issues.

W hen these niche issues are shown to

simultaneously impact multiple sectors (e.g., small business, local economies, local trade jobs, and housing), that really gets policymakers’ attention, regardless of their party affiliation.

Targeted efforts, like organizing local

than one staffer say they remembered scheduling with me before COVID

caused us to cancel AAPL’s 2020 Day on the Hill, and they allowed me to

“jump the line” to get in front of key staffers for our 2021 meetings.)

W hen your request is more than just

“vote yes” or “vote no” on a bill, you will get much further with staffers. Proposing specific legislation (e.g., suggesting the policy language, referencing

the statutes modified, and essentially doing the lion’s share of the legwork), produces a better result than making a nebulous, open-ended request.

Although adopting a grassroots approach has been a strong step toward achiev-

ing our goals, it has its challenges.

T racking ROI is next to impossible. How many people in our network

called/emailed their representatives to Save Reg D? Was the subsequent

removal of the pertinent sections so

constituents to start a grassroots campaign to contact their legislative representative when that representative is a potential swing vote, can be as effective as broader strokes in terms of the result desired.

quickly after our mobilization due

B road grassroots campaigns are

your issue stand can be difficult (made

effective when the goal, in addition to achieving a particular result on an issue, is to educate policymakers and “become more known” in general.

D oors may open more easily when you

are respectful of staffers’ time, organized, and direct about your agenda. Remember, staffers talk, so reputations are immediate and sticky. (I personally found this to be true. I had more

to our outreach, or were we lucky?

C ongress and state legislatures are

insular and “Who’s Who.” If you’re not

already known to them, gaining signifi-

cant entry or figuring out where you and worse by partisan politics’ tradition of

creating significant black boxes). That’s

why so many organizations go the lobbyist route: It’s easier to pay someone who already has a foothold to talk for you. M oney speaks. For grassroots efforts to connect with the money side of

things, constituents need to (1) donate, (2) withhold donations, or (3) donate

to the opposition. It’s indirect at best. WINTER 2022

ADVOCACY

Although we are aware of these challenges, we have found true success with a grassroots approach. We have a 100% track record of wins since our first opposition effort, which was to prevent private lender mortgage licensing from coming to Florida in 2017. Grassroots is here to stay, even as we continue to look for ways to mitigate its limitations.

WHY WE ADDRESS STATE ISSUES In 2021, we got involved with several state-level issues and directly prevented: New York from requiring a license to

transact a business-purpose loan.

C olorado from requiring a license

to service (including self-servicing) business-purpose loans.

Although state issues may seem singular, we always emphasize the snowball effect such legislation has historically had: What is adopted in one state, especially when the issue concerns licensing, has a way of spreading. For this reason, we reach out to our entire network, even on state issues. Although your stake in an issue may be nonexistent, if we lose, it may not stay that way.

AN INSIDE LOOK AT FEDERAL ISSUES We also worked on several issues at the federal level, which we brought to our annual Day on the Hill, which was virtual this year. These issues have provided the basis for much of our learning and strategy going forward, so we’ve summarized them here—along with the key 68

PRIVATE LENDER

(and surprising!) insights and action items that have come from them. Save Reg D. Our most important legislative battle to date came out of left field as part of the federal Responsibly Funding Our Priorities (RFOP) reconciliation package.

In late September, the House Ways and Means Committee approved a comprehensive tax bill that, among other tax-generating proposals, included numerous restrictions that would have effectively killed the universally popular “Regulation D.” Congress adopted Reg D in 1982 to facilitate capital formation, particularly for small businesses, while also protecting investors. According to a 2020 Securities and Exchange Commission (SEC) report to Congress, since 2009, Reg D offerings have driven the success of America’s small businesses, with 64% relying on private placements to raise capital. Reg D has raised $13.576 billion over 242,070 offerings, while protecting investors with 93% of those offerings, including financially savvy accredited investors. Reg D offerings during that period saw only 221 related civic complaints submitted to the SEC. Many of the RFOP proposals would have had far-reaching impacts, with certain provisions promising to upend any businesses that use self-directed IRA (SDIRA) funds under the status quo Regulation D provisions, including private lenders and funds. Sections 138312 and 138314 of RFOP: P rohibited almost all SDIRA invest-

ment into private offerings.

P rohibited SDIRA account holders from

investing in a business if they or a fam-

ily member is an officer of the business or they own less than 10% of the company. Current rules have no limitation on officer status and set the ownership threshold at greater than 50%. R equired SDIRA account holders who presently have assets invested into private offerings and/or prohibited businesses to liquidate their positions within two years. As a result, private lenders and funds would have faced significant hardship in finding new sources of capital, while simultaneously struggling to liquidate current IRA investments within the twoyear time horizon when that capital is deployed into illiquid loans. Confidence in the industry’s continued viability would have nosedived, likely leading to a freeze on investment from other capital sources, similar to how the capital markets froze at the onset of the coronavirus pandemic. These impacts would have rippled through ancillary and dependent industries—from the real estate investors that depend on private real estate loans and the local jobs those loan funds support to the housing market and end homeowner, tenant, or landlord. With such far-reaching and unwelcome impacts not only to our own industry but also to small businesses nationwide, we expected far more publicity around the proposals. But they mainly earned attention only from IRA custodians, their clientele, and the American Association of Private Lenders’ network. Although we thought this was a good sign (maybe others knew something we didn’t), what we found during discussion with legislators and the bill’s sponsors about

why these sections had made it into

sections 138312 and 138314 raised tax

Democratic policymakers anticipated

the bill only furthered our concerns.

money to fund the bill’s spend.

