Private Lender by AAPL by American Association of Private Lenders

The Official Magazine of AAPL | Spring 2022

ADVOCACY 2 Urgent Legislative Issues Impacting Private Lending Page 10

MARKET TRENDS Markets Most At Risk for 2022 Correction Page 58

LENDER LIMELIGHT

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CONTENTS

SPRING 2022

06 A APL AUSE T he Demis e of “ Hard Money ” in a Pr i va te Lending Wor ld

10 ADVOC AC Y 10 A c t i ve Legisla t ion A ler t 14 U pda te on St a te and Loc al Lending I s sues

18 U pda te on CFPB M ee t ing

22 ETHIC S M anaging Employee I s sues E t hic all y

28 FUNDAMENTAL S 2 8 6 Ways to Mitigate Loan Risk 3 2 A necdot al Ver sus Fac t- Bas ed Ev idence in Deal Evalua t ion

3 6 I ndus t r y Per spe c t i ve s: Break ing Into t he Busines s

42 OPER ATIONS 4 2 B ea t ing t he Odds: How

78 MARKETING & SALES T he L andsc ape Ahead for

Account ing C an H elp You

Direc t-to - Consumer Lending

Sc ale Your Busines s

Vs. Broker s

4 6 L ending to a Fr auds ter : A C au t ionar y Tale

84 COMPLIANCE M or tgage Lender

50 LENDER LIMELIGHT C alling His O wn Plays wi th J osh Baker

58 MARKET TRENDS 5 8 T he Housing Mar ke t s Mos t a t Risk for a C or rec t ion in 2022

6 4 M ar ke t Trends A mong

L icensing — W ha t You N eed to K now

88 S TR ATEGY P ar t ner ing wi t h O t her Lender s to W in More Deals

92 C A SE S TUDY C rea t ing Value in a 10 0 -Year Flood Plain

Var ious C ommerc ial A s s e t Clas s es

70 W ha t t he End of t he ny Ev ic t ion and Forec losure Mor a tor iums M eans for Real E s t a te

74 F orec losure Forec as t:

94 VENDOR GUIDE 98 L A S T C ALL F orge t t he H y pe and Foc us on W ha t Reall y Ma t ter s

T he Unex pec ted A head

SPRING 2022

PRIVATE LENDER

FROM THE CORNER OFFICE

WHAT IS YOUR ASSOCIATION DOING FOR YOU? At AAPL, we continually work to provide you with tangible benefits and support through our three pillars: education, ethics, and advocacy. Although many of our initiatives and improvements serve our membership exclusively, others are entirely public. We understand that part of safeguarding our industry means supporting all private lenders. As we rise together, so too do we fall together.

EDDIE WILSON CEO, AAPL

LINDA HYDE

Managing Director, AAPL

KAT HUNGERFORD Executive Editor

DAVID RODRIGUEZ Design

CONTRIBUTORS

Christopher Ambrose, Katie Bean, Daren

Blomquist, Alex Breshears, James Hadlock, Tom Hajda, Kat Hungerford, Ruben Izgelov, Beth

Johnson, Beeta Lecha, Tom Meade, Don Pelgrim, Serge Petroff, Zachary Richards, John V. Santilli, Michael Schumacher

COVER PHOTOGRAPHY Manny Pandya

Private Lender is published quarterly by the

American Association of Private Lenders (AAPL).

AAPL is not responsible for opinions or information presented as fact by authors or advertisers.

SUBSCRIPTIONS

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913-888-1250. Use of Private Lender content

If you ask any AAPL staff about the actionable projects we’re working on today, the immediate response would probably be, "Oh wow, where do I start?” So, here’s your summary for this quarter. Education // We are running a full audit of our decade-plus content archive to bring essentials to the forefront and make it easier for private lenders to find the information they need. As part of that, we’ll also be developing targeted resources to equip borrowers with knowledge about how our industry works, the terms we use (see page 6 for more on that discussion), and what red and green flags to look out for. For our membership, we are expanding our much-loved Certified Private Lender Associate course with a Commercial Asset class. Separately, we are developing a community notice board for job openings and other timely needs—affectionately dubbed the AAPList. Stay tuned for more updates as we move closer to launch. Ethics // Every two years, we ask our Ethics Committee to review our Code of Ethics as a living, breathing document that must change with the times to protect the viability of our industry. They help ensure our Code is clear and complete and does not burden members with unattainable expectations. We will announce any changes in this publication. To provide guidance on these expectations, just as we have integrated ethics topics into this publication (see page 22 on Managing Employee Issues Ethically), so too will we be bringing them to our ongoing webinar series (subscribe to our newsletter at aaplonline.com/friends-ofaapl for invites). Advocacy // California is trying to add an additional capital gains tax to nearly all residential properties sold within seven years of purchase, starting at a high 25% for homes sold within three years. Additionally, New York recently brought a 2021 bill back to life that would require a license to transact commercial (business purpose) loans and other transactions. Find out what we’re doing to fight—and what you can do to help—on page 10. Beyond working for lender-friendly legislation, our largest ongoing effort is to continue building a grassroots network of constituents and growing our ally organizations. We’re happy to report that our strategy of leveraging relationships and education has worked in every single legislative battle we’ve fought, with your combined voices winning the day, time and time again. #YourAssociationAtWork

without the express permission of the American Association of Private Lenders is prohibited. www.aaplonline.com

LINDA HYDE

Managing Director, American Association of Private Lenders

SPRING 2022

A APL AUSE

THE DEMISE OF “HARD MONEY” IN A PRIVATE LENDING WORLD AAPL originated the term "private lender" 13 years ago. Today, we believe borrower education about terminology is the next step to safeguarding the industry while also supporting member businesses. by American Association of Private Lenders Editorial Board

ords have power. We use

own vernacular for finding our address,

them to define our place in the world and to communicate that position to others. Recently, one phrase long used in our industry has come under fire: hard money.

and when “hard money” appears along-

What is a hard money lender? Is it the same as a private lender? An asset-based lender? Non-agency? Balance sheet lender? Non-conventional lender?

on collateral—in this case, the tangi-

Talk to industry professionals, and you’ll come away with more opinions—and conflicting definitions—than there are people at the table.

WHY DOES IT MATTER?

side “private lending” in the search

results, for some, it’s a mental dead end. “Hard money lenders” originally determined creditworthiness based strictly ble “hard” asset of real estate. “Soft”

criteria such as borrower experience,

PRIVATE LENDER

A NEW TERM FOR TODAY’S PROFESSION

exit strategy, credit history, and other considerations weren’t factors. With

housing market crash—true “hard money

Few know that the American Association of Private Lenders was for a brief period in 2009 (the same year it was established) called the National Hard Money Association. The small caucus that gathered at our inaugural annual conference shared ideas to bring the profession into the mainstream and safeguard its position in the larger finance market.

taught us that underwriting both the

Perhaps the most crucial idea to come out of that conference was the need for

less due diligence, hard money lenders could close loans quickly, and borrowers were willing to pay a premium for

that fast close and light underwriting. In today’s more information-rich

world—and a world still riding the Our industry is at a crossroads: Main Street borrowers one direction, Wall Street capital in another, and Uncle Sam increasingly on patrol. Each has their

borrower and the asset is crucial to our own and our borrowers’ success. And the advent of sophisticated origination, underwriting, and servicing tools enabled lenders to keep up with timelines while adding more steps to due diligence.

aftermath of the Great Recession and

loans” are hard to find. The recession

a new term to define their vision for

the industry and its future: not “hard

money” and “hard money lenders” but

“private money” and “private lenders.” With that, we became the American

Association of Private Lenders—and

and provide all parties with a single set of terms that accurately define our profession and the loans transacted.

CONSENSUS, BUT NO QUICK SOLUTION

we began spreading the word.

BACK TO THE CROSSROADS To Capitol Hill, “hard money” hasn’t

evolved from its origins. Conversely, the industry’s real estate investor borrow-

ers want to work with private lenders as they practice today, but still find those

lenders by searching for “hard money.” Although having two different languages to talk with wildly different audiences

may seem immaterial, the reality is that

it’s impossible to keep groups siloed—and legislators have increasingly expressed sensitivity to this terminology.

As an example, nearly every battle AAPL has fought to prevent the increasing

regulation of our industry is because

legislators see continued use of the “hard money” descriptor and don’t understand that it has evolved. We’ve met with suc-

cess at each turn thanks to our ability to reeducate policymakers on who we are,

what we do, and why what we do matters. On the Wall Street front, do we think

“hard money” terminology will cause

their exodus from the industry? Absolutely not. Currently, while they may have personal perceptions about it,

for the most part, our contacts within

and the industry itself. We set a path then to safeguard and support our members’ businesses. Although we recognize “hard money” is not recognized positively in some circles, we need to work toward a solution that allows people to continue to fulfill the needs of their business.

AAPL has been running the long game to minimize use of the “hard money” terminology since 2009. Beyond promoting our “private lender” replacement, by intention “hard money” and its derivatives haven’t appeared in this publication for years (except under very specific editorial exceptions—this being one). As the industry has acclimated to the new term, stakeholders have become more vocal in their distaste for its predecessor.

To that end, the solution is to educate borrowers on what these terms mean and what terminology to use to find the type of loan and partnership they are looking for. This is not a change we can force, because it will leave too many lost connections and missed opportunities on the table. Just as we have nurtured use of “private lender” in our own industry, so too must we partner with others to nurture it among real estate investors.

But.

As much as our industry and practicing professionals may acknowledge the phrase’s reputation , borrowers and their needs are what keep lenders open for business.

Thankfully, this is an endeavor that is already in the works. As many of you know, AAPL’s sister company is Think Realty—an education platform for real estate investors with a 20,000+-strong membership and an even wider network with hundreds of connections to local REIAs. Moving forward, Think Realty will duplicate our editorial guidelines on the use of “hard money” across their media platform. They will also publish educational content on terminology and explain how knowing what words to use can help real estate investors find funding and lending partners efficiently. Additionally, we will work with our wider network to organically feed the movement by providing resources and promoting candid discussion.

THE DIRECTION AHEAD

WHAT YOU CAN DO

Our position has not changed since 2009: We have a duty of care to all our members

As a matter of course, many of you already educate your borrowers on how your

Borrowers still search “hard money” to find private lenders. We’ve had reports from some lenders that eliminating the phrase from their sites led to less traffic and fewer leads. And Google Ads still ranks “hard money” and its iterations as earning more clicks and impressions, although there’s no data on the quality of those leads compared to borrowers searching for “private lenders” and related keywords.

the sector tell us they simply relabel

the loans in their investor reporting. The goal here is to raise perception

SPRING 2022

A APL AUSE

loan programs work and how you differ from conventional mortgage lenders. We encourage you to also include information about the different kinds of private lenders within our industry. Setting expectations and equipping prospects with this knowledge both benefits the borrower and fosters their trust in you. It also serves the good of our industry. Finally, from the many conversations we’ve had with our members and other industry stakeholders on this topic, we’ve found a common desire for ways to differentiate the types of lenders in our space. “Private lender” is an all-encompassing term but can lack nuance. Please tell us what terminology your borrowers have responded well to as you explain the: S ource of your lending capital, whether

that be the capital markets, syndication, and/or your own balance sheet.

Size and scope of your lending busi-

ness, such as if you are lending from a retirement account a few times a year, a local lender closing a few loans per month, or a large regional or national outfit extending hundreds or thousands of loans per year.

L evel of due diligence and your

matrix of “hard” and “soft” underwriting considerations. ∞

Are there other ways you seek to find differentiation within the industry? Let us know.

FINALLY, SOME DEFINITIONS Underpinning the concept of minimizing the use of “hard money” in our industry is a recurring theme of standardization—that the root of the issue is too many interpretations of what the same terms mean. We offer up the following definitions for discussion, debate, fine-tuning, and eventual consensus: P rivate lender: Any non-depository individual or entity that originates business-purpose loans secured by hard assets, generally real estate. H ard money lender: A subset of private lender where creditworthiness is determined solely by the securing real estate collateral. C orrespondent lender: A subset of private lender where the closed loan is sold to investors. Portfolio lender: A subset of private lender where the closed loan remains in the lender’s portfolio. Fund manager: A subset of private lender where, depending on the fund structure, the deployed capital is sourced by offering exempted securities to accredited and occasionally non-accredited private investors. P rivate investor: An individual or entity that seeks a return by deploying capital through a private lender or fund; the investor may or may not be named on the loan’s promissory note. P rivate money broker: Any individual or entity that acts as an intermediary between a borrower and a private lender without directly originating the loan.

PRIVATE LENDER

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(877) 472-4842 www.civicfs.com SPRING 2022 9

ADVOCACY

Active Legislation Alert Proposed California and New York bills will significantly impact private lenders. by Kat Hungerford

hen it rains, it pours.

Within 10 days of each other, California and New York proposed legislation impacting our industry. As of the time of publishing, California seeks to add a capital gains tax to nearly all residences sold within seven years of purchase, while New York is once again looking to require a license to transact commercial (business purpose) loans.

CALIFORNIA AB 1771 FLIP TAX: WHAT YOU NEED TO KNOW California AB 1771 will charge an additional 25% capital gains tax on almost every residential property sold within three years of purchase. The additional tax would decline in annual increments until the property has been owned for more than seven years. Legislators proposed AB 1771, also known as the California Housing Speculation Act, on the misguided notion that soaring prices of California homes are driven by real estate investor purchases of residential properties in California. The bill lacks nuance, with the chief issues being: 10

PRIVATE LENDER

T here are no carve-outs or exemp-

tions for equity earned through property improvement.

E xcept for a few narrowly defined cases,

the bill lumps in consumer homeowners.

One reason we believe policymakers think real estate investors are to blame for the present affordable housing crisis is the data they are getting on “fix-and-flippers" (home sales where the buyer is an entity and the home is resold within a year) includes iBuyers. Whereas “real” real estate investors make substantial improvements to the property, most iBuyers make few repairs. Zillow reported spending an average of $5,555 per residence in fourth quarter 2021. iBuyer’s stated goal is to control the transaction from end to end and make money on each part of that transaction. The result is that their entrance into the market has skewed the real estate investor data to make the whole sector look bad. At the same time, they don’t care about the capital gains tax because that’s not where they’re hoping to earn a return. These are tech “startups” backed by billions, playing out an experiment with disastrous results—even for themselves.

As Opendoor said in their 2021 fourth quarter 10-K report to the Securities and Exchange Commission, “We have a history of losses, and we may not achieve or maintain profitability in the future.” Although tech companies and their experiments come and go, in its effort to decrease real estate speculation, this bill will permanently decimate the rehabilitation of substandard, derelict, or vacant housing stock. The tax means there will be little or no return on investment for mom-and-pop fix-and-flip professionals making needed renovations. These are local real estate investors who support the housing market and ancillary industries from a real end-to-end perspective, including realtors, lenders, contractors, and escrow professionals. The bill also removes one of the chief draws of homeownership vs. renting—the potential to earn equity—for those not certain of their ability to stay in their homes for the duration of legislators’ arbitrary timelines or who must sell due to exigent circumstances. In addition to causing new problems for California’s current and prospective

homeowners and affordable housing stock,

the bill fails to address another cause of the state’s housing crisis: Large institutional investors are purchasing residential

properties in the first-time-homebuyer

price range and turning them into long-

term rentals. These buyers frequently price out potential homeowners with all-cash

offers above market comps. Because these institutional investors are not reselling,

they are not subject to the bill’s premise. They make their money from tenants,

not resale, and their activity is difficult to monitor because they purchase through multiple and often-changing entities.

The proposed timeline and amount of

additional capital gains tax is as follows

for homes sold within a certain num-

payer resides, not where the “needed affordable housing” property is located.

ber of years from the initial purchase:

allocated for such efforts. In addition,

Next Steps. AAPL, our sister company Think Realty, and ally organizations including the California Mortgage Association and the California Association of REALTORS®, are fully opposed to this bill passing in any form. In addition to formal joint opposition letters, we have started a public petition and provided sample letters for you to customize and send to your California representatives at aaplonline.com/ca-f lip-tax. There you can also find additional bill analysis and overview videos.

communities based on where the tax-

Not a California resident or domestically or foreign-licensed business? You should

< 3 years: 25% 3 -4 years: 20% 4 -5 years: 15% 5 -6 years: 10% 6 -7 years: 5% > 7 years: NONE

Finally, although the bill’s text says the

purpose is to put the resulting tax funds toward affordable housing, only about

30% of the additional taxes are specifically the monies raised will be distributed to

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ADVOCACY

still care about this bill! We’ve seen it time and again: State legislators get ideas from one another. A show of force here will demonstrate to other states the battle they will face if they seek something similar. You can help us get the word out by sharing the social posts linked at aaplonline.com/ca-flip-tax.

NEW YORK A1420/S1061 COMMERCIAL LICENSING: WHAT YOU NEED TO KNOW If you’re feeling déjà vu, you’re right on the money: This is the same bill you likely heard us talking about in early 2021, with earlier (unsuccessful)

versions also proposed in the 2019-2020 legislative session. Although the bill went nowhere following its proposal—and our subsequent immediate loud opposition—in January 2021, its sponsor amended and recommitted it to the Banks Committee in mid-March 2022. As of the time of this writing, the only material change to the bill is that 50% of the funds generated via these new licensing fees will be distributed via grants to minority- and women-owned businesses that fit certain criteria specified within the bill text. Below is our original analysis of the bill: New York is proposing a law via Assembly Bill A1420 and corresponding Senate Bill S1061 that will require

private lenders and other persons to obtain a license before providing certain loans and other financial products to businesses located in New York. Loans and other transactions

covered. Licensing would be required

to make loans of $500,000 or less to businesses located in New York for the purpose of assisting the businesses with their capital needs (Covered Loans). This requirement would apply to both secured and unsecured loans.

Licensing would also be required to provide other “commercial financing products” to New York businesses, including lease and accounts receivables transactions of $500,000 or less (Covered Transactions).

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PRIVATE LENDER

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Lenders and other persons covered.

Licensing requirements would apply to: A ll persons making Covered Loans

or other Covered Transactions to New York businesses.

A ll persons paid to refer Covered

Loans or other Covered Transactions to New York businesses.

A ll persons marketing Covered Loans

or other Covered Transactions on behalf of persons who make Covered Loans or other Covered Transactions.

Exemptions. Licenses would

not be required for:

Persons making five or fewer Covered

Loans or other Covered Transactions during any 12-month period.

B anks, credit unions, insurance

companies, trust companies, and similar companies.

We believe passage of this legislation would:

L ower the capital deployed into the

New York economy as private lenders choose to lend their money elsewhere.

D ramatically increase interest rates

for commercial loan borrowers due to private lenders’ higher operating costs and fewer private lenders competing in the New York market.

D ecimate the inventory of affordable

Do we need to worry about this?

