Private Lender by AAPL by American Association of Private Lenders

SPECIAL FEATURE: COVID-19—MOVING FORWARD ECONOMY

How's Real Estate Demand Holding Up?

CORPORATE RESPONSIBILITY & ETHICS

TITAN TALK

Glenn "The Mobile Home Guy" Stromberg

Avoiding Accidental Redlining

The Official Magazine of AAPL | Summer 2020

LENDER LIMELIGHT

Lou & Raffaele Forino Running Their Gauntlet to Success

SUMMER 2020

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CONTENTS

SUMMER 2020

06 BUSINESS S TR ATEGY

0 6 I nt r igued by Pr i va te

10 C an an I R A Be a Bu yer

14 L ender s: Have You

Lending?

36 CORPOR ATE RESPONSIBILIT Y & ETHIC S

of M y Notes?

C onsidered a Deed in L ieu of Forec losure?

T he “ Now ” and “ Not Ye t ” of Inves t ing in a Pos t-

Pandemic Housing Mar ke t

24 ACCOUNTING

R eminder s for R EI Ts on

Prohibi ted Tr ans ac t ions

28 LEGAL

W here Should You

Incor por a te Your Busines s?

32 LEGISL ATION

P ropos e d M odi f ic a t ions

5 0 C ov id -19 ’s Impac t on

5 2 C api t al Les s ons f rom

Pr i va te Lender s

C ov id -19

74 W here A A PL’s Educ a t ion C ommi t tee Sees Pr i vate

Lender K now - How N eed ing a Boos t

48 SPECIAL FEATURE 4 8 L ook ing Beyond C ov id -19

Leader ship in T imes of

74 EDUC ATION

Crea te and Protec t Weal t h

N av iga t ing a Sea Change: Uncer t aint y

A ns wer ing t he Challenge to wi th Lou and Raf f aele For ino

8 0 T ITA N

TA LK

Glenn St romberg I s t he Mas ter of Mobile Home Inves t ing

86 TECHNOLOGY

8 6 H ow Tec h Revolu t ionized

9 0 H ow A r t i f ic ial Intelligence

Real E s t a te Financ ing

5 4 H ow to Pivot During a Crisis

5 8 M or tgage Pay ment

6 0 M y Bor rower I s in

95 RESOURCE GUIDE

6 2 W ha t t he C oronav ir us

98 L A S T C ALL

to SEC Def ini t ion of

“Acc redi ted Inves tor ”

Redlining and O t her

42 LENDER LIMELIGHT

20 MARKET TRENDS

70 MANAGE & LEAD

A voiding Acc ident al Preda tor y Pr ac t ices

Defer ment Gotc has Def aul t— Now W ha t?

Pandemic C an Teac h Us A bou t Mar ke t ing

6 4 S ome A spec t s of Remote

Wor k C ould Become Par t

I s Tr ans for ming Lending

P a t h to Succes s

By pas s es C omfor t Zone wi th Jason Har r is

of Our Fu t ure

6 6 U nder s t anding SBA

C oronav ir us Dis as ter Relief Progr ams SUMMER 2020

MEMBERSHIP

MEANS SOMETHING. Join the oldest national association representing the private lending industry as a viable alternative for borrowing and investing. As a member, youâ&#x20AC;&#x2122;ll gain prestige through our:

ADVOCACY

CODE OF ETHICS

EDUCATION

RECOGNITION

SUPPORT

NETWORKING

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PRIVATE LENDER

FROM THE CORNER OFFICE

YOUR ASSOCIATION UPDATE During the past several months, due to the coronavirus pandemic, the world came as close to a near-standstill as we are ever likely to see. Then, clear incidents of police brutality and injustice drove our nation to protests, and in many cases violence, in all 50 states. At just a little more than halfway through the year, 2020 has already been a year of personal, economic and political turmoil.

EDDIE WILSON CEO, AAPL

LINDA HYDE

Managing Director, AAPL

KAT HUNGERFORD Executive Editor

KELLY SCANLON Copy Editor

SPRINGBOARD CREATIVE Design

CONTRIBUTORS

Katie Bean, Daren Blomquist, Edward Brown, James Cabaj, Brett Crosby, Nema Daghbandan, Olivia Durnell, Jim Garlock, Abhi Golhar, Jason Harris, Kat Hungerford, David Kelly, Dina Kroshkin, Beeta Lecha, Clay Malcolm, Melissa Martorella, Susan Naftulin, Jadon Newman, Randy Newman, Chris Ragland, Lawrence Schwartz, Ray Sturm, Nancy Wallace-Laabs, Kelli White, Eddie Wilson

COVER PHOTOGRAPHY Kevin Michael

Private Lender is published quarterly by the American Association of Private Lenders (AAPL). AAPL is not responsible for opinions or information presented as fact by authors or advertisers.

SUBSCRIPTIONS

Visit www.facebook.com/aaplonline or email PrivateLender@aaplonline.com.

BACK ISSUES

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

For article reprints or permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail PrivateLender@aaplonline.com or call 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is prohibited.

To help private lenders navigate the health crisis, we launched our public COVID-19 resource page at aaplonline.com/covid19. As we slowly bring the “crisis” part of COVID-19 to a close, it is now time to look toward rebuilding. This issue features a special section on page 48 about how we not only put the crisis behind us, but what we can take away from it to make us better and stronger. Our response to the inequality throughout our nation was less of a clear path. Although our association mandate is to support the private lending industry, at what point must organizations look beyond to support something larger? Equality is not a political issue. It is a human right. Find our statement on page 85. Although the protests may be drawing to a close in the near future, the issue is one we will struggle with for years. For our pillars of Education, Advocacy and Ethics, here is your association update: Education // Our annual conference may look a little different this year as we navigate guidelines and work closely with Caesars Palace Las Vegas to ensure the health of all attendees. But, we are still set to host the nation’s largest private lending event on Nov. 15-17, alongside new virtual attendance capabilities. For details, check out our newly launched mini-site at aaplonline.com/conference. Advocacy // Although the closure of government offices and focus on COVID-19 stalled most legislative matters, we did submit a letter of support for the SEC’s proposed update to the definition of an accredited investor. Find out how this may change your private lending business—and read the full letter—on page 32. Ethics // You probably have seen our Code of Ethics (aaplonline.com/ethics)—all AAPL members pledge to follow it and face consequences if they do not. But how should lenders ensure they adhere to best practices? It’s easy to unintentionally fall into unethical actions like redlining just by virtue of how your loan underwriting and requirements are structured. The intent may not be there, but the outcome is the same. Read on for this issue’s focus on redlining on page 36.

LINDA HYDE

Managing Director, American Association of Private Lenders

SUMMER 2020

BUSINESS STR ATEGYÂ

PRIVATE LENDER

INTRIGUED BY PRIVATE LENDING? Here are three questions to consider before you jump in. by Abhi Golhar

OVID-19

It can be passive, lucrative

hundreds of

time, if you do it right.

has spurred

conversations

among real estate investors, entrepreneurs and

business owners about the

and take very little of your Before jumping into private lending, here are a few questions to ask yourself.

best ways to create multiple sources of income,

especially those that are

sustainable long-term and provide peace of mind for

maintaining our lifestyles.

WHAT INTERNAL BUSINESS FACTORS SHOULD I CONSIDER TO SEE IF IT MAKES SENSE?

One income stream to explore is private lending, especially if you have cash sitting on the sidelines right now. Why?

Right off the bat, a few come to mind: location, liquidity, time, risk tolerance and business workflow and technology.

Depending on the cities and states you ultimately pick to lend in and the type of project you are interested in financing, the amount of capital required of you to deploy per loan will vary. Here are a few simple steps you can follow to quickly determine what your internal business gut is telling you. Step 1 // Identify the cities and/or states in which you want to do business. Some lenders work only in one or a couple of states. One of the reasons they do this is they know exactly what they want and what they are looking for. They set the rules so it’s a win-win for everyone. Step 2 // Liquidity is a large component of the volume of deals you can do in the location you choose. You would be a great fit as a private lender if you look like the following examples: Y ou’ve done well as a flip-

per and you’re looking for additional opportunities to expand your business.

Y ou have a large amount

of capital in an IRA account that can be shifted to a selfdirected IRA account.

Y ou’re a high-income

earner (e.g., a physician, dentist or C-suite company executive).

Y ou’re a software genius

who exited a tech startup.

The bottom line here is this: If you don’t have (or have access to) a large amount of capital to lend, there’s really no point jumping into the game. Step 3 // The total time you invest in learning about becoming a private lender and building the infrastructure for your business can be substantial. Here are a few things to consider pulling the trigger on that will take some time: E stablishing your business name and brand and getting a good understanding of why you’re different in the marketplace O btaining business insurance I dentifying your lending criteria and focus D etermining your marketing strategy to find potential borrowers S etting your risk limits As you can see, it’s not as easy as creating a landing page and becoming a lender overnight. There are many components to launching successfully, and the time required to do so is intensive. Step 4 // Your risk tolerance will define the way you lend. As in any business, your appetite

SUMMER 2020

BUSINESS STR ATEGY

for risk results in how aggressively you pursue opportunities to help your business grow. As a private lender, you’ll need to decide which lending opportunities you’ll focus on, including, but not limited to: S ingle-family new construction

S ingle-family renovation (fix and flip)

S ingle-family rentals (buy and hold)

M ultifamily

C ommercial

Step 5 // Mastering busi-

L and development

ness workflows and lever-

And the list can go on and on. The bottom line is: What do you want your niche to be, and how comfortable do you feel in that area? If all these areas of real estate are foreign to you, maybe consider investing with an existing private lender who can offer you a yearly return but also provide insight into the space so you can start gaining more confidence in your own deals.

Guess what? This is not a theoretical example. This happens

aging the right technology

to private lenders every day!

across multiple platforms

Why? Because most lenders

is one of the biggest challenges private lenders have. Here’s an easy example: You

have been trying to fit a custom workflow into multiple existing platforms that just don’t have as

may be a private lender who

much flexibility as they need.

is considering a platform for

But, imagine a world where

loan origination and another platform for loan servicing. But you’re worried that really hot leads are getting lost, loans

there’s only one dashboard that can connect all the dots or a custom interface that can help manage all your work-

could stall and, frankly, your

flows from a single dashboard

team could underperform.

with multiple users. This

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isn’t just a fantasy. This can be a reality within only a few months with the right development team behind you. As a new private lender, depending on how much you want to scale your business, building a custom workflow from the get-go can be a valuable component of your lending business.

WHAT QUALITIES DO YOU NEED TO BE “CUT OUT” FOR THE PRIVATE LENDING BUSINESS? The two big ones are being detail-oriented and patient. If you consider yourself a detail-oriented person, you’ll win the lending game. Why? This space requires you to bring your A-game and do your homework about the deal, the borrower, the municipality, etc. If you enjoy getting a little lost in the analysis of a deal, you’re the kind of person the private lending space is looking for. Having thorough knowledge of what you and your capital is getting into is vital to your success as a private lender.

