Private Lender by AAPL by American Association of Private Lenders

SPE CIAL F E AT U R E: N E W CO M M IT TE E M E M B E R S

The Official Magazine of AAPL | Spring 2021

BUSINESS STRATEGY “Working” Opportunistic Capital

MARKET & TRENDS NY Licensing Impacts

LEGISLATION HMDA Compliance Headaches

LENDER LIMELIGHT

Ben Fertig No Magic Bullets SPRING 2021

Struggling to differentiate your fix-and-flip program from your competitors? You’re not alone. Nearly one year ago, lenders across the United States froze their fix-and-flip lending programs in response to the COVID-19 pandemic. Today, the market is strong and a resurgence of programs abounds — with one pesky problem: they’re nearly all the same. Susan Andress is the Business Development Director for Residential Capital Partners’ Correspondent Lending Program. In this role, she’s heard the stories of many lenders trying to differentiate themselves from the competition and she has helped them generate a real value proposition by using Residential Capital Partners’ platform. This is how she’s changing the game:

Blazing fast approvals In a hot market, turn-around time is critical. Andress says, “The greatest value I can offer my correspondents is speed in underwriting and closing. We’ve made it a very tight process. Lenders will ask me: ‘How quickly can you close?’ and, I say: ‘As soon as you provide me with a complete file!’” Residential Capital Partners’ program has an edge thanks to their relationships across the nation, including an exhaustive list of appraisers in every market and two dedicated people monitoring the underwriting and approval process. Residential Capital Partners has also helped its Borrowers move quickly in the contract-to-closing process by providing Proof of Funds Letters to them. Andress explains, “A ResCap Proof of Funds Letter helps our Borrowers win the approval of weary Sellers. By assuring the Seller that the deal won’t fall through, they win the deal—period.”

Funding Residential Capital Partners is a privately-owned balance-sheet lender that provides 100% funding for fix-and-flip investors. The majority of private lenders are stuck around 90% funding as a byproduct of their capital provider: Wall Street.

“The market will stay strong in the coming year. Lenders will have to stay competitive to survive. There is no competition for ResCap’s 100% funding solution – I have had correspondents build entire marketing campaigns around our program to great success.” – Susan Andress Andress explains, “At a 90% advance rate, my borrowers would only achieve a 24% ROI on their average deal. At a 100% advance rate, my borrowers can achieve a 51% ROI on their average deal. That’s 2x the return for the same risk. On top of that, with more cash in their pocket, they can do 4x as many deals!”

Flexibility for return borrowers To date, Residential Capital Partners extends loans to 47 states and counting and deepens its relationship with its Borrowers every step of the way. Investors that have made ResCap their lender of choice, see the benefit from our loyalty programs: “When we are working with a repeat borrower, our ability to be flexible with our terms and creative with our financial solutions improves. Confidence pays dividends.” Andress says.

The market is going strong. Do you have the funds you need to seize this opportunity? Call Susan Andress today to see how Residential Capital Partners can extend your lending program. PRIVATE LENDER Susan Andress, Business Development Director | 866.441.0223 | susan.andress@rescappartners.com.

CONTENTS

SPRING 2021

06 BUSINESS S TR ATEGY

0 6 T he O ppor t uni t y of

34 LEGAL

O ppor t unis t ic C api t al

10 A Cr i t ic al Look

18 C OV I D -19:

Forec losures

Forec losure

50 LENDER LIMELIGHT

Lender s’ Sel f- Regula t ion

22 A re You Acc ident all y Or igina t ing to Forec los e?

2 6 T he Ul t ima te Bluepr int for Sc aling Grow t h in Real E s t a te C apabili t y

and Prof i t

E c ho Par k

60 LEGISL ATION & ADVOC AC Y

6 0 I RS E x tends O ppor t uni t y Zone Fund Benef i t

64 H M DA C ompliance: H eadac hes for Pr i va te Lender s

P ropos ed L icensing Legisla t ion C ould Impac t t he N Y Housing Mar ke t

72 MARKETING & SALES

P ublish Your Clos ed Deals

76 INSUR ANCE

D on’ t Le t Your Insur ance Requirement s Ge t You in Hot Wa ter

80 PROFESSIONAL DEVELOPEMENT

I nside t he Deal: M y E x per ience Wor k ing wi t h

‘Cur a ted ’ C o - L i v ing

30 O pt imizing Fi x-and - Flip Progr ams for Grow t h

N o Magic Bulle t s

56 C A SE S TUDY

22 GROW TH S TR ATEGIES

46 J udic ial v s . Non - Judic ial

A L i t mus Tes t of Pr i va te C apabili t y

ew L aw Impac t s 42 N Non - Judic ial

Funds

38 F ederal Evic tion Moratorium E x tended

14 U BT I and Mor tgage Debt

18 ETHIC S

68 MARKET & TRENDS

in Bank r uptc y

at A l ter nat i ve Fund St r uc t ures

3 4 B or rower s

a Pr i va te Lender

84 A APL-AUSE

2 021-2022 C ommi t tees

94 RESOURCE GUIDE 98 L A S T C ALL

W ha t Dr i ves You

SPRING 2021

OPPORTUNITY UNLEASHED ®

YOUR TRUSTED LENDING PARTNER Amidst all of the changes in today’s market, one thing remains the same ... CIVIC’s commitment to all of our valued partners. We are operating as strong as ever and our robust pace of funding continues undaunted. If you need an experienced lender that provides superior service, quick closings, and competitive rates, you’re in the right place.

BRIDGE

PRIVATE

RENTAL

CORRESPONDENT

© ©2021 All Rights Reserved. is anot a commitment to lend. All offersmay of credit subject credit on approval. 2020Civic CivicFinancial FinancialServices, ServicesLLC. All Rights Reserved. ThisThis is not commitment to lend. Restrictions apply.are LTV limit istobased current,Restrictions accurate may apply. LTV limit is based on current, accurateLLC appraised value. CivictoFinancial Services, LLC reserves the right amend rates and guidelines. All loans are made appraised value. Civic Financial Services, reserves the right amend rates and guidelines. All loans areto made in compliance with Federal, inState, compliance with laws. Federal, State, and Local laws.LLC Civic Services, is a California Finance Lender NMLS 1099109 and the California of Business and Local Civic Financial Services, is Financial a California FinanceLLC Lender under NMLS 1099109 andunder the California Department Department of Financial Protection and Innovation FL Mortgage Servicer License #MLD1536, Oversight License #603L321, AZ Mortgage BrokerLicense License#603L321, #092863, AZ FL Mortgage Mortgage Broker LenderLicense Servicer#0928633, License #MLD1536, ID Lender Mortgage Broker/Lender IDLicense Mortgage Broker/Lender License MBL-9610, NV Mortgage License MB4419, NVNV Broker #4443, OR NV NMLS ID #1410002, OR Mortgage Lending LENDER #MBL-9610, NV Mortgage License MB4419, NV Broker License #4443, NMLSLicense ID #1410002, Mortgage Lending License #ML-5282, License #ML-5282, DRELicense Mortgage Entity License Civic Financial Services, LLC is an lender. equal opportunity lender. UT DRE MortgageUT Entity #10570639. Civic #10570639. Financial Services, LLC is an equal opportunity

(877) 472-4842 www.civicfs.com

FROM THE CORNER OFFICE

YOUR ASSOCIATION UPDATE EDDIE WILSON

Think back to just a year ago at this time when the world as we knew it

CEO, AAPL

changed almost overnight. You may have had overwhelming feelings

LINDA HYDE

of concern, angst, frustration, and—most of all—uncertainty.

Managing Director, AAPL

Now, take a moment to reflect on all you accomplished despite the

KAT HUNGERFORD

challenges the pandemic brought. If you realize one thing from this past

Executive Editor

year, it’s just how resilient we are. We adapt, we grow, we learn, and we

KELLY SCANLON

continue to move forward.

Copy Editor

DAVID RODRIGUEZ Design

CONTRIBUTORS

Katie Bean, Daren Blomquist, Edward Brown, Jan Brzeski, Rocky Butani, Cort Chalfant, Nema Daghbandan, Mike Fallot, Kat Hungerford, Kevin Kim, Tae Kim, Jerry King, Romney Navarro, Randy Newman, Kemra Norsworthy, Chris Ragland, Sherman Ragland, Lee Rogers, Andrew Spiering, Michael Tedesco, Marc Weitz, Don Wenner

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.

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That is what we are doing at AAPL—moving forward and guiding our members toward more success as we navigate a still-uncertain 2021. Because unless you have discovered the omniscient crystal ball, we’re all still figuring it out as we go. Yet, we can plan for success, and we can continue to fight for the best interests of the private lending industry. And with that, here’s what you need to know about what’s going on at the American Association of Private Lenders. Advocacy // As of late January, we are fighting proposed legislation in New York that would

require a license for an entity or individual who makes or solicits loans to a New York business in the amount of $500,000 or less. Given how extremely broad the language in this bill is—much more so than other licensing language we have seen—we are concerned that should this bill pass in New York, it could easily snowball to other states. Find out more and help us with this ongoing battle at aaplonline.com/NY-ab1420. Data // We have just closed our first of many quarterly industry surveys. As we move forward, these surveys will provide a look at the private lending industry that we’ve never had before,

building data over time to create a true benchmark standard for the profession. Metrics include everything from loan fees and terms to foreclosure rates and market confidence assessments. Respondents receive the aggregated and anonymized AAPL Market Insight Report as a thank you for participating. Sign up to respond at aaplonline.com/survey. New Committee Members // We are pleased to announce the 2021-2022 term members

for our Education, Ethics, and Government Relations committees. These committees and the advisers that sit on them help guide nearly all our initiatives to improve both the value we offer members and the private lending profession’s standing in the larger financial community. Read about who they are and what they bring to the table on page 84. Thank you for being with us in our joint commitment to uphold integrity in the private lending industry. One thing will always be certain—we are dedicated to progress and to overcoming challenges, together.

LINDA HYDE

Managing Director, American Association of Private Lenders

SPRING 2021

BUSINESS STR ATEGY

PRIVATE LENDER

The Opportunity of Opportunistic Capital Make sure your portfolio is ready for the expected wave of foreclosures hits. by Chris Ragland

s a lender, there are few

things less desirable than having capital on the

sidelines for extended periods of

time. Idle capital decreases aggre-

gate returns to investors, generally means loan originators are making less money, and puts pressure on target yields for those with orga-

nized funds and endless marketing

material touting predictable results.

It goes without saying, then, that lenders create revenues only when capital is working. When the market contracts, and it always eventually does, we are cautious. And rightfully so. When the tide goes out, we worry about our underwriting, our reputation, and our enterprise.

REENTRY OF SAFE AND SAVVY With the return of lender and real estate market duress, we are introduced to the

archetype of the wise: the savvy investor who has lived through real estate cycles and is still around to tell the tale. These lenders showcase conservative underwriting principles and their use of fundamentals to build bulletproof portfolios. This approach often proves to be not just prudent, but necessary for the survival of lenders during market contractions. These underwriting pillars of private lending are what we turn to when we are no longer enamored with market exuberance.

‘CANARIES IN THE COAL MINE’ The real tragedy of a real estate contraction lives in the wallets of the developer, the flipper, and the hands-on real estate investor. The borrower, not the lender. These small business owners are the canaries in the coal mine, falling and failing first during a market downturn. These business owners are the single-most

valuable asset to a lender, right ahead of the capital that is being deployed. There is a synergistic nature between the lender and the borrower. Without one or the other, there is no lending business model. But capital can be efficient. It can be highly organized. Capital can be captive if managed properly. Capital can be redeployed over and over again, often without permission from the underlying investor if structured through a managed fund. The small business owner, on the other hand, must always source and close a new opportunity each time there is a deal. The entire process starts anew for a borrower, the true boots on the ground. Sadly, the frontline investor needs merely a single misstep to reach the end of the line. There is very little room for failure. And failure in a deal, often means a complete exit from the industry for a borrower. The lender on the other hand, recaptures the SPRING 2021

BUSINESS STR ATEGY

asset, and moves on. For these reasons, the borrower can potentially carry more value than the underlying capital.

NOT SO SIMPLE Although providing capital and loan products is the core of a lender’s mission and purpose, debt products are still largely driven by market and investor demand. In rich interest-rate environments, debt products tend to be short term and risk-centric, and they include additional layers of collateral monitoring. The collateral and the realization of asset improvement protects the principal. A good example of this type of product is a

short-term flip, regardless of asset class. On the other hand, when interest rates are low, products tend to shy away from risk, offer longer terms, and focus more on credit than collateral. A rental property would be an example in this scenario. If only real estate markets were that simple: low-risk environments resulting in low rates and long terms, and highrisk environments leading to higher rates and shorter terms with a focus on asset valuation. Naturally, there is every flavor in between. Sophisticated lenders will carve up debt products to offer the best (and worst) of both ends of the spectrum. They have learned over time to slide the underwriting pillars around to appeal

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PRIVATE LENDER

to different borrowers under varying circumstances. Choose your flavor!

WHAT IS OPPORTUNISTIC CAPITAL, REALLY? We are living through yet another unprecedented economic situation, and the unexpected is suddenly the expected. So, we should reconsider the types of products typically categorized as debt versus equity instruments. By reevaluating where capital focuses on opportunity, we can cross the line and move opportunity capital out of equity and into the debt realm. This is the opportunity of opportunistic capital.

“We can … move opportunity capital out of equity and into the debt realm.”

If you conduct a search for opportunity column. There are terms that describe

tional debt, perhaps for 85% of the capital needed, and then a second lien for the remaining 15%, the opportunity capital.

nity funds.” These funds deliberately seek

The risk to the opportunity capital is higher, but the returns would be too.

capital, you will find it firmly in the equity high-risk/high-return funds as “opportuinvestment positions where equity solves a funding gap in the capital stack. They endeavor to capture generous returns

upon exit or, in some cases, as long as the business venture is active. These investments are some of the most rewarding, but they come with significant risk. As equity, these funds are not only under

the thumb of any leverage the enterprise may have taken on but also at the mercy of the operator’s ability to perform.

But what if we turned this structure on

its head, and there was a debt facility for opportunity capital? It would need to

represent only a small portion of a lender’s portfolio—just enough to capture the rare opportunity where a borrower turns to a high-cost equity partner. Radically, the

lender could even provide both layers of debt, fulfilling nearly the entire capital stack while also ensuring compliance with the more traditional debt layer

obligations. In this scenario, the lender would have a first lien for their tradi-

In a strange turn of events, this unification of debt provides greater oversight and authority for the lender, and less stress and more transparency for the borrower. With the right structure and rigorous collateral monitoring by the lender, this structure can yield a greater return for both parties while removing bad actors and fraud from a rapidly growing industry. Thinking outside the box is not difficult. But it is a little easier when we enable the success of each other. ∞

Sound familiar? Of course, it is equity disguised as debt. If you are a seasoned lender, you should have alarm bells ringing by now. Providing 100% of the capital stack to a borrower has long been accepted as folly. We prefer the borrower to have “skin in the game.” And while we often see those funds arriving at closing, it is not often we verify where they came from. But if we do, what adjustment to the terms do we make when we discover the funds were provided by an outside equity partner? We charge a premium.

ABOUT THE AUTHOR

This premium, this adjustment to the terms that is derived from the perceived risk of lack of funds directly from the borrower, should find a new home. This premium should be moved into the capital stack as debt. The premium should be real, palpable, and valuable to both the borrower and the lender. The borrower receives a complete solution for their project, and the lender receives a risk-adjusted premium for their second lien.

Brokerage, disposition, insurance,

CHRIS RAGLAND Chris Ragland has managed real estate-

related businesses for the past 20 years. management, finance, development—

Ragland has exposure to all aspects of

real estate. But 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 real

estate, Ragland serves on several boards for non-profits and is also active in the start-up community in Austin, Texas.

SPRING 2021

BUSINESS STR ATEGY

A CRITICAL LOOK AT ALTERNATIVE FUND STRUCTURES by Cort Chalfant

are often collected by the manager. Loan

issue of Private Lender, we

have a baseline to compare alternatives to. Variations do exist, but this table generally captures the default setup among private lending funds.

ing about why Nexus Private

Note that there are other impositions on the fund that are not reflected in Table 1 and

are brought in-house for any number of

n “An Insider’s View of

Fund Management,” an

article in the Winter 2021

intentionally left readers hangCapital didn’t follow conven-

tional wisdom when it came to

choosing a structure for its fund.

argue that the traditional approach

investor. Although it sheds light on

However, these are simply services that reasons rather than being performed by a

RELEVANT REVENUES & EXPENSES

one left off. It explains why you can

respective interests of manager and

tion management fees are good examples.

TABLE 1 CONVENTIONAL FUND S TRUC TURE: WHO GETS WHAT ?

This article picks up where the prior

falls short of adequately aligning the

servicing, fund servicing, and construc-

Borrowers Origination Fees

A s s e t s Under M anag emen t (AU M)

2%–4% of Loan Amount

RECIPIENT Fund

Fund Manager

100%

why we chose a different approach,

(late payments, draw fees, etc.)

Incidental Fees

Monthly Impositions

100%

it is not intended to be a promotional

Interest Payments

8%–14%

80-100%

0%–20%

N/A

100%

piece. Instead, we hope you will accept that it is nothing more than a critical look at alternative fund structures.

CONVENTIONAL FUND STRUCTURE

Asset Management Fee Incentive Fee*

the typical fund structure so we 10

PRIVATE LENDER

N/A Yes (80%-

Upside for Investor Expense Ratio**

Table 1 provides a quick review of

1%–2.5%

1%–5%

15%–20% over 6%–8% hurdle

85% of profits)

N/A

100%

N/A

*The Fund Manager earns 15%–20% of profits after investors receive a minimum 6%–8% Return on Investment. **Best-guess operating expense ratio at the fund level as a percentage of AUM

TABLE 2 FUND S TRUC TURE FOR NEXUS RELEVANT REVENUES & EXPENSES Borrowers

loan servicing and construction manage-

ment, but its management entity performs

A s s e t s Under M anag emen t (AU M)

Fund

Fund Manager

1.5%-2.25% of Loan Amount

100%

Incidental Fees

(late payments, draw fees, etc.)

Monthly Impositions

100%

Interest Payments

10%–11.5%

100%

N/A

Origination Fees

third party. Nexus, for example, outsources

RECIPIENT

fund servicing in-house and charges the

Asset Management Fee

party imposed prior to being replaced.

Incentive Fee

N/A

100% over 8.5% hurdle

Upside For Investor

None

N/A

100%

N/A

same amount to the fund that a third-

NEXUS FUND STRUCTURE

Expense Ratio*

Now, let’s take a look at the Nexus model:

An astute observer may notice that under this alternative structure, 100% of all

revenue from all sources goes to the fund,

and the fund manager charges no fees. The manager’s sole compensation is a profits distribution after everyone else is paid

first—in our view, the epitome of the man-

ager “putting its money where its mouth is”! By comparison, under the conventional approach, the fund manager is “in the

money” the moment a loan is originated,

which means they are motivated to make that loan whether it’s a good or bad one.

Similarly, they are incentivized to grow the

pot as big as possible to earn more inciden-

None

1.1%

*Excludes allocations for loan losses Nexus expenses each month to build up reserves.

tal income and asset management fees, all of which are priority distributions to the manager ahead of payments to investors.

alternative fund recognizes only $500

There are finer but more powerful points as well. Under GAAP accounting protocols, the alternative structure must amortize origination fee income over the number of months of the respective loan term. Under the conventional format, however, the manager earns 100% of the fee at the time of closing.

motivator to do a loan in a way that the

For example, a $300,000 loan with a 12-month term and a 2% origination fee would pay the conventional manager $6,000 immediately, whereas the

nation fee income from prior originations

of income for each of 12 months. So that “pop” for the conventional manager is a watered-down version for Nexus is not.