The concerning factor here is this bill’s longevity over two consecutive legislative sessions. The latest attempt jumps on the post-COVID assistance bandwagon, alleging that minority and women-owned businesses in New York were left out of the Federal Paycheck Protection Program and are in “desperate need of funding to employ and/or pay staff, purchase inventory and pay rent and utilities.” This may be true, but we question the

KAT HUNGERFORD

motives involved that would establish the

Kat Hungerford is executive editor

Minority- and Women-Owned Business Development and Lending Program, outline that program’s grant eligibility criteria, and provide for its funding—all within a seemingly-unrelated bill on commercial licensing. Our main concern is the program’s inclusion was designed to make this bill a must-pass effort since its previous iterations died in committee. Although the Minority- and Women-Owned Business Development and Lending Program may be a worthy cause, it does not belong in A1420/S1061. Next steps. We have reopened our

petition opposing the bill and will

of Private Lender magazine and

project development manager at

the American Association of Private

Lenders. She specializes in operations, project management, and marketing. Hungerford also acts as secretary for the association’s Government

Relations Committee, which serves as

AAPL’s advocacy arm in Congress and state legislatures.

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

supports the industry's dedication to

best practices by providing educational resources, instilling oversight

processes, and fighting regulatory

encroachment. Find more information at aaplonline.com.

be reengaging our partners and ally organizations in our advocacy efforts. You can download and customize a sample opposition letter at aaplonline.

housing as commercial borrowers intentionally avoid smaller balance loan transactions due to the lack of capital available and the higher cost of borrowing.

uent, please help us get the word out.

Hurt local trade jobs that

It may not affect you today, but New

depend on business income from commercial borrowers.

ABOUT THE AUTHOR

com/NY-ab1420. We will keep that page updated as we monitor the bill’s progress. Even if you are not a New York constit-

York is traditionally the rallying ground for legislation that snowballs. ∞ SPRING 2022

ADVOCACY

Update on State and Local Lending Issues The devil is in the details, so the GRC relies on AAPL members to alert us to proposed legislation that could impact the industry. by Christopher Ambrose

he AAPL Government Rela-

critical role in the process by working with

to monitor legislation that

ful legislation to the GRC’s attention.

tions Committee endeavors

may impact you—both positively

and negatively.

the GRC and bringing potentially impact-

MITIGATING NEW YORK THREATS

Much of this legislation is at the fed-

eral level,including recent foreclosure restrictions, changes involving the

Home Mortgage Disclosure Act, and

regulations issued by the U.S. Securities and Exchange Commission. The GRC also tracks actions, opinions, and guidelines issued by the Con-

sumer Financial Protection Bureau.

In 2021, the GRC helped block implementation of a bill in New York state

that would have required a license to

transact a business-purpose loan. Only 10 states presently require licenses for

certain business purpose loan transactions, and this legislation would have

had a significant impact on those of you

In addition, the GRC monitors state and

who transact business in New York. The

greater impact on your lending activities.

carried over to surrounding states too.

local legislation, which may have an even

impact of the legislation likely would have

Although changes at the state and local

In particular, New York Assembly Bill

level have the potential to significantly

change your business policies and prac-

tices, these changes are not always obvious. Monitoring thousands of proposed

bills can be daunting. However, you play a 14

PRIVATE LENDER

A01420 and Senate Bill S1061 in their

original forms (parallel bills) would have required any person or entity engaged in the business of making or solicit-

ing “commercial financing products to

businesses” of less than $500,000 in New York to obtain a commercial financing license. Although the bills generally were directed at perceived abuses by factoring capital providers (e.g., high rates and high numbers of defaults), the bills were broadly written and did not contain the exemptions that were included in prior, similar pieces of legislation. The proposed legislation would have had the unintended consequence of requiring many AAPL members to obtain a commercial financing license. Similar bills had included exemptions for parties involved in fewer than five transactions per year, banks, credit unions, insurance companies, certain other licensed entities, and most commercial loans secured by real property. And, the state of New York already regulates consumer mortgage lending activity through other licensing regimes—generally limited to loans made to individuals primarily for personal, family, or household purposes.

The penalty provisions of the bills were draconian. If you did not obtain and operate under the proper license, the penalty provisions could have resulted in the complete voiding of the loan, including the loss of your principal. The GRC immediately engaged in several ways. It conveyed an official policy position that raised objections to the bills and proposed a business purpose exemption that matched previous New York legislation, namely an exemption for “any commercial financing product secured by real property.” The GRC also mobilized its lending partners in the region and coordinated an email campaign. Additionally, GRC members Ruben Izgelov and George Caballero met with state officials to express AAPL’s concerns and to propose alternatives. Ultimately, the bills never moved past the committee stage. Although the bills may be reintroduced, the GRC continues to monitor them and remains in contact with their sponsors.

COLORADO WATCHDOGS In Colorado, bill LSS No. 21-0508 would have required a license to service business purpose loans (including self-servicing). This bill would have created the Colorado Nonbank Mortgage Servicers Act. It would have placed certain types of nonbank mortgage servicers that service mortgage loans under the oversight of the administrator of the Colorado Consumer Credit Code. Further, the bill would have required these servicers to abide by requirements related to recordkeeping, reporting, record requests, examinations, and inspections, among

“More and more cities and counties are enacting local laws similar to state lending laws, particularly involving prohibitions on certain lending practices deemed to be abusive." other requirements. A violation would

have been defined as a deceptive trade

practice under the Colorado Consumer Protection Act.

This bill was introduced through reg-

ulatory action and not through normal

legislative channels. It is a prime example of how your efforts can assist the

GRC. This Colorado bill was brought to

WHAT TO WATCH FOR Proposed state and local legislation may not get the big headlines federal legislation gets. However, state and local legislative issues may impact your business as much or more than federal legislation.

the attention of the GRC through AAPL

Here are some areas where changes can create issues for you, so be alert to them:

The GRC promptly went into action and

ommercial licensing C

provided an explanatory memorandum,

B usiness purpose licensing

connected directly with the bill’s sponsor (Rep. Mike Weissman), and coordinated

E xpansion of the definition of consumer purpose licensing

member Boomerang Capital Partners.

with the Colorado Mortgage Association to completely carve out a business-pur-

O rigination licensing

pose lending exemption. The bill did

E xpansion of licensing to real estate secured lending

reintroduced in 2022. As it is doing with

T ransfer tax issues

not move forward in 2021, but it may be

the New York bills, the GRC will continue to monitor future attempts to resurrect the Colorado bill.

These are only the most recent examples

S ervicing issues O rigination issues O wner-occupied housing issues

of how AAPL members are working with

R estrictions on fees or costs

have unintended, detrimental conse-

F air lending (particularly state supplements to federal fair housing laws)

these and other pieces of legislation are

C hanges to foreclosure laws (judicial and nonjudicial)

industry, they could have huge impli-

U sury issues and caps on fees or costs

the GRC to address legislation that may

quences for AAPL’s members. Although not always directed at the private lending cations if concerns are not addressed.

P rohibitions on terms SPRING 2022

ADVOCACY

Changes to enforcement mechanisms

of legislation is addressed on a case-

Changes to security requirements

by-case basis. In some instances, the

C onsumer protections in general that may (intentionally or not) carry over to commercial or business purpose loans

including the Mortgage Bankers Association or one of its state affiliates, real

hanges to state enforcement C agencies or regulators A ssignee liability I nsurance requirements T he broadening of “abusive lending” activities bility to pay, prepayment restrictions, A and amortization restrictions, particularly pertaining to commercial or business purpose loans lternative dispute resolution restric A tions (e.g., mandatory mediation or arbitration limits or requirements) L oan flipping I n general, proposals that may restrict or impede private lending activities More and more cities and counties are enacting local laws similar to state lending laws, particularly involving prohibitions on certain lending practices deemed to be abusive. Although these laws primarily pertain to consumer purpose loans, there may be a trend toward more local involvement in all categories of lending. These local developments may also raise preemption issues and conflicts between the roles of the state and municipal regulators.

HOW YOU CAN ENGAGE The primary role of the GRC is to advocate for your best interests; each piece 16

PRIVATE LENDER

GRC coordinates with other entities,

The GRC counts on AAPL members to keep tabs on state and local legislators. The devil is in the details, and your active engagement is paramount. ∞

estate organizations such as the National Association of Realtors or one of its state affiliates, land title associations, state

associations of mortgage professionals,

ABOUT THE AUTHOR

and builder and developer associations. If you are aware of potential legislation that may impact the private lending

industry (good or bad), please reach out

to the GRC. You can do so by completing

the online form at https://aaplonline.com/ government-relations/report-a-bill/ or

directly reaching out to GRC members:

CHRIS AMBROSE

Chris Ambrose (West), crambrose@ambroselaw.com

Chris Ambrose is a member of Ambrose

Chris Ragland (Southwest),

Amgrose practiced law in San Diego and

chris@raglandrealty.com

C ort Chalfant (Mountain), cort@nexuslending.net

M ike Fallot (East North Central), mike@mmlending.com

G eorge Caballero (East South Central), george@georgecaballero.com

M att Gunter (New England), MGunter@rcncapital.com

Nema Daghbandan (South

Atlantic), nema@geracillp.com

Ruben Izgelov (Middle Atlantic), ruben@welendny.com

L inda Hyde (Vice President of

AAPL), lhyde@aaplonline.com

K at Hungerford (Project

Development for AAPL),

khungerford@aaplonline.com

Law Group LLC, a niche law firm based in Portland and Bend, Oregon. Previously, Los Angeles, California.

Ambrose received a bachelor’s degree in economics from the University of California, San Diego, and his Juris

Doctor from the University of San Diego

School of Law. He is admitted to practice before the state courts of California,

Oregon, and Washington. Ambrose also

has been admitted to practice before the federal district courts in the Northern,

Central, Eastern, and Southern District Courts of California; the District Court of Oregon; the Eastern and Western

District Courts of Washington; and the Ninth Circuit Court of Appeals.

Ambrose has focused on private lending and the real estate industry for 25

years, including entity formation and

operations, licensing, finance, litigation, judicial and nonjudicial foreclosures, workouts, employee relations,

administrative and regulatory challenges and hearings, and dissolution.

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ADVOCACY

UPDATE ON CFPB MEETING FORWARD Last fall, the American Association of Private Lenders, its general counsel Geraci

LLP, the AAPL Government Relations Committee, and several of our members met virtually with key personnel at the Consumer Financial Protection Bureau (CFPB) to discuss the Home Mortgage Disclosure Act’s applicability to and impact on the private lending community.

This meeting—organized as part of our annual Day on Capitol Hill outreach

efforts—represented the first time that members of the private lending community were able to earn an audience with the CFPB. Attending from the CFPB were Tricia Kerney-Willis, assistant director, Mark McArdle, assistant director of mortgage markets; Patrick Orr, acting chief of staff of markets; and Charles Johanek, senior advisor of financial institutions.

During the meeting, we learned that CFPB leaders were unaware of the burden

HMDA rules had on private lenders or that many of the fields were not applicable to business purpose transactions. It seems the 2018 HMDA updates that require

private lenders to furnish Loan Activity Reports (LARs) for their non-consumer loans signaled to the CFPB that its purview had fundamentally expanded.

Previously, AAPL and industry leaders viewed HMDA’s 2018 implementation of a divergent definition of a mortgage loan as an oversight. HMDA uniquely defines

a mortgage loan as “an extension of credit that is secured by a lien on a dwelling.” The precedent—and more widely used definition (such as found in the Truth in

Lending Act)—characterizes a mortgage loan as “any loan primarily for personal, family or household use that is secured by a mortgage …” thereby exempting business purpose, non-consumer loans.

According to CFPB leadership, the HMDA definition change means the CFPB

is now charged with monitoring investment into communities, even when that

investment is not via a consumer financial transaction. However, following the

meeting the CFPB opened a public comment period seeking input on many of the items discussed during the meeting.

At the CFPB’s request, below is the letter we submitted to our contact with the bureau and through the comment portal prior to the January 21 deadline. We

will keep the private lending community and our membership updated on any

subsequent activity. Although we are cautiously hopeful for continued dialogue, we recognize that more action will likely be needed to affect the changes we seek on behalf of the private lending community.

Consumer Financial Protection Bureau 1700 G Street NW Washington, D.C. 20552 By email: 2021-HMDA-RFI@cfpb.gov Re: Comments to Request for Information Regarding the HMDA Rule Assessment Docket No. CFPB-2021-0018

Dear Mr. Charles Johanek, We are writing on behalf of the American Association of Private Lenders (“AAPL”), an association of non-depository lending individuals and organizations that primarily make loans secured by real estate. Most of our members make loans solely for business and commercial purposes which are often made to organizations and not individuals or natural persons. We appreciate the opportunity to comment on the foregoing Request for Information and explain why the current scope and coverage of the Home Mortgage Disclosure Act (“HMDA”) and its implementation of Regulation C are overly broad and should not continue to apply in its current form to Private Lenders. As stated above, AAPL’s membership primarily makes extensions of credit to borrowers for business and commercial purposes such as the acquisition of rental property or the construction and rehabilitation of homes by real estate investors with the intent of those investors to sell the property to an eventual end-user who will occupy the property. Even though the loans may be secured by dwellings, the borrowers generally do not occupy the property and the loan is for business purposes meaning TILA and RESPA do not apply.

INSTITUTIONAL COVERAGE AND LOAN-VOLUME THRESHOLDS The HMDA Rule1 currently applies to nondepository financial institutions that: (i)

on the preceding December 31, had a home office or branch office in an MSA; and

(ii)

meet at least one of the following criteria:

(A) In each of the two preceding calendar years, originated at least 100 closed-end mortgage loans that are not excluded, and

(B) In each of the two preceding calendar years, originated at least 500 open-end lines of credit that are not excluded. 2

As defined in the Request for Information, the “HMDA Rule” is defined as the final rule on HMDA the Bureau issued in October 2015 and all related amendments issued in 2017, 2018, 2019 and 2020. As noted by the Bureau in its Request for Information, certain provisions in the 2020 HMDA Final Rule that would not go into effect until January 2022, such as the increase in the open-end coverage threshold, are not being considered under this assessment.

2 Threshold to be reduced to 200 open-end lines of credit as of January 1, 2022. SPRING 2022

ADVOCACY

For nondepository financial institutions,

Private Lenders originating business or

commercial-purpose closed-end

the HMDA Rule removed the pre-existing

commercial purpose mortgage loans to

mortgage loans and open-end

institutional coverage tests based on

500 closed-end mortgages in each of

lines of credit for home purchase,

asset-size or loan originations and total

the two preceding calendar years. The

refinancing, or home improvement

loan amounts. This means that, unlike

Bureau should also consider streamlining

purposes. As the Bureau mentioned

depository institutions, nondepository

the required data fields to be collected

in its Request for Information:

institutions must comply with the full

and reported by Private Lenders in a

array of data collection and reporting

manner consistent with the reduced

regardless of the asset size or revenues

reporting requirements for certain

of the lender. The average AAPL

depository institutions and credit unions.

member makes less than five hundred

We believe that implementing the

law consistently for the purpose of

foregoing threshold would prevent

ensuring that all consumers have

certain Private Lenders from reducing or

access to markets for consumer

ceasing their lending activity because of

financial products and services and

the fixed costs of complying with HMDA.

that markets for consumer financial

This is important, because a reduction

products and services are fair,

in access to credit would run contrary to

transparent, and competitive. Section

the community development purpose of

1021 also sets forth the Bureau’s

section 1071 of the Dodd-Frank Wall Street

objectives, which are to exercise its

Reform and Consumer Protection Act

authorities under Federal consumer

(“Dodd-Frank Act”). Furthermore, smaller

financial law for the purposes of

We are concerned that smaller Private

Private Lenders without the financial

ensuring that, with respect to consumer

Lenders will either avoid HMDA

means to fully comply with HMDA’s

financial products and services:

compliance or reduce or cease their

collection and reporting requirements

lending activity because of the higher

may ultimately report information to

relative fixed costs of complying with

the Bureau that is neither fulsome

current HMDA requirements. We

nor complete, resulting in data that is

believe that the Bureau should consider

potentially misleading and unhelpful. The

introducing both an asset and revenues

utility of HMDA data reported by Private

threshold to address the greater burdens

Lenders is further diminished by the fact

associated with HMDA compliance

that most borrowers are organizations

by Private Lenders. Private Lenders

rather than individuals, which means

with assets and revenues under such

that no borrower demographic data

thresholds should be exempt from the

is reported with respect to such

HMDA data collection and reporting

borrowers’ race, ethnicity, sex, or age.

loan transactions annually, and many have fewer than fifteen employees in total. This means that the monetary costs and related compliance burdens associated with HMDA compliance are proportionally greater for these smaller lenders than for larger depository institutions and other market participants who can better absorb the compliance costs associated with HMDA.

“Section 1021 of the Dodd-Frank Act states that the Bureau shall seek to implement and, where applicable, enforce Federal consumer financial

(a) Consumers are provided with timely and understandable information to make responsible decisions about financial transactions; (b) Consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination; (c) Outdated, unnecessary, or unduly burdensome regulations are regularly

requirements. AAPL believes that a $200

TRANSACTIONAL COVERAGE

identified and addressed in

Further, we believe that it would be

The HMDA Rule requires reporting

regulatory burdens;

appropriate and equitable to increase

of applications for, and originations

(d) Federal consumer financial

the covered loan volume threshold for

of, dwelling-secured business- or

million asset-based exemption would be appropriate for Private Lenders.

Most business or commercial purpose mortgage loans originated by Private Lenders are closed-end.

PRIVATE LENDER

order to reduce unwarranted

law is enforced consistently,

without regard to the status

private investment to areas where it

Considerable effort is expended by

of a person as a depository

is needed, or assisting in identifying

Private Lenders and other lenders that

institution, in order to promote

possible discriminatory lending patterns

originate only business or commercial

fair competition; and

and enforcing antidiscrimination statutes.

purpose mortgage loans, through acquiring HMDA reporting software,

(e) Markets for consumer

STREAMLINED PROCESS

employing personnel for the sole

and efficiently to facilitate

Many of the required HMDA data fields

report “not applicable” throughout

access and innovation.”

are applicable only to mortgage loans

the process. We request the Bureau to

entered into by consumer borrowers

consider creating a streamlined process

primarily for personal, family, or household

for Private Lenders by eliminating

purposes and do not apply to business

these fields from the required data set

or commercial purpose mortgage loans

to be completed by such lenders.

financial products and services operate transparently

We do not believe that the objectives of the Dodd-Frank Act are furthered by subjecting business purpose mortgage loans to the coverage of HMDA. As

made to business entity borrowers.

previously mentioned, most Private Lenders originate mortgage loans for solely business and commercial purposes which

purpose of HMDA reporting, to then

These fields include rate spread, race,

CONCLUSION

ethnicity, sex, age, borrower credit score,

are almost always made to organizations

borrower credit scoring model, HOEPA

We respectfully request the Bureau

and not individuals or natural persons.

status, total loan costs, total points and

to consider exempting business

fees, origination charges, discount points,

purpose mortgage loans from the

lender credits, prepayment penalty

coverage of HMDA. In the alternative

terms, DTI ratio, loan originator NMLS ID,

we request the Bureau to consider:

We urge the Bureau to reconsider the HMDA Rule’s adoption of a dwelling secured standard, which captures business purpose mortgage loans

and automated underwriting system.