If you consider yourself a patient person, you’ll win the lending game. Why? Making a last-minute deal because you were caught up in the hype is a bad move, and it’s not one private lenders make—ever. If you feel something seems too good to be true, it probably is. Let others take on that risk. Stick to your lending criteria and never ever deploy your hard-earned capital on emotion. It’s a numbers game. Don’t let anyone tell you otherwise.

WHAT IS A GOOD “LOW-RISK” STEP-BYSTEP STRATEGY TO GET YOUR FEET WET AS A PRIVATE LENDER? How would you define “lowrisk”? Look for minimal headaches, a strong borrower with a solid timeline for repayment and an even stronger team to finish the project and return capital. Using this definition, especially if you’re thinking about jumping into the private lending game, single-family new construction and major renovations are out of the picture altogether. Starting with smaller loan amounts and a quicker turnaround (approximately 3-6

months) gives you the time to figure out the kinks in your system and your overall lending personality. Here’s a simple strategy to follow that’ll jumpstart your lending business: F ocus on the Midwest, or areas where you can digest the loan amounts ($55,000-$95,000). L ook at loans on singlefamily fix-and-flips that take less than six months to complete or long-term buy-and-hold (rental) properties.

private lending business, but if you master all of them and take your time, it can be a very rewarding experience in both the short and the long term. Remember to set your rules and follow them— don’t buy into the hype. ∞

ABOUT THE AUTHOR

T horoughly vet your borrower and have them bring 20-25% as a down payment. T hree origination points and 10%-12% interest can be a good place to start. C heck, double-check and triple check your loan-tovalues (LTVs) in the area. I t’s OK to joint venture with your borrower. Taking a percentage of profits can be a good way to develop a closer relationship with potential borrowers, given the deal and structure make sense.

ABHI GOLHAR Abhi Golhar is a three-time

nationally syndicated radio host, author and investor.

For tips on how to develop

smarter software that provides you with better leads and quicker brand visibility, visit AbhiGolhar.com.

There are many components to building a successful

SUMMER 2020

BUSINESS STR ATEGYÂ

Can an IRA Be a Buyer of My Notes? Selling notes to IRA investors is similar to selling notes to an individual, with one large exception: The self-directed IRA ecosystem lacks direct methods to get in front of account holders. by Clay Malcolm

PRIVATE LENDER

or other entity. The IRS does not actively participate in the IRA holder’s choice of investments, nor does the account’s custodian. So, your customer is simply the account holder (and their financial team if they use one) who is the decision maker for the account.

WHAT IS AN IRA INVESTOR LOOKING TO BUY? Since IRA holders have different levels of expertise, risk tolerance and expected investment returns for their accounts, there is no one answer to this question. Here are a few things to consider about your potential buyer:

n IRA (whether

qualified persons” (i.e., the

Roth, SEP or

their lineal ascendants and

traditional or

IRA holder, their spouse, and

SIMPLE) can

descendants; the descendant’s

purchase existing notes.

spouses; and any fiduciaries

an HSA (health savings

that short list of prohibited

these accounts to par-

chase a note, with or without

So can a Solo 401(k) or

to the plan). Notwithstanding

account). The IRS allows

sellers, the IRA can pur-

ticipate in debt invest-

collateral and of any length

ments of all kinds.

term from a private lender.

It is worth noting that the

Selling a note, or a package of

IRS does have a prohibition

several notes, to an IRA is not

that restricts an IRA from

significantly different from

purchasing a note from “dis-

selling to a person, company

The note itself will need to match the experience level of the IRA investor. Generally, notes are an excellent match for IRA investors. Most people in the U.S. have had some experience with debt. Usually their experience includes getting a loan for a home, education, a business, etc. Basic concepts like interest rate, collateral and repayment schedule are familiar to them. Performing notes will likely be easier for IRA investors to understand. Saying to a potential buyer something like “This is the existing note, and here

is the performance to date” is intuitive and compelling. In addition to the ease of com-

prehension, assuming the note continues to perform, there is not much work required on the part of the IRA holder. On the other hand, the draw of non-performing notes for an IRA investor is most likely to be the discount. Savvy IRA investors are actively looking for premium returns, and the possibility of combining that return in a tax-advantaged account is a primary goal.

The expertise of IRA holders may affect whether they are interested in performing notes or non-performing notes. Although having a note in one’s IRA demands minimal atten-

tion on the part of the account holder, buying non-perform-

ing notes may only be for IRA holders who have experience renegotiating the terms of a note and the desire to perform the renegotiation or foreclose. This may be an arena where private lenders choose to sell non-performing notes to other private lenders’ IRAs or 401(k)s. An advantage of self-directed IRAs and 401(k)s is the IRA holder gets to use personal expertise to create an invest-

ment strategy for the account. One of the restrictions, noted previously, is the IRA can’t

SUMMER 2020

BUSINESS STR ATEGY

purchase a note the account holder (or their business entity) already owns. But there is no prohibition for the lender to sell their note to another lender’s IRA or Solo 401(k). A transaction between lenders can result in wins all the way around. The original lender sells their note and gets cash to lend out again. The IRA holder lender whose account buys the note gets an investment they understand and can manage using their expertise.

quarter 2020 edition of Private Lender magazine) will also be attractive to an IRA investor who is looking for a passive asset. In this scenario, the IRA holder is commonly going to be vetting the people running the fund’s operation rather than evaluating each note. The IRA gets to participate in the benefits of buying discounted notes but does not necessarily need to have great skill or experience with resolving a note that has gone off track.

A non-performing note fund (see “Designing Nonperforming Note Funds” in the second

The repayment schedule will need to match the timetable of the IRA holder.

Since notes yield periodic returns, they match well with IRA holders who are taking distributions, but they may not be as desirable for someone who is not taking distributions.

monthly, which are then distributed to the account holder monthly (or quarterly, annually, etc.). This is an attractive match for the IRA holder.

Imagine you are an IRA holder who is older than 59.5 years old (the threshold age after which the person can take distributions from their IRA without penalty) and you need income from your account for living expenses. This scenario is an excellent match for a note. By having this asset, the IRA could be receiving payments from the borrower

Conversely, an IRA holder who is in their 40s and not interested in taking distributions may view a note with monthly cash payments coming into their IRA as a burden since that cash now needs to be reinvested (i.e., more work the for the account holder). That said, ROI is king. If the return is superior to that account holder’s other invest-

Ad 12

PRIVATE LENDER

ment opportunities, it won’t matter how old the person is.

HOW DO I FIND IRA INVESTORS? This question points to a glaring hole in the self-directed ecosystem. Most companies that provide self-directed IRAs,HSAs and Solo 401(k)s maintain a business model that occupies a relatively restrictive spot in the business landscape. Investment advice neutrality is a cornerstone for the IRA provider, allowing them to offer

their account services without having to fulfill the regulatory obligations associated with giving financial advice. While this means that IRA account fees can be quite economical, it also means the IRA provider can’t connect their client base to investment opportunities. The net effect is that a company in the logical spot to help lenders access IRA investors can’t perform that function. So, to answer the question, finding IRA investors is most often accomplished via direct communication either with your existing sphere of clients

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and contacts or by accessing a community, live or online, such as a local Meetup group or REIA. There are also innovative online resources (e.g., privatelenderlink.com has an investments directory) available to connect investors with entities that offer investments. Having found a group that includes IRA investors, remember there are a surprising number of Americans who still don’t know their IRA can invest in assets other than publicly traded stocks, mutual funds, etc. You may be the person who introduces the concept to them. In fact, introducing the IRA investment concept to people who have already invested with you using their personal funds can be a most effective strategy. They already know how to buy notes. They already know you. They may just need to know that their tax-advantaged account can participate without jeopardizing the tax benefits. If you are selling to an IRA investor, it is worth noting that the IRA custodian is typically involved in the transaction— both the paperwork and the disbursement of funds. So, you may want to plan on the process taking a little extra time. That said, IRAs and Solo 401(k)s have billions of dollars of investable cash in them, and selling notes to IRA inves-

tors is very similar to selling notes to an individual. In both cases, it is a person making a financial decision to purchase the note you are selling. ∞

ABOUT THE AUTHOR

CLAY MALCOLM Clay Malcolm has been in the self-directed IRA and 401(k) marketplace for almost a

decade as both an educator and an investor. An expert at self-directed account strategies, Malcolm has

taught continuing education classes for CPAs, CFPs and real estate professionals

across the country. He has

also served on the American Bankers Association IRA steering committee.

Malcolm is currently a member of the business development team at Advanta IRA.

He received his bachelor of science degree in

communications from

Northwestern University. You can reach Malcolm

through the company website at www.advantaira.com.

SUMMER 2020

BUSINESS STR ATEGY

Lenders: Have You Considered a Deed in Lieu of Foreclosure? When used properly, a DIL can be a great option for lenders seeking to avert foreclosure. by Randy Newman

iven the current economic

uncertainty,

01 W hat does a DIL do? 02 S hould we use it?

At the outset of most discus-

The first question is answered much more directly than the second. A DIL is, in its most basic terms, an instrument that transfers title to the lender from the borrower/property owner, the acceptance of which typically satisfies any obligation the borrower has to the lender. The two-word answer as to whether it should be used sounds deceptively simple: It depends. There is no one right answer. Each situation must be thoroughly analyzed.

sions concerning DILs, two

Items that a lender should

unprecedented

unemployment and number of loans in default, lenders should properly review,

evaluate and take appropriate action with bor-

rowers who are in default or have talked with them

about payment concerns.

One alternative to foreclosure is a deed-in-lieu of foreclosure or, as it is colloquially known, a deed-in-lieu (DIL).

questions are typically asked: 14

PRIVATE LENDER

consider when determining

which course of action to take include, among other things, the property location, the type of foreclosure process, the type of loan (recourse or nonrecourse), existing liens on the property, operational costs, status of construction, availability of title insurance, loan to value equity and the borrower’s financial position. One of the misconceptions about accepting a DIL is thinking it means the lender cannot foreclose. In most states, that is inaccurate. In some states, statutory and case law have held that the acceptance of a DIL will not create what is called a merger of title (discussed

below). Otherwise, if the DIL has been properly drafted, the lender will be able to foreclose.

GENERAL ADVANTAGES TO LENDERS In most cases, a lender’s curiosity will be piqued by the offer of a DIL from a borrower. The DIL may very well be the least expensive and most expeditious way to deal with a delinquent borrower, especially in judicial foreclosure states where that process can take several years to complete. However, in other states, the DIL negotiation and closing process can take

significantly longer to complete than a nonjudicial foreclosure.

the interior of the property may very well be a mystery to

property before vacating and

readily available for the lender collected and any necessary

handing over the keys as part

to review so that rents can be

Additionally, having a bor-

the lender. With the borrowerâ&#x20AC;&#x2122;s

of the negotiated agreement.

rower to work with proactively

cooperation, the lender can

action to get the property ready

can give the lender much

condition any consideration or

The lender can also get quicker

more information about the

acceptance of the DIL so that

propertyâ&#x20AC;&#x2122;s condition than

an inspection or appraisal can

the property from wasting.