For the same reason, the alternative struc-

ture smooths out what could otherwise be large gyrations in manager income from high and low origination months while

adding a stabilizing source of income to

the fund. This is because deferred origi-

is evenly recognized across many months. This latter point is one of the reasons why Nexus weathered the pandemic

SPRING 2021

BUSINESS STR ATEGY

storm so well. We enjoyed origination fee income even though we pulled back dramatically on new originations.

investor. Figure 1 compares distributions under the two approaches to investors and the manager, respectively, using our hypothetical $300,000 loan amount.

Next, I’ll make the argument that other than the asset management fee conventional funds customarily charge, the Nexus alternative makes more money for the manager but at considerably less risk to the

This comparison is for illustrative purposes only. In reality, the conventional approach typically uses debt to equity in a 1:1–2:1 ratio and/or sells loans while retaining a strip

FIGURE 1

INVESTORS

ASSUMPTION

$ AMOUNT*

2.0%

$850 10.0%

$30,000

Asset Management Fee

1.5%

$4,500

1.25%

$3,750

CONVENTIONAL

Manager

Incentive Fee

PRIVATE LENDER

NEXUS

7.0%

8.5%

20.0%

100.0%

*amounts shown are annualized

$6,000

Interest

Preferred Return

debt at 25% of loan value and rarely sells its loans. These are strategic choices driven by a dual focus on safety and client service. They do not influence the values in Figure 1.

DISTRIBUTIONS - NEXUS STRUCTURE INVESTORS

MANAGER

First: to the Fund

Origination Fees

$6,000

Origination Fees

$6,000

Incidental Fees

$850

Incidental Fees

$850

Asset Management

$4,500

Interest Income

$30,000

Subtotal

$11,350

Subtotal

$36,850

Cash Available for Expenses

$36,850

Second: to the Fund

AUM $300K

Incidental Fees

Investor

Nexus, on the other hand, caps the use of

MANAGER

First: to the Manager

LOAN AMOUNT

Operating Expense

juice returns for the fund but add risk.

DISTRIBUTIONS - CONVENTIONAL STRUCTURE

COMPARATIVE DISTRIBUTIONS: INVESTORS VS. FUND MANAGER

Origination Fee

(portion of the coupon). Both these actions

Interest Income

$30,000

Other

Cash Available for Expenses

$30,000

Less Operating Expenses

$3,750

Less Operating Expenses

Less Asset Management Fee

$4,500

Less Asset Management Fee

Cash Available for Distribution

$21,750

Cash Available for Distribution

Third: Distributions to Investors Preferred Return

$3,750 $

Second: Distributions to Investors $21,000

Preferred Return

Cash Subject to Profits Split

$750

Fourth: Share of Profits

$600

$150

Total Income Received

$21,600

$11,500

Unlevered ROI

7.2%

$25,500

Cash Subject to Profits Split

$7,600

Third: Share of Profits

$7,600

Total Income Received

$25,500

$7,600

Unlevered ROI

8.5%

Preferred Coverage Ratio

1.04

Preferred Coverage Ratio

1.30

Expense Coverage Ratio

3.64

Expense Coverage Ratio

9.83

Levered ROI*

$33,100

7.5%

Levered ROI*

8.5%

Preferred Coverage Ratio

1.10

Preferred Coverage Ratio

1.50

Expense Coverage Ratio

2.35

Expense overage Ratio

4.47

*assumes 25% of AUM from debt and cost of debt is 6%

ABOUT THE AUTHOR

CORT CHALFANT Cort Chalfant is the manager of Nexus

The major takeaways from the comparison in Figure 1 are:

U nder the conventional model, the manager is “in the money” before investors; with the alternative

approach, investors are given priority. E xpense and preferred return cov-

erage ratios are considerably higher

under the alternative approach. This translates into greater safety for

investors (and explains why they get no “upside” in the Nexus model).

O ther than the asset management fee, compensation the manager earns in

the alternative model is greater than

in the conventional model. In addition,

the alternative fund manager can communicate that “they put their money where their mouth is,” whereas the

conventional fund manager cannot.

There is another critically important point that is not apparent from looking at Figure 1. It has to do with REO (Real Estate Owned) scenarios. REOs are

properties owned directly by the fund, typically as a result of foreclosure.

Private Capital. He is a seasoned executive in multistate real estate acquisitions, asset management, leasing,

Regardless of structure, in a foreclosure, the fund temporarily loses interest and ancillary fee income on the principal amount of the loan. In this case, the conventional fund manager loses ancillary fee income, and its incentive fee income is reduced. The lion’s share of the pain is felt at the investor level as profits and coverage ratios decline. In this case, the wrong party got punished for making a bad loan.

development, and commercial debt

By contrast, under the alternative structure, the manager absorbs 100% of the hit to profits from an REO, because its only compensation is whatever profit remains after everyone else gets paid first. In this case, the right party got punished for making a bad loan. However, the flip side is that REOs are typically resold at a profit. Consequently, the alternative fund manager usually makes up for his temporary losses by enjoying 100% of the gain on sale. In that event, the right party got rewarded! ∞

ordinances, and agreements and has

transactions. He has a demonstrated

track record managing and directing

a diverse range of real estate projects and affiliate operating companies. Chalfant’s core competencies are synthesizing complex business

opportunities, threats, resources, and

conditions into winning strategic plans; financial underwriting; and mentoring

high-performing teams. He is a skilled negotiator of legal contracts, leases, a solid understanding of mortgage

and capital markets, syndications, and capital formation.

Before his tenure at Nexus Private

Capital, Chalfant was vice president of Coast Range Investments, senior vice

president of the Rancho Sahuarita Companies, and an acquisitions and asset

manager at the Holualoa Companies. Chalfant has an MBA from the University of Arizona, where he graduated first

in his class (tied), and a BBA in finance from the University of Delaware.

SPRING 2021

BUSINESS STR ATEGY

UBTI and Mortgage Debt Funds Make sure you understand the laws and tax consequences surrounding UBTIs. by Edward Brown

nrelated Business Taxable

Income (UBTI) is income that is regularly generated by a

tax-exempt entity by means of taxable activities. This income is not related to the main function of the entity, and it

prevents or limits tax-exempt entities from engaging in businesses that are unrelated to their primary purposes.

subject to UBTI, even though the income derived at the MDF level is not passive in and of itself. The IRA investor, however, is a passive investor. Consequently, the IRA is not usually subject to UBTI. There are times, however, when this is not so.

WHAT CAN TRIGGER UBTI?

they take a deed of trust as collateral for

From the MDF sponsor’s standpoint, there are ways the UBTI can be triggered for the investor in a MDF. One is if the MDF borrows within itself to generate income (called a leveraged MDF), according to the exclusion for passive income rules under IRS Section 512(b)(4). Another is if the MDF ends up foreclosing on too many assets, and the IRS treats the MDF as a dealer in real estate. This second risk is relatively small. Under normal circumstances, the IRS would not treat most MDFs as being in the business of buying and selling real estate.

cally, income derived from an MDF is not

Ordinarily, interest is considered a passive investment and would not have UBTI

UBTI greater than $1,000 is subject to taxation. For 2019, the highest tax rate was 37%. Most forms of passive income (e.g.,

dividends, interest income, and capital gains from the sale of capital assets) are not treated as UBTI.

Many investors use their IRAs to invest in

Mortgage Debt Funds (MDF). Many MDFs like to attract retirement accounts because of the passive income that is derived—

MDFs lend money similar to a bank in that the loans they make to borrowers. Typi-

PRIVATE LENDER

issues associated with it. However, an MDF is “in the business” of making loans that derive its income from interest and is considered an active business. As such, UBTI has to be a consideration for both the investor and the promoter. According to IRS Section 514(b)(1), this means any property (or property loans, in the case of an MDF) held to produce income with respect to which there is an acquisition indebtedness at any time during the taxable year may have UBTI issues. In the case of losses, UBTI may not be offset against other activities that are substantially unrelated. However, related activities may use losses to offset UBTI as well as be carried over from one year to the next for offsetting purposes. For example, if, in year one, an MDF (that uses leverage) suffers a loss of $5,000 (on the investor’s K-1), there is no UBTI issue in that year. If, in year two, the K-1 shows a profit of $4,000, the carry-over of year one’s loss would wipe out year two’s UBTI

potential [of $3,000 (after subtracting the allowable first $1,000 of UBTI)]. Whether an activity is substantially related is based on the facts and circumstances according to Treasury Regulations 1.513-1(d)(1). Most MDFs that use leverage usually

portfolio, however, depending on how

much leverage is used and the bank covenants required to obtain this leverage. In addition, for those investors in the MDF

who use their IRAs (or 401(k)s, pensions,

or profit-sharing plans), this leverage may

subject the income derived to create UBTI.

T he income derived by the MDF H ow much leverage was used to produce that income. In addition, it is important to consider the length of time that leverage was used, as the UBTI will be calculated using a pro-rated formula.

to investors. If the MDF can borrow from

Certain key factors for the investor’s IRA that the MDF sponsor should be aware of include:

IRS Section 514(a)(1) would require the

a bank at 5% and lend it out at 8%, there

ow much the IRA has invested in H

of income derived from “debt-financed

of UBTI is not taxable to the IRA

tion indebtedness” for the taxable year.

center on attempting to enhance its yield

is a 3% arbitrage in favor of the MDF. This may possibly put undue risk in its

the MDF because the first $1,000

IRA to include in UBTI a percentage property” equal to the “average acquisi-

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BUSINESS STR ATEGY

For example, the accompanying chart shows an IRA investor with $100,000 in an MDF generating a rate of return of 6.5% (without leverage) not having the $6,500 income subject to UBTI since no leverage was used. However, if the MDF chooses to leverage the fund 50% (50% investor funds and 50% bank funds) for the entire year and can borrow (from the bank) at 5% and invest that portion at 8%, the net income to the IRA (after subtracting the bank interest expense and UBTI tax) would be $8,760. Many IRA investors may not feel the extra $2,260 earned in this example is worth the risk. When a real estate syndication goes bad, it is usually only for one reason—leverage. If no leverage is used, usually the only way for a real estate

PRIVATE LENDER

UBTI INCOME Non Leverage

100,000

6.5%

6,500

Leverage

100,000

8,000

(5,000)

Net Arbitrage Inc. (subject to UBTI tax)

3,000

First $1,000 UBTI Tax Free

(1,000)

Net UBTI

2,000

(740)

Net Leveraged Portion Income After UBTI Tax

2,260

Net Income After UBTI Tax

8,760

Cost of Leverage

UBTI Tax

37%

investor to lose substantially most or all of his or her investment in these types of investments (i.e., REITS, limited partnerships, limited liability companies, etc.) is if the real estate taxes associated with the underlying real estate are not paid. When leverage is used, the banks have first priority over the assets. Simply, the more leverage that is used, the riskier the investment; thus, it is important for the MDF sponsor to consider how much and for how long leverage is to be used. Investors using their retirement sav-

ings to invest in assets that potentially produce UBTI should ask the manager how much debt/leverage is used in the investment. A small amount of leverage is not usually taking on undue risk, especially if that leverage is used sparingly. One strategy in this case is to use a small amount of leverage, and on a very short-term basis, for an MDF for specific reasons—mostly, to help fund short-term loans in a fund when expecting payoffs on other loans or anticipated investor money flowing in. As soon as payoffs or investor money comes in, the line of credit (leverage) can be paid down immediately. This provides the ability to close deals that otherwise might not have been able to close. The short-term nature of this leverage does not usually create enough UBTI income to concern the retirement investor. In addition, the short duration of the leverage puts the fund at minimal risk; however, since the rate of interest to obtain the leverage is less than the income derived from it, the fund still benefits from a small amount of positive arbitrage.

BLOCKER CORPORATIONS One strategy that has been instituted in recent years to help avoid UBTI is a “blocker corporation.” (In a 2008 handout regarding a seminar on UBTI, Suzanne McDowell, senior counsel at Steptoe and recognized as a top lawyer in the tax-exempt organization field (according to Legal 500), wrote: “Exempt organizations can avoid the debt-financed property rules by investing in a foreign corporation in a country that does not impose an income tax. According to an IRS private letter ruling, an exempt organization held 100% of the stock in a foreign corporation that invested in a U.S. Partnership holding debt-financed securities. The agency held that the dividends the foreign corporation paid to the exempt organization were excluded from UBTI as dividends under IRS Section 512(b)(2) and were not debt-financed income because the exempt organization had not incurred debt to acquire its interest in the foreign corporation.” Although private letter rulings are not law in and of themselves, one can believe that the IRS position on similar matters would remain the same. Thus, an MDF may choose to explore setting up a blocker corporation to avoid UBTI becoming an issue. However, the MDF must consider the costs of setting up and the continual operation of the foreign corporation to determine whether it is worth the time and expense just to avoid the potential of UBTI.

and promoters should carefully study the UBTI rules and consult tax professionals to determine whether UBTI is a factor for their investment decisions. ∞

ABOUT THE AUTHOR

EDWARD BROWN Edward Brown is in the Investor

Relations department at Pacific Private Money and is host of the long-running radio show The Best of Investing.

He has published multiple works,

appeared on CNN, and served as

chairman of the Shareholder Equity Committee, protecting 29,000

shareholders in a $500 million REIT. Brown was also a recipient of a prestigious MBA Tax Award.

Because the laws surrounding UBTI are numerous and complex, both investors

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ETHICS

COVID-19: A LITMUS TEST OF PRIVATE LENDERS’ SELF-REGULATION CAPABILITY by Kat Hungerford

PRIVATE LENDER

he private lending industry of today can trace its

near-exponential growth

over the past decade back

to government regulation. Regulation

of parallel industries, that is. Strictures that have reined in traditional institu-

tional lending practices have largely

benefited private lenders, spurring borrowers to come knocking at the door.

Private lenders have, for the most part, operated outside licensing and reporting requirements affecting institutional lenders. That’s because their clientele is primarily businesses transacting business-purpose loans secured by non-owner-occupied dwellings rather than consumers looking for traditional mortgages on a primary residence. Today, only 11 states require a mortgage license to transact these loans, with federal regulation being limited to a few (albeit still burdensome) disclosure and reporting requirements.

“While the 2007 financial crisis is a clear example of possible

impacts to an industry for unwise

decisions, a more immediate one is the present COVID-19 crisis.”

status quo to purposefully regulate private lenders. While the New York legislation is ongoing as of the time of this writing (see

The regulation gap between private and institutional lending is not only what has allowed private lending to grow but

Whether state or federal, most recent regulation impacting private lenders seems almost accidental, effected through vague wording like “lien on a dwelling” (Equal Credit Opportunity Act and Home Mortgage Disclosure Act) instead of the more widely adopted “credit offered or extended to a consumer primarily for personal, family, or household purposes” (Truth in Lending Act and Real Estate Settlement Procedures Act). The latter exempts private lenders, whereas the former does not.

aaplonline.com/NY-ab1420), the Florida

The past several years have seen only two states—New York in 2021 and Florida in 2018 and 2019—attempt to change that

unregulated” applies in the context of

The common answer is that as any indus-

ing and other financial industries.

under the watchful eye of legislators. Pri-

bills either did not pass or were passed

without the regulating language. Their failure was largely a result of advocacy efforts from the American Association of Private

Lenders and its general counsel Geraci LLP. This is not to say that private lenders are completely unregulated. They must still comply with anti-usury, anti-discrimination, fair advertising, loan servicing,

foreclosure laws, and more. Speaking of the private lending industry as “largely comparison with institutional lend-

also to exist as a recognized industry at all. While large national private lenders might be able to survive regulatory hurdles, the smaller lenders that make up much of the industry would not: Their operational costs would skyrocket as demand shrinks with fewer differentiators between “bank” and “not bank.”

Ok, we’re “largely unregulated.” What do we have to worry about? try grows, its practices increasingly come

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ETHICS

vate lenders need to establish and follow best practices now to be able to mitigate bad actors that can become the face of the industry and a reason to regulate.

large enough to regulate? Who is the “we” that establishes things? What “best practices” will avoid regulation? How do we stop “bad actors”?

But while the soundbite makes sense, it’s still unhelpfully vague. When does the industry magically become

As with much of history, it often takes a crisis to shine a light on what’s wrong. In the aftermath, government picks up

the slack—often clumsily—to prevent it from happening again. While the 2007 financial crisis is a clear example of possible impacts to an industry for unwise decisions, a more immediate one is the present COVID-19 crisis.

COVID-19 is a litmus test of our ability to self-regulate. As with pre-COVID-19, the nature of most private lenders’ business means that there is limited regulation in play. Federal foreclosure and eviction moratoriums only applied to government-backed loans from Fannie Mae and Freddie Mac. And while some states enacted regulation that applies to private loans, most such moratoriums are ending soon, if they haven’t already. Court closures and local ordinances may slow down proceedings, but private lenders without federal or state considerations are under no legal obligation to extend forbearances or deferrals, or to delay foreclosure. There is also little regulation on when the missed payments from forbearance or disclosure are to be made up, allowing lenders to call the total of the deferment due when the borrower (and most of the nation) is still recovering from the crisis. This is what is legally permissible. But following the letter of the law does not prevent future regulation should the industry come under scrutiny and it is decided private lenders profited from the crisis and/or contributed to its economic impacts. Although the American Association of Private Lenders and Geraci LLP published a Forbearance Request Guide and

PRIVATE LENDER

Request Form (available at aaplonline. com/covid19), not all private lenders will see them, and for those that do, not all will follow them. While most lenders feel a sense of “we’re all in this together” during a crisis that impacts everyone, lenders face their own resultant financial hardships, with some having to weigh compassion against possibly having to shut their own doors.

lenders for the most part are not so far removed from the borrower as to lose feeling for what they are going through. It’s harder to pass the buck in our industry.

The balance between legal, business, and best practice considerations is delicate, and we often don’t realize we’re failing until the crisis has passed and we’re in the post-mortem.

If private lenders can show they helped borrowers in the face of this crisis, they will have a powerful platform when talking to legislators about their ability to self-regulate, and the industry will less likely be lumped into the regulatory aftermath of COVID-19 and future issues. Where institutional lenders may fail in the eyes of the public and legislators, private lenders need not. Ultimately, it is our choice. ∞

There is a silver lining that has for the most part kept us on the right track: Unlike decision-makers at banks, private

This article has been updated and reprinted with permission. It was originally printed in Originate Report.

ABOUT THE AUTHOR

KAT HUNGERFORD Kat Hungerford is executive editor of

Private Lender 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 state and federal legislatures.

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ETHICS

Are You Accidentally Originating to Foreclose? Consider these insights for being your borrowers’ watchdog—and building your reputation as an ethical lender. by Kemra Norsworthy

riginating to foreclosed

the lender wants the asset at an even

lending business as

payment less the cost of foreclosure).

on is also known in the

“loan to own.” Loan to own can be

intentional, or it can be accidental. Regardless, it’s bad business.

Intentional loan to own typically occurs because the asset in question is desirable. For example, a high-end property could be in a desirable area that doesn’t see much change in ownership, or it could be a multifamily property that generates great income. In either case, you know the borrower doesn’t have the income or credit to refinance out. Simply put, predatory loan to own is practiced because 22

PRIVATE LENDER

higher discount (i.e., the borrower’s down Accidental foreclosure, on the other hand, can occur for a number of reasons. Let’s take a look at several and how to avoid them.