R educing the scope of

secured by multi-family (5 + units)

Since key questions regarding protected

business purpose mortgage

dwellings, large apartment buildings,

class characterizations such as ethnicity,

loans covered by HMDA,

and condominium associations. We

sex and race remain necessarily

question whether this standard has

unrecorded in reports by private lenders

furthered HMDA’s goals of bringing

engaged in business purpose loans to

greater transparency to the mortgage

legal entities, we submit that the data

market, helping to determine whether

collection process imposed on them

financial institutions are serving the

provides literally none of the intended

housing needs of their communities,

utility for which the rules were originally

assisting public officials in distributing

devised and yet impose a considerable

irrelevant data fields collected for

public-sector investment to attract

administrative and regulatory burden.

investment/business purpose loans.

A dding new asset and revenue

thresholds to the institutional coverage of Private Lenders, and I ncreasing the loan volume

thresholds for Private Lenders, and R educing or eliminating certain

Sincerely,

Eddie Wilson CEO AAPL

Linda Hyde Managing Director AAPL

Nema Daghbandan AAPL General Counsel Geraci LLP SPRING 2022

ETHICS

Managing Employee Issues Ethically Understanding these best practices will help you address an employee's mental health issues, especially within the stressful lending services industry. by James Hadlock

FORWARD FROM JEFF SPIEGEL, FIRST CHAIR OF AAPL’S ETHICS COMMITTEE AND PRINCIPAL OF SPIEGEL ACCOUNTANCY CORP.: AAPL, as the oldest and largest trade association safeguarding the private lending profession, has a storied history of firsts—one of the most crucial being the establishment of its Code of Ethics. By administering the Code, AAPL ensures our industry remains viable and trusted by borrowers, investors, and partners. It also serves as proof of internal checks and balances to help maintain the industry’s status quo in federal and state legislatures. AAPL’s Ethics Committee regularly reviews the Code for ongoing clarity and completeness and ensures it does not unnecessarily burden membership with impractical expectations.

PRIVATE LENDER

Beyond the Code itself, the Ethics Committee provides ongoing best practice guidelines for following the code. The Code and these guidelines are always available to the public at aaplonline.com/ethics. In this article, we explore one seemingly small aspect of the Code, but one that carries a huge impact: that members not discriminate against any party based on their disability. The nature of AAPL’s Code of Ethics is that it does a lot with seemingly very little. “Any party” might include borrowers, investors, partners, or employees. And while we may think of disabilities as physical issues we can see, sometimes

unseen disabilities are the most debilitating and marginalized. The Committee and AAPL believe member companies have a duty of care in managing employee issues ethically: both the seen and the unseen. Although the Committee feels confident providing guidance on most aspects of the Code of Ethics, this one had us a bit stumped, so we turned to subject matter expert James Hadlock with Blunovus to discuss how companies can better serve their employees’ mental health, especially within the financial sector. Read on for his recommendations. If you have questions about this or other elements of AAPL’s Code of Ethics, please email ethics@aaplonline.com.

ccording to the Centers

7 0% of finance industry workers believe that admitting to suffering from mental

for Disease Control and

health conditions would have negative

Prevention (CDC), approx-

imately one out of five adults in the

U.S. has a diagnosable mental illness,

consequences at work.

F inancial services employees are

1.5 times more likely to die by sui-

and 76% of Americans have reported

cide than the national average.

experiencing at least one symptom of mental illness in the past year.

SUFFERING IN SILENCE

The financial/lending services industry is not immune. In fact, mental health conditions are more widespread in the financial/lending services industry compared to other sectors. Before the pandemic hit, human resources consultancy AdviserPlus found that 33.9% of absence days in financial services were attributed to mental illness, compared to 22% in utilities and 24% in retail. Lyra Health has published the following findings: 67% of senior decision makers at

financial institutions would consider quitting their jobs within the next

year if stress levels do not improve.

As common as these mental health conditions are, it might be surprising to learn how few people receive treatment. In a 2017 Substance Abuse and Mental Health Services Administration report, of the nearly 57 million adults with a behavioral health condition (substance use or mental health condition), approximately 40 million, or 70%, did not receive treatment in the past year. Most behavioral health conditions are treatable. So why aren’t we as open to talking about them as we are about physical conditions such as the flu or

diabetes? Eight out of 10 workers with a mental health condition say shame

and stigma prevent them from seeking

mental health care. Stigma and negative stereotypes about mental illness persist both in our society and at work. Even in the most forward-thinking

workplaces, many employees keep their conditions private. They are afraid that opening up about their situation will

hurt their status at work, compromise

relationships, or put their job at risk. This

situation prevents employees from getting better and being productive at work.

THE COST OF MENTAL ILLNESS Stigma drives silence, but employers must talk about this issue. The mental health of your workforce and your company’s bottom line are intricately linked:

M ental illness is the single greatest

cause of worker disability worldwide.

18.7 million with substance use conditions, 17.2 million of those are untreated I n 2017, of the

56.8 million adults aged 18 or older

with a behavioral

health condition...

...about 39.7 million (70 percent) did not receive treatment in the past year

Source: Substance Abuse and Mental Health Services Administration, National Survey on Drug Use and Health, 2017. | GAO-19-274

11.2 million with serious mental illness, 3.7 million of those untreated

35.4 million with other mental illness, 22.9 million of those are untreated

The numbers on the right side add up to more than the numbers on the left side due to co-occurring substance use conditions and mental illness.

Received treatment

Did not receive treatment

SPRING 2022

ETHICS

Mental health conditions such as stress, burnout, anxiety, and depression are prevalent in the workplace, with a large proportion of those costs passed on directly and indirectly to employers.

62% of missed workdays can be

attributed to mental health conditions.

Sources: Mental Health: A Workforce Crisis,” American Heart Association CEO Roundtable, 2018 and Bad for Business: The Business Case for Overcoming Stigma in the Workplace,” National Alliance on Mental Illness of Massachusetts, 2015.

Spending on mental health treatment and services reached $225 billion in 2019, according to an Open Minds Market Intelligence Report. That number is up 52% since 2009.

In “The State of Workplace Mental Health in U.S. 2021,”, a report led by experience management company Qualtrics:

How does this impact you? Workplace stress is estimated to cost employers $500 billion annually. In 2018, the American Heart Association estimated that untreated depression expenses alone will cost employers $9,450 per employee, per year, in absenteeism and lost productivity.

5 0% of employees say they have left a previous role due to mental health reasons.

8 4% report at least one workplace factor negatively impacts their mental health.

E mployees miss an average of eight days of work per year due to mental health.

Property Types: Commercial

ETHICALLY ADDRESSING MENTAL HEALTH AT WORK As an employer, whether your enterprise is large or small, you have a legal obligation to provide a safe work environment for employees. Although it may seem daunting to be supportive without invading an employee's privacy, handling mental illness in the workplace doesn’t have to be a difficult proposition. Here are some safe and ethical steps employers can follow in their mental health strategy to ensure better emotional well-being for both management and employees.

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PRIVATE LENDER

Understand Where You Are Today // It is important to get a good sense of what you are already doing, what employees need, and where you can improve. This can mean providing surveys, talking with staff members often, and reviewing relevant healthcare data. Reduce Stigma // With any organization, change starts at the top. Leaders are vital in implementing mental health policies and procedures that influence workplace culture and employee experiences. Make talking about mental health a priority in your organization. Start with leaders and managers being open about how they have been impacted by behavioral health conditions. It’s not enough to talk about mental health

issues and less likely to face issues

at your company. To reduce stigma, leaders need to be more transparent and authentic about their own experiences. If you have felt stressed or overwhelmed at work, talk about it with your teams. Share with them how you’ve navigated it. It will empower your employees to address their own challenges.

like racism, prejudice, workplace

violence, and harassment that lead to depression and related complexities.

The working culture should encourage casual interaction among employees,

and social activities should be promoted

outside the workplace to develop a sense of camaraderie among co-workers.

Create a Culture of Connection //

Get to know your people. Invest in creating a culture of connection. Check in on your people regularly to see how they are doing. Understanding their perspective and respecting sensitive issues is vital for a safe and comfortable working environment.

Seek Education and Training //

Organizations with diversity and inclusivity are more aware of these

outcomes for all employees at work,

Leadership today is no longer just about engagement and results. Leaders are now expected to take on additional

responsibilities, including understanding and supporting employee’s mental

health, driving diversity and equitable and fostering a sense of belonging.

S TIGMA R ANKS L A S T WHEN EMPLOYERS LIS T THEIR TOP MENTAL-HEALTH PRIORITIES. Top behavioral-health priorities1

% of respondents indicating as a top 3 priority (n=289)

Improving employee productivity and engagement

Increasing access to mental health treatment

Addressing employee well-being, stress, and resilience

Reducing employee burnout

Supporting behavioral-health needs of employees with high medical costs

Supporting behavioral-health needs of specific employee subgroups

Improving behavioral-health literacy

Improving access to substance-use-disorder treatments and recovery supports

Improving supports after disability leave

Reducting total cost of care for employees with behavioral-health needs Reducing stigma

18 17

Question: Respondents selected their organization's top three behavioral health priorities for 2021 from the list above.

Source: McKinsey Health Employer Survey, 2020

SPRING 2022

ETHICS

It’s essential to train your managers.

Results from the recent 2021 report “The

Effects of Employee Burnout” conducted by Gallup along with the “Skillsoft

Global Knowledge Report” revealed

98% of managers agree mental health is

around mental illness, work-related stress, discrimination, and bullying/harassment. Continually improve on your progress by tracking, monitoring, and measuring the effectiveness of your initiatives.

having a direct impact on their bottom

Here are some considerations for managing employees with mental health conditions:

managers feel equipped to handle the

01 H ave strong policies and

line. Yet less than 32% of those same mental health needs of their teams.

Support Employees with Mental

Health Conditions // Take an integrated approach to mental health and develop a plan that provides easy-to-access

solutions. Include clear instructions to

immediate support and resources along with management and/or staff training

procedures—and follow them clearly and fairly.

02 Create a quality working

environment and provide flexible working arrangements where possible and/or appropriate.

03 E nsure your staff is aware of

available support and resources.

04 M onitor workload at regular

intervals; acknowledge the importance of work/life balance by insisting on sound people-management practices.

05 Understand the signs and symptoms of

mental illness. If an employee discloses a medical condition, ask them about it and have them provide a medical opinion. Seek consent to discuss functional limitations, stressors, prognosis, recovery timeframes, etc. with the company’s general practitioner or medical specialist.

06 A ddress mental health risks and protective factors while ensuring job roles are clear.

CREDIBILITY WITH YOUR INVESTORS IS MORE IMPORTANT THAN EVER

We specialize in audit, tax, and fund accounting. CPAs with over 20 years experience working with Private Lenders

info@spiegel.cpa | (925) 977-4000 | www.spiegel.cpa 26

PRIVATE LENDER

If an employee does encounter a mental health condition, you don’t want them to be afraid to seek support and treatment—or worry about backlash at work.

PEOPLE WHO FEEL BETTER DO BETTER Is it your moral and ethical duty to provide mental health support and resources to your employees? Yes. Seeyour employees as people, with hopes, dreams, and challenges. If you invest in their emotional prosperity, you’ll understand that people who feel better simply do better at work and in life. ∞

ABOUT THE AUTHOR

JAMES HADLOCK James Hadlock is nationally recognized

07 I f you carry out performance management or disciplinary action, maintain a clear paper trail of the action you have taken, and make sure it’s consistent in terms of the reason you have carried out the action.

08 D o not delay carrying out action. Delay can exacerbate existing mental illnesses. Ask yourself: Would I be treating someone the same way if

they did not have this condition but in the same circumstances? Get Buy-in From Your Employees // Cooperation is the key to success. Leadership, human resources, and management cannot do much without the cooperation of employees. Your staff and co-workers need to be educated, supported, and interested in having an emotionally healthy workplace, which is why an overall culture of trust and respect is essential.

as one of the most prominent voices advocating for a more connected,

supportive, and emotionally healthy workplace. He is an experienced

entrepreneur, mental health activist,

keynote and executive coach. He’s also the co-founder and chief evangelist of Blunovus, an emotional support platform and leadership coaching

company that helps organizations such as the Utah Jazz, Purple, and Divvy

move upstream and proactively invest in the emotional prosperity of their people on a cultural level.

SPRING 2022

FUNDAMENTALS

6 Ways to Mitigate Loan Risk Don’t forget that when you push and pull levers, moving one lever can impact the entire project you’re funding. by Alex Breshears

s a private lender, there

the original borrower and co-borrower

pull to mitigate risk, includ-

ties, and injection of capital into the

are a lot of levers you can

ing changing terms to offset the risk of a loan.

Remember, risk tolerance is less about

haven’t discussed roles, responsibili-

project, the risk of default could actually be higher than if the borrower took on the project independently.

a number and more about a how you

Another thing to consider is whether

loan is out there. But remember, when

level. One lender, still viewing their

will need to consider how doing so

to push LTV amounts, thinking their

ect. Pulling one lever impacts other

forced appreciation. Another lender

second- and third-order effects and

getting “too bubbly” and back off. If both

feel sleeping at night knowing the

you are accurately assessing the risk

you change loan parameters, you

local market as red-hot, may continue

might affect other areas of the proj-

equity buffer only gets bigger with

places. The trick is to figure out those

may perceive the red-hot market as

whether those effects are intended.

lenders are in the same market, how

For example, adding a co-borrower

requirement to a loan may help add

do you assess which one may be right? That is the million-dollar question!

more capital on paper for the loan,

Here are six levers you can push or

partners not getting along and finish-

depending on the loan situation and

but you may have introduced a risk of

pull to mitigate the risk of a loan,

ing the project on time or on budget. If

your risk tolerance with the loan.

PRIVATE LENDER

LOAN TO VALUE Loan to Value is the first lever many lenders pull back when uncertainty arises. Lowering the LTV means you have less capital at risk if the borrower fails to perform on the loan, whether that’s due to their own project miscalculations or a market correction. Some lenders may assess lowering the LTV is safer because it builds the equity buffer. If 2008 taught us anything, we learned exactly how fast that buffer can disappear. The risk with moving this lever on borrowers who are currently in the pipeline for underwriting but haven’t closed yet is the the project then risks being underfunded, making it difficult to exit the loan. If the property requires significant renovation and the borrower runs out of capital when the place is taken down to the studs,

the value of that property is automatically going to be worth a lot less. Again, if the project stalls out here, that equity buffer is likely negatively impacted. Lowering the LTV isn’t the failsafe many new lenders believe it to be, but assessing the impact the lower LTV makes to the loan scenario can help avoid potential pitfalls.

NARROWING CRITERIA FOR PROPERTY Some small private lenders may spend a significant amount of time underwriting the borrower but take only a cursory look at the property details. These lenders believe the borrower is the person making

decisions on behalf of the property. This belief may give lenders a false sense of security, causing them to fund atypical properties because of their faith in the borrower. Think tiny homes, container homes, or some other structure that is out of character with the surrounding area or made from unique building materials. Narrowing criteria for property could also look like avoiding rural properties, luxury residential housing, and second home properties and markets. These types of properties don’t tend to fair well in an economic downturn.

have opted to fund projects needing

With the longer-term real estate market largely up in the air amid the hysteria of early 2020, some small lenders might

home will be less affected by material

minimal rehab so they could be placed back on the market and sold amid an epic housing shortage. In addition, major rehabs required laborers to be at the property, sometimes multiple teams at the same time, which meant social distancing requirements would significantly delay project timelines. As delays wore on, raw material prices rose quickly as supply and demand worked against each other. A borrower doing just a light rehab on a smaller prices than a major rehab project on a 4,000-square-foot property. SPRING 2022

FUNDAMENTALS

CAPITAL RESERVES During the pandemic, investors with sizable portfolios of rental properties lost income on those units because tenants were out of work and programs for rent relief or direct payments to individuals were not up and running yet. As a result, many lenders— conventional and alternative lenders alike—started requiring capital reserves (proof of funds) to cover a specified number of mortgage payments, typically six months to a full year. Capital reserves could keep many investors afloat when rehab draws were halted or tenants stopped paying and, therefore, reduced overall risk for the lender.

Small lenders can use this lever if they feel the borrower needs a larger capital buffer, is inexperienced, or the project takes longer (and usually goes overbudget). Liquid capital means the borrower has more options to make the payments, fix overruns in rehab, and qualify for conventional financing if they are trying to refinance out into a longer-term loan. Just as in the conventional lending space, a new capital reserves requirement may put a borrower out of the running for a loan. Rarely will you hear of a lender who regretted not funding a loan. There are plenty of opportunities out there, and smaller lenders may feel they need to compete with larger institutional lenders and offer more lenient terms. The opposite is true! Smaller

lenders doing balance sheet loans often

have flexibility larger companies lack. That doesn’t mean you should offer more lenient

terms, but you can move the levers you want according to each lending opportunity.

PERSONAL GUARANTEES To be competitive, some lenders may

not require a personal guarantee

from a borrower. During the Great

Resignation, some borrowers chose

to live off reserves while looking for better employment opportunities.

If the loan requires a personal guar-

antee from a borrower, assets need to

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back up that guarantee. The personal guarantee helps reduce the risk of not being made whole at the end of the loan. A personal guarantee with a borrower who has next to no assets is basically worth about as much as the paper they signed on. Pulling this lever can also involve bringing on a co-borrower who will also sign a personal guarantee with assets to back up the ink on the page.

LENGTH OF LOAN CHANGES Early in the pandemic, some smaller lenders changed the length of the loan. For example, many lenders offered longer loans, some 18-24 months in length, to allow for more time to deal with material shortages and social distancing for laborers and technicians. The idea was to allow the right amount of time for the project and borrower needs. Lenders who chose projects with fewer renovation requirements may have had a shorter length of loan time, perhaps eight months with an ability to extend. Again, keep in mind that changing one metric has a ripple effect on other parts of the loan. Funding a loan for a project requiring significant renovations, but then requiring the borrower to complete the work in eight months is likely setting the borrower up for failure. The other side to this discussion are the lenders who wanted that longer loan term for consistent cash flow from solid borrowers while the world established how to operate in this new normal. The downside of longer terms for loans is that a lender may not be able to spot

a borrower who has a project running behind due to mismanagement.

LOWERING PROPERTY VALUATIONS Markets may vary greatly, but if you think it’s a hot market how can you safeguard yourself? Getting a formalized opinion through a comparative market analysis, broker price opinion, or appraisal can offer an unbiased second opinion on value and takes the guesswork out of valuations. A lender that chooses to perform selfvaluations can limit comparable properties sale dates to the last 90 days only to get a better idea of more recent values. In cash flow markets, appreciation tends to be less, so having more conservative valuations in these markets specifically can help with maintaining an equity buffer. Other things to avoid would be cashflow markets and focus on appreciation markets, which fair better in a down economy. Choosing to fund residential property near the median home price of your market can offer a quicker and easier exit typically. Condos also tend to slump as borrowers become hesitant to take on large fees that many condo associations charge owners. Remember, these six levers don’t exist in a vacuum. Pulling one can cause unintended consequences downstream, introducing more risk to the lending opportunity than the original loan parameters. When you consider a potential change, ask yourself, “Why?” What specifically are you trying to mitigate? Does the contemplated change truly address that risk?