The agreement for the DIL

going through the foreclosure

be completed to determine

process. During a foreclosure

property value and viability.

obtain from the borrower infor-

that the borrower will not

and absent a court order, the

This also can result in a cleaner

borrower does not have to let

turnover of the property

the lender have access to the

because the borrower will have

property for an inspection, so

less incentive to damage the

access to make repairs or keep

for market can be taken.

Similarly, the lender can easily

should also include provisions

mation on operating the building rather than acting blindly,

saving the lender considerable time and money. Rent and

maintenance records should be

pursue litigation against the

lender and possibly a general

release (or waiver) of all claims. A carve-out should be made to allow the lender to (continue SUMMER 2020

BUSINESS STR ATEGY

to) foreclose on the property to wipe out junior liens, if necessary, to preserve the lender’s priority in the property.

GENERAL DISADVANTAGES TO LENDERS In a DIL situation (unlike a properly completed foreclosure), the lender assumes, without personal obligation, any junior liens on the property. This means that while the lender does not have to pay the liens personally, those liens continue on the property and would have to be paid off in the case of a sale or refinance of the property. In some cases, the junior lienholders could take enforcement action and possibly endanger the lender’s 16

PRIVATE LENDER

title to the property if the DIL is not drafted properly. Therefore, a title search (or preliminary title report) is an absolute necessity so that the lender can determine the liens that currently exist on the property. The DIL must be drafted properly to ensure it meets the statutory scheme required to protect both the lender and the borrower. In some states, and absent any agreement to the contrary, the DIL may satisfy the borrower’s obligations in full, negating any ability to collect additional monies from the borrower. Improper drafting of the DIL can put the lender on the wrong end of a legal doctrine called merger of title (MOT). MOT can occur when the lender has two differ-

“ When used properly, a DIL is a great tool (along with forbearance agreements, modifications and foreclosure) for a lender, provided it is used with great care to ensure the lender is able to see what they are getting.” ent interests in the property that differ with each other.

the LTV equity in the prop-

erty along with the financial

For instance, MOT might occur when the lender also becomes the owner of the property. Once MOT happens, the lesser interest in the property gets swallowed up by the greater interest in the property. In real world terms, you cannot owe yourself money. Once the owner of the property and the lienholder (mortgagee/beneficiary) become the same, the lien disappears since the ownership interest is the greater interest. As such, if MOT were to transpire, the ability to foreclose on that property to wipe out junior liens would be gone, and the lender would have to arrange to have those liens satisfied.

situation of the borrower is

As stated, getting the property appraised and determining

the borrower’s other secured

paramount. Following a DIL

closing, it is not unusual for the borrower to sometimes file for bankruptcy protection. Under the bankruptcy code, the

bankruptcy court can order the undoing of the DIL as a preferential transfer if the bank-

ruptcy is filed within 90 days

after the DIL closing happened. One of the court’s main func-

tions is to ensure that all creditors get treated fairly. So, if

there is little to no equity in the property after the lender’s lien,

there is a practically nil chance the court will order the DIL

transaction undone since there will not be any real benefit to and unsecured creditors.

However, if there is a significant amount of money left on the table, the court may very well undo the DIL and place the property under the protection of bankruptcy. This will delay any relief to the lender and subject the property to action by the bankruptcy trustee, U.S. Trustee, or a Debtor-in-Possession. The lender will now incur additional attorneys’ fees to monitor and possibly contest the court proceedings or to evaluate whether a lift stay motion is worthwhile for the lender. Also to consider from a lender’s perspective: the liability that may be imposed on a lender if a property (especially a condominium or PUD) is under construction. A lender taking title under a DIL may be deemed a successor sponsor of the property, which can cause innumerable headaches. Additionally, there could be liability imposed on the lender for any environmental issues that have already occurred on the property. The last possible disadvantage to the DIL transaction is the imposition of transfer taxes on recording the DIL. In most states, if the property reverts to the lender after the foreclosure is complete, there is no transfer tax due unless the sale price exceeded the amount owed to the lender. In Nevada, for instance, there is a transfer tax due on the amount bid at the

sale. It is required to be paid even if the property reverts for less than what is owed. On a DIL transaction, it is looked at the same as any other transfer of title. If consideration is paid, even if no money actually changes hands, the locality’s transfer tax will be imposed. When used properly, a DIL is a great tool (along with forbearance agreements, modifications and foreclosure) for a lender, provided it is used with great care to ensure the lender is able to see what they are getting. Remember, it costs a lot less for advice to set up a transaction than it does for litigation. ∞

ABOUT THE AUTHOR

RANDY NEWMAN Randy Newman is a recovering real estate attorney and

the founder of Total Lender

Solutions, a non-judicial foreclosure trustee representing lenders throughout Arizona,

California, Nevada and Texas. Newman can be reached at (866) 535-3736 or

randy@tlsemails.com.

SUMMER 2020

PRIVATE LENDER

SUMMER 2020

MARKET TRENDS

The “Now” and “Not Yet” of Investing in a Post-Pandemic Housing Market Many investors are approaching acquisition opportunities with caution, even as they prepare for future buying opportunities that haven’t materialized. by Daren Blomquist

eal estate

“I’ve got about 10 properties

a licking in

then. “… I’ve taken lower

investors took late March

following the coronavirus pandemic and national

emergency declarations.

“It’s going to be tough the next few months. Investors are scared,” said Chicago-area investor Michael Hallman in a March 26 phone interview. Hallman has been rehabbing and reselling 12 to 20 properties a year since 2012. He owns about 15 rental properties. 20

PRIVATE LENDER

right now for sale,” he said

prices than normal. …I’ve had people pulling out of them

because of the coronavirus.” But a few months later, it’s clear that real estate investing opportunities have kept on ticking despite the market turmoil. “Everybody’s buying like it’s

He explained that his company buys, rehabs and resells 1,500 to 2,000 distressed properties a year, mostly to owner-occupants. “Anecdotally, things are moving, inquiries are high. … We see that our suburban, exurban, almost rural stuff is moving—stuff that has been on for 300 or

the last house on earth,” said a

400 days,” he said. He said

spokesman for a New York-

they’d expected the post-

based institutional investor in

COVID real estate market

an April 26 phone interview.

to be softer than it is.

A RAPID REAL ESTATE REBOUND The rapid real estate rebound post-COVID is evident in both retail market data from the Multiple Listing Service (MLS) and distressed market data from the Auction.com marketplace. While retail home sales continue to lag 30% to 50% below year-ago levels, average home sale prices for the most part have continued to increase on

an annualized basis, according to an Auction.com analysis of weekly MLS data. The analysis shows home prices have increased an average of 3% compared to a year ago in the nine weeks since the pandemic and national emergency declarations. Prices did go negative in one week—the week starting April 26—but bounced back to positive appreciation in the following two weeks.

U.S. AVER AGE HOME PRICES BY WEEK

2019

2020

$400K $380K $360K $340K $320K $300K

1/5

1/12

1/19

1/26

2/2

2/9

2/16

2/23

3/1

3/8

3/15

3/22

3/29

4/5

4/12

4/19

4/26

5/3

5/10

Source: MLS Data

Further, mortgage applica-

tion data from the Mortgage Bankers Association (MBA) shows prospective buyer

demand strengthening, with purchase applications in the

week ending May 22 increasing 9% from the previous week

and 9% from the same week

a year ago. The week of May 22 marked the sixth consec-

utive week with a week-overweek increase in purchase mortgage applications.

Real estate investor demand

has also picked up after slowing down in late March. The

sales rate for online auctions

of bank-owned (REO) property rose for six consecutive weeks to a 10-week high in the week starting May 3, according to proprietary Auction.com

marketplace data. The aver-

age price per square foot for

REOs sold via online auction hit a new year-to-date high of $86 that same week.

“(The pandemic) hasn’t stopped me. I’ve been buying and buying and buying,” said one distressed property investor who said he had purchased more than 75 properties through Auction.com so far in 2020 by the middle of May. “I’m probably doing more than I did last year, and I had a big year last year.”

supply of inperson foreclosure auctions. According to public record data from ATTOM Data Solutions, nearly 18,000 properties were brought to foreclosure auction on average in the first two months of 2020, but that supply dropped 85% to about 2,500 properties brought to auction in April.

The rising sales prices in both the retail and the distressed market are not just a function of strengthening demand. They also reflect dwindling supply. In the nine weeks after the pandemic declaration, new listings on the MLS were down an average of 41% a week.

“NOW” AND “NOT YET” BUYING OPPORTUNITIES

Meanwhile nationwide foreclosure moratoriums enacted by Fannie Mae, Freddie Mac and the Department of Housing and Urban Development (HUD)— which account for more than 60% of active mortgages—have temporarily decimated the

Pent-up distressed inventory eventually will hit the market once foreclosure moratoriums are lifted and mortgage forbearance programs are ended. In light of this, many investors are proceeding with caution on acquisition opportunities now, even as they prepare for an even bigger buying opportunity that has not yet materialized. “It’s an artificial high right now. In the background, the

next wave is coming,” said Lee Kearney, CEO of Spin Companies, a group of real estate investing businesses that has completed more than 6,000 real estate transactions since 2008. “I’m definitely in wait-and-see mode. Kearney said that real estate is not the stock market. “Real estate moves in quarters,” he said. “We may actually have another quarter where prices rise in certain markets … but at some point, it’s going to slip the other way.” Kearney continues to acquire properties for his investing business, but with more conservative exit pricing, maximum rehab cost estimates and higher profit targets in order to convert to more conservative purchase prices. “Those three variables give me an increased margin of error,” he said, noting that if he does SUMMER 2020

MARKET TRENDS

R APID REBOUND IN DIS TRESSED PROPERT Y DEMAND $84

1/5

1/12

1/19

1/26

2/2

2/9

R EO Auction Sales Rate

start buying at higher volume, it will be outside the large institutional investor’s buy box. “The biggest opportunity is going to be where the institutions won’t buy,” he said. The spokesman for the New York-based institutional investor explained how the buying opportunity now is connected to the bigger future buying opportunity that will come when pent-up foreclosure inventory is released. “I do think the banks are anticipating more foreclosures, and so they are going to make room on their balance sheets … they are going to be motivated to sell,” he said. Although the average price per square foot for REO auction sales increased to a year-to-date high the week of May 3, those bank-owned properties are still selling at a significant discount to retail. 22

PRIVATE LENDER

2/16

2/23

3/1

3/8

3/15

3/22

3/29

Average Price Per Square Foot

Year-to-date in 2020, REO auction properties sold on the Auction.com platform have an average price per square foot of $77, while nondistressed properties (those not in foreclosure or bank-owned) have sold at an average price per square foot of $219, according to public record data from ATTOM Data Solutions. That means REO auction properties are selling 65% below the retail market on a price-per-square-foot basis. Similarly, the average sales price for REO auctions sold the week of May 3 was $144,208 compared to an average sales price of $379,012 for properties sold on the MLS that same week. That translates to a 62% discount for REO auctions versus retail sales. Those types of discounts should help protect against any future market softening caused by an influx of fore-

4/5

4/12

4/19

4/26

5/3

investors. “We’re still in a seller’s market. … The sustained demand for property, whether homes or rentals, has not waned a lot. It has paused a bit, but people are coming back.” ∞

ABOUT THE AUTHOR

Source: Auction.com

closures. Still, the spokesman for the New York-based institutional investor advised a cautious acquisition strategy in the short term. “The foreclosures will catch up to us, and it will hurt the entire market everywhere— and you don’t want to be caught holding the bag when that does happen,” he said. Others view any influx of deferred foreclosure inventory as providing welcome relief for a supply-constrained market. “It will help with the tight supply in these markets … because the providers we work with are going to see more distressed inventory they can pick up at a discount, whether at auction or wherever, and turn into a turnkey product,” said Marco Santarelli, founder of Norada Real Estate Investments, a provider of turnkey investment properties to passive individual

DAREN BLOMQUIST Daren Blomquist is vice president of market economics at

Auction.com. In this role, Blomquist analyzes and forecasts complex macro and micro-

economic data trends within

the marketplace and greater industry to provide value to

both buyers and sellers using the Auction.com platform.