BE DILIGENT The most common culprit is laziness. Your first question to someone who wants to borrow money from you, regardless of the amount, should always be, “How can you pay me back?” Of course, you should

also ask about their exit strategy. When the exit is to refinance out and hold longterm, always ask questions such as: Who’s your takeout lender? What is your current credit score? and Can I speak to your takeout lender with your permission to discuss any potential problems that may occur? A good and ethical lender should be able to point out if there is an issue with credit, rental income, debt-toincome ratio, or appraisal and know right away if there is a possibility of any hiccups in the refinance process.

DON’T GET COMPLACENT Another risk is getting too comfortable with your borrower. This can occur with long-term hold refinances as well as with flips. Things change—income, DTI, etc. Maybe renters are not paying, so your borrower’s DTI goes up, or maybe they missed a payment and now their credit has an issue. Not continuing to do due diligence and not checking back with your borrower’s takeout lender are risks to avoid, especially with borrowers who plan to hold long term.

LOOK FOR TRENDS For your borrowers involved in flips, watch for trends in their projects. Consider requesting an REO schedule. The biggest things to check are locations and price points. If a borrower steps out of their normal territory, it isn’t usually a red flag. But you should question, “Why this area?” Maybe it’s a one-off, or it’s a great deal, or competition has priced the borrower to look beyond their usual location.

Similarly, review the borrower’s price point history on the REO schedule. As the lender, always make three columns: (1) purchase price, (2) rehab budget, and (3) resale price. Look for the average of each column. A buyer on a fix-and-flip should always be close enough to the mean of each one. Seasoned investors tend to not stray from their standard deviation. When that does occur, question the change. Ask whether they can handle a rehab budget of that size compared to their previous projects and whether they have experience with a remodel of that size. Also question their experience at a resale price at this value. You want to beware of highend sellers getting involved in low-end properties and vice versa. For example, a borrower most familiar with high-end properties may pay too much on materials that don’t fit the property’s profile when they are fixing a low-end project. Conversely, a low-end flipper might end up not budgeting the right amount for the materials required on a high-end flip.

PAY ATTENTION TO DSCR Next, consider the debt servicing coverage ratio. A good private money lender should always have a rough estimate of how big their borrower’s portfolio is. An easy way to know whether a borrower’s DSCR is healthy is to look at late fees. If the borrower starts paying later and later and incurring late fees, the borrower might not be in good DSCR health. If you know your borrower doesn’t have a healthy DSCR and you lend more to that borrower, you are setting the borrower up to fail.

“A good and ethical lender should be able to point out if there is an issue with credit, rental income, debt-to-income ratio, or appraisal.”

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ETHICS

A responsible lender must act as the gatekeeper, looking out for both the company and the borrower. Accidentally lending to foreclose on is as much the lender’s fault as it is the borrower’s. Both parties must know when to say “no” to a transaction. Yes, it is a rush to see the loan amount (either dollar amount or loan numbers) increase, but at the end of the day, you must protect your clients from being their own worst enemy. Being a watchdog for your client using the insights outlined here protects your client, protects your business, and builds your reputation as an ethical lender. ∞

PORTFOLIO STABILITY Finally, review the borrower’s portfolio.

It’s always important to look at the average loans for a borrower’s typical projects.

If a borrower usually does between five and 10 flips a year, but their portfolio

is now at 10 open projects, be cautious. A change in bandwidth that fast will

definitely hinder the borrower’s ability to perform. The ultimate goal is your borrower’s success, and their success is also the lender’s success (yours!).

YOU CAN’T CONTROL TIMING OF THE SALE It’s easy for clients to assume the property they have on the market will sell

quickly. The truth is, neither the borrower nor the lender can control the time in

which a property will sell. Transactions can fall through for a many reasons.

Counting profit before the funds are

sent is an easy trap to get sucked into.

PRIVATE LENDER

Some lenders make the mistake of lending at low points for a short-term loan because a closing is coming up. But in one personal instance, financing for the buyer fell apart at the last minute due to a verification of employment. The buyer lost his job a week before closing. The borrower was stuck in default, and an extension was required. Even with the extension, the borrower had to redo his calculations. Quite frankly, the lender’s decision cost the borrower a lot of money. The lender should have been more cautious and looked after the borrower. But at the time, that lender was counting the transaction for the week. The situation was uncomfortable for both parties: The borrower didn’t perform, and the lender agreed to something that wasn’t best for the client. Looking back, the transaction could have been a lot worse. Although the financing fell apart, it was a sellers’ market, so it was easy to find a new buyer. But if the transaction had fallen apart because of something bigger like a failed inspection, there’s a chance that borrower wouldn’t be a client anymore.

ABOUT THE AUTHOR

KEMRA NORSWORTHY Kemra Norsworthy is the principal

managing partner for Bull Funding Corp. She has been involved with

lending, particularly bridge funding,

since 2003. She has owned companies and also worked for large banks. Her expertise includes originating and

underwriting as well as leading her

peers. During her career, Norsworthy has turned some of the worst bank

branches into the best in their regions.

MEMBERSHIP

MEANS SOMETHING. Join the oldest national association representing the private lending industry as a viable alternative for borrowing and investing. As a member, you’ll gain prestige through our:

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RECOGNITION

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JOIN TODAY! AAPLONLINE.COM 913.888.1250

SPRING 2021

GROWTH STR ATEGIES

THE ULTIMATE BLUEPRINT FOR SCALING GROWTH IN REAL ESTATE Here’s how to set yourself up for success in even the most challenging market environments. by Don Wenner

here do you want your business to be in one year, three years, five years?

Answering this question in a COVID-19 economy may seem tricky. After all, since the pandemic hit, we’ve seen far too many real estate entrepreneurs and businesses stagnate. Their growth plans have failed or been scrapped. Only the most prepared players have emerged stronger. For real estate firms that have moved forward during the pandemic, it hasn’t all been about cash flow and strong portfolio assets. It’s also been about having a strong blueprint for scaling growth through all cycles. With the right culture and method of executing, you can set yourself up for success in any environment—even a pandemic or market crash.

PRIVATE LENDER

Let’s take a look at the elements of blueprint for scaling growth in real estate.

BE MISSION-DRIVEN Purpose-driven companies achieve 30% higher levels of innovation and grow three times faster than competitors, according to Deloitte research. Clearly, culture paves the way for success. During your high-growth phase in real estate, you may have achieved fast growth by testing innovative ideas, breaking the rules, and/or moving quickly. However, exponential growth can’t be achieved on that strategy alone. You could stagnate or fail after that first growth spurt, especially if you encounter external scenarios like a pandemic. Verne Harnish, the founder of the Entrepreneurs Organization (EO), has studied why startups struggle after their initial high-growth phase. He cites a lack of focus and alignment on vision—not setting long-term goals, scaling too quickly, or not having a scalable infrastructure. All those issues stem from not having a good culture and clear mission. Your mission and cultural values should be more than just words. They should be practical. Your team members should understand how to apply those values to their daily work. You can even create a playbook that is a tool laying out the vision, strategy, and direction of your organization. In short, in the world of real estate, you and your team need something greater to bind you together.

Real estate startups must focus on structure

“Real estate startups must focus on structure and discipline as soon as possible. When you’re growing at breakneck speed, you don’t need theories. You need a blueprint for profitable scalability and direction on how to maximize execution.”

and discipline as soon as possible. When you’re growing at breakneck speed, you

don’t need theories. You need a blueprint

for profitable scalability and direction on

how to maximize execution. The success of this blueprint centers on discipline: D isciplined people D isciplined operations D isciplined strategy D isciplined acceleration

As you get bigger, more is at stake. You simply can’t risk having inefficien-

cies and poor decision-making. With

structure and discipline, you mitigate risks, avoid bottlenecks, and increase your odds of scaling successfully. To scale successfully, you need: A clear mission statement. A definition of your

company’s purpose.

C ore values that your team can live out each day.

A vision for where you’ll be in one, three, five, and 10 years.

A strategy and practical tools for

realizing your mission and vision.

With a great mission, culture, and strategy in place, you’ll have more clarity and focus. And you’ll be able to work with greater purpose.

EMBRACE A STRONG STRUCTURE AND DISCIPLINE You’ve probably heard that 90% of startups fail. This is true, but it’s not as if they

all fall flat on their face. As data from the SBA shows, only 21.5% fail in their first year. Fifty percent of startups fail by their fifth year and 70% by their 10th year. So, many companies plug along but then fade away over time. They fail to scale successfully, and they eventually die due to cash flow issues, inefficient processes, and other problems. In private lending, home flipping, multifamily investing, and other real estate businesses, we see these issues time and time again. The problem is, startups experience initial success by being bold and breaking traditions. If that approach helped you get where you are, you may think that’s the right path forward and may not develop a strong organizational structure. This can cause discipline problems and lead to pitfalls such as not having sufficient capital or not doing proper due diligence for a deal.

CREATE AND EXECUTE A GROWTH PLAYBOOK Once you’ve instilled a purpose-driven

culture and operate with incredible focus and discipline, develop a playbook. This playbook should be able to adapt to the

ebbs and flows of the real estate industry, with plug-and-play tools for any scenario. To design a strategy to grow your business, you must:

Determine where you want to go. Understand what drives your mission. E xecute on the great ideas that align

with your mission, purpose, and value.

This strategy must be clear and

actionable, with SMART goals: Specific, Measurable, Achievable, Realistic, and Timely. Keep these goals

top of mind. Research shows you’re SPRING 2021

GROWTH STR ATEGIES

42% more likely to achieve your goals if you write them down. To analyze your successes and failures, you must know your key metrics. For instance, maybe you’d like to do 20% more real estate lending deals in the coming year. Ask yourself questions like: H ow many more leads do I need to generate to get there?

H ow much more capital do I need from investors?

D o I need to hire more team

members to achieve this goal?

After answering these questions, you can track those metrics and take steps to close any gaps.

ROCK STAR TEAMS PUSH YOU AHEAD Of course, the best plan won’t work without execution. That requires the right people and the right operations. In real estate, founders wear many hats in the early years. But if you want to scale and make a name for yourself in real

successfully becomes almost natural. To get and keep rock star talents, you should:

D efine the right person. For example,

if your company is full of entrepreneurs, you should say you want a self-starter

A-level talent.

B e picky. The cost of a bad hire easily

Your team members must not only possess excellent skills but also fit your

exceeds $40,000 for managerial level

positions, according to studies. In real

organizational culture. Companies with

estate, the number may actually be

high employee engagement are 21% more

between $50,000 and $100,000.

Nationwide Direct Short-term Lender $1M - $75M Since 1997

(616) 977-7900 NorthwindFinancial.com PRIVATE LENDER

your values and are engaged, scaling

who thrives when given autonomy.

Experience Counts.

you have talented individuals who share

estate, you can’t do it all alone. You need

When You Need It ......

• • •

profitable, according to a Gallup survey. If

P ut people in the right role. Put employees in positions where they can best leverage their skills and add value. S et responsibilities and

The same idea applies to real estate business. You don’t achieve greatness in one fell swoop. Greatness comes from consistent work over time.

expectations. Team members must know what they need to accomplish. Make their role and their goals clear and achievable.

If you want to scale successfully, focus on consistency. With the right mission, discipline, strategy, and team, consistency becomes much easier to achieve.

Reward good work. As Gallup

You also need specific processes for all that you do, from hiring to how you find and analyze deals. This keeps you working efficiently, ensures you capture new opportunities, and prevents you from entering bad deals (which can significantly hurt growth).

research states, recognizing employees is low cost, high impact. It boosts morale and productivity.

With a great team and management system, you can build a company in which people take ownership of their work. That should give you most of what you need to withstand market cycles, economic challenges, and anything the competition throws your way.

CONSISTENT EXECUTION ENABLES ACCELERATION You’ve certainly heard WeWork’s story. Their growth-at-all-costs model made them a venture capital darling—until they weren’t. The rapid growth was expensive and inefficient, and the company has had to retreat. Scaling like WeWork can be attractive, but you should manage your growth more wisely. Rome wasn’t built in a day. In Jim Collins’ book Great by Choice he emphasizes the value of consistency through the idea of the 20-mile march. The idea is simple: If you have to walk 3,000 miles, you’re more likely to succeed if you keep a 20-mile pace each day. That way, you can handle any bad weather and tough terrain without overextending yourself.

THE SECRET WEAPON TO SCALE YOUR BUSINESS If you dream of building a $1-billion-dollar real estate business, first build an elite organization and a blueprint for scaling growth. This should be a practical system that leverages your organization’s mission, purpose, values, and talents. Along the way, consistently improve organizational culture, structure, and discipline. Develop a sound strategy and execution playbook. And focus on bringing in the talents that can take you to the next level. With clear goals and responsibilities and great leadership, your team will stay disciplined and perform.

ABOUT THE AUTHOR

DON WENNER Don Wenner is the founder and CEO of DLP Real Estate Capital, a multi-

faceted company that leads and inspires the building of wealth and prosperity

through the execution of innovative real estate solutions.

DLP Real Estate Capital is the parent

company to DLP Capital Partners, DLP Lending, DLP Realty, DLP Real Estate Management, and Alliance Property

Transfer. DLP Real Estate Capital is a

leader in the single- and multi-family real estate sectors of brokerage, investment management, asset

management, property management, construction, and private lending.

The company generates consistent

returns and results for its investors and partners, and gives back through the DLP Positive Returns Foundation, an

organization focusing on job creation

and affordable housing. DLP’s purpose is Dream. Live. Prosper. Passionately

creating prosperity through real estate.

Although there’s no one-size-fits-all approach, this blueprint gives you a framework for building an elite real estate organization and scaling your business. Use it in the way that fits your company best. You’ll reap the rewards as your business achieves sustainable success and growth. ∞

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GROWTH STR ATEGIES

OPTIMIZING FIX-AND-FLIP PROGRAMS FOR GROWTH AND PROFIT Standardizing your processes creates efficiencies and transparency—and drives success. by Andrew Spiering

o set your company up

for success in fix-and-flip lending, the right mix

of standardization, people, and

technology is key for a profitable

program. Let’s look at some of the

best practices for delivering better efficiencies, transparency, and an

outstanding customer experience.

PROCESS STANDARDIZATIONS DRIVE BETTER EXPERIENCES For companies like yours to succeed and grow, consider how company-wide standardizations can provide benefits in multiple areas, for both borrowers and internal teams. Temple View Capital, a leading fix-and-flip lender, is a good example of

PRIVATE LENDER

a company that has focused on standardizing processes that have made a positive difference for its nationwide program. To do fix-and-flip nationally, Temple View Capital has discovered the importance of developing standardized processes that are easy for their time-strapped borrowers to navigate. Eugene Amegashitsi, the vice president of loan and portfolio administration, said the company’s borrowers are focused on finishing their projects so they can sell them, make their money, and move on to their next deal. He noted that if Temple View can’t offer their borrowers consistent processes, they won’t be able to keep them. Recognizing this, Temple View has created a standard process that sets borrowers up for success. They created

tiers based on borrower experience. When the company begins to work with a new borrower, the borrower is placed in the tier that will place them on the right path. As the borrower’s experience grows, Amegashitsi said Temple View can adjust, giving the borrower more flexibility and better terms. Although the relationship may start off simply as a business transaction, depending on how the borrower wants to grow and business progresses overall, the relationship can become symbiotic and breed success for everyone.

COMMUNICATE OFTEN AND EARLY Standardizing processes and programs is a start. To optimize growth and profits even more, consider the improvements

you can make in terms of communication with the customer. The more convenient and transparent your communications, the more your borrowers will feel at ease with you, and their trust in doing business with you will grow. The easier you can make it to communicate and for borrowers to access information, the better and easier the portfolio will be to manage and to keep in good standing. Amegashitsi said Temple View has taken a huge step in improving their client communication, especially post-closing. Why? Because after the loan closes in fix-and-flip, clients will be involved with properties where they don’t know what’s going on behind the walls. He said Temple View’s goal is to ensure they answer borrowers’ questions quickly and with clarity, meaning a response to inquiries in less than 24 hours, a turnaround time that helps borrowers keep

their projects moving forward. The company uses technology that keeps all communication and information organized in one place, which helps meet the goal of a 24-hour response.

complaints has been a big part of Tem-

Still, Amegashitsi said, implementing seamless communication processes isn’t enough. At the heart of any truly successful communication process is a team that understands how it works and can therefore use it to its maximum potential. A team that understands and fully utilizes the tools they have enables them to respond to people’s needs quickly and clearly.

communication and documentation in

Amegashitsi pointed out that the Temple View platform allows them to not only keep a record of customer communication but contains mechanisms that ensure quick and ongoing follow up. Staying on top of any potential issues that could become problems and quickly managing

ple View’s customer service success.

Interestingly, Amegashitsi said that being able to use technology to communicate,

execute documents, and organize all the one place helps keep everyone account-

able. Accountability is especially important when you are working with people who make a living doing construction

projects—not being able to get answers or money quickly can be a big issue.

TECHNOLOGY IS KEY Technology is a major key to opti-

mizing efficiencies in your organization’s day-to-day processes.

Amegashitsi notes that, in particular, Temple View has used technology to

improve the process of requesting draws

SPRING 2021

GROWTH STR ATEGIES

and managing construction projects. He said before the company began using construction loan management software, they had to guess how much time it took from a borrower requesting a draw, to when the inspection was ordered, to when the inspector got out to the site, to when a draw was processed. Using software, they now have a very clear understanding of that timeframe, and the process has sped up considerably.

a certain percentage range of completion

Amegashitsi points out that technology not only makes it easier to manage loans and offer a better customer experience, but also helps you make smarter decisions about your pipeline.

into the flow of business and let you

One way to make better decisions is to analyze computer-generated reports. He said that at any point in time, he can pull a report that shows what’s happening in the company’s portfolio and through comparative analysis access various perspectives of what’s occurring. For example, a report can help you better understand how you were doing a year ago compared to current, or since the coronavirus pandemic began. Lately, Amegashitsi has been leveraging reporting tools to analyze draw request volumes, funds released, and time frames compared to 2020 to see how the COVID-19 crisis has impacted them. Those reports can also provide visibility into the health of your portfolio pipeline, revealing how quickly projects are moving. Amegashitsi reviews percentages of project completion, individually and as a whole, to see how far and fast projects are moving. He tends to check the percentage of projects that are within

PRIVATE LENDER

to assess how the portfolio is flowing.

Your company will need to determine the metrics that are meaningful for it and

that mirror your standards for a healthy

pipeline. For example, as projects progress to completion, you may want to know

what is replacing them and can analyze that information and inform the sales team that you need more loans. That

information can provide critical insights

Borrowers are competing with traditional homebuyers who are driving up prices, forcing companies like Temple View to be more diligent in their valuations and closing timelines to ensure they are not lending based on values that are out of touch with the market. Using your financial capabilities, technology, teams, and standardizations, you’ll put yourself in position to attract best-in-class borrowers who return to you time and time again. ∞

know where and how you need to push. In addition to pipeline health, you will

want to create a cadence for when to look at the health of each project, specifically how many days have passed since the

last draw. Amegashitsi said he needs to

understand how many clients are within

ABOUT THE AUTHOR

a reasonable time frame, such as 30-60 days, and who is beyond 180 days. He

notes that if someone hasn’t taken a draw in six months, there is an issue Temple

View needs to understand and deal with. Setting checkpoints like these will help you understand whether you need to

touch base with a borrower. Doing so

early could mean the difference between solving a small issue immediately or

dealing with a bigger problem that is more costly to resolve down the line.