Sometimes talking through the situation with another private lender can help you decide whether your solution is sound or could cause more problems than it is worth. There isn’t always a right answer. Sometimes there’s just the “best choice” given the information you have available combined with some educated guesses about the future. ∞

ABOUT THE AUTHOR

ALEX BRESHEARS Alex Breshears is a private money

lender, short-term rental owner and

manager, LP investor in syndications, and private lending fund manager.

Breshears started a private lending

company, Infinite Road Investments, in April 2020, funding first-lien and

second-lien positions for residential property in the Hampton Roads,

Virginia area. She also started an

educational Facebook group called

“Private Lending Lessons” that offers

weekly educational lessons, daily posts for discussion, and opportunities to network with other investors about

private lending and projects that may need funding.

Breshears is also passionate about

financial education and independence for female investors. She is currently a chemistry professor, teaching for a four-year school.

SPRING 2022

FUNDAMENTALS

ANECDOTAL VERSUS FACT-BASED EVIDENCE IN DEAL EVALUATION When you are considering an investment, don’t make the mistake of relying solely on opinions and experience rather than on data. by Beth Johnson

PRIVATE LENDER

trust your instinct, but placing too much

value on your gut without backing up your feelings with quantitative underwriting can be disastrous.

Just because you know someone

personally does not mean you should forego collecting and verifying proof of past relevant performance—both

financially and professionally. Both can

be good indicators of future behavior. (See

“Don’t Let Relationships Fool You,” Private Lender, Summer 2021).

Although previous experience can provide some insights into a deal’s merit, no investor or deal is immune from risks outside the borrower’s control, such as market corrections or dishonest contractors.

Given these factors, can an argument

really be made that a borrower is the most important aspect of the deal—more so

than the actual property and project itself?

OTHER FACTORS TO CONSIDER

When evaluating a prospective deal, elationship building and networking are paramount to success for the small,

independent private lender. These low-

key lenders tend to fly under the radar. They don’t publicly advertise and typically do not have a brand that sets them apart in the real estate community. Additionally, these truly private equity lenders likely have less capital to deploy, and they are more risk adverse than institutionally backed lenders with more experience, resources, and deal flow.

WHAT ARE RELATIONSHIPS REALLY WORTH? Most will tell you relationships are of high importance, especially when lending money, because the borrower is responsible for executing the project—and a house flip cannot complete itself. To these lenders, the experience of the operator(s) involved are critically important in determining whether the loan will be repaid. Be aware, however, that a lender can place a disproportionate amount of value on borrower “feels.” Yes, it is true you should

considering person, project, and property to categorize and evaluate the deal's

merits and risks is a good strategy. The importance of each will vary greatly,

however. Every private lender, even a new one, relies on a unique point of view or set of priorities to govern their lending guidelines and processes. Personal

bias in private lending is based on both experience and on values or in other

words, risk tolerance—especially when there isn't much real estate lending

experience to lean on yet. For every lender who tells you the person (borrower) is

the most important factor, you can find SPRING 2022

FUNDAMENTALS

another who pushes the asset as the primary consideration. So, which is it?

character, and creditworthiness. To get a

Finally, ask for a list of three professional

No other lender can tell you how to define your own guardrails in private investing. Even the most seasoned investors can fall prey to bad projects, market corrections, and setbacks outside their control. For example, you’d be hard pressed to identify a single real estate investor that was not affected in some way from the COVID19 pandemic. Experience may save an investor from greater loss, but experience alone cannot provide you, as the creditor, with full protection of your principal.

and discuss past projects and goals. Back up

worked with on past projects. This will

Even if you prefer to place greater weight on the borrower, you should still choose a combination of both qualitative and quantitative data to underwrite borrower experience,

better sense of the borrower, meet in person

references from people the borrower has

your borrower “feels” by verifying critical

provide several lenses through which to

ple, have the borrower complete a project

they provided themselves, online data

each deal, including addresses, purchase

simply will not get the entire profile of a

data through documentation. For exam-

assess your borrower—the information

experience spreadsheet with details about

validation, and third-party feedback. You

prices, rehab costs, and final sale prices.

borrower through one approach alone.

Go one step further and validate the bor-

You can apply this same three-pronged

can do so through online public records

which go hand in hand. Physically

surprised that prospective borrowers some-

borrower, noting the neighborhood

on which they were a mere capital partner

condition, and proximity to amenities

but did not actually own the property.

and mass transportation.

rower was on title as a vested owner. You

approach to both property and project,

from the tax assessor’s office. You may be

tour the subject property with the

times inflate their involvement on a project

characteristics, the current property

or acted only as the general contractor,

such as restaurants, shopping,

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a “good, better, or best” option but rather a multifaceted approach to uncover every reason to say “no” to a deal, if necessary. To get the most accurate picture of risk as a lender, you must employ a combination of verbal communications with the borrower, request written documentation from the borrower, do your own offline and online research, and request thirdparty objective commentary from key experts. Your goal is to combine your “feels” with empirical datapoints that help you make the best decision possible with the limited information available to you. ∞

ABOUT THE AUTHOR Take it one step further and ask the gen-

eral contractor to be present as well so you can hear directly about the scope of work and estimated costs. Then go home and

conduct your own online data research. Do a neighborhood review, identify

recently sold comparable property, and

study MSA demographics such as popu-

lation growth (or decline), key industries, and major employers.

Finally, verify your own research by

obtaining a third-party appraisal or BPO (broker’s price opinion) for the value of the property after it’s completed.

Be sure to evaluate outside factors such as economic stability (both nation-

ally and locally) and potential shifts in the real estate market or interest rate hikes, which could adversely affect real estate sales and prop-

erty valuations in the short term.

Private lenders just starting often miss some of these steps because of the overwhelming tasks of underwriting the borrower and property. Be sure you are not a private lender who makes the mistake of overlooking any of them. Local real estate associations and meet ups as well as national real estate education groups like BiggerPockets. com often host industry or market “State of the Union”-type events that can provide insight into trends and potential impacts to real estate investing. Several news outlets such as HousingWire.com can keep you up to date online as well. These considerations are just the tip of the iceberg regarding what a private lender must evaluate with respect to the borrower, the project, and the property—as well as other potential economic impacts. Hopefully, you can see there are choices about how to effectively underwrite a potential loan opportunity that are not necessarily

BETH JOHNSON Beth Johnson is co-founder and managing partner of Flynn Family Lending, a familyowned private lending business offering

creative financing solutions throughout the state of Washington.

Before getting into private lending,

Johnson spent 20 years in the tech and

telecom industries managing all aspects

of corporate training and communications, while investing in real estate on the side. As a real estate investor, she and her

husband have experience in wholesaling

and flipping, and they now prefer to invest in small multifamily properties. In her

spare time, Johnson enjoys spending time with her blended family of five, running, traveling, and playing a little poker.

SPRING 2022

FUNDAMENTALS

Industry Perspectives: Breaking Into the Business One investor recounts his journey into private lending and the factors he considered as he scaled. by Zachary Richards

PRIVATE LENDER

forward as a real estate investor—and a place to park my down payment money.

DISCOVERING PRIVATE LENDING I had heard that many investors use private lending money to purchase flips and other projects that banks deem too risky. I figured there was a good reason banks stay away from those projects. All the podcast interviews I listened to gave me the impression you needed millions of dollars of either your own or investor capital to get started. The idea of not owning the underlying real estate but controlling it via lien was very appealing to me: I would be able to participate in real estate investing, but since I would not own the property as a rental, I would not be subject to 2 a.m. calls from the borrower about a problem with the property. So, I pushed private lending to the back of my mind and committed to reconsidering it once I had the appropriate funds.

imilar to the experience

of other private lenders,

my first opportunity in the

industry fell in my lap. I graduated

from a small technical engineering school in Massachusetts with a degree in computer science in 2016 and was working full time as a software engineer when I was first exposed to private lending. My journey into real estate investing began with the purchase of a duplex in 2019. I lived in one of the units and rented the other. I was happy being a landlord. I owned an asset that pro-

vided passive monthly income, and living in the building made it easy to take care of any maintenance issues. In spring 2020, I set out to purchase my second investment property. By the time I started actively looking, the mid-2020 COVID-19 runaway real estate market was in full swing. I couldn’t find anything on the MLS where my numbers worked. Being a full-time engineer, I didn’t have the time or interest to knock on doors, find off-market properties, or manage my own flips. After looking for a few months, I decided I needed to find another path

But then someone purchased the property directly behind mine as a fix and flip. Being the nosy neighbor and real estate investor I am, I searched the county records to find out who bought it and what they were planning to do with it. I discovered the investor used a private loan from an individual to purchase the property and “only” borrowed $100,000, an amount within my reach. My interest in private lending was rekindled.

LEARNING THE BASICS I set out to learn everything I could about private lending. At the same time, I SPRING 2022

FUNDAMENTALS

pursued my MBA with a specialization in finance at the University of New Hampshire, reasoning that an MBA would help advance my goal of diving further into real estate investing and private lending.

the first part I needed to figure out. If I at least understood the mechanics of private lending, I’d be able to focus on finding deals later. I was afraid to find a good deal and then not know what to do with it.

Interestingly, I discovered it was very easy to find information on how to borrow private money, but finding information on how to lend it was very difficult. Occasionally, I’d stumble across a blog post that offered advice such as “it’s what you don’t know that can hurt you with lending” or “make sure you know what you’re doing.” That advice wasn’t actionable, and it didn’t give me a place to start for becoming a private lender.

I also read it is important to have a team in place to help underwrite and close a loan—and your attorney and title company are critical members of that team. I contacted a few local title companies to see if they would help me understand the legal side of private lending and produce a document set for me.

Finally, I received a call back from a local title company, recommended to me from another local real estate investor in my network. I set up an appointment to meet with their attorney and paralegal. They explained the legal side of things and sent me home with the documents they use for their clients. After familiarizing myself with them, I was confident they would be able to handle a closing for me. Now I just needed to find a deal.

This proved a bit more difficult than I anticipated. An attorney at one title company told me private lending is illegal and I needed a license. From my previous research, I was fairly certain

Before discovering APPL, I was able to find a couple of books on private lending and a few more articles that taught me the importance of conservative underwriting, emphasizing the textbook terms of lending

I knew from my preliminary research that the legal side of private lending was

that in my home state of New Hampshire, a license was not necessary.

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PRIVATE LENDER

80% of the purchase price of the property and 100% of the repair costs—up to 65% of the after-repair value of the property. I was relieved to have a concrete box to use as a guidebook for my first deal to help ensure that it would work out.

MY FIRST DEAL A couple of weeks after I talked to the title company, I received a referral from another local real estate investor. One of his friends was interested in buying a property in southern New Hampshire. The investor was looking for a $100,000 loan toward the purchase of a property that he was buying for $140,000. He was going to fund the repairs himself. The

closing was in 2 1/2 weeks. Being new to the industry, I was afraid to make a decision. I was then asked the question I was dreading: “Are you interested in lending on this property?” I finally had a deal. I thought I would have been excited. Instead, I was petrified. On a Friday afternoon, I spoke to the investor on the phone and asked him a few questions about himself, how he got started in real estate, and his experience level. I requested a few references. Then I visited the property with him and his agent. It needed mostly cosmetic repairs that likely would take just a few months to complete. I spent that whole weekend trying to talk myself out of the deal. I was about to

INDUSTRY LEADING RESPONSE TIME AND SERVICE

give a stranger $100,000 of my own money with nothing but some paperwork to ensure that I got repaid—paperwork that I didn’t even fully understand yet. I told my parents what I was doing; they told me I was crazy. By Sunday afternoon I had started to convince myself the deal was sound. I was lending well below 80% of the purchase price of the property to an experienced investor with exceptional references, with a title company and attorney that had completed hundreds of transactions involving private lending. I told myself I’d done enough due diligence and should be comfortable with the deal; it was time to go for it. After the closing, I didn’t hear much from my investor, and I didn’t really expect to.

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SPRING 2022

FUNDAMENTALS

Toward the end of the month following the closing, I was curious whether I would receive my monthly payment. To my relief, on the 25th of the month (seven days early), my first mortgage payment showed up in my mailbox.

had a viable business. I just needed to put the pieces together.

I had officially become the bank. I was hooked. I wanted to do it again, but I was out of money.

I spent the next several months working with my attorney to understand how I could legally place investors’ funds into deals for them. We had to navigate state and federal securities laws and other legalities to ensure what I was trying to do was legal.

A BUSINESS IS BORN

LESSONS LEARNED

That loan had consumed most of my savings and until it was repaid, I couldn’t do any more deals. Knowing I had about six months before the money would make its way back to me, I spent my spare time reading every piece of information about private lending I could get my hands on.

My biggest challenge has been growing both sides of the coin. As a whole note lending company, I essentially match borrowers with investors. Maintaining a steady and roughly equal flow of borrowers with deals and investors with capital is crucial to keeping the business running. My local market is a small world. I did not want to earn the reputation of being the lender who can never close a deal. I chose instead to grow my local circle of borrowers slowly and steadily as I continue to tap my personal network for potential investors. Paying attention to the lead flow on both sides of the transaction has been critical to keeping my journey into private lending relatively smooth and steady.

While I was looking for other lenders I could connect with and learn from, I stumbled upon a private lending Facebook group and became an active participant. Through this group, I learned that several smaller lenders use investor funds to grow their businesses via the whole-note (sometimes called “trust deed”) investing method. This is an arrangement in which I would find deals for my investors and place their funds into deals for them. I would find the deal, arrange the closing, handle the paperwork, and service the loan. I thought it sounded great, but I wasn’t sure how I was going to convince anyone to invest with me.

comfortable with, and I do not waiver from them. Instead, I strive to provide my borrowers with the best service possible. I want to work with people who are willing to pay a bit more to work with someone local who can close quickly. My next goal as a private lender is to scale so I can lend full time. I’m close, but I haven’t made it to the point of having a steady enough deal flow to leave my W-2 behind. My goal for 2022 is to build the consistency required to grow my business beyond a side hustle. ∞

ABOUT THE AUTHOR

ZACHARY RICHARDS Zachary Richards is the founder and

principal of Kagan Lending, a private lending company based out of New Hampshire that offers financing

solutions throughout Maine, New

In the meantime, I had been talking to friends and family about what I’d been up to. After explaining what private lending is and how it works, a few of them asked how they could participate.

I have also learned to trust my gut a bit more. As a generally agreeable person, I tended to see the positives in all the deals I consider, which means I sometimes overlook the negatives. I’ve realized that not everyone that reaches out is a good fit for me to work with and that leveraging my network to get references for potential borrowers is cheap insurance.

That was the moment the light bulb went on. I realized I potentially

Additionally, I have decided not to compete on price. I have rates and terms I am

he is a volunteer who raises Seeing Eye

PRIVATE LENDER

Hampshire, and Massachusetts.

Kagan Lending places investor funds into lucrative opportunities and

fully manages the end-to-end client experience for its investors.

Before becoming a private lender, Richards worked in the software

industry, first as a software developer and then as a product manager. In his

spare time, he likes to hike and ski, and dog puppies.

SPRING 2022

OPER ATIONS

BEATING THE ODDS: HOW ACCOUNTING CAN HELP YOU SCALE YOUR BUSINESS An outsourced or in-house accountant can provide the information private lenders need to make educated decisions about growth. by Beeta Lecha

uccessful entrepreneurs

Although about half of companies make it

navigate several phases

most common reasons a small business or

know their businesses will

of growth. The same can be said of a

newly formed private equity fund. Once it reaches a growth level beyond what could be considered natural, organic growth, the fund sponsor must start considering strategies that allow it to scale.

WHY SOME PRIVATE EQUITY FUNDS FAIL

to the 5-year mark, the other half fail. The private equity fund might fail include: Lack of market need. The private

lender may have an excellent product or service, but there may not be a demand for it in their market or region. A market analysis can help determine which type of loan product or service a private lending company should provide. Competition. Although there may

Before scaling up their business, private lenders must ensure they indeed have a thriving operation. The investment fund should not only be able to meet the daily demands and constraints of its cash flows but also should have a reserve on hand, which is necessary for growth. Additionally, a fund manager should focus on what will help their fund survive. 42

PRIVATE LENDER

be a demand for the private lender's

product or service, other similar service providers may oversaturate the market. Strength of team. Fund managers

who like to retain total control of their investment fund may spread themselves too thin. They may be reluctant to hire the right employees or bring in another partner with complementary skills.

Inability to obtain capital. According to the National Small Business Association, a quarter of small businesses cannot acquire the funds necessary to operate. Newly formed funds may struggle to get investors, lines of credit, institutional financing, or private loan volume if their financial records are not attractive or stable. Managing costs. Private fund managers may avoid using third-party service providers to reduce costs. Although they may save money in the short run, they could lose out on the valuable, key benefits long-running service providers bring, such as strategic planning or tax planning to help reduce taxes. Pricing. The fund will not be profitable if management prices the loan products or services too low. Likewise, setting interest rates and transaction fees too high may result in lost revenue and returns to investors due to lack of loan volume.

FOCUS ON INVESTMENT FUND STRATEGIES It is common in companies with 10 or fewer employees for the owner to do it all—from generating revenue and managing employees to handling accounting, marketing, recruiting, and human resources. Fund managers may also spend a great deal of their time on daily recurring tasks and putting out fires, leaving little time to focus on the fund’s investment strategy, improvements in efficiency, and industry trends. Instead of performing back office tasks, fund managers should concentrate on the overall structure of the fund and doing

what they do best—finding investors and borrowers. For a well-managed fund to produce sustainable returns for investors, fund managers must efficiently balance fund size and deal flow. There is one area, in particular, that private lenders should consider outsourcing to free up their time to work on “big-picture” business growth: accounting. Outsourcing the accounting function frees the fund manager to develop a new loan product or implement a new service line. It also allows them to focus on maintaining a pipeline of potential investors by making strategic network connections, developing referral sources, focusing on deal flow raising additional capital,

and prioritizing other areas where their time and attention are of more value.

BOOKKEEPER VERSUS ACCOUNTANT So, should a private lender who’s made

the commitment to offload the accounting function hire a bookkeeper or an accoun-

tant? The roles are often perceived as being synonymous, but there are subtle distinc-

tions between the two positions. It is essential that private lenders understand those

decisions before making a hiring decision. Bookkeepers focus on organizing the

financial data and recording financial

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866.535.3736

TotalLenderSolutions.com SPRING 2022

OPER ATIONS

transactions into the accounting software. They perform clerical and administrative tasks, manage business accounts, and maintain the accuracy of the data from accounting systems.

costs, increase revenue, and monitor

both a bookkeeper and an accountant

ager time and money through strategic

Accountants, on the other hand, provide the same clerical and administrative tasks as bookkeepers, but they also deliver a high-level analysis of the accounting data. Accountants give advice, create financial models, and analyze variables that inf luence financial success. They create financial statements and monitor the financial health of the investment fund. Accountants can make suggestions to help reduce

investment fund’s overall success.

Fund accountants can provide sponsors

PRIVATE LENDER

the financial stability of the fund.