Blomquist’s reports and analysis have been cited by thou-

sands of media outlets nationwide, including all the major

news networks and publications such as The Wall Street Journal, The New York Times and USA TODAY. Blomquist 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.

1 AMC for Private Lending Over 1,300 Private Lenders Can’t be Wrong

“

“Hands down the best example of good customer service I have ever seen”

”

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Not All AMC’ AMC’s are Created Equal

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-735SUMMER 2020

ACCOUNTING

REMINDERS FOR REITS ON PROHIBITED TRANSACTIONS Be diligent about the impact of loan modifications and foreclosures during the coronavirus pandemic. by Beeta Lecha

he passage of the Tax

Cuts and Jobs Act led to an

increase in the number

of private lending funds converting to mortgage REITs over the past two

years. Fund managers made

the conversion decision by carefully weighing whether the tax benefits of the Section 199A 20% Qualifying Business Income Deduction outweighed the increased compliance costs associated with operating a REIT. 24

PRIVATE LENDER

Due to the current pandemic, it is important to be circumspect when administering your REIT. Loan payment delays or forbearances may be indicative of upcoming loan modifications or foreclosures, which could disqualify the private lending entity’s REIT status. To maintain REIT status, the REIT may need to make investment decisions that might reduce stockholders’ overall return and alter investment objectives but would keep the REIT election safe. Loss of REIT status would lead to the mortgage REIT reverting to

a C corporation, resulting in unfavorable tax treatment. The C corporation would pay tax at a 21% tax rate, and the dividend payments issued to investors would be taxed a second time at the investors’ income tax rates, resulting in double taxation.

LOAN MODIFICATIONS Loan modifications or foreclosures could result in REITs failing to meet the required income or asset tests. If loan modifications or foreclosures within a REIT do not meet safe harbor guidelines, they may

result in prohibited transac-

tions. Loss of REIT status may occur if IRS regulations are

not met. There are workable

solutions around these matters if the manager is proactive

and plans to avoid problems.

PROHIBITED TRANSACTIONS FOR REITS AND SAFE HARBOR RULES REITs are required to pay a 100% tax on net income

generated from prohibited

transactions. These transac-

tions may arise when a loan is foreclosed on and leads to the sale of a real estate owned asset

“Due to the current pandemic, it is important to be circumspect when administering your REIT.”

if that property is considered to be held as inventory or primary sale to customers. Exceptions may be made when the fair market value (FMV) of the property sold in a year does not exceed 10% of the aggregate tax basis or aggre-

state. IRS safe harbor rules provide relief in situations where a REIT might engage in a prohibited transaction if REIT compliance is not met.

the beginning of the year.

To ensure these rules are satisfied:

Fund managers with mort-

01 T he property held to

gate FMV of REIT assets at

gage REITS and borrowers in default need to be more diligent during our current economic

produce rental income

must remain in the REIT for at least two years.

02 A ny accumulated

expenditures made through the REIT,

during the two-year duration, may not

exceed 30% percent of the property’s net sale price.

03 T he REIT: (a) made

no more than seven

property sales during

the year; (b) during the tax year, the aggre-

gated adjusted bases of the property does

not exceed 10% of the aggregate adjusted basis of all assets

held by the REIT as of the beginning of the year; (c) the FMV of property sold does

SUMMER 2020

ACCOUNTINGÂ

not exceed 10% of

the FVM of the total

REIT assets as of the

beginning of the year.

04 I f the property consists of land or improve-

ments not acquired

through foreclosure or lease termination, the

REIT has held the property for at least two

years for the produc-

tion of rental income.

05 I f the seven-sales

property rule related to Sec.(b)(C)(iii)(I)

(item 3(a) above) is not met, substantially all

of the marketing and development expen-

ditures relating to the property sold were

met through an inde-

pendent contractor or

taxable REIT subsidiary from whom the REIT receives no income.

DEALER VERSUS INVENTORY To distinguish between inventory and investment property, a REIT may take the position that the property sold was not inventory and the REIT is not a dealer of property assets. If it were determined that a REIT sold dealer property, that would be considered a 26

PRIVATE LENDER

prohibited transaction. Essentially, property or inventory held primarily for sale as part of its business model is not considered a capital asset.

INCOME FROM A FORECLOSURE PROPERTY

tests (among other requirements). The REIT must:

01 I nvest at least 75%

of the assets in real

estate related income.

02 D erive at least 75% of taxable income

from rents or mortgage interest.

If the REIT does not follow IRS guidelines, income from a foreclosure property will be taxed at the highest rate by multiplying the net income from the sale of the foreclosed property by the highest rate specified per tax code. Tax will be imposed for each taxable year on the net income from a REIT liquidating a foreclosure property asset. Sales of assets of a REIT that do follow a liquidation plan would not be considered prohibited transactions under tax code Section 857(b)(6). The IRS ruled that if the taxpayer previously expressed that he or she intended to hold the assets or properties for a minimum number of years, yet now sees a long decline in asset value and has explored alternatives to hold on to the properties, the REIT may pursue a complete liquidation.

REIT QUALIFICATIONS To qualify as a REIT, an entity must meet two annual income

loan modification or foreclosure, carefully review the REIT qualifications and safe harbor rules to mitigate any risk of loss of REIT status or of engaging in a prohibited transaction. â&#x2C6;&#x17E;

03 D isperse a minimum of

ABOUT THE AUTHOR

90% of gross taxable

income to shareholders each year in the form of dividends.

04 M aintain a minimum

of 100% of its share-

holders after the first

BEETA LECHA

year of existence.

Beeta Lecha is a principal at

05 E nsure no more than

She leads the Taxation and

50% of its shares

may be held by five

or fewer individuals

during the last half of each taxable year.

06 H ave no more than 20% of its assets consist

of stocks in taxable REIT subsidiaries.

Make sure to consult your tax

adviser, as a REIT may be sub-

ject to some federal, state and

local taxes on property, even if the REIT qualifies as a REIT

under federal tax guidelines. If the mortgage REIT has a

loan in default, which the fund manager feels will result in a

Spiegel Accountancy Corp.

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, she 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 Accountants (AICPA) and the California

Society of CPAs (CALCPA).

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

real state investors

nationwide financing .

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# SUMMER 2020

LEGALÂ

PRIVATE LENDER

Where Should You Incorporate Your Business?

of a corporation, nor mem-

bers or managers of an LLC, to be residents of Nevada.

Despite the advantages of

incorporating in Delaware

or Nevada, business owners should consider the initial

and ongoing costs of forming and maintaining a business

in those states—in addition to

There may be reasons (or not!) to start your business in a state where it isn’t located.

cost and compliance require-

ments in the state where their

business is physically located. If your business conducts most or all its activity outside of

by David Kelly

Delaware or Nevada, you’ll

likely be required to register as a “foreign entity” in the state where your business

Business owners often follow the lead of large companies when they form a business entity. Often, these larger companies have the resources to hire the best attorneys to decide where to incorporate, and these attorneys typically advise them to form in Delaware.

for the creation and protection of corporations, and the Delaware Court of Chancery provides a low-cost venue to settle business disputes. The state of Delaware emphasizes these advantages and openly caters its laws to the formation of entities in the state, because it recognizes that corporate fees are a substantial source of revenue for the state.

According to the Delaware Division of Corporations, more than 66% of Fortune 500 companies and more than 80% of public companies are incor-

entities, it makes sense that

many people think it’s a good idea to start their businesses in Delaware, despite their

business having no connec-

porated in Delaware. Because

tion whatsoever to the state.

most large, well-known

Delaware general corporation

companies are Delaware

law is among the most flexible

Nevada is another state with a reputation for catering its laws to the formation of corporate entities under its

is located. For example, a

“foreign entity” for the state of California is any entity

formed in a state other than California. On the flip side,

if you form an entity within

California and your business

conducts most or all its activity within California, the entity is considered a “domestic

entity.” All 50 states classify companies with the same

foreign/domestic perspective.

FOREIGN ENTITY REGISTRATION AND COMPLIANCE

jurisdiction. Nevada has no state corporate income tax and does not require any shareholders, directors or officers

How do you know whether you need to register as a foreign entity in a state?

SUMMER 2020

LEGAL

All states provide guidelines

For example, in California,

Revenue and Taxation Code

business activity in California

about which activities do or

the California Corporations

provides additional clarity.

Code and the California

Doing business under the Cal-

exceeds the lesser of $500,000

Revenue and Taxation Code

ifornia Revenue and Taxation

require a company formed in

Code is described as “actively

a state other than California

engaging in any transaction

to register in California as a

for the purpose of financial

foreign corporation, foreign

or pecuniary gain or profit.”