NAVIGATING THE MARKET FOR 2021 Everyone is dealing with the slowdown

in the fix-and-flip market. The properties for borrowers to do their best business are not as available as they once were.

ANDREW SPIERING Andrew Spiering is the director of

partner development at Land Gorilla, award-winning pioneers of modern construction finance technology.

For the last five years, he has helped partners manage safe, fast, and

profitable construction loans. For more information, visit landgorilla.com.

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scotsmanguide.com SPRING 2021

LEGAL

Borrowers in Bankruptcy Here’s what you need to know about the automatic stay — and strategies for getting past it. by Marc Weitz

As part of a series of articles discussing strategies for private lenders to deal with bankrupt borrowers, this piece takes a deeper look into when the automatic stay applies and strategies for getting around it. We examine grounds for dismissing the bankruptcy or filing a motion for relief from the automatic stay.

hat is an automatic stay?

The automatic stay is an injunction that comes into force immediately when a borrower files for bankruptcy. As a lender, you must halt all efforts to collect on your loan, to stop the foreclosure process, to record any liens or renew judgments, and to stay lawsuits.

Violations of the automatic stay could result in sanctions, and acts done in violation of the stay, even unknowingly, are void. For example, liens

PRIVATE LENDER

recorded or foreclosure sales after a bankruptcy has been filed could be

voided, leading to costly consequences. However, you can postpone the foreclosure sale date indefinitely in the hope

you can find a way around the stay. Also, you must continue to send your regular monthly loan statements to the bor-

rower. Beyond that, do not contact the

borrower. Any contact must go through the borrower’s attorney or by making

proper filings with the bankruptcy court.

WHEN THE AUTOMATIC STAY DOES NOT APPLY Before tackling the automatic stay, make sure it applies. First, is the collateral part of the bankruptcy estate? As an example, consider a case recently where a private lender gave a loan on a property held by an LLC. The LLC’s parent company filed for bankruptcy, not the LLC. The automatic stay applied only to the parent company, and the lender was free to foreclose. However, in such situations, be aware that the parent company may ask the court to extend the stay to the LLC. Another instance is when one person in a married couple files for bankruptcy. The property of the other, non-filing spouse is not part of the bankruptcy unless it’s a community property state. If the borrower filed a bankruptcy that was dismissed within one year before the current bankruptcy, the automatic stay lasts just 30 days. If three or more bankruptcies were dismissed within a year, there is no automatic stay. However, the debtor may ask the court to reimpose the stay for cause. The automatic stay may not apply if the debtor had a prior case dismissed for failure to comply with a court order, or if a motion for relief from stay was filed in a previous case and the debtor dismissed it before the motion could be heard by the court. There is no automatic stay if relief from stay was granted in a prior case involving the same debtor and the same property in the last two years. Equally,

if the court issued an order forbidding the debtor from filing for bankruptcy, there would be no automatic stay. In all these cases, don’t assume that there is no stay and foreclose. Being wrong could be costly. It is recommended that before proceeding with foreclosure, you should file a motion for relief from stay to confirm there is no stay.

GROUNDS FOR A MOTION TO DISMISS Once you’ve determined the automatic stay applies to the collateral real property securing your loan, the next step is to

analyze whether there are valid grounds to ask the court to dismiss the bankruptcy. If the bankruptcy is dismissed, the automatic stay goes away, and you can foreclosure. If the property is owned by a corporation or LLC, figure out if the bankruptcy was properly authorized under the governing document. This document dictates the requirements for a corporation to file for bankruptcy. For instance, if the governing document requires the unanimous vote of all shareholders to file for bankruptcy, make sure the authorization that accompanies the petition follows those rules. The goal of a chapter 11 bankruptcy is to confirm a plan. If you can argue with evi-

dence that the debtor has no realistic possibility of confirming a plan, that would be grounds for dismissal. Indications are a lack of income, the debtor is stalling, or the property is deep underwater. Bad faith is another ground for dismissal. Indications are an incomplete petition, fraud, multiple bankruptcies, few employees, little or no cash flow, few unsecured creditors, or allegations of wrongdoing by the debtor’s principals. Check to see if the debtor is over the chapter limits. To file a chapter 13, the debtor must have less than $419,275 in unsecured debt and $1,257,850 in secured debt. Under the new small

SPRING 2021

LEGAL

business chapter 11 subchapter V, the limit is normally less than $2,725,625 in non-contingent debt. Due to the coronavirus, this was increased to $7,500,000 from March 2020 to March 2021, which, as of press time, Congress is likely to extend. In a chapter 7, the debtor must not have too high of an income, called a means test. Breaking these limits is grounds for dismissal.

GROUNDS FOR RELIEF FROM STAY If you’ve determined the automatic stay applies to your collateral and you don’t have grounds for dismissal, the next step is to determine whether you can move for relief from stay; that is, asking the court for permission to lift the stay specifically for you to foreclosure. The most common ground for private lenders is when the debtor has no equity in the property, and the property is not necessary for reorganization. The first prong is simply that the property is completely underwater. The second only concerns chapters 11 and 13, in which the debtor is trying to confirm a plan. To satisfy this prong, provide evidence that an effective reorganization may occur without the collateral property at issue or that the debtor is unlikely to successfully reorganize. Courts usually rule in favor of the debtor on this prong to give the debtor a chance. If the bankruptcy drags on, you can move the court for relief from stay by saying the debtor is delaying because reorganization is not possible. In a chapter 7, the second prong is eliminated because it is a liquidation, and the debtor is not trying to confirm a plan.

PRIVATE LENDER

Inadequate protection payments are grounds for relief from stay. These are monthly payments from the debtor to a secured creditor to protect their collateral from a diminution in value during the bankruptcy. If the court orders such payments and the debtor does not make them or they are inadequate, the court could grant relief from stay to foreclose. Adequate protection is a great tool for private lenders that will be discussed in a future article. Relief from stay may be granted if you present evidence the bankruptcy was filed in bad faith or as part of a “scheme to hinder, delay, or defraud creditors.” Indicators include: H aving few creditors.

owed. If there’s a deficiency, then you have to file a claim with the bankruptcy court as an unsecured creditor. Other jurisdictions require different steps. Finally, file relief from stay only if you have credible grounds. Don’t file one just to be “aggressive.” Otherwise, you could lose credibility and have trouble filing one later when better grounds exist, such as delay or the lack of a reasonable plan. The next article will discuss how to deal with the bankruptcy if you cannot dismiss the case or get relief from stay. ∞

ABOUT THE AUTHOR

Transferring the property

just before bankruptcy.

N ewly created entities. A n incomplete petition. R elief from stay granted to

you in a previous case.

T he debtor being ordered

not to file for bankruptcy.

A ny circumstantial evidence

supporting a claim for abuse of the bankruptcy system.

You’ll notice that there is a crossover of grounds for a motion to dismiss. If your relief from stay is granted, foreclose as quickly as permissible to prevent the debtor from playing games. Jurisdictions treat what happens next in different ways. In California, you may foreclosure and get paid what you’re

MARC WEITZ Marc Weitz is a California bankruptcy

and real estate attorney helping private lenders recover investments from

borrowers in bankruptcy. With 23 years’ experience in law and investing, Weitz has a unique knowledge and under-

standing of both the investment and the legal side.

Weitz is also a Chartered Financial

Analyst (CFA), a California licensed

real estate broker, and an investment property owner.

Where will your network take you? The top echelon of the real estate investment and private lending industries meet in one place: the Presidents’ Circle. Circle members build deep connections across the REI landscape, learn tomorrow’s trends from leaders driving the industries, and step into the spotlight via Think Realty and the American Association of Private Lenders’ powerful media outlets. Will you be there? aaplonline.com/presidents-circle

SPRING 2021

LEGAL

FEDERAL EVICTION MORATORIUM EXTENDED Here’s a look at what private lenders need to know about the executive order. by Nema Daghbandan

s part of a concerted effort to mitigate the spread of the COVID-19 pandemic, newly-elected President

Joe Biden implemented a flurry of 17 executive orders within a mat-

ter of hours after his inauguration.

One of them is specifically intended

to offer protection for tenants across

the nation. The original version of the

executive order was scheduled to expire on January 31, and one of the Biden

administration’s first actions extended the deadline through March 31, 2021.

WHAT ELSE DOES THE EO INCLUDE? The executive order additionally provides for an extension of the corresponding foreclosure moratorium on federally backed mortgages, including those

affiliated with the USDA, VA, and HUD. It also permits property owners to submit an application for mortgage forbearance 38

PRIVATE LENDER

should they wish to do so. In addition to the extended eviction moratorium, President Biden has requested that Congress funnel more than $30 billion in additional rental assistance. The proposed action earmarks $25 billion to be used as direct rental relief to property owners, with the remaining $5 billion planned to assist in covering energy and utility expenses via initiatives like the Low-Income Home Energy Assistance Program.

BACKGROUND: WHY AN EXTENSION?

in conjunction with several comparable

eviction pauses enacted by state and local governmental entities, were intended to bring financial relief to countless

renters that are finding it hard to make ends meet due to growing unemployment rates. Housing advocates have

applauded President Biden’s decision,

emphasizing the fact that halting evictions is part of a larger public health imperative to stop the spread of COVID-19.

However, the logic used by the Trump

administration and now carried over by

the Biden administration appears dubious and mostly politically motivated; specif-

Shortly after President Biden issued the executive order, there was widespread expectation of further extensions of the eviction moratorium. Notably, the administration extended the foreclosure moratorium for loans covered under the CARES Act through June 30, 2021.

ically, that a temporary pause in evic-

Initially implemented in September 2020, the original federal eviction moratorium,

During 2020, mandatory stay-at-home

tions has any significant impact related to the spread of the novel coronavirus.

Approximately 20% of American house-

holds were delinquent on their rental payments as of December 2020, according to

a study conducted by the Census Bureau. orders were rolled out to curb the spread

of coronavirus; however, governmental initiatives to provide some form of rental assistance have been somewhat limited. This has prompted many tenants to ask: How can the government expect me to stay at home if I can’t stay in my house? In September 2020, former President Trump ordered the CDC to place a federal prohibition on evictions. That executive action was applicable to tenants who anticipated earning less than $99,000 (or $198,000 if filing jointly) in 2020, experienced a significant drop in salary, attempted to pay some or all rent, or tried to submit an application for rental assistance and would be rendered homeless or would experience substandard living conditions if evicted from their current home. The tenant was also required

“It should be noted…that regardless of what moratorium a renter is covered by, their outstanding rent payment balance will not be canceled or waived as part of the process.”

to sign a declaration, under penalty of perjury, and file it with their landlord. On the state level, some jurisdictions implemented more robust forms of eviction protective measures and rental assistance initiatives. On the other end of the spectrum, other states allowed their local moratoriums to expire at the close of 2020. Analysts claim the effects of doing so have had deadly consequences. A study conducted by public health specialists from UCLA and Johns Hopkins Univer-

directly linked to the continuance of evictions during the pandemic. Certain demographics and minorities have been disproportionately impacted by COVID-19 and the subsequent increase in housing displacement.

WHO QUALIFIES? The renewed CDC moratorium on evictions is applicable to the majority of tenants, but not all of them are eligible

sity found that up to 433,700 COVID-19

per the guidelines of the executive order.

cases and nearly 10,700 deaths can be

Renters must meet certain threshold SPRING 2021

LEGAL

criteria to take advantage of the protections the moratorium offers. It should be noted, however, that regardless of

what moratorium a renter is covered by, their outstanding rent payment balance will not be canceled or waived as part

of the process. They will likely still owe the rent when eviction moratoriums at all levels are permanently lifted.

Tenants can still be evicted for offenses

other than being delinquent on their rent installments. For example, the executive

order does not protect renters if they are: B eing evicted for engaging in criminal activity on the rented property.

P utting the health or safety of

other property residents at risk. D amaging or posing an

immediate and significant risk to the rented property.

V iolating any applicable building code, health ordinance, or

similar regulation pertaining to health and safety.

V iolating any other provision or contractual obligation of the lease agreement.

The executive order applies to any

property that is leased for residential use, including any house, building,

mobile home or land in a mobile home

park, or comparable dwelling leased for residential use. Temporary or seasonal tenants are excluded from the order.

Renters are eligible for protection as part of the federal moratorium on evictions if they meet the following conditions: 40

PRIVATE LENDER

R enter is unable to pay their rent due to a significant loss of income or increased medical expenses

ABOUT THE AUTHOR

R enter received under $99,000 in 2020 (or $198,000 as a family), or was not obligated to report their income in 2019, or was issued a stimulus check R enter attempted to obtain rental assistance from their state or municipal government if it was being offered

NEMA DAGHBANDAN Nema Daghbandan, Esq., a partner at Geraci LLP, manages The Real

R enter plans on paying rent, even if it is a partial payment, if they are able to afford it

Estate Finance Group at the law firm.

R enter would be rendered homeless or living in a substandard capacity if evicted from their current home

the preparation of loan documents and

If the conditions are met, the tenant must print the CDC declaration form and provide it to their landlord or property owner via either email or hard copy. All members listed on the lease or rental agreement contract are required to provide a copy of the form individually. Renters who need this information in languages other than English—including Spanish, Chinese, and Arabic—can download the translated version of the CDC declaration forms via the Alliance for Housing Justice website. Landlords who do not comply with the eviction moratorium could face a fine of up to $100,000 or one-year imprisonment, or both, if the noncompliance does not directly lead to the death of the former tenant. Landlords who violate the order and the violation results in a death can be fined up to $250,000 or one-year imprisonment, or both. ∞

Daghbandan’s practice entails all

facets of lending matters across the

country, including but not limited to

addenda in all 50 states, loss mitigation efforts, preparation and negotiation of secondary market documents,

including loan sales and participation

agreements, line of credit/warehouse facilities, hypothecations and securitizations.

Daghbandan advises financial

institutions on various lending matters, including licensing, usury, and

foreclosure. Daghbandan is also an

expert in default management and leads the firm’s nonjudicial trustee group. He may be reached at

Nema@GeraciLLP.com.

SPRING 2021

LEGAL

NEW LAW IMPACTS NON-JUDICIAL FORECLOSURES California enacts major changes to the non-judicial foreclosure process. by Randy Newman

were wiped out. There was no post-sale

except for the Internal Revenue Service.

THE WAY IT IS NOW

ties, the foreclosing lender typically had the

over the opposition of several

should be sold individually or as a group.

industry groups, the California

legislature approved, and the gover-

nor signed into law, SB 1079 which fundamentally changed the way in

which non-judicial foreclosures con-

clude and certain sales are conducted. It is effective January 1, 2021.

Given that trends typically start in California and make their way east, coupled with the political climate in the country, it is not far-fetched to think other states may very well follow in proposing or enacting something similar.

THE WAY IT WAS

right to determine whether the properties

Additionally, the conclusion of the trustee’s sale meant that all rights and interests of

the borrower, current owner (if different), and junior lienholders in the property

redemption period for any of those parties The only claims those foreclosed parties had were for surplus funds, if any. The

successful bidder at the sale, be it a third party or the foreclosing lender, became the owner of the property on the fall-

ing of the gavel. The trustee’s deed was

then issued in the name of the successful bidder and the process was complete.

Following the sale, the lender could not Prior to the enactment of SB 1079, if the deed of trust encumbered multiple proper42

PRIVATE LENDER

As you are probably aware, like much of the country, California has been in the middle of an affordable housing crisis for many years. Except for a few years following the late 1980s, real estate prices in California have skyrocketed, continually outpacing income levels. The state government has made it a mission to look for ways to combat ever-rising prices and create ways to make housing more affordable. Unfortunately, as is often the case, the solution does not always work and can be as bad as, if not worse than, the problem. The legislature perceived one of the problems to be big corporations and hedge funds purchasing most, if not all, of the properties at the foreclosure auction, thereby turning neighborhoods from owner-occupied areas to corporate-owned rental housing. As such, SB 1079 was enacted to, among other things, foster continuing owner-occupancy of one-to-four-unit residential properties that were sold at the foreclosure auction. Thus, this new law applies only to one-to-four residential properties.

n the final few months of

2020, much to the dismay and

Simple, right?

obtain a deficiency judgment, and the borrower had no redemption rights.

Even after SB 1079 became law, certain things have remained consistent. For instance, at the conclusion of the foreclosure auction, the rights and interests of the borrower, current owner, and junior lienholders are all wiped out. No deficiency judgment can be obtained by the foreclosing lender, and the borrower has no post-sale right of redemption. However, the successful bidder at the fore-

for the full amount of its bid. If the

POST-SALE PROCESS

Civil Code 2924m, creates a new process in which these Eligible Bidders have the right to bid on the foreclosed property following the completion of the auction.

If the successful bidder is a natural person who gives the trustee an affidavit that they are buying the property for themselves, they intend to occupy the property as their primary residence within 60 days after the trustee’s deed is recorded, the occupancy will be for at least a year, and they are not the parent, child, or spouse of the trustor/ mortgagor, the foreclosure process is complete, and no further action may be taken.

Under the new process, to be considered to purchase the property, an Eligible Bidder must deliver to the trustee—so that it is received on or before 15 calendar days after the sale—a Notice of Intent to Bid (NOIB). The NOIB is a document that essentially informs the trustee that an Eligible Bidder may put in a bid for the property. The NOIB just simply identifies the Eligible Bidder and the property. No amount of potential bid is necessary to disclose.

The class of Eligible Bidders was appar-

However, if the successful bidder at the auction was not a prospective owner-occupant, certain parties can now purchase the property from the trustee after the sale is concluded (called an “Eligible Bidder”). The law, codified in

If the NOIB is timely received by the trustee, the Eligible Bidder has until 45 calendar days from the foreclosure sale date to submit its bid. Like all bids in California, the amount the Eligible Bidder submits must be certified funds

property as their primary residence under

closure auction may or may not become the owner of the foreclosed property.

Eligible Bidder determines it does not want to bid, there is no penalty to the Eligible Bidder—no action is required. ently created with the intent that it would create more opportunity for owner-occupants to purchase foreclosed properties. Eligible Bidders are broken out into two tiers as to their priority to purchase the property. The first tier consists of the tenant or tenants in the property. An eligible tenant buyer is someone who, at the time of the foreclosure auctions, is occupying the an arm’s length rental or lease agreement that was entered into prior to the recordation of the notice of default and who is not the mortgagor or trustor or the child, parent, or spouse of the mortgagor or trustor. SPRING 2021

LEGAL

The second and final tier of Eligible Bidders are a large group consisting of:

01 A prospective owner-occupant. 02 A nonprofit organization in

which an eligible tenant buyer or prospective owner-occupant is a voting member or director.

03 A n eligible nonprofit

corporation based in California whose primary activity is the development and preservation of affordable rental housing.

04 A limited partnership in which the managing general partner is an eligible nonprofit corporation.

05 A limited liability company in

which the managing member is an eligible nonprofit corporation.

06 A community land trust. 07 A limited equity housing cooperative.

08 T he state, the Regents of the

University of California, a county, city, district, public authority, or public agency, and any other political subdivision or public corporation in the state.