Depending on its size, a fund may have who work together to guarantee the

THE VALUE OF AN ACCOUNTANT

come at a high price—potential errors and lost future opportunities. Hiring an accountant can save the fund manplanning during the startup of the fund. with valuable insights during the startup phase by: C onsulting on the best fund structure

Startup Stage. During the startup

at the time of formation. Choice of

choose to oversee their fund’s financial

LLC, corporation, partnership) affects

so might help reduce costs in the early

lenders and investors and helps reduce

phase, many private fund managers

entity structure (sole proprietorship,

records on their own. Although doing

current and future tax savings for

years of the business, this decision could

taxes when dissolving the fund.

Running a private equity fund comes with risks. Many new investments funds, without vision and planning, fail within the first five years. Fund accountants serve numerous roles as a fund scales up and can help beat the odds of failure. Their job is to provide important financial information and guidance that helps fund managers make educated decisions as they strive to build a successful private lending fund. ∞

ABOUT THE AUTHOR

A ssisting with the fund’s strategic plan and financial analysis, ensuring the fund will be profitable.

financial resources to scale without maintain adequate revenue to cover

BEETA LECHA

R ecommending the most suitable type of accounting, loan servicing, or investor management software.

the costs of running the fund.

Beeta Lecha is a principal at Spiegel

E nsuring accounting procedures comply with government regulations. A dvising how to track routine

expenses to reduce taxes.

Scaling Phase. Accountants play an

integral role during a fund’s growth phase and are a valuable resource during its scale up. An accountant can, for example: P rovide accounting reports to help the

fund manager make crucial decisions.

A nalyze cash flow patterns to deter-

mine whether the fund has the

reducing yields to investors, but also

Create financial forecasts, allow-

ing the fund manager to determine courses of action while scaling.

P repare budgets to increase reve-

nues, reduce costs, and monitor the fund's financial health as it scales.

P rovide advice and insights

during mergers and acquisitions or fund restructuring.

M aintain consistent and stable

financial records, making the fund attractive to investors and institutional capital providers, if the fund requires additional capital to scale.

Accountancy Corp, leading the Taxation and Fund Accounting

practices. Lecha has 13 years of private equity and alternative

investments experience, primarily

focusing on private lending and real estate funds. In addition to fund

accounting and investor reporting, Lecha provides tax strategy, tax

planning, and tax compliance for fund managers and real estate investors. Lecha is a member of the American

Institute of Certified Public Accoun-

tants (AICPA) and the California Society of CPAs (CALCPA). Lecha serves

on the Education Advisory Committee of the American Association of Private Lenders (AAPL).

SPRING 2022

OPER ATIONS

Lending to a Fraudster: A Cautionary Tale Dedicate the time to properly evaluate the borrower. by Michael Schumacher

f you are a private lender, your

can’t (or won’t) pay you back. Usually things go as planned, but not always.

value) first-position note from another

get paid back. The best way to

As Voltaire wrote, “Is there anyone so wise to learn from the experience of others?” With learning from the experience of others in mind, I offer a cautionary tale that I hope you never face. This is a true story, though names and certain details were omitted to protect the not-so-innocent.

business in the past. The terms of the

Several years ago, we received an offer to purchase a $4 million (20% loan-to-

the prospective note purchase through

primary goal is ensuring you

improve those odds is to scrupulously follow your due diligence checklist.

Your checklist may include engaging an appraiser, performing a property inspection, running a background check, obtaining a credit report, and anything else necessary to mitigate risks. The goal is to ensure the value of the property will be sufficient to cover the loan if the borrower 46

PRIVATE LENDER

private lender with whom we had done note were not complicated, and the

borrower’s exit strategy was straightfor-

ward. He had a signed purchase and sale agreement with a third-party buyer.

The lender had done several loans with this borrower and reported that he had always performed as expected. We put

our due diligence procedure; everything

appeared to be in order. However, based

borrower needed additional time to complete the sale of the property. Since we could see that he was making progress, we offered him an extension.

first priority position, which it did.

it still didn’t show in their search. At

performed as expected throughout

In response to our extension offer, the borrower and his attorney presented us with a preliminary title report showing a large senior lien ahead of our loan, which the borrower failed to disclose when our purchase note was funded. This new title report was from a different company than the one on our policy. The newly discovered senior lien was cross collateralized with multiple properties, and the total loan amount was substantially more than the value of our collateral.

date neared, however, it was clear the

Our first action was to dust off our title policy to confirm it showed us in

we engaged an attorney who specializes

on the note seller’s experience with the borrower, we deviated from our protocol by using the stale credit check the

note seller provided, and we didn’t run our own background check. Deviating from our standard process was a mis-

take, because we would have uncovered that the borrower had been involved in

litigation that would have raised red flags. We negotiated the note purchase and took over the assignment of the note. The experience to that point was as

professionally fulfilling as purchas-

ing some papers can be. The borrower the initial loan term. As the maturity

We then presented the situation to our title company and asked them to run a

search for this senior lien. Surprisingly, this point, we concluded we either had a fraud situation or a title claim on

our hands. It turned out to be both. The title company was largely uncoop-

erative at the onset, despite the fact they

essentially acknowledged their search had missed the senior lien on two separate occasions: when the policy was issued

and again when we had evidence a senior lien existed. Rather than rely on the title

company’s attorney to solve the problem, in title insurance to tender a claim.

SPRING 2022

OPER ATIONS

In hindsight, engaging our own attorney to represent us early in the process turned out to be invaluable, due to the yearlong legal quagmire that was about to unfold. In response to our effort to assert our priority lien position, the borrower engaged in a series of evasive tactics.

FRAUDULENT BORROWER TACTIC #1: SELL THE PROPERTY The borrower advised us of his plan to sell the property to pay off this senior lien, which would have left nothing to pay off our loan. He asserted that, in light of the shortfall caused by the senior lien, he had no obligation to pay

PRIVATE LENDER

our loan back, despite the fact the borrower personally guaranteed our loan and had executed an owner’s affidavit certifying there were no deeds, mortgages, or other security interests affecting the property. Concerned the borrower would sell the property, pay off the senior loan, and leave us empty-handed, our attorney successfully petitioned the courts to block the sale of the property.

FRAUDULENT BORROWER TACTIC #2: FORECLOSE ON HIMSELF

learned he was a partner in the senior lending entity and used several shell companies to obtain an assignment of the senior deed of trust. The borrower assigned the senior loan to a newly created entity that he controlled. This senior lending entity then began foreclosure of the property. Essentially, the senior lender, who was also our borrower, sought to foreclose on his own property to avoid paying our deed of trust. To stop this action, our attorney again successfully petitioned the

Although the borrower initially claimed he was unaware of the senior lien, we later

courts for a temporary restraining order to stop the foreclosure.

FRAUDULENT BORROWER TACTIC #3: RENEGOTIATE OUR LOAN THROUGH MEDIATION Since the borrower’s attempts to sell the property and foreclose us out both failed, he threatened us with a protracted legal battle. We agreed to go into mediation, whereby the borrower offered to settle in exchange for a $150,000 reduction of our loan payoff. Although we weren’t enthusiastic about a protracted legal battle, we also weren’t willing to take a discount. We presented the title company with an offer: We would settle if they paid the $150,000 the borrower was demanding, ensuring we would be made whole. Because the title company was aware they were on the hook for the full policy amount, they made the wise decision to mitigate their losses and pay the borrower’s demand. Ultimately, we reached a three-way settlement agreement whereby the title company paid the unscrupulous borrower $150,000, the borrower released all claims, and we released our restraining order. The borrower sold the property and paid us back our full loan amount, including all late fees, default interest, and legal fees.

LESSONS LEARNED As you underwrite new loans, consider some of the lessons we learned and best practices.

01 K now your borrower // Since the

note seller vouched for the borrower, we let our guard down and skipped the background check. Learn as

much about your borrower as you can. If possible, contact several of the borrower’s past lenders for reference.

02 R edline the pro forma title

policy to strike through any exceptions // Make sure it ties to the lenders’ escrow instructions, and have title sign the lender’s escrow instructions before closing.

03 Double-check the excluded

exceptions before the closing // Lenders escrow instructions show which title exceptions need to be removed. Do not hesitate to ask your attorney for clarifications if something doesn’t look right.

for months or years. Asset-based lenders are wise to dedicate the time it takes to properly evaluate the borrower in addition to the value of the asset. Most importantly, don’t deviate from your due diligence procedures. ∞

ABOUT THE AUTHOR

04 M ake sure you get the final and

full title policy document // It usually comes in the mail about 30 days after loan closings. The preliminary title report is not the actual title policy. Sometimes the title company fails to mail the final policy, so you might need to follow up with them.

05 R eview the final policy // Confirm

it matches the preliminary pro forma title report, the exceptions listed in the lender’s escrow instructions, and the required endorsements. If you’re not comfortable doing this, ask your attorney to do the reviews.

If a title issue arises, engage your own counsel to review the policy; if necessary, tender a claim against the insurance company. Insurance companies will defend you to an extent, but they’re also loath to pay claims. The inherent risk in providing a loan never shows up at the closing table. Issues typically don’t reveal themselves

MICHAEL SCHUMACHER Michael Schumacher, president and founder of Enact Partners, provides strategic direction for the company and is responsible for managing

the company’s private commercial

mortgage fund—EP Guardian Fund.

During the last 20 years, Schumacher has executed more than $1 billion in

commercial real estate development

and investments throughout the United States for both public and private

companies, with clients ranging from family trusts to large publicly traded institutions.

Schumacher previously served as a city councilmember for the city of

Carlsbad, California. He also served as chairperson of the Carlsbad Planning Commission and the Design Review Board. He has served on numerous

other boards and commissions in the San Diego region.

SPRING 2022

LENDER LIMELIGHT WITH JOSH BAKER

Calling His Own Plays Former NFL player Josh Baker jets into high gear with his new venture. by Katie Bean

osh Baker’s career path has been unorthodox, veering from a major in criminal

justice to a stint in the NFL to a

career in private lending. Through

every step, he’s made forward progress, grinding to make that next first down. Josh grew up in Chesapeake, Virginia, where he played high school football. His talent took him to the University of Delaware. Unfortunately, some minor infractions like lighting a candle in his dorm room ran him afoul of the school’s threestrike rule, and he had to take a one-year hiatus from playing. (Ironically, during that hiatus, the school did away with its three-strike rule—timing is everything.) Unwilling to give up on the sport, Baker kept working and eventually made it

PRIVATE LENDER

onto the roster of the New York Jets as an undrafted free agent. He was versatile, playing fullback and tight end as well as on special teams. Early into his second year on the team, he took a bad hit. As he went for the ball, an opposing player hit him in the knee, resulting in a microfracture along with torn meniscus and ligaments. It was a devastating blow to his body and his career. He rehabbed the rest of the season but ultimately decided it was “time to hang up the cleats.” “It’s bittersweet,” he said. “There’s an acronym—NFL—and it means ‘not for long.’ So, you kind of know that going into it.” Although he misses the fun times, Baker said he definitely doesn’t miss training camp.

LENDER LIMELIGHT WITH JOSH BAKER

A NEW PLAY Ready for a fresh start, Baker decided in 2013 to move to Austin, Texas. He didn’t have much of a career plan, but he was open to opportunities. He started out by networking and working odd jobs— doing “a little bit of everything,” he said. He met a former NHL player who took him under his wing, allowing him to listen in on conference calls and learn how business deals were structured. Baker started doing research on his own to dive deeper into the business and ended up “being a deal junkie.” He enjoyed talking with business owners who were looking for different types of financing and connecting them with people looking to deploy capital. His experience taught him important career-building lessons. First, he learned that athletes have a natural “sphere of influence” and can often use their alma mater to make connections.

OUTSIDE-THE-BOX SOLUTIONS

“If you knew my name, that means you’re really a die-hard Jets fan,” Baker said. “But if (someone has) a pretty decent name (from playing sports), and you’re a business owner, and you get an email, and you remember that guy playing, the likelihood of that business owner getting back to us and responding to us was a lot higher.”

At first, Baker and a team at Players Capital Group built a real estate brokerage as an entry into the market. They identified top lenders as well as developers who were doing 10-12 deals a year. They consolidated the deals and brokered them to lenders.

Baker also learned the economic principles such as supply and demand that play into different business ventures. He gravitated toward real estate after seeing the demand for capital in that space.

The product is geared toward developers of long-term-hold rental properties who need creative solutions to manage their portfolio. An acronym that fits many borrowers Baker works with is BRRRR: buy, rehab, rent, refinance, repeat.

“Here in Austin, the real estate market is just on a tear and has been on a tear for a while,” he said. 52

PRIVATE LENDER

Three or four years ago, Baker began gravitating toward nonqualified mortgage lending.

Baker said he likes that non-QM loans don’t have to fit a certain mold, either for

the borrower or the lenders providing the capital. “There’s so many different products and ways to get creative to find a solution. And then that solution is tailored to the developer,” he said. “I like thinking outside of the box to provide a solution to somebody. And then, once you do that one time, that can be replicated for that particular relationship going forward, whether it’s bringing you to a borrower or a lender. I just think it’s always cool bringing tools and products to somebody that they can use to scale their business.”

‘THE MORE PEOPLE WE HELP, THE BETTER’ This year, Baker’s business has taken a deeper step into lending. He and

THIS OR THAT ? ANDROID OR APPLE? “Apple through and through”

CALL OR TEXT? P O K E R O R P O O L? M O U N TA I N O R B E AC H J O G G I N G O R W E I G H T L I F T I N G? "Neither”

E A R LY B I R D O R N I G H T O W L? "My routine is to sleepwalk directly to the coffee machine with local news.”

LENDER LIMELIGHT WITH JOSH BAKER

BREAKING INTO THE INDUS TRY Former New York Jets football player Josh Baker got into finance and real estate with little background in either. His success proves that tenacity and hard work pay off for those making a career change, just as it did on the field. When he first star ted out, “sometimes I was just a fly on the wall,” he said, absorbing the conversations and looking up terms he didn’t know. He listened to podcasts and shadowed people to understand the industry. Baker offers the following tips for others who want to get into the real estate lending industry: nderstand the financial aspects. U Everything revolves around that for borrowers and for lenders. s you start participating in conA versations, ask questions. If you’re afraid of something that seems like a stupid question, Baker suggested framing it as, “When you use the term [Fill in the Blank], what does that mean to you? Because everyone has a different definition.” o matter what, assume success as N you grow or take your business to the next level. Baker recommends leveraging information to promote confidence in your next steps. I f you want to meet lenders, pretend you’re a borrower and vice versa. Use that mindset to think through where you’d find people to network with and how to connect with them. tay thirsty for information. Never S assume you know it all, especially when you don’t know anything.

PRIVATE LENDER

several partners have a new fund aimed at helping small and regional lenders “take a second bite of the apple,” he said, helping them build on relationships with rental property owners. “We realized that a lot of these smaller to mid-sized private lenders, it’s not a natural fit for them to originate long-term loans,” Baker said. “You know, someone rents a property—they buy a house and fix it, and instead of selling it, they want to refinance out of (a bridge loan) and hold that in their rental portfolio. A lot of private lenders are not set up in a way they can handle that second loan, that long-term, 30-year loan. Traditionally, that’s done with banks.” Baker’s goal with his new venture, a company he named De Novo, is to operate as an outsourced capital markets division for small and mid-sized lenders. It also will offer technology that will either replace or plug into what lenders already use to allow them to process, underwrite, and sell loans in a single platform, Baker said. For Baker, the value proposition is allowing lenders to maximize relationships they’ve already created with borrowers. “Extending this product to them without us participating on the front-end origination point is, I would say, one big separator” from others in the market, he said. By targeting smaller lenders, Baker aims to reduce the barriers to entry they would otherwise face to originate long-term loans, such as high monthly fees and lender minimum net worth requirements. “It’s important because, operating in the space, I’m seeing all the problems, and they’re not necessarily market problems,” he said.

lenders have the real relationships with borrowers. He likens the project to adding a few rungs to the ladder of success.

ABOUT THE AUTHOR

“It’s kind of cliché, but the more people we help, the better,” Baker said. “If you’re able to streamline and enhance and provide people with a real relationship and more competitive pricing, you know, in theory, it’s economics to trickle down to the borrower.” He added that with the current shortage of available rental housing, he hopes that offering this product will help entice investors to create more rentals in their portfolio for families who can’t afford to buy. ∞

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.

FAVORITES? T V S H O W: “Mayor of Kingstown” on Paramount+, starring Jeremy Renner

P L AC E T O T R AV E L : Breckenridge for snowboarding—“Mainly tuck and roll down the mountain”

SPORT OTHER THAN FOOTBALL: NBA

FAVO R I T E S E A S O N: Playoffs (and spring, in the traditional sense)

GUILT Y PLE A SURE: Golf. Baker says he’s by no means mastered the sport: “That’s why it’s so guilty,” he joked. “I’m still trying to identify where the pleasure part is, but I keep coming back to it. Only having one knee that works is a different kind of handicap.”

From Baker’s perspective, the market favors national lenders, although local SPRING 2022

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MARKET TRENDS

THE HOUSING MARKETS MOST AT RISK FOR A CORRECTION IN 2022 Here’s a look at markets with the most overinflated home prices and those with the biggest backlogs of distress. by Daren Blomquist

PRIVATE LENDER

A look back at how the housing market

correction is a growing

2018 slowdowns provides some clarity

for the second half of 2022. Rising

inflation is forcing the Federal Reserve to implement contractionary monetary policy that will raise mortgage rates and put downward pressure on housing demand and home price appreciation. The Fed is expected to raise its benchmark federal funds rate several times this year, and some forecasters are expecting those increases to translate into average mortgage rates at or above 4% by year’s end. Even before the the Fed raising interest rates, mortgage rates had risen to 3.69% by mid-February, according to the Freddie Mac Primary Mortgage Market Survey. The real estate market has seen the risk of a home price correction emerge three times previously during the decadelong housing boom that took off in 2012: in 2014, 2018, and 2020. In 2020, the freshest high-risk period in memory, the rising risk came from an external shock to the housing market in the form of the pandemic. In the three months immediately following the pandemic declaration, demand for housing took a nosedive and home price appreciation slowed dramatically. It was a short-lived trend that may be hard to remember, given the rapid and robust turnaround since then. The housing slowdown risk emerging in 2022 looks much more like the scenario that played out in 2014 and 2018: a shift toward contractionary Fed policy putting upward pressure on mortgage rates and downward pressure on home price appreciation.

on how it might behave in 2022.

A BRIEF HISTORY OF RECENT HOUSING SLOWDOWNS

A similar pattern showed up in 2018, with average mortgage rates rising above their long-term average for 17 consecutive months, starting in January 2018 and ending in May 2019. The average mortgage rate during these 17 months was nearly 4.5% (4.46%). That was notably higher than the average

Starting in June 2013, average mortgage

rates rose above their long-term average of

rate of 4.25% during the 2013 and 2014 surge above the long-term average.