LLC, or foreign partnership if

The Taxation Code then goes

the company is seen as “doing

further and provides quan-

a good place to look because

business” in California.

titative rules to determine

the main reason states want

Although the California

whether a company is seen as

do not require registration. The two best places to find these guidelines are the state’s Secretary of State website (or the state agency that handles the formation of entities in the state) and the state taxing authority. State tax rules are

a company operating within its borders to register is so the state can collect taxes, fees and related revenue.

tangible personal property of the business in California exceeds the lesser of $50,000 or 25% of the business’s total real and tangible personal property. In practical terms, California gains significant revenue from

limited list of activities that do

In California, a foreign entity

not constitute doing business

must register with the Cali-

ness in the state, which fuels

in California, the California

fornia Secretary of State if its

its foreign entity process.

requiring the registration of foreign entities doing busi-

ty yal Lo

Integrity

Relia bili ty

Pre cis ion

Pro fe

al ion ss

Innovativ e

PRIVATE LENDER

also register if the real and

Corporations Code provides a

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sales. The foreign entity must

“doing business” in California.

er stom Cu Care

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or 25% of the business’s total

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noteservicingcenter.com newacct@noteservicingcenter.com

Some professions require foreign entity registration regardless of quantitative thresholds, so it is important to review a state’s Secretary of State guidelines and the state taxing authority together to ensure compliance. The process of registering a foreign company in most states is similar to forming a domestic company. Foreign company registration usually requires filings with the Secretary of State, a registration fee, the payment of an annual franchise tax and ongoing compliance similar to that of a registered domestic entity.

HOW TO CHANGE WHERE YOUR COMPANY IS DOMICILED If your company is a Delaware entity and you wish to change it to the state in which the company is physically located, this is called “domestication” or, simply, “changing your company domicile.” Each state is different, but the basic steps you must follow for domestication are to:

01 M ake sure your com-

pany is in good standing in the state in which it was formed (this

typically requires a Certificate of Good Standing from the formation state).

02 F ile a new articles of

organization for an LLC, or articles of incorporation for a corporation, in the new state.

03 E nsure you properly

dissolve the entity in the old state. The new state of formation may require proof that the former entity was dissolved.

Keep in mind that the original and new state may have various other filing requirements to complete the process of domestication. Though it is likely the most expensive choice, the easiest way to ensure you are moving your entity correctly is to contact an attorney in the state to which your entity will be moved.

IN GENERAL, AVOID DELAWARE AND NEVADA In most cases, registering your company in Delaware or Nevada only adds cost and complexity, with no real advantages for your company. In addition to annual fees, taxes and ongoing compliance, your company must have a registered agent for service of process in Nevada or Delaware.

For large corporations with thousands of shareholders, Delaware is likely the best location for the company to incorporate due to the state’s laws, legal system and experience with large and complex organizations. This is beneficial even if your business is based in another state. However, if your business is smaller, and you do not anticipate going public or having thousands of shareholders and potential lawsuits, it is likely best to form your entity in the state where your business is located to avoid unnecessary costs and additional compliance. Nevertheless, because Del-

aware entities (especially corporations) are often seen as offering a company an air of credibility or legitimacy, it may be wise, for presentation purposes, to register an entity in Delaware. Companies seeking investor capital may be more successful registering in Delaware if their potential inves-

tors prefer owning shares in a Delaware corporation due to the state’s favorable reputation. In conclusion, most business owners are best served to form their entity in the state where the company is based to pre-

there are circumstances where registration in a specific state may have its advantages (e.g., providing peace of mind to investors) despite the added cost and compliance. ∞

ABOUT THE AUTHOR

DAVID KELLY David Kelly is an associate attorney in the Corporate

and Securities department of Geraci Law Firm.

Kelly obtained his bachelor

of arts degree in economics from Clark University in

Worcester, Massachusetts. Afterwards, he worked in

the insurance and lending

industries for approximately seven years. He returned

to school to obtain his law degree from Chapman

University in Orange, California. Prior to joining Geraci Law

Firm in 2019, Kelly worked in

the Corporate and Securities department of another Irvine law firm.

vent additional fees and com-

pliance requirements. However,

SUMMER 2020

LEGISL ATION

PROPOSED MODIFICATIONS TO SEC DEFINITION OF “ACCREDITED INVESTOR” AAPL and Geraci LLP support many of the changes. by Olivia Durnell

PRIVATE LENDER

On Dec. 18, 2019, the Securities and Exchange Commission (SEC) proposed modifications in its rules to modernize the definition of “accredited investor.” Accredited investor status is significant because it enables individuals and entities to take advantage of investment opportunities that are not offered to the general public. These include investments in private companies and offerings by specific hedge funds, private equity funds and venture capital funds.

ABOUT THE AUTHOR

OLIVIA DURNELL Olivia Durnell is a corporate and securities attorney at

Under the current rules,

supporting many of the

accredited investor status

proposed changes.

verification in its comment

is determined by income or

In the comment letter, AAPL

letter. AAPL suggested that

net worth. The proposed amendments would provide alternative methods for obtaining accredited investor status, enabling more investors to participate in private offerings. The amended definition of an accredited investor would include new inclusion of individuals

encouraged the SEC to allow those who have passed the Series 7, 65 or 82 exams to be considered an accredited investor. Moreover, AAPL supported the addition of licensed attorneys, CPAs, CFAs and CAIAs to the definition as long as these

attorneys be permitted to verify professional designations, certifications and good standing of potential accredited investors. Currently, the SEC is reviewing the submitted comments and the public is awaiting final regulations or requests

Geraci LLP, whose practice

involves advising clients on

securities compliance in private and public offerings. Durnell works closely with clients to

establish and design mortgage funds, real estate acquisition funds and real estate investment trusts (REITs).

Durnell attended the University of California, Irvine School of Law. While in law school, she

was the chair of the Women’s

Law Society and participated in Moot Court. Additionally,

individuals pass requisite

for additional comment.

exams, have a minimum of

As of the time of publish-

three years’ of experience

ing, the SEC has made no

and are in good standing

final ruling on the pro-

with their respective licens-

posed modifications.

ranging from obtaining tax

The SEC requested public

ing body. Additionally, AAPL

comment on the proposed

advocated for the inclusion

AAPL and Geraci LLP’s

documents to obtaining rights

amendments to the accredited

of knowledgeable employees

investor definition, and

for private funds and their

AAPL endorsed a letter

managing entities in the defi-

with certain professional certifications and designations as well as certain employees of private funds.

nition of accredited investor.

Durnell received pro bono

honors for her legal work in the community. She repre-

sented nonprofit and start-up companies in legal matters

exemption to filing corporate

(AAPL’s general counsel) letter

to intellectual property.

to the SEC is published in its

Durnell also has a bachelor’s

entirety on the next page.

degree in political science with a certificate in business from the University of Wisconsin.

Finally, AAPL supported the creation of new methods of

SUMMER 2020

LEGISL ATION

U.S. Securities and Exchange Commission Attention: Vanessa A. Countryman, Secretary 100 F Street, N.E. Washington, D.C. 20549-1090 Re: F ile no. S7-25-19 Amending the “Accredited Investor” Definition Release no. 33-10734

Dear Sir or Madam,

We appreciate the opportunity to comment on the above mentioned release and are writing to you to comment in support of much of the Securities and Exchange Commission’s (“SEC” or “Commission”) proposal to amend the definition of an “Accredited Investor.” We support this proposal’s effort to increase access to investments by including new categories of natural persons such as those with professional certifications or designations as well as those who hold the status of a “knowledgeable employee” of a fund. Professional Certifications and Designations

We are in agreement with the SEC that those with professional certifications and designations are deserving of accredited investor status as they have undergone significant education and have gained valuable experience through their chosen career paths. We agree with the SEC that those who hold a Series 7, 65, or 82 license should be permitted to qualify as accredited investors without any additional approval by the Commission as obtaining such a license enables them to evaluate investments on behalf of third parties, thus qualifying them to effectively evaluate investment opportunities on their own behalf as well. Since individuals who hold these licenses may be easily verified through the FINRA website, we believe persons falling into this new category should qualify automatically as an accredited investor without further requirements or additional steps of verification. In addition, we support the creation of a category permitting natural persons with other professional certifications and designations to qualify as accredited investors. We believe this category should specifically and explicitly include any licensed attorneys, CPAs, CFAs, and CAIAs who have passed requisite exams, have at minimum three years of experience, and who are in good standing with the corresponding licensing body. These individuals have received significant training on evaluating complex legal and financial concepts, and given experience practicing in their given fields, we believe they are more than capable of making complex investment decisions on their own behalf. We believe experience and good standing for a period of three years is an important component as it will protect newly licensed individuals, who may not be familiar with the real world applications of their education, from partaking in inappropriate investment opportunities. It is our opinion that after three years of practicing in finance or law, that individuals will be best equipped to assess accredited investor investment opportunities. We also believe that those with MBAs are uniquely trained in topics such as economics, statistics, corporate finance, and securities thus meriting qualification as accredited investors under new natural person categories. Because those with MBAs are not required to pass a licensing exam, unlike attorneys or CPAs, the new amendments should require these individuals to provide verification of graduation from a nationally accredited university to qualify as an accredited investor.

PRIVATE LENDER

Knowledgeable Employees of Private Funds

We also support including knowledgeable employees of private funds to qualify as accredited investors as these employees are experienced in evaluating and facilitating investment opportunities. However, we propose this category is expanded to include agent employees of private funds, such as employees of managing entities. We believe they should be included in this category because they are similarly situated to employees of the fund in that they are experienced in handling complex securities transactions and therefore capable of personally investing in such transactions. Approval of Status

However, we do not support requiring a commission order for approval of accredited investor status. This requirement is inefficient and is likely to cause significant delay to all parties. The Commission already oversees an enormous number of securities offerings across the country. Due to the immense workload of the Commission, it is likely any approval would take far longer than is reasonable. This delay could cause investors to miss valuable investment opportunities while awaiting approval. Additionally, Commission approval of each accredited investor would require vast resources which would be costly to the Commission. We believe, just as CPAs and licensed attorneys must verify the income and net worth of an investor under the current regime, licensed attorneys should be required to verify professional designations, certifications, and good standing of hopeful accredited investors. Since this is non-financial information, CPAs are not equipped to verify this information whereas attorneys are well suited for researching and confirming the status of these individuals. This would ensure a more efficient process is implemented and the Commission would not expend scarce resources on verification. Income and Net Worth Measurements

Finally, we believe that the income and net worth measurements which are currently used to qualify an investor, under Rule 144A of the Securities Act of 1933, should remain as part of the definition of an accredited investor. We strongly concur with previous opinions which state that the current net worth and income measurements should remain as part of the definition for several reasons: (1) it would be too difficult to regularly adjust for inflation; (2) it would be challenging to calculate and ensure the inflation adjustments reflect the country as a whole; and (3) adjustment for inflation would require timely updates which involve relatively high transactional costs. In conclusion, we are in strong support of the SECâ&#x20AC;&#x2122;s decision to add new categories of natural persons to the definition of accredited investor. We believe individuals with professional certifications and designations as well as those who are knowledgeable employees of funds are common sense candidates for investments currently only available to accredited investors. We believe that certain good standing requirements should be implemented for those qualifying based on licensure. Additionally, we believe that there should be educational requirements for those with MBAs since they are not required to obtain licensure after graduation. It is our opinion that licensed attorneys should be responsible for the verification of this good standing and status for efficiency purposes. Lastly, we believe the current income and net worth requirements should remain as changes would not only be difficult, but would likely mandate ongoing updates. We respectfully request the SEC consider these opinions as it begins finalizing the proposed rules. We would also ask that the SEC make it a priority to create a bright line rule that is simple and easy for investor understanding and compliance. Again, we appreciate the opportunity to comment on this proposed changed to the definition of an accredited investor. We look forward to reviewing the SECâ&#x20AC;&#x2122;s response to this and other comments. Best,

American Association of Private Lenders and Geraci Law Firm

SUMMER 2020

CORPOR ATE RESPONSIBILIT Y & ETHICSÂ

PRIVATE LENDER

Avoiding Accidental Redlining and Other Predatory Practices Private lenders can be more vulnerable to unintentional redlining than other financial institutions. by Susan Naftulin

In light of current events in our country, it is important to address redlining. Although against the law, redlining happens due to inherent biases by lenders and the commonalities that most borrowers in primarily minority neighborhoods share. SUMMER 2020

CORPOR ATE RESPONSIBILIT Y & ETHICS

WHAT IS REDLINING? According to Investopedia,

redlining “is an unethical prac-

tice that puts services (financial and otherwise) out of reach

for residents of certain areas based on race or ethnicity.” The practice dates to the

1930s. Agencies of the federal

government drew red lines on

maps around urban neighborhoods that were considered higher risk to warn lenders

against lending in those areas. This practice was called

“du jure” redlining, which

referred to governmentally sanctioned discrimination.