IRA provisions, when passed together,

What we found was a mix of misin-

Republican staffers were surprised to

would prevent high-net-worth individu-

formation on some of the facts behind

learn these sections did not directly

the provisions, coupled with con-

raise tax money and instead forced

meant to benefit the middle class.

f licting ideologies about why these

SDIRA investors to simply move their

sections belonged in the bill to begin

money from private to public offerings.

Sections 138301 and 13802 of the RFOP

with. This meant that any opposition

Democratic policymakers, meanwhile,

effort needed to take a multi-pronged approach to change minds, further complicating our grassroots strategy.

seemed to feel the additional restrictions on SDIRAs would make the investment

als from abusing an investment vehicle

attempted to directly prevent high-networth individuals from participating in tax-deferred investments by prohibiting further contributions and forcing

vehicle less palatable to wealthy individu-

early minimum distributions if the

Legislators on both sides of the aisle,

als, who would then forgo putting money

regardless of their agreement with the

into SDIRAs entirely in favor of other

contribution plans exceeded $10 mil-

bill in part or in its entirety, thought

(presumably taxable) opportunities.

lion. The idea that wealthy individuals

total value of their IRA and defined

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ADVOCACY

were abusing the SDIRA system origi-

class account holders. Democratic bill

in nearly every offering. Removing these

“Peter Thiel Effect,” which claimed

SDIRA accountholders affected by the

individuals’ ability to diversify their hold-

nated from a ProPublica article on the Thiel turned his SDIRA account into a “$5 Billion Tax-Free Piggy Bank.”

sponsors also believed “middle class”

bill should not be investing in private

offerings in the first place and needed

Democratic legislators in our meetings

more protection because they do not have

138314 dovetailed nicely to make wealthy

diligence and make informed decisions.

more hassle than it would be worth for

the bill’s stated purpose of raising taxes

thought sections 138301, 138302, 138312, and

the investment savvy to complete due

individuals’ investment into SDIRAs

Although this reasoning diverged from

tax planning purposes. However, sec-

to help fund spending, we were able to

tions 138312 and 138214 (the Regulation D-modifying provisions) would likely

have a similar cooling effect for middle

articulate Reg D’s infinitesimal complaint rate of 0.001243% and the participation

of financially savvy accredited investors

opportunities, we explained, would hinder ings outside of Wall Street while simultaneously paralyzing already COVID-impacted small businesses nationwide. One week after our Day on the Hill meetings, a contact on Capitol Hill

notified us that sections 138312 and 138314 were removed from the new

draft of the bill, even while other IRA restrictions remained. That contact

expressed surprise they were removed so quickly as the sections were widely

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(if erroneously) viewed as “non-taxincrease payfors” the bill needed. While it is too soon to label this as a definite win due to the ideology motivating several of the provisions, as of the time of this writing, it appears our grassroots efforts had traction. Beyond our Day on the Hill meetings, our network placed hundreds of calls and sent emails to representatives about the potential unintended damage the bill would do to American small businesses. HMDA and the CFPB. Our meeting

with the Consumer Financial Protection Bureau (CFPB) leaders was full of surprises. It seems the 2018 Home Mortgage Disclosure Act (HMDA) updates that require private lenders to furnish Loan Activity Reports (LARs) for their non-consumer loans signaled to the CFPB that its purview had fundamentally expanded. Previously, AAPL and industry leaders viewed HMDA’s 2018 implementation of a divergent definition of a mortgage loan as an oversight—a result of Congressional legislators’ less-than-detailed language/ research when crafting the act. HMDA uniquely defines a mortgage loan as “an extension of credit that is secured by a lien on a dwelling.” The precedent—and more widely used definition (such as found in the Truth in Lending Act)—characterizes a mortgage loan as “any loan primarily for personal, family or household use that is secured by a mortgage …” thereby exempting business-purposes, non-consumer loans. According to CFPB leadership (we’ve been unable to find a clear record or explanation of such mandate at consumerfinance. gov), the 2018 HMDA definition change

means the CFPB is now charged with monitoring investment into communities, even when that investment is not via a consumer financial transaction. Meanwhile, the agency is not authorized to (and, therefore, does not) track most other types of community investment. We entered the meeting hoping to reach consensus that, due to bad policy language, the CFPB was erroneously collecting data on business-purpose transactions that would in turn skew their consumer transaction reporting. While the discussion ruled that hope out, there were a few key takeaways:

01 CFPB leadership was amenable to

the idea of revising/streamlining LAR fields to be more applicable to business-purpose loan transactions, allowing for cleaner data, clearer identification of consumer versus non-consumer transactions, and less burdensome reporting for lenders.