3.97% for 18 consecutive months, through

The slowdown in home price appreciation

price appreciation dropped from more

than it was in 2013 and 2014. Home price

in July 2014. Home price appreciation

to as low as 0% in March 2019, and home

for seven consecutive months starting in

long-term average of 6% for 22 consecutive

November 2014. During this time, home

was also more dramatic in 2018 and 2019

than 10% in July 2013 to as low as 3.9%

appreciation slowed from 10% in March 2018

dropped below its long-term average of 6%

price appreciation registered below the

April 2014 and ending in October 2014.

months, from April 2018 to January 2020.

RISING MORTGAGE R ATES INCREA SE RISK OF SLOWING HOME PRICE APPRECIATION

Annual HPA HPA 12-21 Avg 30-Year FRM Avg Rate Mortgage Rate 12-21 Avg

30.0%

6.00%

25.0%

5.00%

20.0%

4.00%

15.0%

3.00%

10.0%

2.00%

5.0%

1.00%

0.0%

Average Mortgage Rate on 30-Year Fixed-Rate Mortgage (FRM)

risk facing U.S. housing markets

behaved during and after the 2014 and

Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21

and possibly even a

Home Price Appreciation (HPA)

home price slowdown

SPRING 2022

MARKET TRENDS

In the aftermath of the 2008 recession, with its 33% cumulative decline in median home prices, properties purchased at foreclosure sale sold for an average of 44% below their previous sale prices in 2011—the year before home prices bottomed out and began rising again. This is according to an Auction.com analysis of public record foreclosure sales data from ATTOM Data Solutions. Average discounts to previous sales price for foreclosure sales steadily dropped in 2012 and 2013 to 33%, but they leveled off in 2014 and rose slightly to 34% in 2015 in the wake of the first Fed-triggered housing slowdown of the last decade. Distressed property discounts resumed their drop during the next two years, falling to as 60

PRIVATE LENDER

DURING HOUSING DOWNTURNS

Foreclosure Sales Discount to Last Price

50.0%

20%

40.0%

15%

30.0%

10%

20.0%

10.0%

0.0%

-5%

-10.0%

-10%

-20.0%

-15%

-30.0%

-20%

Home Price Appreciation

A correction would look more like home prices dropping by low single digits, while a slowdown would mean home price appreciation slowing to low single digits. But even a slowdown could represent more, better-priced inventory for homebuyers and investors. This is particularly true for distressed properties, where bigger discounts are typically available when home price appreciation slows and housing inventory increases.

Retail Market HPA

19 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 97 19 9 19 8 9 20 9 0 20 0 0 20 1 02 20 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 1 20 1 12 20 1 20 3 1 20 4 1 20 5 1 20 6 1 20 7 1 20 8 1 20 9 2 20 0 21

To be clear, a home price correction is not a crash, and a slowdown in home price appreciation is certainly not a crash. A crash, like the one that occurred in the aftermath of the 2008 recession, resulted in home prices dropping 33% nationwide—more than double that in some markets.

FORECLOSURE SALE DISCOUNTS

Discount to Last Sale Price

DEEPER DISCOUNTS DURING DOWNTURNS

low as 19% in 2017 before rising again in 2018, 2019, and even 2020, following a 1% decrease in average retail home prices on an annualized basis in 2019. Some markets are more at risk than others, stemming primarily from two preexisting risk factors: inflated home prices and backlogs of distressed housing. Of course, the markets most at risk are also those that potentially will provide the most opportunities for investors. Here’s a look at markets with the most overinflated home prices and those with the biggest backlogs of distress.

MARKETS WITH MOST PRICE RISK Housing affordability for local buyers provides a good yardstick for measuring the degree to which home prices in a market are inflated—or not. For this analysis,

housing affordability was expressed as the price-to-income ratio using the median home sales price in fourth quarter 2021 from ATTOM Data Solutions and the most recent median family income estimates from the Census Bureau. Given that many of the markets with the highest price-to-income ratios in fourth quarter 2021 have been chronically unaffordable over years, if not decades, it’s helpful to look at which markets have seen affordability diverge the most from their pre-pandemic level over the last two years. Among 405 markets with at least 300 home sales in fourth quarter 2021, those with the biggest percentage increase in price-to-income ratios between fourth quarter 2019 and fourth quarter 2021 were Sevierville, Tennessee (96% increase in price-to-income ratio); Edwards, Colorado (74% increase); Coeur d’Alene, Idaho (67%

HOUSING MARKETS WITH BIGGES T PANDEMIC INCREA SE IN PRICE-TO -INCOME R ATIO Q4 2019 to Q4 2021 Change in Price-to-Income Ratio -22%

96%

increase); Barnstable Town, Massachusetts (65% increase); and Glenwood Springs, Colorado (62% increase). A common theme among those top five markets: All are popular vacation home markets, with the possible exception of Coeur d’Alene.

quarter 2019 and fourth quarter 2021

Among larger markets—55 with at least 5,000 home sales in fourth quarter 2021—those with the biggest increase in price-to-income ratios between fourth

were Tampa, Florida (up 43%); Tucson,

were Sarasota, Florida (up 51%); Phoenix,

Arizona (up 51%); Cape Coral-Fort Myers, Florida (up 49%); Lakeland-Winter

Haven, Florida (up 49%); and Austin,

Texas (up 46%). Rounding out the top 10 Arizona (up 42%); Raleigh, North Carolina (up 42%); Charlotte, North Carolina

(up 42%); and Nashville, Tennessee (up

41%). Each of these top 10 markets saw a bigger increase in price-to-income ratios than the nationwide increase of 37%.

MARKETS WITH MOST SHADOW INVENTORY Markets with the biggest backlogs of delinquent mortgages held back SPRING 2022

MARKET TRENDS

distressed properties were led by Tucson, Arizona followed by New York City (8.2%); Phoenix, Arizona (6.3%); Riverside-San Bernardino, California (5.9%); and Memphis, Tennessee (5%). Nationwide, potential shadow inventory of distressed properties represented 2.6% of all existing home sales in 2021. ∞

ABOUT THE AUTHOR

DAREN BLOMQUIST

from foreclosure during the pandemic are also at higher risk for a housing slowdown in 2022. As that shadow inventory of distressed properties returns, it will likely put downward pressure on retail market home prices.

inventory of distressed properties that could return as foreclosure protections phase out. Taking this potential shadow inventory as a percentage of total existing home sales in 2021 helps gauge the level of impact it could have on each local market.

Daren Blomquist is vice president of

The gradual return of this shadow inventory is likely not enough, on its own, to push home price appreciation negative. But even without a home price correction, the increase in distressed property inventory still represents more opportunities for real estate investors to purchase at a discount.

Among 499 metro areas with at least 1,000 existing home sales in 2021, those with the highest percentage of potential shadow inventory of distressed properties were Vineland-Bridgeton, New Jersey (19.6%); Yuma, Arizona (10.5%); Jackson, Mississippi (10.3%); Tucson, Arizona (8.2%); and El Centro, California (8.1%).

ers using the Auction.com platform.

Data from Auction.com on the number of scheduled foreclosure auctions that were canceled or postponed in 2020 and 2021 provide a good proxy for potential shadow

Among larger markets— 57 with at least 10,000 existing home sales in 2021—those with the highest percentage of potential shadow inventory of

PRIVATE LENDER

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 sellBlomquist’s reports and analysis have been cited by thousands of media

outlets nationwide, including all the major news networks and leading

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.

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MARKET TRENDS

Market Trends Among Various Commercial Asset Classes Private lenders should anticipate these five developments among CRE asset classes in 2022. by Don Pelgrim

Despite the initial shockwaves felt at the onset of COVID-19, certain sectors of the real estate market have proven to weather the storm with resounding resilience, and some asset classes have barely missed a beat. Soaring e-commerce sales have accelerated the demand for industrial properties, and multifamily properties have seen rising rent prices coupled with low inventory, making that asset class an attractive choice for investors in top markets.

PRIVATE LENDER

Although some asset classes

rebounded quickly, others may have changed for the long-term. The

pandemic helped transform the idea of a traditional office and reshaped the way we interact. Remote work has become a steady option for many, and certain businesses fundamentally shifted their reliance on brick and mortar to digital operations. What does this mean for office spaces? Is a reset anticipated in the near-term? Other asset classes have been forced to reimagine their operations and longterm vision to stay competitive. Student housing, senior housing, and health care real estate experienced several challenges that placed pressure on facilities. Among these were decreased occupancy, recruiting and retention, and rising operational costs. As a result,

owners and operators are exploring ways to both increase revenue and control costs while growing occupancy. With so many unusual, unpredicted trends stemming from COVID-19, last year’s broader macroeconomic recovery presented an overall solid rebound. Bloomberg reported a record 6.4 million jobs created in the U.S. in 2021. Leisure travel also made a strong comeback in 2021, with the U.S. Travel Association predicting that domestic leisure travel will exceed pre-pandemic levels in 2022. Still, even with widespread vaccine availability, the passage of an historic bipartisan infrastructure bill, children back in school, and a healthy real estate market, experts remain optimistic but mixed on the shape of the recovery in 2022. The World Economic Update from the International Monetary Fund headlines “Rising Caseloads, A Disrupted Recovery, and Higher Inflation.” New mobility restrictions resulting from the Omicron variant, rising energy prices, and supply chain bottlenecks resulted in higher inflation than originally anticipated and predictions for more moderate growth in 2022. As seen in past market shifts, while the appetite of traditional lenders moderates, private lenders continue to demonstrate their viability during economic setbacks and will play a key role during and in the post-pandemic recovery period in the real estate market. Now, as opposed to being considered an esoteric financial product, bridge lending has cemented itself into the mainstream financial ecosystem. Many property owners and operators enter 2022 with the need for capital to reposition, renovate, or acquire

SPRING 2022

MARKET TRENDS

value-add properties as a result of the ongoing changes, effects, and opportunities resulting from the pandemic. Here are five developments private lenders should anticipate among the asset classes in 2022.

that primary markets, such as New York

City, San Francisco, Washington D.C., Los Angeles, and Chicago, show weak growth

compared to secondary markets, primarily in the Sunbelt states, which show steady

growth in the office space sector. So, while

vacancies in core markets remain elevated,

OFFICE SPACE IN LIMBO

and there’s an increase in sublease listings as tenants continue to downsize, Class A

Office utilization rates remain low due to concerns of COVID-19 transmission, but for the first time since the start of the pandemic, the U.S. office market showed positive net absorption during fourth quarter 2021. The National Association of Realtors, however, calls it “the tale of two bifurcated office markets,” noting

buildings in ideal locations with smaller

through various concessions and offering more favorable economics for tenants (i.e., free rent periods, lower escalation provisions, move-in allowances, etc). Looking down the pipeline, lease brokers anticipate office spaces will start to rebound in late 2022 or early 2023. That may result in more viable lending opportunities in better markets.

footprints (i.e., at or below 2,500 square

feet) are showing some signs of demand. Given the lopsided landscape of the

current real estate market, landlords are

WHAT’S IN STORE FOR RETAIL?

reimagining and repurposing existing

Big box retailers and large malls strug-

They are also proactively seeking tenants

online shopping. The pandemic exac-

spaces to respond to market demands.

gled pre-pandemic due to the surge of

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PRIVATE LENDER

erbated those challenges, driving a

number of large retailers to file bankruptcy and forcing owners to default

on their underlying debt obligations.

Fortune reports that nearly one-third of the total 12,200 U.S. store closings

in 2020 were department stores, clothing chains, or other mall-oriented

companies. Due to a lack of available financing, sales of vacant malls and big box retail facilities has lagged.

In-line retail, strip centers, and grocery-an-

favor suburban shopping.” At the height of COVID-19, modifications and forbearance agreements with tenants were prevalent, as owners struggled between lower or no rents and a center potentially plagued by significant vacancy. Once states started to lift COVID-related restrictions, retail centers found their feet again and experienced greater activity. Concerns remain that future variants will cause another dip for tenants and owners of strip centers.

chored centers have fared much better. The

Although there is still a risk of future dis-

of shopping centers have been “propelled

factors, some private lenders see opportu-

curbside pickup, and population shifts that

basis and with more moderate leverage.

Wall Street Journal states that these types

ruption because of new variants and other

by increased foot traffic to grocery stores,

nity in the retail sector, albeit at the right

HOSPITALITY SEES FIVE-STAR FORECAST The hospitality industry faced one

of the biggest disruptions. It was hit

quickly and hard by the pandemic due to government shutdowns and COVID

restrictions. In 2021, the pent-up demand for social interaction and travel has

helped destination hotels and attractions experience a renewed swell of activity. This means that in certain destination

markets that were popular pre-COVID, the hospitality sector may continue to draw demand in 2022 and once again

SPRING 2022

MARKET TRENDS

garner the attention of investors, developers, and lenders as recovery climbs.

While not a new trend, mixed-use

A recent Expedia survey on 2022 travel trends found that 59% of travelers are planning domestic-only vacations, particularly to warm-weather beach destinations and that 78% of respondents are looking to take more frequent shorter trips. As leisure travel picks up, hotel occupancy and other areas of hospitality will see a welcome revival. This uptick in tourism will hopefully spark business travel to follow closely behind.

the pandemic when consumer shopping

Some private lenders may seek out distressed and value-add opportunities in strong markets within the hospitality sector, as hotels reimagine and diversify their offerings to respond to new travel trends and consumer demands. In other markets, conversions and repositioning of hotels and other hospitality properties may create lending opportunities.

THE REBIRTH OF MIXED USE

properties experienced a rebirth during behavior transitioned from malls and big box retail to mixed use and strip centers. As such, some investors, owners, and

operators have their eyes set on mixed-

use zoning and adaptive reuse projects to be a value-added investment addressing

PRIVATE LENDER

ABOUT THE AUTHOR

changing needs in the post-pandemic era.

INDUSTRIAL LEADS THE WAY Industrial and warehouse properties

didn’t skip a step during the pandemic

in response to the flood of e-commerce sales, especially properties in well-lo-

cated areas near ports and transportation corridors. Further, due to the online

DON PELGRIM Don Pelgrim is the chief executive

officer of Wilshire Finance Partners and the manager of the WFP Income Fund,

retailer’s need to reach the “last mile”

WFP Opportunity Fund LLC, and WFP

industrial properties saw either a direct

Based in Newport Beach, California,

of distribution, smaller warehouse and

lift through sales or leases to online retailers or an indirect lift from the resulting

demand and lack of available inventory. Mixed use, whether residential over office space or residential over retail space, is taking steps to rebound from the various issues impacting each segment of the property, including business closures and moratoriums on tenant evictions. The residential component of mixeduse properties will rebound faster than the office or retail components, as the demand for apartment leasing continues an upward trajectory underscored by the continued housing market frenzy. For lenders, this means a heavier reliance on the residential component when underwriting these property types.

will continue to be selective with retail and office space because the pandemic shifted consumer behavior and workplace culture, potentially permanently. ∞

Income Fund REIT LLC.

Wilshire is a real estate finance and investment company focused on

portfolio bridge loans secured by

multifamily, commercial real estate, and

Although the surge in and growth of

senior housing properties nationwide.

not continue at the prior breakneck pace,

educational purposes only and does

online retailers during the pandemic will strong demand is expected to continue

in this sector for the foreseeable future.

SUMMING IT UP The market trends in various asset

classes suggests an optimistic outlook

for private lenders in 2022, with industrial and multifamily leading the way.

Amid the recovery, hospitality and mixed use may make a comeback. Lenders

This article is for information and

not and is not intended to constitute

legal, accounting, or financial advice. For more information about Wilshire

Finance Partners, call (866) 575-5070 or visit www.WilshireFP.com.

The Ultimate Lending Software Top-rated by thousands of users

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MARKET TRENDS

WHAT THE END OF THE NY EVICTION AND FORECLOSURE MORATORIUMS MEANS FOR REAL ESTATE New York housing providers appear to be in a good position in 2022. by Ruben Izgelov

n Jan. 15, New York became

to adequate relief throughout the pan-

eviction and foreclosure

initiatives did more harm than good to

the latest state to end its

moratoriums. After almost two years of

government intervention in the housing market, Gov. Kathy Hochul confirmed the moratoria would not be extended.

It’s no secret that housing providers (landlords) and lenders across New York state welcome the end of the moratoriums. The Centers for Disease Control and Prevention (CDC) moratorium and the supplemental statewide moratoriums that followed pushed many small and medium-sized landlords into a very difficult situation. Unable to evict non-paying tenants, who themselves racked up massive debts, or gain access

PRIVATE LENDER

demic, it became apparent that these

both tenants and housing providers alike. So, what does the end of the New York eviction and foreclosure moratoriums mean for the real estate market?

OPEN FOR BUSINESS One of the biggest things the expiration

New York moratoriums signal is that business is back, and New York City and the

wider state is open to real estate investors. Although the moratoriums were implemented to help those out of work, its end coincides with more employees

returning to work amid a business-asusual mentality. What’s more, schools are back in action, and there was even a welcome increase to the minimum wage from $12.50 to $13.20 per hour for many New Yorkers because of the New York State Minimum Wage Act. In terms of the New York real estate market, things are looking up. Although office vacancy rates may be higher than pre-pandemic levels, demand for residential real estate across New York City has picked up substantially. In fact, CNBC even reported that Manhattan broke records in 2021 with final quarter real estate sales reaching $6.7 billion. It was also reported that more Manhattan apartments sold at the end of 2021

than at any other point in the last three decades. The bidding wars and growing demand is unlikely to ease anytime soon. Within the rental market, rents have increased by up to 50% as pandemic-related discounts came to an end and residents returned to the city, reports Bloomberg.

“Data showed evictions have not spiked in some locations where all restrictions were lifted once the CDC moratorium ended.”

It looks like the fear mongers who were predicting the long-term demise of New York City real estate at the beginning of the pandemic have been proven firmly and happily wrong. These are the data points of a city firmly back on its feet.

ways, New York City is its own micro-

What’s more, it’s not just reflective of the Big Apple. Although in many

pandemic to many prime suburbs

cosm, the journey that New York

real estate has been through also

occurred in cities across the nation. The narrative of city center home

How the New York markets respond post-moratoria is something investors across the country should watch closely.