Under the statute, the tenant or all the tenants collectively have a superior right to purchase the property. To do so, the tenants must, through their appointed representative, simply match the high bid at the sale. Upon receipt of that matching bid, the tenants become the owner of the property. If the trustee timely receives the actual bid (proceeds), then all other interests are 44

PRIVATE LENDER

“ Foreclosing lenders must now rethink their bidding strategies at the auction.” cut off. The second tier of Eligible Bidders must exceed by at least one cent the highest bid received at the foreclosure auction. The question then, is, when does it all end? The foreclosure sale is

final upon the earlier to occur of: T he actual foreclosure sale if

a prospective owner-occupant is the successful bidder; or

15 calendar days after the

foreclosure sale if no Eligible

Bidder or eligible tenant buyer submits a bid or NOIB within

said 15 calendar days following the conclusion of the sale; or 4 5 calendar days after the

foreclosure sale if a notice of

intent to bid is received by the

trustee within 15 days following the conclusion of the sale; or

I mmediately upon the trustee’s

receipt of a bid (equal to the

highest bid at the foreclosure

sale) from the representative of

all the eligible tenant buyers, or if there was no eligible tenant

buyer, upon receipt of all of the bids from those who submitted a NOIB, if sooner than 45

calendar days after the sale.

MULTIPLE PROPERTIES Under most deeds of trust that secure multiple one-to-four family properties, the lender or trustee has the option to sell the properties individually or together. Now in California, unless the deed of trust mandates that all the properties be sold together, the properties must be sold individually. Remember, this is designed to prevent corporate purchasers from buying up all the inventory. In practice, however, this should have little effect on how foreclosure auctions are conducted because most lenders typically direct the trustee to sell the properties individually.

THINGS TO CONSIDER Foreclosing lenders must now rethink their bidding strategies at the auction. It is common for lenders and trustees to start the bidding considerably lower than the price it would sell to a third-party at the public auction and then bid the price up based on participation in the foreclosure auction. That is no longer a wise play. Keep in mind that following the auction, an Eligible Bidder or eligible tenant buyer has the right to submit a bid equal to or as little as one penny over the price for which

ABOUT THE AUTHOR

RANDY NEWMAN

the property reverted. The lender must now account for the risk that the property may be purchased post-sale for the opening bid.

There are a lot of avenues for lenders

There are also issues concerning taxation of imputed income, insurance claims if the property is damaged, and the enforceability of personal guarantees.

what they are contemplating. The best

to consider. Remember to watch your legislatures to stay informed about way to help them enact helpful laws is to educate them about the real-world implications of what lenders do. ∞

Randy Newman is a recovering real estate attorney and the founder of

Total Lender Solutions, a non-judicial foreclosure trustee representing

lenders throughout Arizona, California, Nevada, and Texas.

Newman can be reached at (866) 5353736 or randy@tlsemails.com.

AAPL’s annual Day on the Hill returns fall 2021! Join us as we advocate for private lender and real estate investor-friendly legislation, telling the story of what we do and why we matter. Fall 2021 dates TBA soon. More information and registration at aaplonline.com/doth.

2019 Day on the Hill SPRING 2021

LEGAL

JUDICIAL VS. NON-JUDICIAL FORECLOSURE Consider these tips to analyze which method is best to protect your investment. by Romney Navarro

s lenders set their sights

economic conditions such as

most tried-and-true

so on. And, of course, legal conditions

on growth, one of the

ways to grab more business is to expand into new markets. The

concept seems simple enough. Do some more loans in new markets, which you otherwise would not have had access to, and increase your bottom-line. Simple enough, right? Put that way, sure. Simple enough. But lenders measure risk every day. Expansion into new market(s) brings a complex mix of risk components that must be measured the same as any loan or borrower would be. Those components include real estate conditions such as available inventory and size of buyer pool, 46

PRIVATE LENDER

affordability, household income and can’t be overlooked either.

Legal conditions in lending are heavily impacted by the lender’s ability to not only secure their investment (i.e., the

loan) but also secure the collateral (i.e., the pledged property) in the event of a

borrower default by way of a foreclosure process. Foreclosures, while a common occurrence for many lenders, are not

all created equal because each state has its own “unique” foreclosure process.

sure process can substantially affect a lender’s position in a given property. So, what are the different types of foreclosures? As lenders we should know this. Though the “fine print” may vary state by state, there are two primary methods of foreclosure: 1. Judicial (involving the court) 2. Non-judicial (not involving the court) In general, private lending caters largely to residential investment property owners (landlords, flippers, builders, developers, etc.) who seek alternative

This “minor” detail creates a major

financing for their investment prop-

expand into new markets need to under-

on their loans may be subject to losing

associated with each state’s foreclo-

non-judicial foreclosure process.

complexity that lenders looking to

erties. Property owners who default

stand. The process, timelines, and costs

their properties through a judicial or

Although the term “default” is mostly associated with falling behind on mortgage payments, it is much broader than that. Default may (and likely does) include myriad triggering events such as construction stoppage, term maturity, failure to maintain taxes and/or insurance, and even the occasional transfer of ownership interest, sometimes referred to as a quit-claim deed. So, if you are a lender (investing your own capital directly to borrowers or indirectly through brokers, correspondents, or other conduits) that chooses to do loans in states outside your own, what do you need to know about judicial vs. non-judicial foreclosures? What is the difference? Which method is preferred? Where should you consider lending?

JUDICIAL FORECLOSURES In a judicial foreclosure, the lender must file a lawsuit in the courts to foreclose. After a borrower falls behind on payments, the lender sends a letter notifying its intent to foreclose. After that, the lender files a lawsuit in the courts and gives the borrower notice by issuing a summons. The borrower can choose to let the foreclosure happen or appear in court to contest it. If the borrower elects to contest, there will be a court-ordered hearing, and the judge decides whether the foreclosure sale should proceed. If the court decides in favor of the lender, it will enter a judgment ordering the sale of the property to satisfy the debt.

In a few states, the borrow is given the opportunity to redeem by paying off the entire mortgage debt prior to the sale date. However, if that is not the case, then the borrower can elect to leave voluntarily or get evicted. PROS

A lender is more likely to get repaid. CONS

Long and indefinite timelines (six months to three years), typically more expensive, right of redemption periods where borrowers can buy the real estate back States where it is the norm:

Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Kansas, Kentucky, SPRING 2021

LEGAL

Louisiana, Maine, Maryland, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Vermont, and Wisconsin

NON-JUDICIAL FORECLOSURE

steps by a lender-appointed trustee

rather than court-appointed officers. PROS

ABOUT THE AUTHOR

Speed and convenience CONS

In a non-judicial foreclosure state, the lender can foreclose without going through the courts. In non-judicial states, the deed of trust (the legal instrument or security agreement used to buy the property) authorizes a trustee to foreclose on the property if the borrower defaults on their loan. State laws determine the required milestones, such as how much notice a lender must give a borrower, for this foreclosure process. Although the borrower may have some time to make up missed payments to reinstate their loan, if they cannot do this or enter into some kind of workout plan with the lender, they will receive a notice of intent to sell the property on a specific date. Typically, these sales happen at the courthouse

PRIVATE LENDER

The lender typically gives up the right to seek a deficiency judgment against

the borrower. Though they don’t involve the court, a fair amount of legal activity surrounds non-judicial foreclosures (namely, lawsuits filed by borrowers,

other lien holders, or interested parties)

ROMNEY NAVARRO Romney Navarro is a partner at Noble Capital and co-founder of the Private

in order to protect their investments.

Lender Network (thepln.com). He

States where it is the norm:

construction projects through private

Alabama, Alaska, Arizona, Arkansas,

specializes in financing renovation and capital and has more than 16 years of

California, Colorado, District of Colum-

experience in the real estate industry.

bia, Georgia, Idaho, Iowa, Massachu-

Navarro can be reached at

setts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wyoming ∞

rnavarro@noblecapital.com.

OUR AUDIENCE IS WAITING FOR YOU. Each week, 1,300+ real estate investment aficionados download our podcast across 16 of the medium’s top platforms. Think Realty Podcast is their source for the latest industry trends, hard-hitting insights and news. Contact us at sales@thinkrealty.com to reach our ever-growing audience now.

SPRING 2021

LENDER LIMELIGHT WITH BEN FERTIG

PRIVATE LENDER

No Magic Bullets Hard work and execution built Constructive Loans. by Katie Bean

en Fertig, president of

“I applied for I don’t know how many jobs

admits his entrepreneurial

Then he went on an interview for a job as

Constructive Loans, readily

trajectory was not a “rags to riches story.” Though he’s worked with

well-capitalized partners, his focus and drive spurred his success.

Fertig started his career in mortgage lending through a series of fortunate events. Growing up, he dreamed of playing hockey for the New York Rangers. He made it as far as playing Division 1 hockey at the University of Minnesota, but he realized he needed a fallback plan. “I consider myself a fairly smart guy, which enabled me to realize early on that playing hockey for a living wasn’t realistic,” he said. Although he majored in psychology, Fertig focused on the financial services sector when it came time for job interviews.

out of college,” he said.

mortgage loan officer, one of numerous

financial services positions he’d applied

for. Fertig received the job offer at the end of the interview.

“I didn’t even know what a mortgage was,” he chuckled.

He’s since spent his entire 24-year career

in mortgage banking, with the last nine in private mortgage lending.

BUILDING A TEAM Fertig’s upbringing as an athlete led, in part, to the founding of Constructive

Loans. In late 2017, he connected with the partners at Fay Financial. Like him, they were former Division 1 athletes, which

SPRING 2021

LENDER LIMELIGHT WITH BEN FERTIG

made them “relatable,” Fertig said—and their common bond proved crucial for navigating the COVID-19 crisis. Before linking up with the partners at Fay, Fertig had seen plenty of success. He served as chief operating officer at Jordan Capital Finance. In that role, he was instrumental in two sales of the company, including to Blackstone and Finance of America in 2017. After the sale, he remained with Finance of America commercial to run credit and asset management. “I liked it at Finance of America,” he said. “I got to work with a lot of smart people.” But once he clicked with his current investors at Fay Financial, he left Finance of America and quickly got Constructive Loans, which focuses on third-party origination, off the ground. It started strong, earning national recognition early on and proving itself with strong results. “My primary motivation was I knew I could do this business correctly. I knew I could strike the balance between the markets’ needs and organizational necessities,” he said. “I was confident that I could make a lot of stakeholders happy.” Fertig noted Constructive Loans is one of the biggest originators of debt-service coverage ratio (DSCR) rental loans in the private lender space. Fay Financial “has a lot of clients with capital,” he said, and a vision for building complimentary companies that can take advantage of that capital while giving its investors a great return.

CRISIS MODE The coronavirus pandemic hit the industry and Constructive Loans with unprecedented challenges. The company was firing on all cylinders, and “by far” was hitting its highest production in

PRIVATE LENDER

THIS OR THAT ? TEXT OR CALL? ANDROID OR APPLE? SNEAKERS OR FLIP-FLOPS NIGHT OWL OR EARLY BIRD IT’S RARE THAT I SLEEP M UCH AFTER 5.

R AIN OR SHINE? MOUNTAIN OR BEACH?

March 2020 Fertig said. Then came the shutdowns and uncertainty.

“We turned our focus to taking care

“In the third week of March, the market for nonagency mortgage loans dropped between 15 and 20 points in what amounted to four business days,” he said.

That included paying broker fees on loans

By comparison, he said, it took about a year to see that level of price slippage in 2008-2009 at the beginning of the Great Recession.

During that time, the leadership team

“That effectively stopped lending activity. It was not prudent to write loans that were worth 80 to 85 cents on the dollar as soon as you funded them,” Fertig said.

“We were noticeably hyperfocused

On top of that, the team, which had been centralized in a Chicago suburb with a small contingent in Dallas, went remote.

saw few performance issues with its

of stakeholders,” Fertig said.

I SPEND M ORE TIME ON THE GOLF CO URSE BY FAR, BU T BET WEEN THE T WO, I’D RATHER HIKE A M O U N TAIN.

they didn’t fund, reimbursing earnest

money to the borrowers, and paying off warehouse banks first and foremost.

relied on its athletic training to come

ing more and more capital,” he said.

outcome possible in the wake of the crisis.

The team’s focus is paying off. Fertig said

together as a team to achieve the best

during that period,” Fertig said.

By May 2020, capital began to return

“Investors wanted to get back in.”

March 2021 was on track to be the biggest revenue month in the company’s history.

to the market, and Constructive Loans

LEADERSHIP ON ALL LEVELS

portfolio, Fertig said, and it contin-

One of the company’s keys to success has

ued to perform “significantly bet-

been empowering its 50 employees, Fertig

“It was uncharted territory,” he said.

ter” than agency mortgage assets.

So, the leadership team circled the wagons and considered the lessons of the previous financial crisis.

“As early capital came in, more and

tive processes that employees must follow

cal loan performance was attract-

that allow employees to exercise their own

more capital came in. Our histori-

said. Rather than create narrow, prescrip-

to a T, the company offers broad directives

SPRING 2021

LENDER LIMELIGHT WITH BEN FERTIG

FAVORITES? MOVIE? MONEYBALL T V SHOWS? I WATCH CHEERS RERU NS MORE THAN ANYTHING ELSE.

BOOK? “STRAIGHT FROM THE GUT,” BY JEFF WELCH

SEASON? FALL

GUILT Y PLEASURE? CAMYUS CABERNET. I HIGHLY RECOMMEND IT.

ACTIVITIES IN HIS SPARE TIME: GOLF, RU NNING, WORKING OU T

critical thinking, judgment, and influence when processing loans. The approach emphasizes and encourages leadership at all levels. “It’s very difficult to manage through a crisis, especially the one that we went through in March [2020],” Fertig said. “Leadership is not something that I believe exists only at the top of the organization. I think that philosophy was critical in being able to navigate the third week of March and beyond, and it will be critical to navigate the next time things change unexpectedly.” In the third and fourth quarters of 2020, revenue grew steadily, and it continues on an upward trajectory. As the numbers show, the team has been clicking despite the changes and challenges of the past year, including many employees still working remotely. “I miss people being in the office. I hope we get back to that at some point,” Fertig said.

‘NO MAGIC BULLETS’

DOG DAYS OF THE PANDEMIC Like so many Americans during pandemic lockdowns, Ben Fertig signed up to rescue a dog but ended up far down the waiting list. In the end, he turned to a

breeder for his new furry family member, a yellow lab

puppy named Millie. He previously had yellow labs that passed on years ago.

“She’s our third lab and by far the craziest,” he said. “She is something else.”

PRIVATE LENDER

Constructive Loans relies heavily on 360-degree feedback from employees, clients, and capital partners about all aspects of the business. Fertig said they ask employees about how the leadership team is managing the business to what type of culture they want—and a range of questions in between. He said he asks clients how he can help them succeed and how the company’s products, processes, and even pricing fit in. “We’re obsessed with making sure that our clients are successful,” Fertig said.

“At the end of the day, we’re building a good company. It’s for our clients, for our employees, for our capital partners”

“You can’t really do that without understanding what they need.” In Fertig’s eyes, all that feedback adds up to success for the business. “At the end of the day, we’re building a good company. It’s for our clients, for our employees, for our capital partners,” he said. “We know these loans often have a unique story. We need to appreciate that story and keep it in an organized process at the same time. And that is why we’re successful in this space. There’s no magic bullets here.” ∞

ABOUT THE AUTHOR

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.

SPRING 2021

CASE STUDY

ECHO PARK ‘CURATED’ CO-LIVING A community of furnished

bungalows in the trendy Echo Park BEFORE

area of Los Angeles exemplifies the importance of private lending.

he Echo Park area of Los Angeles is what people imagine the “LA lifestyle” is all about. Cool, trendy, and hip are just a few words used to describe it.

When Anil Khera, the CEO of Node Living, contacted Arixa Capital, he shared his vision for building a co-living community project in Echo Park. It was clear that what Khera had in mind was not going to be the typical multifamily acquisition/renovation project Arixa often finances throughout Los Angeles. As Khera explained, “We call it curated co-living, and what we try to do is merge high-quality interior design with the community lifestyle that the co-living movement is all about. You can move into an Instagram-ready apartment and be connected to all the other residents through community events.” The company already had locations in New York and Dublin,

DURING

PRIVATE LENDER

and this project marked its launch into the Los Angeles market.

Lender // Arixa Capital Client/Borrower // Node Los Angeles Location // Echo Park area of Los Angeles Architecture Style // Traditional Year Built // 1922 Square Feet // 3,714 Lot Square Feet // 7,824 Acquisition Cost // $1,192,500 Initial Funding // $1,575,000 (75% of the

purchase price)

Loan Amount // $1,950,000 LTV // 75% ARV // $4,300,000 (45% LTV) Credit Score Considered: // Borrower is a

foreign national

AFTER

Client Borrower Experience Level: // Strong

experience with similar projects in the U.K.

Interest Rate: // 8.5% Loan Term // 12 months plus extensions Rehab Budget // $648,000 Renovation Line // $375,000 Exit Strategy // Refinance and hold

AFTER

SPRING 2021

CASE STUDY

The project location was ideal for Node’s concept, but the existing property was far from hip. It was built on a Sunset Boulevard hillside in 1922 and showed years of deferred maintenance. The multifamily project consisted of six free-standing 1-bedroom/1bath bungalows and a duplex with 2-bedroom/1-bath units.

PROJECT SCOPE The project was a gut-rehab down to the studs that included updating plumbing, roofs, electrical, flooring, fixtures, exteriors, and common areas. Node’s goal was to preserve the Echo Park location’s original 1920s buildings and structures by retaining the Douglas fir ceiling beams and hardwood floors. Each completed unit was fully furnished with vintage-style, highend appliances, modern furniture, and decorations (including work by local artists). The property also featured communal decks with grills to encourage a sense of community. No square footage was added to any of the improvements, although the bungalow layouts were opened from 1/1 to studios. The duplex layout remained the same.

PROJECT CHALLENGES Although the borrower was experienced in building similar projects in New York and Ireland, this was his first project in Los Angeles, and he did not live locally. To ensure a successful project, Node hired a local builder consultant team to assist with budgets, vendors, and inspectors. This team was instrumental in navigating the many details required to complete the project. 58

PRIVATE LENDER

Projects involving 100-year-old properties are not prevalent in Los Angeles. Arixa’s building inspector conducted a site inspection to determine the structural integrity of the existing structures and to confirm that a renovation (not a tear-down) was possible in keeping with Node’s preservation approach. Additionally, Arixa’s inspector determined that the proposed budget was sufficient to create the results Node envisioned. A key part of the underwrite was the determination of the ARV, which is important in assessing the borrower’s ability to obtain traditional take-out financing. When it comes to valuation, unique projects are difficult to value, and this one was no exception. The furnished units with common area amenities would rent for 50% more than comparable unfurnished units (which was the case when stabilized). Since exact comparable properties weren’t available, Arixa worked with appraisers to find comparable furnished corporate housing to substantiate value. This project can now be used to compare similar projects.

SUMMARY Although “cool” and ”hip” are great for design elements, they don’t appeal as much to traditional lenders. The capacity of nontraditional lenders that have the ability and flexibility to embrace unique projects is the true value and advantage of private lending. The success of this project has led to the second Node Los Angeles project, a two-minute walk down the street, financed again by Arixa Capital. The Node Los Angeles project exemplifies the importance of private lending to developing new and innovative housing in the ever-changing real estate landscape, especially as Los Angeles’ need for housing continues to grow. ∞

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AAPL Code of Ethics

SPRING 2021

LEGISL ATION & ADVOCACY

IRS Extends Opportunity Zone Fund Benefit Ongoing pandemic spurs IRS decision to renew relief measures. by Kevin Kim, Esq., and Tae Kim

PRIVATE LENDER

n the recent IRS Notice

2021-10, the regulatory

agency extended relief to Opportunity Zone Funds

PENALTY WAIVER Generally speaking, an Opportunity

due to ongoing concerns stemming

Zone Fund has to meet certain prereq-

ment essentially renews the prior relief measures implemented via IRS Notice 2020-39, which expired at the end of 2020.