This practice was specifically

prohibited by both the 1968 Fair Housing Act and the Commu-

nity Reinvestment Act of 1997.

Yet the effects of redlining continue to be felt in those origi-

urban ethnic neighborhoods

than it does for the same goods in “better” neighborhoods.

ONGOING IMPACT It has been found that the neighborhoods that were

redlined in the 1930s are still

worse economically than other neighborhoods despite the

passage of more than 80 years.

In “Who Lends Beyond the Red Line?” Kevin Park and Roberto Quercia conclude that as long as the CRA allows lenders to

rely on borrower and neighborhood factors, the CRA has not

been effective in changing the availability of loans in previ-

ously redlined neighborhoods. Current government regula-

tions allow a lender to do the following when evaluating whether to make a loan:

nally affected communities.

C onsider credit history

The Fair Housing Act and

C onsider income

Community Reinvestment Act

(CRA) also specifically prohibited reverse redlining, which is the practice of charging higher

prices for goods and services in certain neighborhoods than in

C onsider property

condition

C onsider neighborhood

amenities and city services

B alance its portfolio to

other neighborhoods. Examples

avoid concentrations in

kets charging higher prices in

structure and loan type

of this would be supermar-

“It has been found that the neighborhoods that were redlined in the 1930s are still worse economically than other neighborhoods despite the passage of more than 80 years.”

geographic regions, loan Banks contend that the barrier

to lending in formerly redlined

communities relates to credit scores of the borrowers. This

becomes problematic because credit scores do not always

report rent payments, utility

bills and other types of regular payments that non-homeown-

ers pay on a regular basis.

PRIVATE LENDER

This resultant discrimination is called “de facto” redlining. The CRA requires that lenders must work diligently to ensure their mortgage lending marketing and loan decisions do not result in de facto redlin-

Accordingly, many of the

ing. This includes tracking

ties cannot develop the credit

denied to ensure there are no

well-determined credit score.

no overt or intentional dis-

applicants in these communi-

how loans are approved and

history necessary to create a

discriminatory results, even if

When little credit history is

crimination is engaged in.

used to determine a credit score, a very minor credit

blemish can have a dispro-

portionately large impact. In effect, to get approved for a

mortgage loan to buy a house, you must own a house.

DE FACTO REDLINING As a result, a disproportionate number of applicants in these

communities will be denied.

Another federal law, the Equal Credit Opportunity Act, prohibits discrimination on account of color, religion, national origin, gender, marital status, age or source of income. Redlining can also include discrimination based on any of these factors.

Writing in a Feb. 2, 2017, article entitled “Redlining: Everything Old is New Again” for the ABA Banking Journal, Timothy Burniston and Barbara Boccia asserted: “As a practical matter, the prohibition of discrimination on a prohibited basis relates to any aspect of a credit transaction. It can include marketing, pricing, underwriting, servicing, modifications and collections. Relevant geographies considered in redlining might relate to where a credit applicant currently resides, or will reside, or where the residential property to be mortgaged is located.” A lender’s behaviors with regard to redlining go beyond

PRIVATE LENDERS AND REDLINING The task of reviewing and

ensuring that de facto redlining is not happening within a

company is particularly difficult for small private lenders.

Private lenders are more likely to fall into illegal activities

than banks for several reasons. First, banks are already highly regulated by both state and federal authorities, so they are less likely to run afoul

examined. Whether a lender advertises in minority neighborhoods can show an intent to redline. Granting credit under less favorable terms to minority applicants in certain

ment that strictly relates to a

the company’s advertising and

combination of factors, such

marketing is not geographically

as credit score, loan amount,

different within any single

loan term, etc., and that this

metropolitan area. For

document is applied neutrally

example, it is fine for mar-

to all applicants, regardless

keting in Colorado to be

of the geographic location of

different from the marketing

the property or the borrower.

in Pennsylvania, but not OK

If two identical borrowers

for marketing in suburban

of different ethnicities and

Philadelphia to be different

geographic neighborhoods

from urban North Philadelphia.

receive the same loan with the

to assist in staying within

hand, are less likely to be

involved with day-to-day reg-

ulation and likely to have less

sophisticated internal systems

than banks. Many private lenders take a more “touchy feely” approach to lending, mean-

ing that every loan gets more

LIQUIDITY SOLUTIONS FOR PRIVATE LENDERS Smith Graham Investment Advisors is a dedicated strategic capital partner for private money lenders throughout the United States. Our platform helps lenders, like you, raise capital by efficiently selling loans. Since 2009, we have successfully transacted in over $2 billion of whole loan purchases.

personal review and attention than bank loans that are run

through an electronic system.

minority borrowers in nonmi-

It is imperative, therefore,

redlining) is also prohibited.

accomplished by making sure

departments and software

geographic areas than to nonnority neighborhoods (reverse

or other informative docu-

have separate compliance

Private lenders, on the other

minority neighborhood may be

and geography. This can be

banks are large enough to

cation in lending approvals.

credit in a predominantly

terms be set forth in a matrix

constant oversight. Second,

the required parameters.

prohibits, limits or denies

It is also important that lending

of the borrower’s ethnicity

of the regulations due to

a clear geographic demarAny lender behavior that

be completely neutral in terms

Institutional Note Buyer

Common Sense Purchase Guidelines

Long Term Strategic Partner

that a private lender’s marketing and review process

140 Broadway, New York, New York 10005 contactmre@smithgraham.com 212-487-5086 www.smithgraham.com

SUMMER 2020

CORPOR ATE RESPONSIBILIT Y & ETHICS

same terms, the private lender should be able to withstand a regulatory review. The key is in being able to show consistent application of written terms. Finally, if a loan is denied because a lender has too many loans in a single geographic area, that concern needs to be addressed in a written document that explains the decision. And, as loans in the geographic area pay off and the concentration lessens, it is important for the lender to extend additional loans in the area, keeping the concentration consistent. The private lender cannot make a few token loans in an area and think they have satisfied the requirement. They must continue to make loans as older loans pay off. It has been shown that if the relevant state or federal authorities are given reason to conduct an investigation into a lender’s lending practices, it will examine that bank’s lending practices to minority neighborhoods both subjectively and objectively, by comparing that lender to its peers. If a lender falls below the average of its peers for loans to minorities in minority neighborhoods, it will be subject to further scrutiny and, ultimately, penalties if warranted.

PRIVATE LENDER

Further investigation by regulators will include an examination of the following: W hether a lender has

a policy of not lending in specific areas that have a predominantly minority population

W hether a lender fails

to market its loans in minority neighborhoods

W hether a lender pro-

vides a more limited product set in minority neighborhoods or has product terms (such as a minimum loan amount) that tends to disqualify borrowers in those areas

W hether a lender has no

branch offices or broker relationships in or near minority neighborhoods but has branches or broker relationships in predominantly nonminority neighborhoods nearby

Both state and federal governmental agencies continue to seek out violations of the various fair lending regulations. Accordingly, it is incumbent upon lenders to continually evaluate their services, marketing choices, complaints, application volume, underwriting, pricing, loan denial patterns and other discretionary practices that, although not done purposely, could

result in de facto redlining. These lenders must also have an in-house review team and compliance management system that ensures no disparities exist and, if they do, to remedy the situation immediately to eliminate any fair lending risk. Most importantly, lenders must make sure all lending criteria used to evaluate an applicant is neutral in terms of not relying on any prohibited factor of the borrower or geography. The first thing a lender needs to do is recognize and acknowledge that there is likely an inherent bias in the way loans are evaluated and strive to develop systems that compensate for these biases. Presently, most governmental enforcement action is focused on consumer loans, not on business purpose loans. However, the lending rules that regulate banks and other lenders are not applicable to consumer loans only. They also apply to commercial lending. Accordingly, it is incumbent upon commercial lenders to operate strictly within the regulations to avoid becoming the focus of government regulations. Like so much in the private lending world, our industry survival depends on our willingness to run our busi-

nesses within the existing regulations (scant may they be) to avoid becoming more highly regulated by third parties, including state and federal governments. ∞

ABOUT THE AUTHOR

SUSAN NAFTULIN Susan Naftulin is co-founder, president and managing

member of Rehab Financial

Group LP. Prior to forming RFG, Naftulin held several senior

management positions in the

mortgage industry, including general counsel, managing

attorney, chief operating officer and senior vice president for both privately and publicly

held mortgage lenders. In each position, she was responsible

for multiple aspects of the company, including loan origination and documentation, licensing and regulatory compliance,

servicing, default management, litigation management and human resources.

CHECKLIST: PREVENT ACCIDENTAL REDLINING The American Association of Private Lenders has established the industry’s first Code of Ethics to ensure the welfare of consumers and protect the reputation of the industry.

WHAT IS REDLINING? A lender is redlining when residents in certain areas are not able to use the lenders’ services or are offered different products based on their race or ethnicity. De facto redlining occurs when creditworthiness and property considerations are spatially correlated to race or ethnicity, geographically creating approved and denied neighborhoods when race is otherwise not a factor.

CONSIDER ATIONS FOR PRIVATE LENDERS Even if you only do business-purpose and/or commercial loans, this is not protection against redlining. Authorities examine not just who you lend to, but in which neighborhoods the properties (borrower’s current address, future address or collateral) are concentrated.