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MARKET TRENDS

within the private housing market be? Well, for one thing, inventory (or lack thereof )—which has been one of the major drivers of rocketing home values since the onset of the pandemic—can begin to slowly normalize.

purchasers, who for nearly two years

Inventory has been throttled ever since the onset of government intervention. In fact, in the final quarter of 2021, inventory in the Empire State decreased by 30.4% versus the same period the previous year (which itself was also lower than pre-pandemic levels). Although inventory won’t normalize overnight, this marks the beginning of the end of a period of artificially low inventory.

through the courts, will lessen their

Normalizing inventory will undoubtedly help both investor and owner-occupant

start hitting the market. This period has

PRIVATE LENDER

have been going toe to toe over what

sparse inventory was on the open market. For investors, the ramping up of

units entering wholesale and foreclosure markets, as lenders take foreclosures

reliance on sourcing real estate on the

open market. This will not only increase overall inventory but also crucially

bring more distressed properties onto

and medium-sized landlords, locked into an unenviable position in which a tenant won’t pay, cannot be evicted, and where rental assistance is either too slow or inadequate. As a result of the huge financial pressure this has created, 12% of housing providers sold off their real estate portfolio following the federal CDC eviction moratorium that ended in August 2021 last year.

the market. In turn, it could help ease

Now, with landlords able to evict

the open market, which itself should also

York, many who found themselves in this

pressure on owner-occupant buyers and start to see an increase in inventory.

non-paying tenants again across New position may decide this is a good time to

But it’s not just foreclosures that will

recoup their losses by selling and cash-

been extremely difficult for many small

estate values over the last two years.

ing in on the large appreciation in real

EVICTION WAVE OR WHIMPER? How quickly this inventory makes its way onto the market depends on the speed and volume of eviction and foreclosure proceedings. Although some initial reports feared a ”tidal wave” of evictions, this seems unlikely given the recent evidence during the aftermath of the CDC moratoriums. Just last year, there was a similar narrative being pushed, alongside the statistic reported in many major publications that 3.5 million U.S. citizens feared they would be evicted in the first two months. However, data showed evictions have not spiked in some locations where all restrictions were lifted once the CDC moratorium ended. For example, The Washington Post revealed that evictions in Atlanta were down 41% in the first three weeks after the CDC moratorium ended in comparison to statistics from pre-pandemic levels in 2019. Other areas of the country also recorded a lower number of evictions than pre-pandemic levels. Eviction Lab revealed that between September and October 2021, eviction levels were at their highest since the moratorium ended, but that still only amounted to 63.4% of the historical average. Looking at these statistics from a national perspective has led to mixed results in the press; trying to understand what this data really means is complex. If anything, this information doesn’t mean that evictions won’t take place later down the line. What’s more, filing rates varied massively by location, which might suggest other factors such as state protections may

have come into play and slowed eviction filings. Also, courts are still dealing with huge backlogs, made even worse following the omicron wave, which is further delaying eviction proceedings.

ABOUT THE AUTHOR

Eviction Lab further pointed out there is no ”data infrastructure” currently in place across the U.S. to track evictions in real time. And although their research focuses on several key states, a complete picture is difficult to capture. From a private lending perspective, the end of the eviction moratorium means investors will be able to evict squatters and non-paying tenants. This will incentivize investors to increase their buying activity, increasing deal flow for lenders. We also know, however, that housing providers by and large are willing to step up and help tenants that genuinely can’t pay, including working with them to access rental assistance programs, and that eviction is always a last resort.

THE BOTTOM LINE

RUBEN IZGELOV Ruben Izgelov has more than a decade in the real estate industry, acquiring, flipping, developing, and financing

more than $350 million in real estate. He has quickly become a renowned

real estate expert, speaker, and guide

for many professionals in the industry. The most successful time in Ruben’s

career was during the 2009 financial crisis, when he bought, fixed, and

sold distressed properties, showing

his determination in both bullish and bearish markets. After using private money financing himself, he quickly saw the innovation desperately

needed in the private lending space and decided to spearhead it by

co-founding We Lend, LLC, a private

As we look ahead to what 2022 may bring, it appears many landlords in New York are certainly in a good position for the coming year. As a result of the state moratoriums being lifted, we are finally witnessing some degree of normalcy return after two tumultuous years. And the effects of that—from more inventory to rent hikes—has great potential to encourage even more growth across New York. It is only a matter of time before the states with remaining moratorium orders follow suit. ∞

lending platform.

Izgelov started his career as a hard-

working 8-year-old boy distributing flyers on the streets of New York.

To this day, he takes that work ethic

with him everywhere he goes. He is a graduate of St. Johns University and

Touro School of Law, where he earned a bachelor’s degree in legal studies

and his Juris Doctorate, finishing cum laude and magna cum laude.

SPRING 2022

MARKET TRENDS

Foreclosure Forecast: The Unexpected Ahead Here are five reasons a significant market correction may be on the horizon. by Serge Petroff

PRIVATE LENDER

uring the past two years,

the entire economy. Those low mortgage

At the end of the day, borrowers need

been waiting for a market

the past, however, and will leave many

afford the staples they need to survive,

the real estate industry has

correction that has yet to occur.

Even though concern among lenders has

payments are about to become a thing of Americans’ purse strings tighter than ever.

FORBEARANCE

increase drastically and frequent bid-

ding wars in areas previously avoided by prospective buyers and investors.

There is no question the pandemic has had a massive effect on the real estate

industry. In March 2020, many owners and renters had to shift to remote work, which

changed the way they viewed their homes. Americans started to question their

quality of life and were no longer con-

tent living in an 800-square-foot studio

apartment. This resulted in many people moving out of metro areas to less dense and affordable locations. Historically

low interest rates helped many Ameri-

cans become first-time homebuyers. For many sellers, everything seemed on the up and up. Alas, nothing lasts forever.

Mortgage servicing companies are not

offering modifications on mortgages

currently in a COVID-19 related forbearance, which is significant. In the past,

when borrowers exited forbearance, they were given heavy subsidies from the U.S.

government. What will occur when those subsidies are diminished? Many owners will default and go into foreclosure.

Keep in mind that forbearances extended

INTEREST RATES

people simply not paying any longer.

sell their home for two reasons, even if it

increases in value. On one hand, if the asset is appreciating significantly, he or she can hire an attorney to prolong the process, which could result in that asset paying

for itself several times over. On the other

hand, these owners simply might not have

anywhere else to go. With rising rents and low housing inventory, the chances they

may opt to remain in their homes is high.

to other types of debt too. Although

mortgage holders have typically done an

excellent job with proper credit reporting, the same cannot be said for other credi-

LACK OF INVENTORY

tors, such as credit card companies. This

Right now, sellers are living the dream. On

has decimated the credit scores of many

ers bidding for properties that were worth

to stay afloat during the pandemic.

demic. For example, during a bidding war,

improper reporting to the credit agencies

any given day, there may be numerous buy-

Americans who merely have been trying

half as much at the beginning of the pan-

So, why should there be cause for con-

cern? Here are five reasons to consider.

gage payments? It follows that inflation,

A person in foreclosure might not want to

The state of the industry as a whole is not sustainable. We have seen prices

how will they be able to make their mortcoupled with low inventory, may lead to

decreased, numerous factors point to a significant correction.

to put food on the table. If they cannot

a home that is on the market for $500,000 may end up going for $100,000 over the

INFLATION During the past few years, a great deal

of money was pumped into the economy, An increase in interest rates is one of

causing massive inflation. In fact, we

upheaval. As previously noted, low inter-

inflation in more than 40 years. Infla-

homes for the first time. This not only

of market correction, and it is directly

the most important indicators of market

are dealing with the largest increase in

est rates helped many people purchase

tion is one of the scariest indicators

assisted buyers but also helped stimulate

correlated to rising interest rates.

asking price. Buyers assume equity is

guaranteed and are investing in properties they would have never considered in the past. This is not sustainable. Moreover,

when the current available inventory is taken off the market, there is not going

to be a quick influx of new properties for

sale. The drastic increase in construction costs, along with the current sky-high

prices for land, is severely diminishing the number of new homes being built.

SPRING 2022

MARKET TRENDS

A decreased demand for housing coupled with rising interest rates could very well lead to a significant market correction. However, this can be prevented if there is a manageable increase in interest rates, a robust job market, rising wages, and targeted assistance from servicers and investors on behalf of borrowers.

COST OF CONSUMER AND COMMERCIAL GOODS There is no question the pandemic has had a direct impact on the industry. COVID-19 caused many people to be unavailable for work, creating a supply/distribution chain disruption. Yes, it was more significant in 2020 and 2021, but we are still feeling the repercussions today. Manufacturers are still not able to supply necessary products due to a worker shortage. That supply shortage combined with transportation issues has had a tremendous impact on the cost of goods and industry-related materials.

THE FUTURE IS IN YOUR HANDS There are a variety of ways the private lending industry can avoid a disruption. It is essential that lenders pay attention to the number of foreclosures in their communities. They are a big indicator of how quickly the market is changing and how it is affecting the judicial system. Even if a borrower forecloses on a property, they still need to go through a process that could very likely take many years. In many places, this timeframe is only increasing. Investors do not want to wait three years to recoup their investments. By 76

PRIVATE LENDER

keeping an eye out and speaking to other lenders, that bottleneck can be avoided. Lenders need to communicate often with their borrowers and stress the importance of staying current on their payments. Many lenders rely heavily on repeat borrowers and may assume those borrowers will reliably make payments. Unfortunately, things happen in borrowers’ lives that may impair their ability to pay. Relationships are key in the private lending industry. It is imperative that lenders know what is occurring in their borrowers’ lives in order to mitigate risk and keep the relationship intact. Lenders need to start analyzing their business models and prepare to adjust the type of borrowers they typically would target. All the factors discussed previously could affect a potential borrower’s credit. Borrowers who have a 730 credit score today might drop to a 650 tomorrow. If lenders prepare for an increase in inflation, interest rates, and supply-chain disruption, the industry will remain stable and prosper. The private lending industry must be cognizant of additional issues a failure to keep the dreaded market correction at bay will create. Although many borrowers are currently sitting on figurative treasure troves of equity, this theoretical wealth can disappear overnight. If housing values significantly drop, a reciprocal increase in foreclosures will follow. Obviously, an uptick in foreclosures and zombie homes will only further exacerbate these problems. By being vigilant and prudent now, lenders can prevent another housing crash. Almost as importantly, lenders can prevent their own financial losses simply by maintaining good relationships with their borrowers. ∞

ABOUT THE AUTHOR

SERGE PETROFF As Axylyum Charter’s CEO and founding partner, Serge Petroff oversees the day-

to-day operations of the organization. This includes the management of the software development team, advertising team,

litigation team assignments and strategy, due diligence underwriting, purchas-

ing and closing, negotiation/settlement guidance, and property disposition.

Petroff’s dedication to the field of foreclosure has been recognized by numerous organizations. During his tenure as a civil litigator in

New York, Petroff attended thousands of foreclosure settlement conferences, successfully

conducted trials, and argued contested foreclosure matters before the appellate courts.

His commitment to offering litigation services to individuals with special needs and those

in poverty has been recognized by numerous nonprofit organizations of the state of New

York. Petroff has been awarded the New York State Supreme Court Pro Bono Award, and Brooklyn Bar Association Gold Certificate for Exceptional Commitment to Pro Bono

Service. He was a member of Director’s Circle of the Volunteer Lawyers Project.

As a practicing trial attorney, Petroff taught various programs to admitted attorneys in

New York. In addition, he is an active speaker and presenter in the industry. Some of his

engagements include The Foreclosure Program Roundtable, Foreclosure Updates for

Volunteer Lawyers, Foreclosure Basics, and Advance Topics in Foreclosure Defense.

SPRING 2022

MARKETING & SALES

The Landscape Ahead for Direct-to-Consumer Lending Vs. Brokers Developing relationships with brokers seeking to enter the private lending space may give your company a boost. by John V. Santilli

PRIVATE LENDER

rokers go where the money

will enable them to be more compet-

rates increasing, refinancing

With interest rates ticking up, brokers will

is. In 2022, with interest

demand declining, and a fresh wave of bank restructuring and layoffs,

that means many conforming loan brokers are seeing opportunity in private lending. Traditional

direct-to-consumer private lenders can and should embrace this latest development and adapt where possible. Mortgage brokers will need to expand their traditional product offering to diversify their own revenue stream. Having more arrows in their quiver

itive in tomorrow’s marketplace. continue to decamp for better opportunities, including what for many will be an independent broker business. All roads lead back to private lenders. It’s up to current lenders to help pave that road to ensure a smooth transition. Aligning a previously direct-to-consumer business to accommodate a broker model requires a thoughtful assessment of operations, underwriting, and marketing. The transition must be a holistic one, engaging your teammates across company divisions.

OPERATING AND UNDERWRITING CONSIDERATIONS Internally, lenders should be building processes for engaging with brokers to ensure your portfolio and loans continue to be managed tightly. An approval process for brokers should implement all possible safety measures, including running an OFAC screening and a criminal background check. The underwriting process will be similar for customers working through a broker, but with one crucial difference: In many instances, you might not interface

SPRING 2022

MARKETING & SALES

directly with the customer during the

“The more resources you can provide, the more you can demonstrate how your deal is better than your competitors’.”

underwriting process. The broker acting as the go-between removes a critical layer of information and potentially

invites confusion. For that reason, you should be applying every discipline to

the underwriting and servicing proce-

dures, with systems developed to elicit accurate and detailed information. An important consideration is that

brokers will likely not want to give up

control of their own hard-won custom-

ers. That may include wanting to order their own appraisals and inspections

from an approved vendor list. The more

resources you can provide, the more you can demonstrate how your deal is better

(619) 309-8973 • bthomas@merchantsmtg.com • www.merchantsmtg.com 80

PRIVATE LENDER

than your competitors’. As always, a

content portal with resources and tools to

helpful service are also critical for dif-

saging should educate this new audience

shortened processing time and friendly, ferentiating you from the competition.

MARKETING TO BROKERS

support brokers. Broker-targeted mes-

about what your products can do and how they will benefit their investor customers. Brokers are generally looking for a “play-

ground” to explore the product. Give them

for ensuing interactions. For example, you create a credit box or a comment box so the broker can feed relevant information to create a loan scenario.

EDUCATION IS KEY

configure your outreach strategy and

capabilities, ideally demonstrating how

This is relationship building, and ideally

scenarios. Consider that a broker may not

over the long-term. For most of us, at

a lender until they are sure your product

a broker-facing website or webpage and

tion. If you can provide easily accessible

Account executives should be prepared for a learning curve. Brokers will need to be taught about nonconforming lending and the unique principles associated with it. Mentoring and training programs will be crucial, whether they are via face-to-face information sessions, webinars, or other delivery methods.

the broker and set a broker-friendly tone

Private lenders would do well to listen to their customers, including brokers. For

On the marketing side, you will need to

the tools they need to examine prices and

messaging to speak to a broker audience.

your product will perform in different

the broker-lender relationship will endure

even want to communicate directly with

the bare minimum, this means creating

can accommodate their customer’s situa-

other related collateral materials. A more

information up front, it will help engage

comprehensive approach might include a

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MARKETING & SALES

more than a decade, customers had the benefit of huge margins on their real estate investments, largely driven by a significant inventory of foreclosed properties. Today, with a shortage of housing, materials, and contractors as well as rising costs for everything, that window has closed. The change in market conditions calls for a more responsive and nimble approach to product offerings. As a company, you want to service not only your client investors’ needs but those of the brokers representing their own investor clients.

MANAGE EXPECTATIONS With a low bar to entry, and no licensing requirements, brokers will find that private lending is an accessible sector to move into. Brokers will need to understand that private lending is a much smaller slice of lending. Where 10 to 20 loans a month might have been normal in conforming conventional lending, the volume will be much more modest in private lending. Setting realistic expectations for new partners will be key. Equally important is for brokers entering the space to find a lender or lenders who will be a good match for their clients in terms of products as well as the resources and tools they offer to help them meet their objectives. On the other hand, a move into private lending may open up new territory for brokers. Loan brokers may have multiple state licenses required by conventional lending. With private lending, they will be able leverage

PRIVATE LENDER

other relationships in states they may not been able to in the past. There are, of course, some cautions for private lenders who are pivoting to establish broker relationships. Private lenders will need to ensure these third-party originators are properly vetted and monitored. Further, it is imperative that these small, less capitalized originators are well educated in your products. Nevertheless, parties on all sides can benefit. For the private lender, it’s an excellent opportunity to draw talent into the pool and leverage that talent to grow the business. Whereas in the past small lenders had to compete with major banks to attract employees, we now have a tremendous boom not only in sales and brokers but also in operations personnel. With demand for products at an all-time high, the timing for this new era in private lending is exactly right. ∞

ABOUT THE AUTHOR

JOHN V. SANTILLI John V. Santilli is chief revenue officer

of Rehab Financial Group. John joined

RFG in July 2019 and is responsible for all

opportunities connected to the company’s growth. He is focused on expanding the company’s sales channels to maintain its position as a leader in rehab financing. Before joining RFG, John acquired 25 years of lending and marketing executive leadership experience

across multiple private and public

marketing-dependent companies.

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SPRING 2022

COMPLIANCE

MORTGAGE LENDER LICENSING—WHAT YOU NEED TO KNOW This is your 2022 update on state-by-state requirements to transact a business purpose, private loan. by Tom Hajda

loan originator. The root of this misunderstanding is a misunderstanding of the SAFE Act and how it applies.

loan application or negotiates the terms of

gage loan originator (MLO) in the state

SAFE ACT AND FEDERAL LAW

In response to the financial crisis of 2008 and the rampant mortgage fraud that occurred prior, Congress passed the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The SAFE Act required all states to enact legislation that would require the licensure of any person who “takes a residential mortgage loan application” or “offers or negotiates terms of a residential mortgage loan for compensation or gain.”

First, let’s clear up a big misconception, specifically that federal law governs licensing. Many lenders believe that if the collateral securing a loan is a 1-4 family residential property, they must be licensed as an NMLS

Under the SAFE Act, a residential mortgage loan is defined as “any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling…” In plain English, this means that any person who takes a

STATE LAW DEFINITIONS

hat is probably most

surprising about needing a mortgage license to

transact business purpose loans is private lender perception. Private

lenders who make loans in states that require a license generally assume all states require a license. Similarly, private lenders who operate in states that do not require a license assume they can make loans anywhere in the country without being licensed. Both perceptions are incorrect.

PRIVATE LENDER

a consumer loan secured by a 1-4 family residential property must be licensed as a mort-

where the mortgage property is located. The definition above was set out as a floor of regulation. What that means is that all states must require an MLO license if the person is involved with consumer loans secured by dwellings. However, states are free to enact legislation that is more restrictive should they choose to do so, and many did.

Under the Safe Act, all consumer loans secured by dwellings require a license, but what about business purpose loans? To answer this question, you must look at the

definition of a “mortgage loan originator”

a loan that is (a) primarily for per-

utes. Each state can define who is consid-

(b) secured by 1-4 family dwelling.

and “mortgage lender” in the state statered an MLO and/or mortgage lender. The following examples illustrate the differences.

sonal, family, or household use, and Therefore, in Colorado, a mortgage

lender does not need to be licensed to make, take an application, or negotiate a business purpose loan.

EX AMPLE 11

Colorado. An MLO is defined as an individual who takes a residential

mortgage loan application or negotiates a residential mortgage loan.

Similarly, a “mortgage company” is defined as a person who takes resi-

dential loan applications or negotiates a residential mortgage loan.

Here, the definition of a “residen-

tial mortgage loan” means, in part,

EX AMPLE 21

Oregon. An MLO is defined as an individual who (a) takes an appli-

same as it is in Colorado. However, the definition of “residential mortgage loan” is a loan that is secured by a 1-4 family property. Oregon does not require the loan be primarily for personal, family, or household use, only that the collateral is a 1-4 family residential property to require a license to originate the loan.

WHICH STATES HAVE RESTRICTIONS FOR BUSINESS PURPOSE MORTGAGE LENDERS?

cation for a residential mortgage

loan, or (b) offers or negotiates terms for a residential mortgage loan.