If these baseline standards are not met,

from the coronavirus. The announce-

The following is a quick breakdown of the key benefits the IRS is carrying over into 2021.

180-DAY INVESTMENT WINDOW Investors are now afforded a 180-day period during which they may choose to make an investment in an Opportunity Zone Fund. Per the updated notice, if that window would typically expire after March 31, 2020, it may now be prolonged until March 31, 2021.

uisites that are reviewed semi-annually. penalties can be adjudged on the respective fund. IRS Notice 2021-10 effectively

negates any Opportunity Zone penalties for both the 2020 and 2021 tax periods if the fund was established prior to 2021.

The extension does not, however, elimi-

nate penalties meted out to Opportunity Zone Funds that were formed in 2021.

WORKING CAPITAL EXCEPTIONS For entities deemed “qualified opportu-

nity zone businesses,” there is typically a

31-month safe harbor period for retaining working capital. The guidelines provide

a 24-month extension in situations where the business is operating in areas that have been declared a Federal disaster zone. The new IRS Notice explicitly states that this 24-month extension is applicable to any working capital that was retained prior to June 30, 2021. Accordingly, all finances a qualified Opportunity Zone business holds in advance of June 30, 2021, in line with the working capital exception is required to be expended within 55 months of receiving it. This prevents businesses from benefitting from back-to-back 24-month extensions. Regardless, the working capital safe harbor, in addition to any other applicable safe harbor carve-outs (such as those available for tangible property), may be exercised multiple times to separate incoming funds, as long as they are collectively under a 62-month cap. To illustrate, consider a qualified OpportuSPRING 2021

LEGISL ATION & ADVOCACY

nity Zone business that is in receipt of a capital contribution upon its forming and subsequently is granted another capital contribution three months down the road. Assuming that both contributions qualify per the working capital safe harbor, that means that under the IRS’ updated notice, the 62-month cap can be extended another 24 months due to COVID-19 considerations.

SUBSTANTIAL PROPERTY IMPROVEMENTS TIMEFRAME Another method for a potential Opportunity Zone Fund to meet the prerequi-

PRIVATE LENDER

sites for this category is to “substantially improve” the associated property. What qualifies as a “substantial improvement”? Under the preexisting guidance from the IRS, if the basis of the property is doubled under 30 months due to improvements, then the IRS considers it substantially improved. For instance, if an Opportunity Zone Fund shells out $3 million to purchase a piece of real estate and expends an additional $3 million to enhance the property, all within a 30-month window, the property will be officially deemed substantially improved. Per IRS Notice 202110, the 30-month substantial notice period is extended, meaning that Opportunity

Zone Funds are afforded an additional 12 months to double basis in their properties.

REINVESTMENT WINDOW PROLONGED A minimum of 90% of an Opportunity Zone Fund’s assets has to be devoted to “qualified opportunity zone property” or QOZP, which does not account for cash. But if an Opportunity Zone Fund sells QOZP, the proceeds from that transaction may be counted as QOZP on the fund’s ledgers as long as it is reinvested within a 12-month window and specific conditions are additionally met.

The IRS rules provide a 12-month extension of this reinvestment deadline if the delay is attributable to a federally declared disaster, as long as the proceeds are reinvested in relatively the same manner as was planned prior to the occurrence of the disaster. The most recent IRS notice affords Opportunity Zone Funds the opportunity to take advantage of the 12-month reinvestment extension if the original period includes June 30, 2020, up to a 24-month cap.

has indicated as recently as December that he will seek to revise the program to incentivize investor benefits for the low-income communities in the zones.

OUTLOOK FOR OPPORTUNITY ZONES PROGRAM

As census tracts change, the Opportunity Zones can be revised at the state and county level, thereby ensuring the areas that are facing economic upheaval can be targeted by investors seeking tax benefits. This would also fuel the private lending industry with new opportunities to lend on residential and commercial real estate projects that flow in as part of these Opportunity Zone projects. ∞

Many have expressed concern about the Opportunity Zones program and whether it will be repealed or restricted by the new presidential administration. This is highly unlikely. There is no indication of a desire to eliminate the program. President Biden

AAPL’s Government Relations Committee has strongly urged Congress to make the opportunity zone program permanent. This will allow for greater revitalization of low-income communities in the long run, a new incentive to build affordable housing, and investments startups and small businesses.

ABOUT THE AUTHOR KEVIN KIM Kevin Kim is an experienced

corporate and securities law attorney with

AAPL’s general

counsel, Geraci Law Firm, and is dedi-

cated to providing reliable and innovative legal solutions. His practice is focused on real estate matters, particularly on

private placements and other alternative

investments for private lenders, real estate developers, and other real estate entrepreneurs. His work includes seeing that

clients are compliant with the applicable

securities laws, structuring strategic part-

nerships, and creating innovative solutions. His securities and corporate practice also includes preparing complex private and

public securities offerings for alternative

investment platforms for clients throughout the U.S. and abroad.

TAE KIM Tae Kim is a

corporate and

securities attor-

ney at Geraci LLP, whose practice

involves advising

clients on securities compliance in private and public offerings, fund designing, and

preparing offering documents. He and the

corporate and securities team work closely with clients to establish mortgage funds,

real estate acquisition funds, syndications, real estate investment trusts (REITs), and qualified opportunity funds.

SPRING 2021

LEGISL ATION & ADVOCACY

HMDA Compliance Many private lenders consider HMDA compliance and reporting to be a substantial burden.

The CFPB was created in 2011 by the Dodd-Frank Act, in response to the 20072008 financial crisis. Its sole purpose is to protect consumers in the financial marketplace. To fulfill its mission, the CFPB collects substantial amounts of data relating to consumer financial transactions. According to the CFPB, the data it collects and distributes is intended to: H elp show whether lend-

ers are serving the housing

needs of their communities. P rovide public officials infor-

by Michael T. Fallot

mation that helps them make decisions and policies.

S hed light on lending patterns

that could be discriminatory.

ealing with needless

reporting HMDA prepares, with data unrelated to consumer home loans.

and reporting is

So, why are private lenders required to devote significant resources to providing data that is irrelevant to HMDA’s core focus and is likely detrimental to the quality and accuracy of the data HMDA reports regarding consumer home loans?

government regulation

high on the list of frustrations small business owners face.

The Home Mortgage Disclosure Act (Reg

C), also known as HMDA, is one example

in the private lending industry. It requires private lenders to expend significant

resources to comply with the extensive

reporting requirements, and much of the

BACKGROUND ON HMDA AND THE CFPB

information provided is of little value. Most private lenders make business purpose loans to business entities,

often for the purchase and repair of

residential property that is secured by a mortgage. For the most part, HMDA seeks to gather information related to consumers who obtain mortgages for the

residence they will occupy; in other words,

home loans. Thus, much of the data private lenders provide contaminates the very 64

PRIVATE LENDER

Congress enacted HMDA legislation in 1975, and it was implemented by the Federal Reserve Board’s Regulation C. In 2011, the rule-writing authority of Regulation C was transferred to the Consumer Protection Finance Bureau (CFPB) In 2015, updates to HMDA took effect, requiring many private lenders to annually report details about their non-consumer (business purpose) loans secured by residential property.

The CFPB publishes extensive data considered to be the most comprehensive source of publicly available information on the U.S. mortgage market. A significant focus of HMDA-generated data is related to consumers (not businesses), including race, age, ethnicity, credit, financial qualifications, and other demographic information. The 2011 Dodd-Frank Act amended HMDA to require reporting of additional data points, transferred HMDA rulemaking authority to the CFPB, and authorized the CFPB to mandate the collection and reporting of any other information the CFPB requires. Beginning in 2018, the CFPB changed HMDA to expand the types of transactions subject to reporting, the types of financial institutions that must report, the data financial institutions must collect and report, and the methodology for reporting. The CFPB regulations for reportable transactions were changed to define a mortgage

loan as one that is secured by a lien on a

individuals—and these are the primary

residence. The regulations did not provide

data points the CFPB seeks to collect.

a distinction between a consumer mortgage loan for the purpose of purchasing a residence for occupancy, or a business mortgage loan for the business purpose of repairing and improving the property. Private lenders that originate at least 25 closed-end mortgage loans in each of the prior two years must comply with HMDA reporting requirements, which require annual reporting of 110 data points for each application processed. These data points are designed for individual (owner-occupant homeowner) appli-

cants. The majority of these data points are not relevant to business applicants such as corporations or LLCs. Corporations, LLCs, partnerships, and other business entities do not themselves have age, sex, ethnicity, and race characteristics normally associated with

As a result of this change, mortgage loans originated by private lenders became subject to HMDA reporting, even though these loans are not consumer-related transactions, and the CFPB was not mandated to collect data for business purpose transactions.

WHAT IT MEANS FOR PRIVATE LENDERS The CFPB estimates the time required, annually, to collect and report the required HMDA data to be between 9,000 and 161 hours. Many private lenders consider HMDA compliance and reporting to be a substantial burden. Private lenders are not like banks and credit unions, which are highly regu-

lated financial institutions that enjoy

the corresponding benefit of access to

low-cost deposits. Private lenders do not have the level of technology and staff

resources dedicated to compliance that banks and credit unions do, so compli-

ance with the complex reporting requirements mandated by HMDA is even a

more of a burden for private lenders. The 2021 filing instructions for HMDA

data collection are outlined in detail in 161 pages. There is only one permitted

method for submission of data: through

the HMDA platform. Filers must strictly comply with very specific formatting requirements for each of the 110 data

fields, including acceptable values for numeric and alphanumeric fields.

Almost all the data points are designed

primarily with individual consumer home

loan transactions in mind. Thus, it is a formidable task for private lenders to discern SPRING 2021

LEGISL ATION & ADVOCACY

exactly what is an appropriate response to enter for many of the data points.

The HMDA regulations focus on the type

For example, the HMDA filing requires a “principal reason, or reasons for denial…”. There are 11 options for the response, including “Other,” but lack of experience is not one of the 11 options. Many private lenders require applicants to demonstrate prior rehab experience as a condition for approval; thus, it is likely that denial for lack of experience is a frequent occurrence. If the “Other” option is selected, then the private lender must manually fill in an explanation, which is limited to 255 characters. The CFPB provides no guidance regarding how to respond to “Other,” so it is likely a very broad range of responses are entered.

the loan or the borrower. As a result,

Many of the 110 data fields do not apply to non-individual applicants such as corporations, LLCs, and others. Thus, a significant number of the responses must be answered with “N/A” or “Other,” likely causing some respondents concern that their submission will be flagged for review.

WHY NO EXEMPTION? The CFPB has exempted banks, savings associations, and credit unions that have assets below a minimum threshold ($48 million in 2021) from the HMDA reporting requirements. Only certain “insured depository institutions” as defined in HMDA are eligible for this exemption. Private lenders are not depository institutions, and thus do not qualify for this exemption.

PRIVATE LENDER

of property, rather than the purpose of both business purpose and consumer

loans are subject to HMDS reporting. Because the data collected from pri-

cessful, we need the active support of all private lenders. Connect with the AAPL GRC online at https://aaplonline.com/ government-relations/committee, and join us at our quarterly online Town Hall meetings to find out how you can help. ∞

vate lenders is not relevant to consumer loans, it seems reasonable that the

CFPB would consider exempting them

from the reporting requirements. This would likely improve the quality of

data provided by the CFPB, reduce the CFPB’s effort to collect the data, and

greatly reduce the burden on private

ABOUT THE AUTHOR

lenders to collect and report the data.

ADVOCATING FOR CHANGE The CPFB has more than 1,500 employees, enormous legal authority provided by

HMDA, and a strong mandate to advocate for consumers. In contrast, most private

lenders are small businesses with a handful of employees and limited resources.

They are understandably focused on making loans and managing their businesses.

MIKE FALLOT Mike Fallot is the CEO and co-founder of

MM Lending, where he oversees all lending

activities. Fallot enjoys working with new and

experienced real estate investors to structure

Private lenders need a stronger and

financing to achieve their goals.

tors to advocate for reasonable changes

private lending business and has firsthand

louder voice with the CFPB and legislain HMDA reporting requirements. The

AAPL Government Relations Committee (GRC) is actively working to advocate for

change and needs the help and support of AAPL members and all private lenders.

The AAPL GRC is a small, focused group without the lobbying clout or budget of banks and credit unions. To be suc-

He has more than 15 years’ experience in the experience with the boom-and-bust cycles of

real estate. Fallot, a graduate of the University of Louisville, previously served as a partner with a regional CPA firm.

Fallot is board member of the Kentuckiana Real Estate Investors Association, past

president the Louisville chapter of Financial Executives International, a member of the Louisville Rotary Club, and serves on the boards of several nonprofits.

The ® Your Ultimate Lending Platform

SPRING 2021

MARKET & TRENDS

Proposed Licensing Legislation Could Impact the NY Housing Market Current home flippers infuse the housing market with quality, affordable inventory.

around being regulated now. These

lenders mostly provide their services to small businesses who may not realize

what they are getting themselves into.”

by Daren Blomquist

Many in the non-traditional lending space don’t see it that way.

“The government does not need to come in and solve for a problem that does not

exist. We’re not talking about payday roposed legislation in New

practices” from happening, due to the fact

loans. We’re talking about two commercial

for real estate investors

cial lenders are allowed to operate without

tion,” said Jeffrey Tesch, CEO at RCN

York could make it harder

to finance real estate renovation

projects, which could further limit the supply of affordable housing inventory in the state, according to an analysis of home flipping

data from the last two decades.

New York State Assembly Bill A1420 and

its corresponding Senate Bill S10610 would require private lenders to obtain licensing if they offer financing products of

$500,000 or less, according to the Ameri-

can Association of Private Lenders (AAPL). Paul Alexander, legislative director for State Sen. James Sanders Jr., who is

sponsoring the legislation in the state

senate, said by email that the legislation was written to “prevent unfair business 68

PRIVATE LENDER

that “currently, non-traditional commer-

entities engaged in a business transac-

being licensed in New York State.”

Capital, a Connecticut-based commercial

Kevin Carmody, legislative director

for Assemblywoman Kimberly Jean-

Pierre, the state house sponsor, provided some more detail on the bill’s intent.

“The bill intends to license alternative/

non-traditional lenders who have popped up as an alternative way for businesses

to receive a loan,” Carmody wrote in an email response to questions about the legislation, noting that it has received

lender focusing on both single-family and

multi-family loans for real estate investors. Tesch said RCN would likely continue to lend to real estate investors in New

York, even if the new licensing regula-

tions were signed into law—albeit with the hiring of new employees needed to monitor compliance. He thinks

smaller lenders with less capital would likely exit the New York market.

support from the fintech industry.

“Those smaller lenders wouldn’t be able

from the internet age because many of

squeeze capital out of the marketplace,”

the internet. They are not a traditional

bilitating property that’s often not just

“These types of lenders mostly originated

to afford to do it, and you’re just going to

their loans are given out quickly over

Tesch said. “That capital is going to reha-

‘financial institution,’ so they can get

distressed but actually uninhabitable.”

INVESTORS CAST AS VILLAINS Previously proposed New York legislation

more directly targeted real estate investors

housing market, particularly investors who rehab and resell homes in relatively short timeframes for a profit. Data supporting the investors-as-villains

rehabbing and reselling homes in New

narrative is certainly more readily avail-

and its Senate counterpart S3060E pro-

to the 2006 housing bubble and 2008-2009

erty that occurred within two years of the

estate investors were lured into specu-

this new “flip tax” would amount to 20%

adding much value to the home between

prior sale and 15% for properties resold

standards and the skyrocketing home

York City. In 2019, Assembly Bill A5375A

able when looking at the years leading up

posed a new tax on the transfer of prop-

Great Recession. Many new rookie real

prior transfer. According to RealtyTimes,

lative home flipping—often without

for properties resold with 12 months of the

purchase and resale—by loose lending

within 24 months of the prior sale.

prices those loose standards enabled.

Both the “flip tax” legislation and the

A total of 374,107 homes were flipped in

legislation are in committee and may

flipped in 2006, according to data from

evidence that some politicians consider

a home flip as a second sale of a property

more recent private lender licensing

2005, and another 333,155 homes were

never end up as law. Still, both provide

ATTOM Data Solutions. ATTOM defines

real estate investors as the villains of the

within a 12-month period. Those were

SPECUL ATIVE VS. VALUE-ADD HOME FLIPPING U.S. Median Sales Price (Flipped Properties)

U.S. Median Sales Price (All Properties)

Average Flipped Property Age (Years)

Average All Sales Property Age (Years)

42 $270,000 $233,000

$213,000

$199,500 21 17

the two highest years for home flipping volume going back to 2000, the earliest that data is available. Home flips in both years represented 8% of all home sales. A deeper dive into the 2005 data reveals many properties being flipped were newer properties likely to be in good condition and in not much need of rehab before a resale. The average age of properties flipped in 2005 was 17 years, the lowest as far back as data is available—and an average of four years newer than the average 21 years of age for all homes sold during the year. Second, the median price of flipped properties in 2005 was $213,000, or 7% above the $199,500 median price of all home sales for the year. This indicates many of the flippers from this era were simply riding the coattails of a hot market rather than adding value to the market through the renovation of distressed properties that still represented affordable inventory even after the rehab. The 2005 and 2006 home flipping data, along with ample anecdotes documented in pop culture (see The Big Short), point to real estate investors as being part of the problem leading to the housing crash in 2008. The speculative buying and reselling with little value added contributed to the home price bubble. The low- or no-doc loans supporting this speculation were the tip of the spear that eventually burst the home price bubble.

VALUE-ADD HOME FLIPPING 2005

2020

But that narrative of real estate investors as villains doesn’t hold up in more

Source: Auction.com analysis of public record data from ATTOM Data Solutions

SPRING 2021

MARKET & TRENDS

recent years with the tighter lending standards and aging housing stock that is often in need of extensive rehab. The ATTOM data show 233,602 home flips in 2020, representing 6% of all home sales for the year. The average age of properties flipped in 2020 was 42 years, the oldest average age on record and nearly 2.5 times the average age of properties flipped in 2005. Unlike in 2005, when flipped properties were four years newer on average than all homes sold, flipped properties in 2020 were an average of eight years older than all homes sold during the year. These older properties are more likely to have deferred maintenance and need extensive rehab. Because they are purchasing distressed homes in need of extensive repairs, home flippers in 2020 purchased at a discount, 25% below estimated “after-repair” market value on average. But they resold at a

premium—8% above market value on average—a result of the significant value added with rehab. This is according to the deeper dive into the ATTOM data. This value-add home flipping also shows up in the New York City market. In the five boroughs of New York City along with Long Island, homes flipped in 2020 were originally purchased by the real estate investor for an average 46% discount below “after-repair” market value. The bigger discount in New York City compared to nationwide was likely because of more deferred maintenance and rehab needed for the much older properties in New York City (95 years old on average compared to 42 years old nationwide). But the flipped New York City properties still resold at a premium of 3% above estimated “after-repair” market value, indicating substantial renovation on the part of the real estate investor.