02 For the first time, our industry was

able to create dialogue with CFPB leadership. This opens a path forward for continued change, such as the CFPB’s post-meeting Nov. 16 launch of an open comment period for HMDA to evaluate “institutional coverage and transactional coverage; data points; benefits of the new data and disclosure requirements; and operational and compliance costs.” All items were discussed in-depth during our meeting, but we can only speculate how much, if any, influence we had on the comment period’s launch/subject matter.

03 Knowing why the CFPB views

business-purpose loans as falling

within their mandate (beyond “the law says so”) allows us to enter future dialogue better equipped, insomuch that while the CFPB may wish to track community investment, the data it gathers is incomplete at best, while creating a significant operational burden for smaller lenders. As of the time of this writing, our Government Relations Committee is working on the CFPB’s request to submit recommendations for revised LAR fields to our Bureau contact. We will also be responding to their public request for information. Bankruptcy Regulation. We met with

head staff from both the minority and the majority chairpersons of the Senate Judiciary Committee to discuss reforming Single Asset Real Estate (SARE) cases. SARE is a popular bipartisan effort to prevent abuse of the nation’s bankruptcy protections. It requires borrowers classified as SARE cases to fulfill heightened requirements to avoid case dismissal, and it ends foreclosure’s automatic stay because of active bankruptcy proceedings. We requested the following action: U pdate the definition of SARE (11USC 101(51B)) to include 1-3 family residential real estate when the debtor is not an individual, or the property is encumbered by a non-personal/family use mortgage. A dopt legislation that requires debtors to self-identify as a SARE case (bankruptcy forms already include the checkbox to self-identify, but it is optional), with penalties for not doing so. U pdate 362(d)(3) to require an automatic hearing 14 days after petition WINTER 2022

ADVOCACY

“...One of the largest battles we face when advocating for lender-friendly legislation: Congress’s perception of borrowers as individuals needing additional protection and leeway due to a lack of financial savvy, and lenders as ‘big business’ preying on the

between two small businesses as core elements of their respective business models. Our next step on this front is to craft specific policy language for our contacts on Capitol Hill so they can propose them to Congress. Although neither party is categorically opposed to our request (a win on its own!), because this is not a hot-button issue, legislators are unlikely to take any action unless we do the legwork for them. ∞

‘little guy.’” filing, where the debtor must show why the automatic stay on foreclosure should remain in place. The hearing may be foregone if the debtor shows it has started to pay the non-default-rate interest; and, if a Chapter 11 filing, the debtor convinces the court they will file a reasonably confirmable plan within 90 days. Failure to file would automatically grant relief from stay. A dopt legislation that prevents a

debtor from refiling for bankruptcy within one year of SARE case dismissal or relief from automatic stay.

Unsurprisingly, we received no pushback from the minority staffer on the Senate Judiciary Committee. The majority Judiciary Committee policymaker seemed open to our recommendations, with slight pushback on why the onus should be on the debtor to self-identify as a SARE case when the lender’s own due diligence documentation should prove SARE status in court. Our explanation was that the issue is not that lenders lack due diligence/documentation of the debtor’s SARE status, but that requiring the courts to bear out the 72

PRIVATE LENDER

status when the debtor already knows their bankruptcy classifies as such (and self-identification requires only checking a box on bankruptcy filing forms they are already filling out) is a waste of court resources and ultimately places the debtor and lender in a worse financial position. We also found the minority Judiciary Committee does not understand the motivation for why a debtor will file bankruptcy if they have no intent to follow through and/or will not be able to meet the timelines and documentation required. They agreed that delaying the inevitable ultimately places both debtor and lender in a worse financial position, but they couldn’t figure why a debtor would file bankruptcy in the first place. This lack of understanding reaffirms one of the largest battles we face when advocating for lender-friendly legislation: Congress’s perception of borrowers as individuals needing additional protection and leeway due to a lack of financial savvy, and lenders as “big business” preying on the “little guy.” We are slowly turning the tide by emphasizing that in our sector, these are private loans made

ABOUT THE AUTHOR

KAT HUNGERFORD Kat Hungerford is executive editor of Private Lender magazine and

project development manager at

the American Association of Private

Lenders. She specializes in operations, project management, and marketing. Hungerford also acts as secretary for

the association’s Government Relations Committee, which serves as AAPL’s

advocacy arm in Congress and state legislatures.

AAPL is the oldest and largest national organization representing the private lending profession. The association

supports the industry's dedication to

best practices by providing educational resources, instilling oversight

processes, and fighting regulatory

encroachment. Find more information at aaplonline.com.

WINTER 2022

CONFERENCE RE VIE W

12TH ANNUAL CONFERENCE HIGHLIGHTS E

ach year, t he A meric an A ssociation of Private

Lender s hos t s t he indus t r y ’s larges t conference,

lauded for it s second-to - none “cult ure of collaboration” and abilit y to draw decisionmaker s, all while covering key subjec t s impac ting t he profession bot h today and in t he fut ure. But don’t jus t take our word for it . On t he following pages, check out conference s tat s, photos, and tes timonials.