CHECKLIS T

If you answer yes to any of these, and further research shows they are predominantly minority neighborhoods, you are

likely redlining. Create policies to extend credit in these areas balanced with the rest of your portfolio. LOAN TR ANSAC TIONS1

re acceptance and/or loan terms ever determined A outside of formulas and quantifiable evaluation standards for credit history, income, loan amount, loan term, property condition, etc.? I s it possible for two identically creditworthy borrowers seeking loans for similar properties in different geographic neighborhoods to receive different loan terms? If you answer yes to any of these, you are at risk of redlining. Create a loan transaction matrix that strictly evaluates and relates the factors (irrespective of race and property location) that you use to determine creditworthiness.

OVER ALL BUSINESS PR AC TICES1

Are there any geographic areas within each of your metropolitan service areas where: You do not lend? Your marketing efforts do not reach? You limit or offer different products/terms? ou lack branch offices or broker relationships Y (when you have them in other areas)?

PORTFOLIO BAL ANCE1

I f you deny a loan because your concentration of loans in that geographic area is too high, when those loans are paid off, are you re-extending loans in that area? If you answer no, and further research shows they are predominantly minority neighborhoods, this is redlining. You must continue to make loans as older loans pay off.

SUMMER 2020

LENDER LIMELIGHTÂ WITH LOU AND R AFFAELE FORINO

ANSWERING THE CHALLENGE TO CREATE AND PROTECT WEALTH Helping clients build wealth and staying ahead of industry change motivate the Forino brothers. by Katie Bean

It’s said that opposites attract. In the case of Lou and Raffaele Forino, their completely different business backgrounds have benefited them as they’ve built Gauntlet Funding.

SUMMER 2020

LENDER LIMELIGHT WITH LOU AND R AFFAELE FORINO

“I don’t think anyone takes for granted that we’re here to build a company.” — LO U FO R I N O

The brothers were born and

raised in Queens, New York.

They chose careers in differ-

ent industries. Lou, the elder,

gravitated toward technology and owned a tech consulting firm, which he sold in 2008.

Raffaele has 25 years of experience as a mortgage banker.

When the Great Recession hit, both sensed an opportunity.

Lou added that post-recession legislation created additional opportunities on the lending side. Capitalizing on their distinct insights and business acumen, the brothers began working together

around 2010 and formalized Gauntlet Funding in 2014.

‘COMPLETE TRUST’

“What spawned the idea is

when the market crashed, we

understood the market so well

that we started acquiring properties,” Raffaele said. “Understanding there was a need for this, we moved over into the

finance side, the private lend-

ing side. The traditional side of

A friend suggested the name Gauntlet, which the Forinos liked because of its connotation of protection. (And, as

comic book fans, they didn’t mind the association with a Marvel Comics series.)

the business was suffering so

The company’s New York

[opportunity] on the distressed

it houses their 10 employees.

fit, if you knew where to look.”

services of a few contractors.

much and there was so much

office is on Long Island, and

asset side that it was a natural

The company also uses the They lend all along the East Coast and had been planning to open a satellite office in

PRIVATE LENDER

Florida. Those plans were put on hold earlier this year as the coronavirus pandemic spread to the U.S. In running the business, “we don’t really operate with titles,” Lou said. They consider themselves co-presidents. Both are actively involved in loan processing, but Lou handles investor relations and Raffaele focuses on client relationships. When it comes to working with family, both agreed that the trust factor is crucial in allowing them to operate at peak levels. “There’s complete trust,” Lou said. “Beyond that, it’s not very different from partnerships I’ve had in the past. Everyone is expected to do their jobs. … I don’t think anyone takes for granted that we’re here to build a company.”

Raffaele concurred that

best. In the course of a day, if

being able to rely on each

you’re really focused on what

other has allowed them

you do best and not trying to

to grow the business. “When we assign roles to ourselves, he’ll keep me informed. I don’t have to wonder if he’s

wear every hat in the company and not look over your shoulder, it’s really impressive what you can get done when

doing something behind my

you have a singular focus.”

back. I don’t have to look over

In fact, that singular focus

his shoulder, and he doesn’t have to look over mine,” he said. “I can’t explain how that makes you feel when we can truly focus on what we do

occasionally spills into after hours. “Sometimes at family events, we end up talking about business more than before,” Lou said.

THIS OR THAT ? CALL OR TEXT? Raffaele: Call. I’ve been told I can talk to a tree. Lou: There are different tools for different occasions, but if I have to choose—call.

ANDROID OR IPHONE? Lou: I’m pro-Android, pro-Windows. Emphatically Android! Raffaele: You have to remember Lou was in the tech industry. I’m an iPhone guy.

NIGHT OWL OR MORNING PEOPLE? Raffaele: Night owl. You don’t get my cheery disposition unless I get six to seven hours or so of sleep. Lou: Both. I just don’t sleep a lot. That’s why I’m grumpy!

SUMMER 2020

LENDER LIMELIGHT WITH LOU AND R AFFAELE FORINO

FAVORITES? FAVORITE PLACE YOU’VE TRAVELED? Raffaele: To me, it’s simple. Italy. The Amalfi Coast. Our family lives kind of close by. Lou: I went to Japan on business. In Tokyo, everything was so different. I found it amazing.

GUILTY PLEASURE? Lou: Too many to mention! Raffaele: Just one—Nutella. I have to stay away from that. That’s a dangerous one to keep around.

FAVORITE MOVIE OR TV SHOW? Raffaele: I might date myself a little, but Seinfeld. And a movie, if I had to pick one, Grease. It’s a great feel-good movie. Lou: Breaking Bad. That was my favorite TV show. And Avengers: Endgame.

A CAUSE DEAR TO THEIR HEART? St. Jude’s Children’s Research Hospital Raffaele: I have several friends who had used their services when a child was ill. I’ve seen the work they do and the burden they took off the family. I think their foundation is tremendous. I know they do what they say. Lou: St. Jude’s is a great organization, no doubt about it.

dot-com company. But no

Clearly, Lou takes to heart

matter where people are,

the often-quoted advice

there’s a way for them to build

to do what you love.

wealth through real estate,” Lou said. “We’re helping

STAYING TRUE TO THE MISSION

the real estate industry motivating. “More people become wealthy

The mission of Gauntlet

through real estate than any

and investors build wealth.

can be a corporate CEO. Not

Funding is to help borrowers

other means. Not everybody

Lou said that’s why he finds

everybody can start the next

PRIVATE LENDER

people build better lives, and I’ve seen this through borrowers who have been with us for years. Their lives have improved dramatically. And if we can be a small

“If you love this, you can be good at it. If you think it’s just an easier path, I promise you it’s not,” he said. For Raffaele, the constant change and staying ahead of the trends keep him excited.

part of helping them achieve

“Every market lasts six

that, that’s a great thing.”

months. There’s a rotation.

“The goal posts do move often in this business. Foresight is paramount. It’s not easy, and I don’t think there’s a formula. But it can make a tremendous difference.” — R A FFA E L E FO R I N O

Some things become in vogue, some things become more popular. I love the way the market moves. … When you know the places under your feet and can feel things move, I love to be able to hop off one and go to the other and understand why things are moving and changing.” Raffaele attributes his knowledge of the market to decades of experience in residential financing. “A lot of clues I can see coming. There are telltale factors if you see them multiple times.” The fluid nature of the industry requires vigilance and the ability to pivot fast, the brothers said. “The goal posts do move often in this business,” Raffaele said. “Foresight is paramount. It’s not easy, and I don’t think there’s a formula. But it can make a tremendous difference.”

While there may not be a formula, Lou said he learned valuable lessons from a business coach early in his career that taught him how to keep a finger on the pulse of an industry. He relies on data, networking, reading industry news and participating in industry organizations such as AAPL to keep perspective on trends and how competitors are responding. But he doesn’t discount his instincts.

The Forino brothers never

forget their business revolves around people and relation-

ships, not just with clients but

ABOUT THE AUTHOR

with employees too. By hiring

“good players,” they’ve forged a

team with great chemistry they said. Although they operate in an industry where it’s crucial

to dot every “i” and cross every “t,” it’s important to their

culture to remain personable

and grow relationships. “People

KATIE BEAN

like real people,” Raffaele said.

Katie Bean is a former news-

“At the end of the day, you have to trust your gut,” Lou said.

At the end of the day, there’s

who loves telling the stories of

That principle applies to all aspects of their business, from doing deals to creating new products.

fundamental to making the

“If it fits with our mission, we do it. If it doesn’t, we don’t do it,” Lou said. “Being entrepreneurs, it’s easy to get bright light syndrome, chasing shiny things. But you have to stay focused on your mission.”

we’re doing. I can’t think of a

one practice that has proven

paper and magazine editor

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

business one they love.

“I think it’s super important to us to have a lot of fun in what day when we haven’t laughed quite a bit at the office,” Lou

said. “Having fun lets people service our customers better and keeps the mood as

lighthearted as possible.” ∞

SUMMER 2020

PRIVATE LENDER

SPECIAL FEATURE

Looking Beyond COVID-19 COVID-19 has been the eye-opening Apocalypse 101 course we didn’t know we needed to take. The pandemic wasn’t just a downturn. It was unexpected to the point of unprecedented. Among the little headaches and hurts of canceled birthday parties, uncomfortable masks, socially distant air hugs and none of the little niceties that help us feel normal, it was catastrophic things too. It was a near-completely frozen economy. It was an entire workforce (and their families) locked in their homes, worrying about making ends meet. It was a technological nightmare as businesses struggled to go virtual. It was worry about the vulnerable among us as the infection and death counts climbed. The one comfort that has held many people through the crisis is the idea that It Will End. The downturn did not grow out of underlying instability. The workforce was not largely incapacitated by illness; rather we shut down as a preventive measure to curtail widespread sickness and death. We did this to ourselves, to avoid a worse thing from happening. And we largely succeeded. We are not in a situation of “if ” things return to normal, but “when.” And that’s a great place to be. So, as we look for the light at the end of the tunnel, we find ourselves at a crossroads: How do we turn this struggle into opportunity? What have we learned that has made us stronger and more resilient? Now is not the time to put the last several months behind us, but to grab them. Examine them. And use them to make us better. Read on to find out how industry experts in their respective fields are doing just that. ∞ SUMMER 2020

SPECIAL FEATURE

COVID-19’S IMPACT ON PRIVATE LENDERS The industry is focused on strengthening itself rather than rebuilding. by Ray Sturm

On March 19, 2020, California announced the nation’s first statewide shelter-in-place order. Within weeks, 44 more states followed suit. The national economy was effectively shut down. In the private lending industry, where we think of ourselves as insulated from Wall Street’s whims, we were quickly reminded how much we’re still tied into the capital markets. Funded largely by bank lending lines, REITs quickly came under margin call pressure as the value of their assets fell as a result of needing to sell both quickly and during a time of limited liquidity. Uncertainty around the true value of a real estate loan rippled out to the private lending world, so our industry was effectively shut down as well. For a few weeks, conversations among lenders, capital partners and private lending 50

PRIVATE LENDER

insiders were not about when the industry would return to normal but rather if it ever would. Wall Street asset managers expressed similar uncertainty, questioning whether the price of homes had plunged 20% overnight.