RECOVERING MARKET VALUE WITH REHAB Purchase Discount Below Market

Resale Premium Above Market

Average Days to Flip

218

-25%

182

-46%

U.S. 2020 HOME FLIPS

NEW YORK CITY 2020 HOME FLIPS

Source: Auction.com analysis of public record data from ATTOM Data Solutions

PRIVATE LENDER

It’s important to note these are not quick home flips. The extensive rehab requires more than just a few weeks, contrary to what might appear to be the case on HGTV. Nationwide, the average home flip in 2020 took more than six months (182 days). In New York City, the average home flip took more than seven months (218 days). That’s certainly true for Michael Hallman, a Chicago-area real estate investor who renovates and resells between 12 and 20 properties a year, after purchasing many of them as distressed properties on platforms like Auction.com. “I buy and sell properties like I was going to go ahead and live in them. Or a family member was going to live in them. So, we don’t really cut any corners. We go ahead and we make sure everything is done,” said Hallman, adding that neighbors are appreciative of the work he does on his investment properties. “People just love that for their block and for their community, and you’re going to increase the value of their neighborhood and their house as well.”

AFFORDABLE OWNER-OCCUPIED HOUSING Hallman resells most of his properties to owner-occupants, helping to improve homeownership rates in the neighborhoods where he invests. This holds true for most investors purchasing on the Auction.com platform, according to an analysis of more than 28,000 properties sold to third-party buyers at the foreclosure auction via Auction.com in the four quarters ending in first quarter 2020.

“Homes flipped in New York City in 2020 were 95 years old on average, 12 years older than the average age of all homes sold in the city during the year.”

The analysis used public record data and data from the multiple listing service (MLS) to identify which properties had subsequently resold as well as tax assessor data to identify which properties were owner-occupied after that subsequent resale. More than 70% of the subsequent resales were owneroccupied as of the first quarter of 2021. Hallman and investors like him are also a source of much-needed affordable housing inventory. The median sales price of homes flipped in 2020 was $233,000, which is 14% below the median

sales price of all homes sold during the year. That stands in stark contrast to the 7% above the overall market that home flippers were selling for back in 2005. This pattern plays out in New York City as well. The median sales price for homes flipped in the five boroughs and Long Island in 2020 was $475,000, or 15 % below the overall median price for all homes sold for the year. Additionally, homes flipped in New York City in 2020 were 95 years old on average, 12 years older than the average age of all homes sold in the city during the year. ∞

ABOUT THE AUTHOR

DAREN BLOMQUIST Daren Blomquist is vice president of market economics at Auction.com. In this role, Blomquist analyzes

and forecasts complex macro and

microeconomic data trends within

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

sellers using the Auction.com platform. Blomquist’s reports and analysis have been cited by thousands of media

outlets nationwide, including all the major news networks and leading

SUPPLYING MORE AFFORDABLE HOUSING INVENTORY IN NYC NYC Median Sales Price (Flipped Properties)

NYC Median Sales Price (All Properties)

Average Flipped Property Age (Years)

Average All Sales Property Age (Years)

publications such as The Wall Street

Journal, The New York Times, and USA

Today. He has been quoted in hundreds of national and local publications and

has appeared on many national network broadcasts, including CBS, ABC, CNN, CNBC, FOX Business, and Bloomberg.

95 83 75 70 $400,000

$557,500

$475,000 $422,500

2005

2020

Source: Auction.com analysis of public record data from ATTOM Data Solutions

SPRING 2021

MARKETING & SALES

Publish Your Closed Deals Spreading the news about your funded transactions is an easy and effective content marketing strategy. by Rocky Butani

any private lending

firms struggle to stay consistent with their

marketing efforts, espe-

cially smaller operations that don’t

have an in-house marketing person.

There is one marketing strategy every loan originator can, and should, execute consistently: promoting closed deals. So many lenders avoid this simple task and miss out on a free and easy way to generate more leads. You spend so much time and effort to close a loan. It takes only a few minutes to post it on social media or to add it to your next email blast. Posting your funded deals is a good opportunity to remind the public you are actively funding loans. Real estate investors and mortgage brokers who frequently see your closed deals will keep you in mind. They may eventually contact you with a loan request,

PRIVATE LENDER

especially if one of your transactions is similar to a deal they’re working on. Promoting your transactions gives your company credibility and shows transparency. Anyone thinking about submitting a loan request may be impressed with the many loans you’ve funded in the past, and seeing your announcements may encourage them to contact you. In addition to origination leads, posting your closed deals may attract capital. Whether you manage a mortgage fund, sell your loans, or syndicate, your completed transactions will impress capital providers seeking reputable loan originators to do business with. For fund managers, communicating a funded loan to the fund’s investors shortly after closing would likely be appreciated, even if they can see the list of loans on the next performance report.

COMMON CONCERNS AND EXCUSES Although publishing news of your closed deals seems simple, many lenders get caught up in the following common excuses and concerns—and they miss potential opportunities. Too Much Effort // “I’m too busy right now” is one of the most common excuses. Although there are varying degrees of effort you can spend to promote your deals, the simplest approaches shouldn’t take more than 5 minutes. And, if marketing your closed deals helps you get more deals, it’s worth more of your time. Once you have a routine for promoting your transactions, you’ll find there isn’t much to it. Poaching // Some lenders say the reason they don’t promote closed deals is they don’t want competitors to poach their borrower clients. There’s no need to mention the property address or borrower name. Poaching is actually more likely to occur through other means, such as from public records. Too Many Deals // Some lenders fund so many loans every month they’d be overwhelmed with promoting them all. You don’t need to post every deal. Select a few per month, perhaps one per week. ROI // Many lenders don’t put enough effort into this vital marketing task because it’s difficult to measure the return on investment. Many leads won’t tell a lender they made contact because they noticed a closed deal post. However,

reading about a funded deal may have helped with the decision to make contact.

WHAT TO INCLUDE At the bare minimum, here are the key pieces of information you must include when you publish your closed deals: I mage P roperty city and state L oan amount L oan type (purchase, refinance, equity cash out, flip, LTR, construction, etc.)

P roperty type (SFR, multifamily,

land, office, retail, industrial, etc.)

A piece of advice about the image: A real image of the property is essential and gives the deal credibility. Don’t use a photo of the city skyline instead; it makes a terrible impression. If you do a site visit, take a few minutes to get a good

shot of the property with your smartphone. If an appraisal is done, ask the appraiser to send you a photo, or try to grab it from the PDF file. Many lenders will take a browser screenshot of Google streetview. If the streetview image is not good, switch to satellite view and grab an aerial image. For construction loans, use an architect rendering image. The bare minimum for a post about a closed deal is commonly known as a “tombstone.” It’s an image with a few lines of text underneath. Creating a tombstone takes very little effort, and it’s easy to maintain a consistent schedule publishing tombstones once you get in the groove.

LEAD GENERATORS If you’re willing to take 5-10 minutes of your time to write up a summary about the transaction, it will make a bigger impact and potentially generate leads

for you. Many borrowers and brokers love to read about funded transactions because there is an educational benefit. Borrowers local to the property get insights about deals getting done in their backyard. Brokers get to learn about the lender and the types of deals they fund. Here are a few tips:

Tell a story // People are more likely

to remember a story than a tombstone. In addition to the numbers and property details, talk about the problem you solved. Brag about why you were chosen as the lender. Was your pricing was more competitive than other lenders? Did you close fast? Did you already have a relationship with the borrower? The relationship information is valuable. It shows the borrower had a great experience working with you in the past. Focus on the transaction // Try to avoid stating your loan guidelines at

SPRING 2021

MARKETING & SALES

the end of the summary. Most people reading about your closed deal will

likely know about your company and your guidelines. And you can always

L ocation (If in a major metropol-

itan city, which neighborhood? Urban, suburban, or rural? Anything unique about the area?)

include a link to your website.

LTV, LTC, LTARV

Besides the effect a good transac-

E xit strategy

tion summary will have on potential leads, it’s good content that will last for years. Consider writing at least

100 words for every deal summary. Additional details // Here is a list

of additional items to include in your

deal summaries to bring them to life:

L oan term (number of

months or years)

W hy did the borrower use

private lending instead of traditional financing?

A ppraisal (Did you require

a full appraisal or did you do in-house valuation?)

D id you do a site visit?

L ien position

W as the borrower a new cli-

Transaction time (How long

did it take to close?)

AAPL has launched the industry’s first benchmark data survey from an impartial organization. The quarterly survey gathers information on everything from origination volume to loan terms and foreclosure rates. Respondents receive FREE aggregated and anonymized results on a quarterly basis, providing a national and regional snapshot of the private lending industry.

PRIVATE LENDER

with closing the transaction?

I nterest rate

Your journey to private lending industry data begins here.

W ere there any major challenges

ent or repeat client?

W as a mortgage broker involved?

H ow much money did

the broker earn?

Let’s take an even deeper dive based on the loan type used in the deal: Purchase Loans // What was the purchase price? How much did the borrower put down? What was the source of the borrower’s down payment (cash, private investor, cross with another property, 1031 exchange)? Was it an off-market sale? Refinance Loans // Was there an existing mortgage, or was it owned free-and-clear? What was the balance of the previous mortgage(s)? Was any cash out provided? What will the funds be used for? Rehab Value-Add Loans // What percentage of the purchase price did you fund? How much (amount or percentage) did the borrower put down for the purchase? Did you provide the renovation/ construction funds? How much did the borrower contribute to the renovation costs? Did you hold back the renovation costs? How many draws? What did the renovation project entail? Did the project go over budget? How long did it take to complete the renovations? What is the expected after-repair value? Is the borrower an experienced investor? Ground-Up Construction Loans // Did the borrower already own the land? Did the loan include the land acquisition? How much (amount or percentage) did the borrower put down for the purchase? How much did the borrower contribute to the construction costs? What type of property will it be upon completion?

Land Loans // What type of land (infill, rural, agricultural)? What is the zoning? Is the land entitled? Is the borrower planning to develop soon? Does the borrower have approved building plans?

ABOUT THE AUTHOR

WHERE TO PROMOTE Email Marketing // Plug some or all your closed deals into your monthly newsletters. Include all the details in the email, or link to a page on your website for more details. Dedicating an email to just one transaction isn’t recommended. Instead, include a few deals, or mix the announcement up with other content. Social Media // Social media is the easiest way to promote your closed deals. Post an image and description on your social media platforms (LinkedIn, Instagram, Facebook, Twitter, etc.). To maximize exposure, tag all the third parties involved in helping you close the deal (brokers, appraisers, title company, attorney, etc.).

ROCKY BUTANI Rocky Butani is the founder and CEO of PrivateLenderLink.com, a website

where investors and brokers can find direct private lending companies,

mortgage investment opportunities,

and industry service providers. He has been in the private mortgage industry for more than 10 years, focusing on lead generation for lenders.

Website // Set up a page on your website to show all your closed deals. Make this your library of deals that can be referenced at any time. Even deals you funded two years ago may be relevant to a borrower or broker. Lender Directories // For little to no cost, you can leverage other companies to promote closed deals. For example, Scotsman Guide offers a great system for promoting deals. They send out a dedicated email to their audience to feature one deal from multiple lenders. ∞

SPRING 2021

INSUR ANCE

Don’t Let Your Insurance Requirements Get You in Hot Water Forty-two states have a law that say you can’t require too much dwelling insurance. by Lee Rogers

PRIVATE LENDER

nsurance. Just the word can conjure up anxiety and dread in many people, especially those involved with the life cycle of a loan. Most lenders have horror stories of situations where they’re ready to close a loan, only for the closing to be held up or fall apart due to insufficient or expensive insurance. An issue with insurance can lead to a mad scramble to find compliant coverage to get the loan closed. Indeed, it is important to have a wellthought-out process in place when it comes to insurance. Some lenders prefer to handle insurance review and tracking in-house, and others may use an outside vendor to review and approve initial coverage. Ongoing tracking and compliance is an additional task that must be handled and organized. These moving parts make insurance an unwieldy part of the loan process—and one that can expose lenders if the insurance is not handled correctly.

COMMON REQUIRED COVERAGES Most lenders require borrowers to have the following coverages: P roperty Coverage // Coverage for

the dwelling, appurtenant structures, and loss of rental income (if applicable)

B uilders Risk // If the project involves new construction or structural remodeling G eneral Liability // Third-party

bodily injury and property damage coverage for the premises

Flood Insurance // For properties

located in a Special Flood Hazard Area (properties in a 1 in 100-year flood plain)

The amounts of coverage, loss settlement provisions, and perils covered may vary by lender, but one area that is becoming an increasing hot spot is the amount of dwelling coverage a borrower must carry. Most lenders have a property insurance requirement that contains language similar to the following: “The minimum coverage must be equal to or lesser of the following: (1) That the borrower must insure for 100% of the replacement cost of the insurable value of the dwelling and any improvements (if a renovation) or (2) the mortgage or lien amount.” At face value, this seems like a very easy-to-understand provision. However, as a lender, it is vitally important that all members of your organization understand what amounts of coverage to require and when it may be acceptable to allow for less dwelling coverage than the loan amount. You should also note that although your lending requirements may not explicitly state what amount of coverage you will accept, that does not exempt you from following the law of the state where your collateral is located. In short, you may not require a borrower to over-insure a property just to meet your loan amount. Penalties vary by state, and violations of these laws may run afoul of both your state’s banking and your insurance statutes, leading to charges of unfair and deceptive trade practices, fines, and possible license suspension. Additionally, if a borrower does have an insurance policy where the property is artificially over-insured, in the event of a loss, the insurance company is still only going to pay the actual cost to replace the property, not necessarily the declared value of the property.

“… If a borrower does have an insurance policy where the property is artificially over-insured, in the event of a loss, the insurance company is still only going to pay the actual cost to replace the property, not necessarily the declared value of the property.”

WHEN THE LOAN EXCEEDS REPLACEMENT COST The trend of loan amounts exceeding the replacement cost of the property is typically more prevalent in markets where land values are a driving factor of appraised values, such as in California, Seattle, New York City, pockets of Texas, and parts of Florida where properties are proximate to the water.

SPRING 2021

INSUR ANCE

However, across the country there are areas where the demand for single-family housing has rapidly driven up the market value of homes, but replacement costs have not risen as quickly. That gap may shrink due to the rising cost of materials and labor; however, the frothiness in the SFR market is expected to continue as more and more people work from home and move from apartments into more spacious single-family rentals. Indeed, according to a February publication of the S&P CoreLogic Case-Shiller report, the national home price index posted a 10.4% annual gain in December 2020, up from 9.5% growth in November 2020. This was the fastest growth rate since 2013. As a lender, it is important to understand the dynamics between rapidly rising market values and more stable replacement values. In a time of rapidly increasing home values, replacement costs may not increase as quickly.

HOW TO HANDLE THE SITUATION So, how do you avoid this situation, and what are your protections as a lender when the replacement cost of the dwelling doesn’t cover your loan amount? The first step is to require a replacement cost estimator from the insurance agent providing the coverage. Most insurance companies utilize the services of a replacement cost estimator to determine the cost to rebuild the structure(s) they are insuring.

PRIVATE LENDER

Examples of common estimating software insurers use are Marshall & Swift, a CoreLogic product, or 360Value, which is a Verisk product. Many insurers will integrate this software into their rating systems, pull appropriate public data, and determine the replacement cost of a dwelling automatically. Many appraisals will also contain a section devoted to the replacement cost of the property, although the appraisal may not always provide an estimate that is as in-depth as the estimate the insurance company provides. There is also the land value of the property to consider. Because land is not an insurable asset, the residual land value of a property will remain your collateral even if the dwelling is damaged or destroyed by an insured loss. In summary, it is a good idea to understand not only your insurance requirements but also the regulations surrounding them. Resources are available to help you quickly find out how each state’s over-insurance statutes read and what the penalties may be for a violation. Make sure you have a well-thought-out insurance review and tracking process, and provide your staff with the training they need to understand what you are asking your borrowers to insure. Insurance is a powerful tool to help provide protection for your collateral and to transfer the risk from your borrower to the insurance company. However, taking a commonsense and legal approach to what you require is essential in these historic times. ∞

ABOUT THE AUTHOR

LEE ROGERS Lee Rogers is the president of realprotect, an Atlanta-based

insurance brokerage that specializes

in working with residential real estate investors. Rogers and his team insure billions of dollars of residential

investment real estate across all 50 states, and he frequently consults

with leading SFR lenders to advise on insurance requirements, coverage, and risk management. He can be reached at

lrogers@realprotect.com or (770) 718-5214.

GERACI L AW - M E D I A - C O N S U L T I N G

SPRING 2021

PROFESSIONAL DEVELOPMENT

INSIDE THE DEAL: MY EXPERIENCE WORKING WITH A PRIVATE LENDER Solve this one thing, and you’ll mint customers for life. by Sherman Ragland

with private lenders

My plans changed, and so did the way I approached private lenders.

ond deal, which was

CHANGE IN APPROACH

y experience working goes back to my sec-

more than 20 years ago in 2001. The

truth of the matter is, like many new

investors, I was too scared of borrowed money to do my first deal, so I dipped

into my retirement account and did the deal I could do with the cash I had.

My primary goal at the time was to build a portfolio of rental houses, so shifting

from one retirement vehicle to another made sense, and I really didn’t want to

take on more debt. That worked out well for one deal, but I quickly hit the wall

when I ran out of cash. More important, 9/11 happened during the middle of my second deal, and my primary source of

income evaporated seemingly overnight. 80

PRIVATE LENDER

Immediately following 9/11, I started wholesaling properties. Using private lenders became a big part of my success in wholesaling two or three deals a month. Having a lender who was ready to lend to me, or to one of my buyers, made the process of wholesaling seamless. This approach worked well for nine months. Then one of my end-user buyers backed out of the deal, stating that the private lender would not lend to her. The statement sounded odd to me, because I knew the lender would lend to anyone, as long as the underlying transaction (deal) was good and met his criteria.

With the buyer’s permission, I called the private lender and asked why he was turning out this particular deal. He immediately shared with me that there was nothing wrong with the deal, but his rule was that he would not lend to a borrower without getting their spouse’s signature on the paperwork if they were married. Despite putting on all the charm, my private lender stopped me dead in my tracks when he asked me, “Sherman, if her husband doesn’t trust her with the deal, why should I?” Then he said the words that changed my life, “Sherman, this is a great deal you put together. Why don’t you do it? If your wife will sign the paperwork with you, I’ll loan you the money!” That’s when I truly understood the power of private lenders for doing rehabbing

as well as wholesaling. With that one deal, my game plan changed overnight. I was sold on rehabbing, with the first $43,000 profit check to cap off my first year as a full-time real estate investor.

GROWTH—AND MORE CHANGE This business model of buying, fixing, and f lipping single-family houses using private lenders served me well for my first few years in the business. But as I outgrew private lenders, the plan began to change. Two decades ago, most private lenders were hyperlocal. Many did not even lend on the other side of town. To the best of my knowledge, there were only two “national rehab lenders” back in 2003, and they did not lend in every state.