PRIVATE LENDER

2 D AY S

25+ SESSIONS & AC TIVITIES

650+ AT T E N D E E S

65 SPONSORS

6,200+ A PP CON N EC TIONS M A DE

A ttendees at our over-capacity VIP Networking Reception the evening before the conference enjoying complimentary drinks and hors d’oeuvres on the OMNIA’s private terrace.

WINTER 2022

CONFERENCE RE VIE W

Eddie Gant and the Jet Lending team kick off our 12th Annual Conference with a special

appearance from Elvis, the industry’s newest private lender and member of AAPL.

Paul Jackson, principal of title sponsor

Residential Capital Partners, on the State

of the Market panel during breakouts. The

conference featured three main stage and 17 breakout sessions across two days, making

this our most education-packed event ever.

PRIVATE LENDER

During their respective sessions, Ray Sturm, CEO of title sponsor Alphaflow, and Ted Jones, Ph.D., chief economist at Stewart Title Company and guest speaker for title sponsor Residential Capital, sponsors set the (main) stage and tone of the conference for looking ahead to 2022.

WINTER 2022

CONFERENCE RE VIE W

E arly arrivals to #AAPLANNUAL enjoy pre-event networking with LendingWise at MGM’s Topgolf.

A s a woman-led business ourselves, we were honored that our 12th Annual Conference included the inaugural Women in Private Lending Luncheon.

PRIVATE LENDER

A ttendees and sponsors keep the Exhibit Hall packed even during standing-room-only sessions.

T he runaway attraction, Power Networking (first brought to you by AAPL), continues to be an annual hit as participants line up to speed network, spurred along by The Mortgage Office.

A ttendees unwind from a packed day in the conference space with The Prospera Networking Reception in the Exhibit Hall.

WINTER 2022

CONFERENCE RE VIE W R ight to left: Ben Fertig,

Constructive Loans;

Eddie Wilson, American Association of Private Lenders; Alex Offutt, Constructive loans.

A APL’s Official After-Party, sponsored by Andelsman Law, Constructive Loans,

Liquid Logics, and Geraci LLP, close out official conference activities at the Water Grill

with a swanky seafood soiree featuring coast-to-coast

oysters, a luxury selection of fine wine, and more.

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WINTER 2022

TESTIMONIALS

O ur A n nu al C on f e r e n ce i s l au de d by t h e in du s t r y ’s W ho’s W ho a s t h e s in gl e b e s t eve n t f or p r i v a te l e n de r e du c a t ion, n e t wor k in g , a n d v alu e. Rea d w h a t l ea de r s f r om ac r o s s t h e s pace h a d to s ay ab ou t our 2021 eve n t .

One thing that makes AAPL so unique (and I think this is

driven by AAPL’s managing director, Linda Hyde, in particular) is a culture of collaboration. The focus of AAPL’s annual conference stays on clients and the amazing

private lending community, on working together and

helping each other. When that emphasis starts from the top, that permeates the conference, making conversaR AY S T U R M Alphaflow

tions much more open and eliminating posturing that is ultimately a waste of time.

Yieldi has been a member of AAPL since launching our

company 3+ years ago. With the pandemic not providing for many in-person opportunities at the early stage

of our growing business, we realized that attending

the AAPL conference was a critical part of our growth and brand recognition in the space. After planning

for the conference for six months with new literature, J OS H LLOY D Yieldi

videos, and a booth, it did not disappoint! We were so incredibly impressed with the balance of content and

the quality of the vendors in the exhibit hall. During the course of the main day, our team had time to meet with the majority of the other vendors exhibiting as well as

PRIVATE LENDER

“We spent the conference talking about 2022 plans:

lenders and investors are excited to do more together

and to evaluate opportunities through the lens of trusting partnership. This is ultimately what makes AAPL so

special and why our entire company is so attached to the association, its leadership (amazing job, Eddie Wilson,

Linda Hyde, and Kat Hungerford) and the actual experience itself. Amazing conference!

—Ray Sturm, CEO, Alphaflow 4-Year Title Sponsor

meet with other lenders and brokers who attended the conference. Just being in person brought a connection with the folks we met with. And in the days since the conference, we have already been working on deals that we would not have otherwise seen. Yieldi had the opportunity to speak on the affordability housing panel and while we did speak, we learned a lot from the other panelists as well as the folks who attended our panel. We look forward to 2022 and know it will be even bigger and better! —Josh Lloyd, Co-Founder, Yieldi First-Time Sponsor

The A APL Conference is such a valuable event for the private

lending industr y. From the education they provide to the industr y

professionals they connec t, their event is something you won't want to miss. Whether you are an experienced lender/investor or are

looking to learn more, this conference has a place for ever yone.