At first glance, you may assume you

do not need to be licensed to negotiate a business purpose loan because the definition in Oregon is basically the

A total of 18 states have some form of restriction on business purpose mortgage lenders. L icense necessary to originate all

business purpose loans. The most restrictive states require a license

SPRING 2022

COMPLIANCE

to originate business purpose loans regardless of collateral type. For example, in these states, you could be financing a 100-story office building and would still need to be licensed as a mortgage lender to make a loan. These states are Arizona, California, Nevada, North Dakota, South Dakota, and Vermont (if the loan is less than $1 million). L icense necessary to originate a business purpose loan if the

collateral is the primary residence of

the borrower. First, mortgage lenders are often surprised they can make a business purpose loan secured by the primary residence of the borrower. Mortgage lenders often refer to business purpose loans as “non-owner occupied” loans. But, occupancy is not the most important issue to determine licensing or other consumer-related laws and, in fact, is generally irrelevant. However, for licensing purposes, the following states would require a license to make a business purpose loan if the property is secured by the primary residence of the borrower: Iowa, Kansas, and Washington. L icense necessary to make a busi-

ness purpose loan secured by 1-4

family residential property. A few states follow Oregon’s statutory scheme in which they require a license to originate a business purpose loan if the collateral securing the loan is a 1-4 family residential property. These states are Georgia (if borrower is a natural person) Utah, Oregon, Minnesota, and Idaho. O ther restrictions. Then there are a few

states that have random rules for licensing. For example, in Rhode Island, if the loan is made to a natural person and is 86

PRIVATE LENDER

less than $25,000, then a license would be necessary to make a loan. These states have some form of licensing- and/ or registration-related issue: Alabama, Florida, North Carolina, and Virginia.

POTENTIAL EXEMPTIONS TO MORTGAGE LENDER LICENSING Even if a license is required to originate or make a business purpose loan, there may be a few relevant exceptions or exemptions available to the mortgage lender. For example, Arizona exempts loans secured by multifamily properties in excess of five units or commercial real estate if the loan amount is greater than $250,000. Additionally, there are often de minimis exceptions that permit a mortgage lender to make a few loans in the state without being subject to a license. For example, South Dakota permits a mortgage lender to make up to five loans as long as the collateral is multifamily or commercial and the aggregate loan amounts do not exceed $4 million in a 12-month period. Finally, there are often wholesale mortgage lender exemptions that permit an unlicensed lender to make a loan in the state as long as there is a licensed broker who originates the loan. For example, California permits a licensed real estate broker to originate a loan to an unlicensed mortgage lender.

OTHER ISSUES OUTSIDE OF LICENSING

States often cover mortgage brokering and loan servicing in different statutes, and you must look to the state statutes to determine whether a mortgage broker license is required even if a mortgage lender license is not. For example, the state of New York does require a real estate broker license to broker business purpose loans even though a mortgage lender is not licensed to make or originate a business purpose loan.

laws in the state in which they intend to lend. The good news is there are 32 states (and the District of Columbia) which do not require a mortgage lender license to make business purpose loans, regardless of the collateral securing the loan. Even in the 18 other states, there can be large exemptions and otherwise limited application to licensing. ∞

F oreign registration. In addition

to mortgage lender licensing, most corporations and LLCs are required to conduct a foreign registration in any state they transact business in. The good news is that most states exempt mortgage lenders from foreign registration requirements because they want to attract capital to flow through their states.

ABOUT THE AUTHOR

O ther registration requirements.

Even if a mortgage lender is not required to obtain a license to make a business purpose loan, the state may require some other form of registration. For example, in North Carolina a mortgage lender does not require a license to make business purpose loans; however, if a lender makes less than $1 million of loans in the prior calendar year, they must file with the North Carolina secretary of state a disclosure statement and either a copy of a surety bond or a notification that a trust account has been established.

DO YOUR HOMEWORK

TOM HAJDA Tom Hajda is senior counsel with the

Geraci Law Firm. He has more than 30 years of experience providing advice

with respect to consumer and business regulatory matters, compliance management, nationwide state

licensing, governmental supervision and examination management,

corporate governance, strategic

acquisitions, and other matters. Hajda

has designed and executed for clients’ regulatory compliance strategies,

including Bank Secrecy Act, Home

Mortgage Disclosure Act, Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures

B rokering and servicing. This over-

view only covers mortgage lending.

Before making a mortgage loan, all lenders must understand the state licensing

Act, Fair Housing Act, Privacy, and Information Security.

SPRING 2022

STR ATEGY

Partnering with Other Lenders to Win More Deals Sometimes the end of the road is just the beginning. by Tom Meade

rivate lending is competitive. It’s just part of the business.

For many, it’s a rush. It’s what

makes it truly enjoyable. There’s nothing

like knowing you beat out the competition. Maybe it was on price. Or perhaps service made the difference. Or maybe the

customer simply believed you were the best

overall fit. Regardless, we can all agree that

a smooth closing day is the best kind of day.

WHERE YOU HAVE FLEXIBILITY Loans are structured in various ways to

win over the borrower, in other words, to win the deal. To be more accurate, loans

are structured in ways that capital markets will allow but are designed to still edge

out the competition. Loans share several

common aspects where you can introduce some flexibility. These are the areas you may be able to tailor to your advantage: 88

PRIVATE LENDER

I nterest rate O rigination points charged at closing

S peed of inspections and draws J unk fees T erm of the loan P re-payment penalty L oan-to-value ratio L oan-to-cost ratio

Do these sound familiar? There are as many ways to structure a private loan as there are types of borrowers. Lenders are even known to create complex matrices and charts to keep brokers up to date, resending them every month as they change. Lenders consistently alter their loan guidelines in response to capital market pressures. But they also strive to remain competitive, or even innovative, when it comes to

winning over borrowers—which also requires changes. The process is as complicated as you want to make it.

STRUCTURING TO STRENGTHS But what if there was another way? What if instead of emulating competitors and responding to their actions, lenders took a more proactive approach in structuring their products? What if

lenders identified their strengths and

Their solution? They focus on purchas-

the results of these partnerships, you

who complemented their offering.

and now a secondary market exists.

of each party in a mutually beneficial

The rapid and organic introduction of

Although the introduction of this second-

way—a truly symbiotic relationship.

it was simply a case of a lender (or set of

ships. Too often lenders chase deals alone

proactively searched for another lender

the table funding lender is one example. Many private lenders with a mandate to assemble large portfolios of loans in the space had and continue to have restrictions on their capital that prevent them from closing a loan directly.

ing closed loans from other lenders,

can see they have accelerated the growth

ary marketplace may sound deliberate,

There are numerous avenues for partner-

lenders) adjusting their loan product in

when they should have been hunting in a

response to the restrictions their capital

sources placed on them. There are many

case studies for these partnerships in the private lending space today. If you study

pack. Large deals can be alluring. There is a chance for a big payday up front if

the deal is structured properly. Lenders

under pressure to put capital to work find SPRING 2022

STR ATEGY

have all heard of these terms. They refer

“THERE IS A LESSON PRIVATE LENDERS CAN LEARN FROM TRADITIONAL INSTITUTIONAL LENDERS, ESPECIALLY FROM COMMUNITY BANKS: LOAN PARTICIPATION.”

to scenarios in which a single lender is unable (or unwilling) to take on all the risk. In the private lending space, these relationships arise out of underwriting more often than partnerships. It’s far more common to see a borrower seek out

it easier to soak up that capital demand with one large loan. But there is a lesson private lenders can learn from traditional institutional lenders, especially from community banks: loan participation. Local banks are rarely the only lender or investor on a larger loan. You might not see it, but it’s rare to see a single investor holding an oversized portfolio

or loan. They share the risk, and the reward, by participating in each other’s deals. It’s a lesson private lenders should take to heart. Instead of lending on massive loans or lending to a single borrower who skews your entire loan portfolio, consider “participating.” Intercreditor agreements. First and second liens. “A” and “B” pieces. We

disguised equity in the form of a subordinate lien than it is for two lenders to partner openly to get a deal closed. Why? There’s a simple answer for anyone who is competitive. It’s natural, and it resides deep in our core. It’s fear. For lenders to work collaboratively, they must share knowledge, information. best practices, and customer contacts—all the

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PRIVATE LENDER

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things many private lenders have kept as guarded secrets. But the truth is, lending money is the oldest business in the modern world. What secret knowledge does one lender really have over others? Customer contacts? The internet has leveled the playing field. If you’re still relying on a Rolodex for your competitive advantage, you might want to make sure your life affairs are in order because your time is up. Information was a form of power for a long time. But in this age, those who can actually execute reign supreme. So why do some lenders believe they are better than others? There’s an answer for that too. It's ego.

Lenders can work collaboratively rather than competitively. Our capital sources and desires are diverse. Why not work together to satisfy that demand? It's too easy to claim the opportunity doesn’t arise. Lenders cross rooms with each other at conferences, on stages, and in advocacy groups. We set up booths and tables next to each other. We even call each other for underwriting information and share best practices. Why not share the wealth of opportunity? Private lenders, take note. Our egos are using fear to keep us from working together. As a result, we often believe we are at the end of the road when, in truth, we are only at the beginning. ∞

ABOUT THE AUTHOR

TOM MEADE Tom Meade is a Titan in more ways than one, especially when it comes to reinvention.

His career spans two decades of traditional finance, construction management, real

estate development, and private lending. As the founder and CEO of Touchstone

Capital Partners, Meade navigates his firm and investors along the path of alternative investments as only a veteran can.

SPRING 2022

CASE STUDY

CREATING VALUE IN A 100-YEAR FLOOD PLAIN Borrower saw opportunity to construct seven homes by raising foundations above the flood plain.

OPPORTUNITY AND SCOPE The borrower, CFF REI LLC, found a low-cost opportunity to build in a residential area in Abilene, Texas, but the target lots were designated "base flood", or 100-year flood plain, by the Federal Emer-

The borrower’s cost basis was $7,000 per lot with the purchase, plus $9,000 for 36" dirt fill to raise the foundations out of the base flood level, bringing the total cost per lot to $16,000. Since the market cost for nearby buildable lots was $30,000, the borrower’s cost basis per lot was 53% below market, yielding a

gency Management Agency. Nearby lots above the flood plain sold

$111,000 savings.

for $30,000, so CFF REI bought the nearby noncontiguous lots.

Finding two nearby lots that could be subdivided into a total of

CFF REI subdivided the two lots into three and four lots each, for

seven lots enabled CFF REI to benefit from economies of scale.

building seven three-bedroom, two-bathroom, 1,210-square-foot

They were able to negotiate for multiple jobs to be completed

single-family residences with a living room and kitchen.

rather than only one job if they were building a single home.

PRIVATE LENDER

Lender // Corridor Funding Client/Borrower // CFF REI LLC Location // Abilene, Texas Square Footage // 7 single-family

residences, each 1,210 square feet Year(s) Built // August 2021-Feb 2022 Loan Amount // $876,000 LTV // 670% LTC // 85% Interest Rate // 9.95% Length of Loan // 12 months Anticipated Rehab Costs // $876,000 Credit Score Considered // Yes Client/Borrower Experience Level // Two

new construction and four flips Exit Strategy // Sell

EXIT STRATEGY The exit strategy is to sell all seven homes at approximately $183,000 each—after realtor fees—a goal the borrower is on the way to achieving. With all homes sold and the loan and financing costs paid, the borrower will realize a profit of roughly $232,000. ∞ SPRING 2022

VENDOR GUIDE

VENDOR GUIDE If you’re looking for a service provider who has real experience working with private lenders, the Private Lender Vendor Guide is your starting point.

In each issue, we publish a cross section of service provider specialties. These providers do not pay for inclusion. Instead, we vet them by talking to private lender references and reviewing their product offerings. AAPL members can access all service providers online at aaplonline.com/vendors. If you’re not a member, keep an eye on this publication for future updates. Then consider joining AAPL to support this and other initiatives!

WINTER

A ccounting B usiness Consultants D efault & Loss Mitigation

SPRING THIS ISSUE!

SUMMER

Appraisers & Valuations

B rokers

C apital Providers

Funds Control

D ata & Metrics

L egal

Lead Generation

Warehouse Lenders

N ote Buying/Selling

FALL

D evelopment Cost Estimates

I nvestor Reporting

Education

L oan Origination Services

Fund Administration

L oan Servicing L oan Underwriting

Insurance M arketing

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

PRIVATE LENDER

Indicates AAPL Membership

APPR AISERS & VALUATION BERNHARDT APPRAISAL

p ortlandresidentialappraisal.com (971) 288-1328 P roducts & Services // Divorce Appraisal, Probate Cour t Proceedings, Bankruptcy Appraisal, TAX/IRS Appraisal, Proper ty Tax Appraisal, Estate Planning Appraisal, Date of Death Appraisal, Planning for Purchase, FSBO

BOXWOOD MEANS, LLC

B oxwoodMeans.com (203) 653-4100 P roducts & Services // Reliable, On-time and Cost-Ef fective Commercial Evaluations, Restricted Appraisals, and Proper ty and Environmental Inspections for Most CRE Proper ty Types Nationwide

PCV MURCOR

www.pcvmurcor.com (855) 819-2828 S econdary Specialty // Default & Loss Mitigation P roducts & Services // Appraisal Management, BPOs and Alternative Valuation Management for Residential and Commercial, Disaster Inspections, Asset Management & Disposition, Title & Set tlement Services, Risk Exposure

APPRAISAL NATION

w ww.appraisalnation.com (866) 735-0901

C APITAL PROVIDERS PEERSTREET

w ww.peerstreet.com (844) 733-7787 S econdary Specialties // Note Buyer/Seller, Lead Generation P roducts & Services // Capital Available for Purchasing Funded SFR and MFR Bridge, Capital for Table Funding/Brokered Loans in Long-Term Rental

SPRING 2022

VENDOR GUIDE

C APITAL PROVIDERS (CONT.) riceparkcapital.com

RICE PARK CAPITAL

P roducts & Services // Private Equity Firm That Invests Equity in Private Lenders

INVESTOR FUNDING NETWORK

www.investorfunding.org (630) 640-9060

VISTA CAPITAL

www.vista-capital.net (760) 779-8900

DATA AND METRIC S PRODEAL

prodeal360.com (646) 387-4047 Secondary Specialty // Loan Origination Ser vices

ZELMAN & ASSOCIATES

zelmanassociates.com

LEAD GENER ATION PRIVATE LENDER LINK

p rivatelenderlink.com (650) 226-4277 P roducts & Services // Private Lender Directory for Companies Of fering Shor t-Term Financing Secured by Residential and Commercial Real Estate

PRIVATE LENDER

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LEAD GENER ATION (CONT.) www.scotsmanguide.com

SCOTSMAN GUIDE

(800) 297-6061 P roducts & Services // Ranked Mortgage Originators and Lenders for Residential

Lending (Prime Mortgage, FHA, USDA, & VA; Non-QM; Hard Money; Construction), Commercial Lending (Prime Commercial, Multifamily Property, Hard Money, Construction), Mortgage Banking (Correspondent Line, Warehouse Line)

cix.com

CIX

(888) 249-1112

REI NETWORK LP

www.myhousedeals.com (713) 701-5144

NOTE BUYER /SELLER w ww.alphaflow.com

ALPHAFLOW

(212) 381-0902 P roducts & Services // Asset Manager Focused on Real Estate Loans Purchased from Private Lenders

www.montvale.co

MONTVALE, LLC

(302) 526-0200

ARE YOU TRYING TO REACH PRIVATE LENDERS?

Try advertising with us. Digital • Print • Newsletter • Social • Webinar

913-888-1250 • sales@aaplonline.com SPRING 2022

L AST CALL WITH BETH JOHNSON

FORGET THE HYPE AND FOCUS ON WHAT REALLY MATTERS by Beth Johnson

uperlatives abound in

the world of real estate investing. Articles,

podcasts, and other media boast

headlines like ”10x Your Business”

and ”1,000 Doors in Only 2 Years.”

The private money industry isn’t immune to peacocking either. Introductions boasting of how much in assets one has under management or origination volume to date are common. Those pronouncements can certainly be a little intimidating to a local lender like me, especially in a world where bigger always seems better. Trying to “keep up” with these boasts can lead to self-imposed goals that demand scale at breakneck speeds and the sacrifice of one’s core values and happiness. I’ve had to battle my own internal talk track as it challenged me to “grow big or go home.” But, my instincts to hold the line win out and I embrace my choice to remain “small and mighty.” Staying true to that vision has served our company well. Our differentiated and creative financing compared to deals backed by institutional capital sets us apart. And we’ve also garnered attention and loyalty with high-net-worth investors who see and feel 98

PRIVATE LENDER

our “Flynn Family Difference” and want to become capital partners for the long run. Our company’s conscious decision to remain small(ish) and our conscientious approach to private money placement allows us to provide white-glove service that makes us reliable and enjoyable to do business with year after year. Because we’re a private lender that specializes in whole trust deed investments, establishing loyalty is a more difficult task since our clients’ investments aren’t bound by lengthy contractual terms associated with syndications and private mortgage funds. Still, we have enjoyed the benefits of organic growth fueled by raving fans of our business model and our extremely personal approach to investment management. I have found that taking a more relationship-based approach to capital raising sets us apart. We lead with charm and follow with character. I try to make every interaction cordial and heartfelt, because that’s who I am and what my investors want from me. I don’t want to shake your hand when we meet—I want to give you a hug. Lenders who lead with their accomplishments before understanding the

prospect’s needs commit a faux pas. This is especially true for new lenders. Lacking a track record, your ability to raise capital hinges on establishing trust. People want to know who you are before they want to know what you’ve done. Nothing grates on my nerves more than being in a meeting with someone I barely know who blurts their pitch deck. When I’m learning about potential investment opportunities, I listen carefully to how my tough questions are answered. I search for vulnerability and transparency. If you build a business with a beating heart and a kind soul, investors will naturally gravitate toward you. Most investment companies can provide reasonable returns and testimonials to support their success. The difference lies in how results are achieved. I want our clients to feel part of a team. I strive for an almost club-like environment, and we take time to educate clients about how we do business and about our industry overall. Yes, this takes up a lot of time. And, yes, it can be exhausting. But if you build your business with a service orientation based on adding value, clients will not only come, but they will also stay with you. ∞

UR BUSINESS O Y TO KE A NE T O W T

tio

ide

ng ppi Ja w D ro

Reach

S HT IG HE

LEV ER AG E

CORRESPONDENT LENDING PROGRAM

La be

led

O r i gi n

ati o n

Exp

v si

Focus on Originating, With RCN As Your Guide Become An Approved Correspondent Lending Partner Today Contact Tiffany Walker, Manager of Wholesale Lending TWalker@RCNCapital.com 860.783.8844 RCN Capital, LLC is licensed as a California Finance Lender under Department of Business Oversight license number 60DBO-46258. Arizona Mortgage Banker License BK-0932325. Oregon Mortgage Lending License: ML-5571; NMLS Company ID: 1045656. SPRING 2022 99

You’re Invited!

A APL’S

13 T H

AN N UAL C ON F ER EN CE The Nation’s Largest Private Lender Event

2022 brings you 3 days of packed sessions, 65+ exhibitors, and 600+ attendees with whom to network and learn.

OCT. 19-21 2022 LAS VEGAS aaplconference.com

100

PRIVATE LENDER