However, they did offer better rates and terms than my local private lenders. The Great Recession brought many changes in the private lending environment for borrowers like me. First, there was an almost total lack of organized capital and private lenders. We had to become good at raising private capital. We did this mainly through private lenders, meaning people who knew little to nothing about real estate but looked to borrowers for their expertise in navigating the rehab (fix-and-flip) waters. One other change occurred in addition to borrowers learning how to become more creative in raising capital. Wall Street fully embraced single-family homes. An explosion of Wall Street-backed funds occurred. These funds looked to actually buy/hold for 3-5 years and buy fix-and-flip

single-family homes coming out of the recession. But, after two or three years that looked as if Wall Street would replace the local rehabbers/borrowers, Wall Street suddenly changed its strategy and decided the better path forward was to make capital available to intermediaries versus actually holding single-family assets. This change by Wall Street set up the current lending environment. First, Wall Street’s participation acknowledged that single-family assets are a viable place to direct capital. Second, nationwide standards have been set for accessing Wall Street capital for single-family assets and, ultimately, making capital available nationwide for single-family assets. Many private lenders have for years known how to tap local sources of capital, such as lines of credit from local lenders SPRING 2021

PROFESSIONAL DEVELOPMENT

and high net-worth individuals through

Most relationships between private

providing borrowers with the tools

influx of Wall Street capital into the

sured in terms of months, unlike other

Most clients are not interested in “one

lenders and their borrowers are mea-

private placement syndications. This

private lending landscape has benefit-

industries where relationships with

and, of course, Wall Street lenders.

decades. “One and done” was very much

A CHANGE THAT STILL NEEDS TO HAPPEN

wholesaler and rehabber 20 years ago.

customers are measured in years and

ted both private lenders and borrowers

the order of the day when I was an active And the same seems to be true today. Why?

Although there is probably more capital

than ever available for private lenders and

borrowers, one thing that surprisingly has not changed during the past 20 years is

private lenders are still very much “capital focused” and not “customer focused.”

needed to meet the borrower’s goals. and done.” Most are interested in build-

ing wealth. Building wealth requires two key things: (1) becoming more efficient

(more profitable) as a rehabber, and (2)

buying and holding assets that contribute to long-term wealth. Both client-centric

goals are at odds with what most private

Because most private lenders are

lenders are capable of doing (or will-

returns for their stakeholders. They

Many clients walk away from the rela-

long-term relationships with bor-

lender when they realize they can obtain

focused on the deal and getting

ing to do) over time for their clients.

are less concerned about building

tionship with their (initial) private

rowers (their clients), which involves

capital at a lower cost as their skills

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For more i nformation or questions email us a t BD@toorakcapital.com

Toorak Capital Partners, is a real estate debt investor backed by KKR & Co. The firm, which buys real estate loans in the US and UK, has funded over $5.0 Billion loans on residential, multifamily, and mixed-use properties to date. TOORAK CAPITAL PARTNERS 15 Maple St., Summit, NJ 07901 | 212.393.4100 | www.toorakcapital.com

PRIVATE LENDER

“ . .. Private lenders who choose to be clientcentered and provide seamless buy/fix/hold capital will have borrowers lining up around the block to do business with them.” Sherman Ragland and David Ragland in front of David’s first fix-and-flip

improve as rehabbers. Many private lenders have recognized this and have created programs that acknowledge better rates for more deals done.

miserably when it came time to convert

Still, when it comes to helping clients build long-term wealth by providing capital that can easily convert to meet the needs of clients who want to buy/fix and hold, the industry continues to operate like it did prior to the Great Recession.

weeks and that we had a Section 8 tenant

Recently, I helped my 19-year-old son obtain his first single-family house as a buy/fix/hold transaction. It was a 30-year-old three-bedroom split level that needed about $30,000 in repairs and to be converted to four bedrooms. With those modifications, the house could easily rent for $3,500 a month, yielding a net monthly cash flow of $1,200. We diligently researched local and national private lenders who could fund the deal, knowing that it was going to be a buy/fix/hold, not a buy/fix/flip. We did our diligence and received (written) commitments to fund the deal as a buy/ fix/hold. Still, the private lender came through like a charm in the initial acquisition and “rehab” funding but failed

the deal into a 30-year investor loan. Suddenly, in spite of the fact we were able to complete the rehab in just four

ABOUT THE AUTHOR

lined up and ready to go in eight weeks, the deal became a problem. Now we had to “wait for two or three more months” and start the loan application process all over again “Please do not sign the lease, just submit it for underwriting” became the new marching orders. Frankly, I appreciated all the private lenders who told us up front they would not fund a deal if the exit strategy was to rent it. At least they saved every-

SHERMAN RAGLAND Sherman Ragland, CCIM, is a member of the FORBES Real Estate Council. He is the founder and dean of the

Realinvestors®️Academy, the first real

one time and grief by being honest.

estate school for real estate investors

In the end, we sold the property and made

Realinvestors®️holds an A+ rating with

an $87,000 profit. I can’t complain about

approved by a state certifying agency. the Better Business Bureau.

making the profit. And I can’t complain about the speed at which this private lender funded the deal and acted on the draw requests. However, I believe private lenders who choose to be client-centered and provide seamless buy/fix/hold capital will have borrowers lining up around the block to do business with them. ∞

SPRING 2021

A APL-AUSE

Introducing AAPL’s 2021-2022 Committees Meet the committee members who will be the association’s advisors in three critical areas: education, advocacy, and ethics.

During the past decade, we’ve zeroed in on three distinct areas that have grown to form the backbone of nearly every initiative we take as an association: Education, Advocacy, and Ethics. To better serve you and the private lending industry, every two years we appoint industry leaders to serve as advisors in these crucial areas. We are pleased to announce our 2021-2022 appointees. Read about their unique perspectives and what they bring to their respective committees below.

E D U C AT I O N A D V I S O R Y C O M M I T T E E

MELISSA MARTORELLA, Geraci LLP I bring legal expertise to AAPL’s Education Advisory Committee. In my day job, I represent lenders, brokers, and other members of the private lending industry, and I advise them on how to lend nationwide and remain compliant when doing so. By working with various members of this community, I also know how to balance legal concerns with business decisions to help private lenders navigate through issues no matter where or how they operate. I use this expertise and experience when working with AAPL and the committee to help advise best practices for our industry.

PRIVATE LENDER

BETH JOHNSON, Co-Founder & Managing Partner, Flynn Family Lending With a professional background in corporate learning and development, I have a significant amount of experience in facilitating all aspects of the training function, including instructional systems design, program design and assessment, and facilitation.

SAM KADDAH, Liquid Logics Building on my strong desire for teaching and advising, I bring a unique combination of 30 years’ experience in technology, fintech, in-depth process optimization and streamlining, Big Four consulting, and Fortune 500 executive leadership. And, as a founder, I am well-versed in building sales and topline growth to enhance knowledge and best practices in the industry.

STEVE KUPTZ, Trinity Mortgage Fund I started in real estate from the public accounting side. I spent my early career—the first six years—with KPMG and later Laventhol and Horwath, focusing specifically on the audit, taxation, and SEC reporting and compliance for large, publicly offered eeal estate syndications. I was fortunate to gain an early “Wall Street” perspective for the accounting, tax, and compliance issues involved in the ownership and ongoing management of large nationwide real estate funds focusing on multifamily, industrial, and commercial office holdings. I then spent 30 years, along with my two business partners, directly involved in the investment, development, construction, financing, and management of affordable multifamily rental, commercial and industrial real estate, focused primarily in Southern California. Through three major downturns and recoveries, I experienced firsthand the challenges and rewards of owning debt-finance real estate. Having experienced the ups and downs from both sides, I bring a healthy and balanced perspective to the lending and borrowing process. For the past five years, my two partners and I have successfully built Trinity Mortgage Fund focusing primarily on fix-and-flip, construction, and acquisition bridge loans in coastal Southern California. From this experience, I bring the perspective of the small (approximately $50 million) fund manager lending directly to entrepreneurial borrowers in coastal San Diego, Los Angeles, and Orange counties. Our borrowers appreciate, and benefit from, the fact we have walked in their shoes over the past 40 years.

SPRING 2021

A APL-AUSE

ERICA LACENTRA, Director of Marketing, RCN Capital I bring more than 8 years of comprehensive marketing experience in the private lending industry to AAPL’s Education Advisory Committee. My areas of specialty include brand development and marketing strategy management, partner relationship management, event planning, digital and print ad development and execution, email marketing, and social media marketing.

BEETA LECHA, Spiegel Accountancy Corp I will continue to provide current and pertinent information as a contributing writer to Private Lender magazine, as well as take part in educational webinars offering progressive content that is relevant to the private lending industry.

JEFF LEVIN, Specialty Lending Group I bring a very well-rounded perspective to the Education Advisory Committee. Throughout my career, I have participated in a wide variety of associations and have always had my hand in their programming, both social and educational. I believe associations are defined by the programming they provide their members. This is the true value add. Associations are a place to get together with like-minded people in your industry to discuss current events, deepen your knowledge, and come together as a united voice for our industry. As a lender for 25+ years, I have first-hand knowledge of the ups and downs of lending as well as governing regulations, trends, and best practices. Besides my lending background, I have been a borrower, a buyer, a seller, and a teacher in the lending field for the past 15 years.

PRIVATE LENDER

RANDY NEWMAN, Total Lender Solutions I bring almost 40 years of real estate experience, including more than 30 years licensed as a real estate attorney and educator, and 15 years as a broker. Having represented every possible participant in real estate transactions as well as litigation gives me a rather broad and unique perspective. I regularly write and teach various real estate topics, with my primary focus the last several years being in the default and foreclosure industry. I keep up-to-date with the new laws and legislation that seem to be in a constant state of flux.

G O V E R N M E N TA L R E L AT I O N S C O M M I T T E E

CHRISTOPHER AMBROSE, Ambrose Law Group LLC I have been involved with the private lending industry for more than 25 years, primarily as legal counsel for private lenders of all sizes and at all levels—from formation and licensing through their day-to-day operations through dissolution. To be an effective legal counselor, I believe a knowledge of all facets of the industry is critical. Toward that end, I have been actively involved with a variety of trade organizations over the past 25 years (primarily in the Pacific Northwest), including the Oregon Mortgage Bankers Association (including as vice president and president) and various legislative committees. I have participated in and seen the great growth of the private lending industry during that time and have assisted with the implementation of a variety of legislative matters, have testified before and served on various governmental committees, and appreciate the impact the private lending industry has in the financial sector. I believe I can be a strong advocate for and against those governmental actions that most impact our industry and am excited to serve.

CORT CHALFANT, Nexus Private Capital It doesn’t hurt that I have decades of experience in real estate acquisitions, development, and finance blended with a healthy dose of economic development work, but perhaps my biggest contribution is energy. While time—or a lack of it—crimps what any of us can contribute, I’m enthusiastic about providing value to AAPL members through the work of the GRC.

SPRING 2021

A APL-AUSE

NEMA DAGHBANDAN, Geraci LLP My entire legal career has revolved around representing private lenders. I love their entrepreneurial spirit and ability to solve complex capital problems that traditional banks cannot. I have had the honor and privilege to be able to get into the legislative advocacy arena, to protect and advance the rights of private lenders, to fend off harmful legislation and regulations, and try to advance causes that provide benefit to private lenders. As an attorney who is deeply immersed in laws that affect private lenders, I am able to quickly analyze proposed legislation to determine its effects on the industry.

MIKE FALLOT, MM Lending LLC I bring more than 15 years of experience as a direct private lender, serving the fix-andflip, single-family market in Kentucky, Ohio, and Indiana. I have served on the board of the Kentuckiana Real Estate Investors Association and the Fuller Center for Housing.

BRIAN GALLIAN, NDetail Capital I bring an open mind and the determination to get our members’ message into the hearts and minds of our elected officials.

MATT GUNTER, RCN Capital One of my personal joys is the interplay between the legal and political processes. It is part of the reason I decided to become a lawyer and a major reason why I wanted to join and enjoy being a part of the Government Relations Committee. Here, I get to use my abilities in a new and unique way, all while providing a service to our members.

PRIVATE LENDER

CHRIS RAGLAND, Ragland Realty I bring a wealth of entrepreneurial and investor experience to the GRC. Having been a part of dozens of businesses throughout my career, I often see around corners, understanding the micro- and macroeconomic nature of private lending and real estate investing.

ETHIC S COMMIT TEE

KEVIN KIM, Geraci LLP I’ve been an attorney serving the private lending industry for nearly 10 years. I’ve also served AAPL as an adviser, instructor, and sponsor during that time. This background grants me a unique insight into the ethical and acceptable practices of a private lender.

MIKE HANNA, Investmark Mortgage Having served on the Ethics Advisory Committee for five years, I am honored to have been selected to continue serving for a sixth. As part of the committee, I assisted in establishing the Code of Ethics, taught the ethics portion for the Certified Private Lender exam, participated in complaint hearings when a violation was reported, wrote ethicsrelated articles for Private Lender, and participated in the committee’s panel discussions at the annual conference in Las Vegas. With more than 16 years of lending experience, I bring to the committee a deep understanding of the lending business, the industry, and the ethical challenges we face as lenders. Each loan has its own dynamics, both with the client and the property being underwritten. While originating almost 2,000 loans and reviewing several thousand applications, I have seen numerous scenarios where ethics have played an important role in deciding whether to fund a loan or how to guide a client over the course of a loan. During these challenging times, behaving ethically is more important than ever.

SPRING 2021

A APL-AUSE

SUSAN NAFTULIN, Rehab Financial Group My unique position as both a lender and lawyer give me a different perspective than other members of the Ethics Advisory Committee. As a lender, I am always looking for opportunities to grow my business, Rehab Financial Group LP (RFG), through marketing and product diversification, while doing the right thing ethically. As a lawyer, I am always looking to protect RFG and keep it on the right side of the law and relevant regulations. These two roles are constantly in tension with each other, and every day is filled with decisions about where the ethical and legal lines are and how to most effectively run a profitable company that is always on the right side of morality and law. It is this perspective that I bring to the Ethics Advisory Committee. When discussing ethical issues among committee members, it is frequently easy to come up with ideas about how something should be managed. But these ideas frequently need to be looked at from 360 degrees, meaning that it needs to be examined as both fundamentally legal, practical from a business perspective, and ethical. Although something may be legal and commercially practicable, the committee must also ensure the ethics threshold is also reached. In addition, I bring an East Coast perspective to the committee, along with Jeff Tesch. RFG is located outside of Philadelphia, and its lending area is primarily along the East Coast. Lending regulations, default managing, and legal process vary widely from region to region and state to state. The presence of voices from different regions provides a healthy balance to the committee. In addition, new fraud techniques tend to show up in one region of the country first and then spread to other regions. Having committee members from across the country allows us to discuss these trends and look out for them as they expand nationally.

RUBEN IZGELOV, Co-Founder/Managing Director, We Lend LLC Although I am not an admitted and practicing attorney (yet), I did graduate at the top of my class from Touro School of Law and always had a love and an appreciation for law and government relations. I also have a very modest network in New York City politics.

PRIVATE LENDER

KEMRA NORSWORTHY, Principal Managing Partner, Bull Funding I bring the experience of lending and a willingness for the industry to be ”doing business correctly.” This makes the field a fair and even playing field. Unethical people create more rules to follow for lenders and business owners who genuinely want the best for clients. I have been an auditor for big banks during the housing bust. I also have a criminal justice degree.

KENDRA ROMMEL, Civic Financial I bring more than 25 years of lending experience and building relationships founded on the ethics I know to be correct. No one wins in bad business dealings. I am thrilled to contribute when and where I can to encourage the development and innovation of good businesses and operators in our space.

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SPRING 2021

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SPRING 2021

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. Each issue, we publish a cross section of service

KAT HUNGERFORD Private Lender Executive Editor

SPRING THIS ISSUE!

Appraisers & Valuations D ata & Metrics Lead Generation N ote Buying/Selling R aising Money

lenders they have previously

keep an eye on this publication

worked with, and reviewing

for future updates, and check

provider specialties. These

their product offerings.

service providers do not

AAPL members can access

pay to be included. Instead,

all service providers online

out our magazine archive at aaplonline.com/magazine-archive. Then consider joining

at aaplonline.com/resource-

AAPL to support this and

expertise, talking to private

guide. If you’re not a member,

other association efforts!

SUMMER

FALL

WINTER

D evelopment Cost Estimates

Funds Control

A ccounting

Investor Reporting Portals

D efault & Loss Mitigation

Loan Origination Services

L egal

we vet them to ensure their

E ducation Fund Administration M arketing P roperty Insurance

L oan Servicing

Warehouse Lenders

L oan Underwriting

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

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Indicates AAPL Membership

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DATA & METRIC S AMERICAN ASSOCIATION OF PRIVATE LENDERS

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SPRING 2021

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SCOTSMAN GUIDE

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NOTE BUYER /SELLER ALPHAFLOW

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w ww.investorfunding.org

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SPRING 2021

L AST CALL WITH MICHAEL TEDESCO

WHAT DRIVES YOU

by Michael Tedesco

’ve always been wired a certain way, from back before I

can remember. I’m very high

energy, very high strung, and very

committed to the things I care about.

My Mom told me a story once about when I was 4. I was jumping on a hotel bed trying to make it to the other bed across the nightstand. I missed the bed, and my cheek hit the corner of the stand leaving an instant knot the size of a golf ball. She said I cried for an hour. As my Mom and Dad were deciding whether to take me to the hospital, I got back up, still crying, and began jumping on the bed again. My Dad yelled “Michael, that’s how this started.”

PRIVATE LENDER

With angry little tears streaming down my giant bruised face, I yelled back, “But I didn’t get it yet!” I jumped again, landed on the other bed, and instantly stopped crying. My Mom said right then and there she knew I would be successful in life. Now, flash forward 25 years later after I’d grown a company 20 times over. The owner came to me and said I was making too much commission and he would have to eliminate it from my contract. He then handed me a piece of paper where he’d scratched out how I could get by on salary alone. In a moment of pure rage, I stood up and protested. “You touch my contract,” I said, “and I walk out tomorrow and start my own company.” I slammed the door, left the office, and stood outside thinking, “Oh, my God, what did I just say?” I never thought about being an entrepreneur, never wanted to own a company, and had zero idea how to even begin. But, somehow, within two weeks, Appraisal Nation LLC was formed. Struggling with your first startup is challenging. Doing it when the housing market collapses a month in was excruciating. We started with two clients, but getting new ones in that kind of market proved nearly impossible. I would look up every mortgage company I could find, drive directly to their offices, ask who their owners were, and try to see them. When they said no, I would call them the next week to remind them how we wanted to be a partner for them. When I ran out of lenders in Raleigh, I moved on to Charlotte, a six-hour round trip weekly drive. This routine continued for over two years, and although the business began to slowly develop profit, I did not. In the first three

years of Appraisal Nation’s existence, I took two paychecks. Two. On weekends, I worked street corners and flea markets selling sports apparel. I worked 12- to 15-hour days, seven days a week for years. We cut coupons, budgeted groceries for three boys, and even put our home up for sale. Never once, not once, did I think Appraisal Nation wouldn’t be successful. I wouldn’t let it fail. I refused to fail even if it meant some suffering. Today, Appraisal Nation is the fifth largest appraisal management company in the country and the largest in private lending. We provide valuation solutions to more than 65% of all institutional investors. We provide employment to well over 100 families. Communities are stronger because of us. None of this happened by accident. No startup angel investor threw money at us on a whim. This company was built through years of tireless hard work and dedication to a belief that our model was correct and our principles were strong. Pure stubbornness and the fact that I refused to quit, even when partners suggested we should, also played a part. I don’t know what makes your business successful—maybe drive, passion, a relentlessness to never fail, or maybe even a little stubbornness. But I do know success is not about money or how many employees you have or how many properties you have. Success is about fulfilling purpose. For me— with my family, my beliefs, and Appraisal Nation—I feel I have fulfillment in those areas, and in many ways I feel successful. But in other ways, I still feel like that 4-yearold boy, tears streaming down his face, still trying to jump across to the other side. And that is what drives me. ∞

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