Andelsman Law is grateful that we got to speak at and sponsor this event. We made many valuable and new connec tions that will be essential for growing our business. Thank you for producing this L A R RY A N D E L S M A N Andelsman Law

conference for our industr y! A APL is the leading association for pri-

vate lenders nationwide and we highly recommend get ting involved. —Larry Andelsman, Esq., Founder & Principal, Andelsman Law First-Time Sponsor

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WINTER 2022

TESTIMONIALS

The AAPL Conference is clearly the

Super Bowl of private lending. They’ve built a tremendous brand that is

respected in the industry, and it’s shown with their continuous growth.

—Brett Al-Azzawi, National Lending B R E T T A L - A Z Z AW I

Experts First-Time Sponsor

National Lending Experts

This was my seventh AAPL conference, and I have to say thank you to Linda, Kat, Eddie, the rest of the AAPL team, and all of the committees. This was the biggest and most successful AAPL conference ever. I know I say

KEVIN KIM

ing conference of 2021. The exhibit hall was constantly bursting with energy, and I met so many new faces,

including lenders, brokers, and developers. The AAPL conference is the best way to conclude the calendar

this every year, but the AAPL team and membership

year, but this year it set the tone for 2022.

really stepped it up to new levels. I go to a lot of trade

—Kevin Kim, Esq., Partner, Geraci LLP

shows, and I have to say, this was the best private lend-

Founding Sponsor

Geraci LLP

We have been so thrilled to work alongside [the AAPL

is booming. The event was bigger and better than ever

the private lending industry. The space has evolved so

incredible speaker lineup to the packed exhibit hall and

team] to help promote and further AAPL’s mission in

much over the years and we attribute so much of the

legitimization and professionalization of the space to

AAPL and all the association has been able to accomplish. Not to mention, AAPL has been such a great E R I C A L AC E NTR A RCN Capital

PRIVATE LENDER

partner to RCN too.

“After the year we had in 2020, the 2021 AAPL Annual

Conference was proof that the private lending industry

in every aspect. From the dynamic content and the

engaging conference networking events, it was truly

one for the books. We were able to make some great

connections and even get deals going onsite, so there is no doubt this event will pay dividends for RCN. Another phenomenal event by AAPL!

—Erica LaCentra, Chief Marketing Officer, RCN Capital 7-Year Sponsor

Being a new organization is never easy. Especially a new

I had the privilege of spending quality time with key

a member of the American Association of Private Lend-

and Craig. This group of professionals are incredibly

organization in the private lending space. We have been ers since our inception, and the organization has given us more than we could have ever anticipated.

We are very fortunate to be growing at an incredible

pace. Being so impressed with the AAPL, we thought B RYC E M A LO N E A xylyum

it would be beneficial to include additional members of our executive team, including Chief Legal Officer

Rachel Packer, Director of Capital Markets Jane Petroff,

members of the AAPL team, including Kat, Linda, Eddie, busy, and despite that fact, they each made it a point to spend time with each member of our team. They

even took it a step further and introduced us to AAPL

members we had not the pleasure to meet prior. These

professionals include Eddie Wilson and Craig Johnson, who both took the time to have in-depth conversations with me one-on-one.

Product Development Manager Halli Schermer, and our

I cannot express my appreciation enough to the

The opportunity to learn in such a supportive and

are doing for the private lending community. We look

Director of Media and Communications Lauren Lorey. professional environment was very important for our

team, and we are pleased that we were able to share the experience with other members of Axylyum Charter. This event afforded us a platform to experience all

American Association of Private Lenders and what they forward to expanding our relationship and look forward to future events.

—Bryce Malone, Axylyum First-Time Attendee

aspects of the private lending community. The entire show, including the booths, receptions, networking,

and educational forums, were exceptional. Our team

left the event excited, informed, and impressed—all of which I credit to AAPL, the amazing staff, and the level of quality speakers presented at each forum.

The AAPL conference creates a unique environment

to connect with industry insiders. Seeing firsthand the challenges they are up against offered me the best

chance to spot opportunities in the marketplace. The

speakers and planned topics presented insightful perspectives that you just can’t find elsewhere. —Chris Ragland, Ragland Realty C H R I S R AG L A N D

9 Year Attendee

Ragland Realty

WINTER 2022

AWA R D S 2022 E XC E L L E N C E AWA R D N O M I N AT I O N S O P E N R e c o g n i z e a p r i v a t e l e n d i n g p r o f e s s i o n a l w h o e l e v a t e s t h e i n d u s t r y.

A APL champions the private lending industr y

Our Excellence Awards showcase peer-nom-

Year, Rising Star, and Community Impact award

finance, safeguarding the industr y’s

resources to solve problems, kick-start innova-

by more than 1,200 unique voters—at our 12th

mission, we recognize those who strive to

as a viable alternative to conventional

inated AAPL members who leverage their

reputation and future grow th. As par t of that

tion, and improve their communities.

Annual Conference.

2021 saw 13 nominees across our Lender Mem-

Nominations for our 2022 awards are now open

elevate the profession.

ber of the Year, Service Provider Member of the

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PRIVATE LENDER

R I S I N G S TA R Rising Stars are members who have accomplished outstanding personal growth in their companies during the past year.

2 0 2 1 R I S I N G S TA R His Nomination

// “Doug has gone from supervis-

What He Has to Say About It

// “This award is a tremen-

ing loan officers to becoming a strategic partner

dous honor and very appreciated by everyone at Housemax.

private lenders in the country. The company has

ant to me, and I am very grateful for the recognition. This is

leadership. He’s one of the true industry stars.”

what will be a record-setting year in 2022. We are coming

and CRO of HouseMax, which is one of the top

Knowing the private money world is watching us is import-

achieved that status due in no small part to Doug's

tremendous steam as we finish up our best year and roll into

—Ray Sturm

for everything that can be earned, and we won’t stop until we are the largest lender in the country.”

DO U G RO B E R T S HouseMax

CO M M U NIT Y IM PAC T This award honors personal commitment to improving local and/or private lending communities through volunteering, development programs, or other civic efforts.

2 0 21 C O M M U N I T Y I M PAC T AWA R D E E His Nomination

// “Raul specializes in fix-and-flip

member for many nonprofits and recently established

sional colleagues that also were nominated in this special

his own 501(c)(3), the Avfund Family Foundation. His

community volunteerism has positively contributed to the livelihood of many underserved families attaining The Av fund Group

// “It is a humble honor

to receive the 2021 AAPL Community Impact Excellence

underserved communities. He serves as a board

R AU L AV I L A

What He Has to Say About It

funding and in rehabbing blighted properties in

the American dream of homeownership. Raul is a

strong advocate of empowering youth and individuals to expand their knowledge, advocate for civic safety, and take action on social issues.” —Liz Soto

Award. I would like to congratulate my AAPL profes-

category. I have always felt the calling to voluntarily serve

communities in various leadership capacities. It brings me

joy to be part of community advocacy, witness underserved families attain their American dream of homeownership, empower youth to make right choices in life and see

families thrive in their redeveloped communities. I am very grateful to be an AAPL member and to unite with my AAPL professional colleagues with an entrepreneurial spirit and leadership. Thank you.”

WINTER 2022

AWA R D S AAPL MEMBER OF THE YEAR 2021 SERVICE PROVIDER MOT Y His Nomination

// “Joseph co-founded Mortgage Automator in

2019, spurred by his 16-year career as a private lender. Since then,

Automator has been helping hundreds of private lenders streamline, automate, and grow their businesses. More than $10 billion worth of

loans have been funded through the system, with more than 100,000 auto-generated documents that have saved mortgage professionals thousands of hours. Joseph continues to advance the vision of

J OS E PH FOO K S

Mortgage Automator

Mortgage Automator, bringing disrupting leading-edge technology to private lending, an industry long overdue for a shake-up.” —Tatiana Caciur

What He Has to Say About It

// “I am honored

to be a member of AAPL and extremely grateful for everything the association has done for

Mortgage Automator. AAPL 2019 was our very first U.S. trade show, so to win the award just

two years later is very humbling. As a company

that is paving a new way in the industry, the recognition this award brings to us tells us that we

are doing something right. It inspires us to keep on innovating and raising the bar.”

SEARCHING FOR CONTEXT? Participate in our quarterly private lender data survey to gain complimentary access to the AAPL Market Insight Report. The Report aggregates survey responses for insight into portfolio volume, origination metrics, delinquency rates, loan and collateral details, confidence assessments, and more. Sign up today at aaplonline.com/survey.

PRIVATE LENDER

AAPL MEMBER OF THE YEAR 2021 LENDER MOT Y His Nomination

// “Bill Tessar, president of Civic FS, has

with transparency and empathy through the pandemic,

shoulder to shoulder with fellow AAPL members who are

to the benefit of all industry personnel. He has provided education, guidance, and resources for all. I believe he exemplifies the AAPL mission.”

Civic Financial

// “Fostering the private

lending community is something I am passionate about, so

cifically in private money lending. He has communicated

W I LLI A M T E SSA R

What He Has to Say About It

an abundant knowledge in the mortgage industry, spe-

—Kendra Rommel

to be recognized by AAPL is a true honor. I am proud to be dedicated to our lending space with a driving force and

commitment to push our industry to a higher plateau. 2021 has taken CIVIC to new heights, and it’s an absolute privi-

lege to lead our CIVIC team and contribute to the progress we are all making together.”

Services

MEMBERSHIP ISN’T EXTRA. IT’S THE FOUNDATION OF EVERYTHING. AAPL membership is the standard among private lenders and the foundation supporting the industry’s viability and growth. We drive education via a multitude of resources, shield reputation by enforcing standards of practice, and safeguard legislative interests nationwide. Join the oldest and largest association providing for private lender education, ethics, and advocacy at aaplonline.com/join.

WINTER 2022

PRIVATE LENDER

WINTER 2022

RESOURCE GUIDE

RESOURCE GUIDE If you’re looking for a service provider who has real experience working with private lenders, the Private Lender Resource Guide is your starting point. In each issue, we publish a cross sec-

lenders they have previously worked with

keep an eye on this publication for future

tion of service provider specialties.

and reviewing their product offerings.

updates, and check out our magazine

These service providers do not pay to be

AAPL members can access all service

archive at aaplonline.com/magazine-ar-

included. Instead, we vet them to ensure their expertise by talking to private

WINTER THIS ISSUE!

providers online at aaplonline.com/

chive. Then consider joining AAPL to

resource-guide. If you’re not a member,

support this and other association efforts!

SPRING

SUMMER

A ccounting

Appraisers & Valuations

Funds Control

D efault & Loss Mitigation

C apital Providers

I nvestor Reporting Portals

D ata & Metrics

L oan Origination Services

L egal Warehouse Lenders

Lead Generation N ote Buying/Selling

L oan Servicing L oan Underwriting

FALL

D evelopment Cost Estimates Education Fund Administration M arketing P roperty Insurance

Want in? Nominate yourself or a company you’ve worked with at aaplonline.com/resource-guide-nominations.

PRIVATE LENDER

Indicates AAPL Membership

ACCOUNTING ATM PROFESSIONAL SERVICES, CPA P.C.

w ww.atmcpas.com (301) 947-2860 Products & Services // Advisory Services: Governance, Risk and Compliance.

Business Services: Small Business Accounting; Payroll; Par t-time CFO Services; Audits, Reviews, and Compilations; Bank Financing; Business Valuation; Strategic Business

Planning; New Business Formation; Internal Control Advisory Services. Tax Services, including planning, preparation and resolution.

COHNREZNICK

w ww.cohnreznick.com (818) 205-2622 Products & Services // Advisory, Accounting and Tax services for Private Lenders

SPIEGEL ACCOUNTANCY CORP

ACQUAVELLA, CHIARELLI, SHUSTER LLP

w ww.spiegelcorp.com (925) 949-5687 Products & Services // Accounting, Tax, Fund Administration, Consulting Services for Mor tgage Lenders, Small Businesses, and Individuals.

www.acsaccounting.com (732) 713-6305

DEFAULT & LOSS MITIGATION AXYLYUM CHARTER LLC

w ww.axylyum.com (212) 983-0262 Products & Services // Por tfolio wide engagement options for immediate purchase of retailers and whoesalers N/O/O loans.

WINTER 2022

RESOURCE GUIDE

DEFAULT & LOSS MITIGATION NOBLE CAPITAL

https://noblecapital.com (512) 492-3818 Secondary Specialties // Loan Servicing, Note Buyer/Seller

S.B.S. TRUST DEED NETWORK

https://sbstrustdeed.com (818) 991-4600 Products & Services // Non-Judicial Foreclosures, Bankruptcy, Post Foreclosure Options for Lenders, Deed in Lieu of Foreclosure

TOTAL LENDER SOLUTIONS

www.TotalLenderSolutions.com (866) 535-3736 Products & Services // Non-judicial foreclosures, UCC Sales, Reconveyances, Education

AUCTION.COM

DSI INC.

iSERVE

SERVICE LINK

www.auction.com

d efaultservicesinc.com (512) 382-0366

i serverealestate.com

www.svclnk.com

(949) 672-3668

(858) 486-4213

(800) 777-8759

LEGAL ACTIVIST LEGAL

https://activistlegal.com (202) 869-0804 Products & Services // Legal ser vices in the areas of real estate, mor tgage, banking and private investor transac tions for non-per forming loans and assets.

PRIVATE LENDER

Indicates AAPL Membership

ANDELSMAN LAW

h ttp://andelsmanlaw.com (516) 625-9200 Products & Services // Real Estate Transactions for Lenders, Developers and Individual.

CABALLERO LENDER SERVICES

https://caballerolenderservices.com (225) 328-1071 Products & Services // Foreclosures, Bankruptcies and Real Estate Closing representation for lenders and investors.

GERACI LLP

https://geracilawfirm.com (949) 379-2600 Products & Services // Foreclosures, Real Estate, Corporate, Securities, Litigation, Banking and Finance, Bankruptcy, Consulting, Asset Protec tion

HARTMANN DOHERTY ROSA BERMAN BULBULIA LLC

www.hdrbb.com (917) 902-9617 Products & Services // Legal Representation of Private Lenders in Multiple States.

LAW OFFICE OF MARC WEITZ

w ww.weitzlegal.com (323) 600-4805 Products & Services // California At torney Helping Private Lenders Recover Investments from Borrowers in Bankruptcy.

WINTER 2022

Indicates AAPL Membership

RESOURCE GUIDE

LEGAL (CONT.) www.efalaw.com

MCFADDEN FELDMAN LAW

(312) 344-3529 Products & Services // Legal Services for Real Estate and Note Transactions; Initiating Foreclosures, Evictions, and Protecting Creditors Rights in Bankruptcy; Serving Illinois, Indiana and Wisconsin and Providing Litigation Oversight Nationwide. Secondary Specialties // Default & Loss Mitigation

PRIVATE LENDER LAW/LAROCCA HORNIK ROSEN & GREENBERG

www.privatelenderlaw.com (212) 536-3529 Products & Services // Legal Services for the Private Commercial Real Estate Lending Industry

https://www.scheerlawgroup.com

SCHEER LAW GROUP, LLP

(949) 263-8757 Products & Services // Private Lender Representation in Litigation, Bankruptcy, Transactional, and Compliance Mat ters with Of fices in Nor thern and Southern California.

COHN & DUSSI, LLC

HAJJAR PETERS LLP

www.cohnanddussi.com

https://legalstrategy.com

(781) 494-0200

(512) 637-4956

SYNDICATION ATTORNEYS, PLLC www.SyndicationAttorneys.com (904) 504-4055

WAREHOUSE LENDERS WESTERN ALLIANCE BANK

www.westernalliancebank.com (602) 952-5462 Products & Services // Providing Commit ted Revolving Lines of Credit to Established Private Lenders Specializing In Residential Fix and Flip, Commercial Bridge, or NPL /RPL Note Purchases. Loan Sizes Typically Range from $10 Million to $100 Million.

PRIVATE LENDER

WINTER 2022

L AST CALL WITH CHRIS R AGL AND

FROM HERE TO THERE AND BACK AGAIN by Chris Ragland

he Real Estate industry

can be unforgiving. The

moment we come to understand and accept that, we discovera world of opportunities. I did my first investment deal when I was in college. As is true for many of us, it was an accident that led to a career. I purchased my first house during the “dotcom” era, only to realize that if I rented enough of the rooms to my college buddies, I could create cash flow. Rinse. Repeat. One house became many, and before I knew it, I had a small portfolio. My tech career evolved into a real estate career. Through a chance encounter, I was offered a job and partnership at what would become one of the nation’s largest property preservation companies. I witnessed the power of technology and scale—and what that could do when it came to assigning a multiple and valuation to an enterprise. After a few years, feeling the entrepreneurial itch, I started an investment-focused real estate brokerage and worked with some of 98

PRIVATE LENDER

the wealthiest people I knew at the time. We scooped up properties by the handful during the financial meltdown. I learned people make money when the market is strong, but true wealth is created during downturns by those who are prepared. Still, helping others build their empire wasn’t enough. I longed to build something of my own. First, I moved from equity to debt, from investor to lender, and rebuilt something that just needed attention and faith. With a small team, we set out a few years after the Great Recession to build the premier private lender in Texas out of a fledgling commercial development company. We knew the Texas market weathered the storm, and we were prepared to act as the foundation for real estate investors who needed capital. We started syndicating deals, then building funds, and finally moving into the loan sales ecosystem that so many private lenders see now as the standard. We created a system, a culture, a titan of the industry. And yet, the calling I heard so many years previous would not yield. I longed

to return to my ambitions, to building my own empire. I wanted to walk on dirt, not Wall Street. I wanted to smell lumber, not an office building. I wanted to build again. Through another chance encounter, I was empowered to start my own investment-focused brokerage yet again—this time with a family office behind me. We set out to build the first fully integrated real estate investment management firm of our kind. We set up the brokerage to source deals, the development company to oversee the improvements, the management company to stabilize and manage the properties, and the insurance company to manage the risk. Once we proved our model, we set up a fund specifically aimed at helping others realize their aspiration of owning a slice of the American dream. When I reflect on these transitions, I see a pattern: Chance encounters lead to life-changing opportunities. It’s a gentle reminder to be open to new ideas, people, and, yes, challenges. These simple ingredients are the building blocks for what we are all seeking—opportunity for fulfillment. And, perhaps, if we are lucky, our own empire. ∞

INDUSTRY LEADING RESPONSE TIME AND SERVICE

Private Lending law Firm

27 YEARS IN THE PRIVATE LENDING SPACE WIDELY RECOGNIZED FOR SERVICING PRIVATE LENDERS ACROSS THE COUNTRY Larry Andelsman and his team have been providing us with the best counsel for all our legal needs. His team is easy to work with and insightful, as they share valuable advice and knowledge in all things lending related. Larry and his team provided the same top-quality work to us for years - staying consistent with their service and response time from when we were a small firm to the size we’ve -Nachmen Klein grown to today. Learn more about our services at AndelsmanLaw.com

Broadview Funding

Expedited Closing Process

Online access to legal checklist 24/7

Loan Document Preparation Nationwide loan documents tailored to your transaction. We prepare a wide range of loan documents, including commercial, rental, residential, lines of credit, construction, and more

Closing and Settlement Nationwide We ensure clients have access to trusted advice, loan documents, and resources for loans nationwide.

hydrate your business. WINTER 2022

You’re Invited!

AAPL’S

13TH ANNUAL CONFERENCE

The Nation’s Largest Private Lender Event 2022 will bring you 2 days of packed sessions, 60+ exhibitors, and 500+ attendees with whom to network and learn.

OCT. 19-21 2022 LAS VEGAS AAPLCONFERENCE.COM

100

PRIVATE LENDER