GETTING SERIOUS ABOUT STABILITY

Fast forward to today: Private lending is coming back already, the value of real estate stayed firm and the industry is focused on strengthening itself more than rebuilding. It’s time to look forward.

means they have been focused

An overarching theme around the industry is stabilization.

For some of the world’s largest institutional investors, that

on moving their credit lines to non mark-to-market (MTM)

structures. Note that MTM is a method of measuring fair

value of the assets on a credit

line and may require the line’s

borrower to provide additional collateral (i.e., meet a margin call) if the value of the assets on the line is marked down. NonMTM lines are more expensive, but they’re more stable. For lenders, and even some aggregators, stability has meant raising new funds that they themselves control. Internal funds will seldom provide the same level of liquidity or profitability as tying into the capital markets, but they can serve as welcome ballasts during times of uncertainty and a demonstration of reliability to partners. For many, that feels a bit like going back to “old school” hard money lending practices and filling the vacuum left by institutional investors with more expensive capital from family offices and high net worth individuals. The capital markets can be fickle. As Noah Martin, the CEO of Direct Access Capital, said: “Capital markets are a pendulum. For RTLs, institutional capital overreached in a race for market share. Shocks to the credit markets have caused capital to retreat from RTLs as fear and losses have pushed the pendulum to the opposite extreme. The industry needed a correction, and a little creative destruction will help price discovery of the equilibrium that appropriately reflects the risk/ return model of the asset class.”

struction may be the one area that takes a much longer time to come back to preCOVID-19 activity. To Noah Martin’s point, investors do not see an attractive risk/return trade-off yet, so new construction may significantly lag light and even heavy rehab in 2020.

new home builds or its glut of aging housing stock that requires rehab, so there will be plenty of borrowers in the market. Couple that with perhaps a reversal in the migration from suburbs to cities, and the private lending industry will be more important than ever. It’s time to get to work. ∞

A lignment // We’re seeing a

PENDULUM SWINGS With that in mind, here are a few places we see the pendulum swinging as we get back to work: I nstitutional Investors //

Wall Street’s top institutional investors are getting ready to reenter the private lending market. Although rates certainly matter, their primary focus is on credit.

Valuation // Valuations

have generally held up,

but volume is down significantly, so there is still some uncertainty. Even with experienced borrowers, skin in the game is key and that requires (1) more conservative LTVs and (2) a strong allergic reaction to placing the value of a property above its recent market-clearing purchase price. Beyond valuation, the key area of focus is liquidity, both for markets and for borrowers.

L iquidity (Market) //

Private lending has done well when financing the typical “down the fairway” home rather than the McMansions. A huge force driving that success is liquidity. Liquidity means we’ve got certainty of a sale and that we have data to back up the borrower’s ability to deliver on ARV. When valuation is less certain, investing into markets that move homes and backing typical rehabs and properties is paramount.

L iquidity (Borrowers) //

For borrowers, lenders (and investors) need to see greater interest reserves and ability to meet the capital needs of any project. The likely outcome here is experienced borrowers doing fewer projects, as they’re required to put more capital into each. With less competition for them in the market, they will hopefully make that up with improved returns.

N ew Construction //

Unfortunately, new con-

cultural shift back to alignment of interests. A focus on volume replaced credit in many firms. In the lending world, the easiest way to grow has always been to drop underwriting standards, but it’s also the fastest way to destroy value and lose trust with investors. Bringing credit back to the forefront, often through financial alignment, will be key.

S econdary Trades // The

industry was flooded over the last few months with bargain hunters looking to buy stranded loan tapes for 70 cents on the dollar. For the most part, these groups left empty-handed, and we’re now seeing tapes trade at par or just below.

Looking forward, the private lending industry’s future is as promising as ever. Banks have almost always behaved more conservatively coming out of economic shocks. At the same time, COVID did nothing to help the nation’s shortage in

ABOUT THE AUTHOR

RAY STURM Ray Sturm is the CEO of Alpha-

Flow, a capital partner to private real estate lenders. AlphaFlow works with private lenders

around the country and invests

on behalf of some of the world’s largest institutional investors.

Prior to launching AlphaFlow, Sturm founded RealtyShares,

one of the industry’s top plat-

forms for real estate investing. His early career in finance included investment banking at Bear

Stearns and Lazard Frères and

private equity at CCMP Capital. Sturm has a bachelor’s degree in finance from the University of Notre Dame and a Juris Doctor and MBA from the University of Chicago.

SUMMER 2020

SPECIAL FEATURE

Capital Lessons from COVID-19 The value of diversified capital sources—and why the biggest opportunity may still lie ahead. by Chris Ragland

No one saw this coming. At least not like this.

We have been talking about the next recession since we got out of the last one. Now that it’s here, some lenders seem to be affected more than others. Many lenders ground to a halt and others plowed ahead. There’s a simple reason for that: capital. Not just having it, or having a lot of it, but access to various types of it. If you’re wondering what is differentiating lenders right now, what’s powering one over another, what’s driving their decision-making process, you can stop. It’s capital. 52

PRIVATE LENDER

NOT ALL CAPITAL IS EQUAL If we look at the private lending landscape through the lens of COVID, one thing is clear: Not all capital is created equal. Private lenders have historically used three types of capital sources: direct (or syndicated) lending, lending through a fund and secondary markets. All three of these sources can work together (and often do), but if we break them down, we see different strengths and weaknesses.

Over the past several years, we have seen the rise of Wall Street capital in private lending. It’s efficient (quick decision making). It’s hungry (lower cost). And it’s plentiful (virtually unlimited). At least it was until COVID-19. All it took was an existential crisis and Wall Street made for the exit door faster than you can say securitization. While this capital may be fickle during a time of crisis, it will return (and has) with new rules, new loan guidelines and a renewed appetite. Why? Wall Street continues to struggle when it comes to generating reliable yield for investors. But it wasn’t so long ago that private lenders played matchmaker. We matched,

or syndicated, private loans between affluent investors and savvy flippers. We charged points, created a spread between the note rate and what the lender was paid, and serviced the loan. It was good old-fashioned private lending. It was also inefficient, limited and often frustrating when it came to managing the person-

alities of our lending pool.

It’s the middle ground that deserves another look. Yes, a fund. The only thing better than having a large pool of private lenders to rely upon is having one where the capital is captive and under your direct control. Naturally, creating a lending fund requires more time (and money). But they are efficient vehicles, if struc-

pandemic will quickly gob-

ble up market share. Those lenders will grow, and they will own the stage during

the recovery. Just remember, hubris is the platform for

you’re doubling down on your lending or buying up new opportunities, you’re doing it with capital. And just like an experienced mechanic, you need various tools for the job. ∞

greed. If you find yourself in this position, be wise. Make

certain you maintain quality

underwriting, process-driven servicing and always have a backstop for loans that fail.

ABOUT THE AUTHOR

For those of you with a

more entrepreneurial spirit, there’s something new out

there for you. And it’s coming in all shapes and sizes. It’s

not just more loans or market tured and managed properly. They give you control over your lending capital, ensuring you can continue to lend through a crisis, while giving your investors diversification across all your assets. While it may not be the cheapest capital, it’s yours to manage.

OPPORTUNITIES IN DIVERSITY Which one is best for you and your lending company? All of them. Yes, all of them. While having too many capital sources are likely to present problems, diversified capital means you have flexibility. You have several tools in your toolbox, and your capital toolbox is no different.

If you want to solve the myriad challenges that being a private lending presents, and you want to survive this (and the next, and the next, etc.) challenge, you need to have diversified capital sources. Possessing lending capital is necessary to continue your core business operations, but managing abundant capital allows you to capture market share at the expense of your competitors. When lenders stop being lenders, they are quickly forgotten. That’s because this business is unforgiving. The market moves forward, regardless of your level of preparedness. Lenders that have continued to market and lend during the COVID-19

share won from your compet-

itor. No, it’s discounted loans. Nonperforming loans. Foreclosures. Loan tapes. REOs.

Software platforms. Employees. Entire businesses are for sale. All of these will take capital

if you plan to take advantage.

More than that, it will require know-how, grit and focus.

But remember what brought you to the dance. And if

you do decide to take on additional lines of busi-

ness, do so in a methodical

and well-prepared manner. Rome wasn’t built in a day.

Whether your present situation is focused on surviving

CHRIS RAGLAND Chris Ragland has managed

real-estate-related businesses

for the past 20 years. Brokerage, disposition, insurance, management, finance, develop-

ment—Ragland has exposure to all aspects of real estate.

But his favorite role to play is investment mentor.

An active investor and principal in several real-estate-related

ventures, Ragland continues to

grow his portfolio of properties

while he builds up those around him. In addition to real estate, Ragland serves on several

boards for non-profits and is also active in the start-up

community in Austin, Texas.

or thriving, you’re thinking about capital: types, cost, access, diversification. It doesn’t matter whether

SUMMER 2020

SPECIAL FEATURE

HOW TO PIVOT DURING A CRISIS

STARTING POINT There is no doubt the high

unemployment rate is hav-

ing a devastating impact on

the economy. Eventually, life

and real estate investing will

resume, just at different levels and with different players. For me, business had been booming. Right before the

shelter-in-place orders, I was rehabbing two properties

that we acquired with hard

money. Our exit strategy was to owner finance them.

Here’s how one experienced real estate investor managed operations during COVID-19.

WHERE WE HEADED So, here’s a recap of

what has happened.

by Nancy Wallace-Laabs

Real estate investors had been musing about a market correction, but no one was ready for the impact of COVID-19. Still, it’s not all bad. A seasoned real estate investor can see beyond the fear mongering and bleak forecast. However you want to view this particular time, one thing is certain— from misfortune comes fortune. 54

PRIVATE LENDER

First, I completed a cash-out refi with a new local community bank. They were easy to work with, and all their decisions stayed in-house. The property was the collateral for the loan, so there were no huge stacks of paperwork to submit. I did have my credit run and provided three years of tax returns. The appraisal was conducted via pictures I submitted of the property. From start to finish, the timing was just under 30 days. I met this lender by popping into the bank one day. I was introduced to the decision

maker and was able to lay out

my investing strategy. I told them I was looking for a lending partner that would enable me to continue to grow my real estate investing business. Through every step of the loan approval process, I was in contact with the decision maker, who kept me informed. Yes, he had an assistant who was kept in the loop on correspondence, but I appreciated the personal touch of this lender who was intent on building a true business relationship that benefited both parties. Second, here’s how the exit strategies, for three properties in different stages of rehab, were impacted. Our original exit strategy:

01 Purchase with hard money

02 R efinance with private

investors, typically from their IRA accounts

03 Rehab the property as needed

04 O wner finance the

sale to retail buyers (typically first-time homeowners)

05 S eason the note for

6-12 months to show a pattern of payments

06 S ell off part of the

note, retaining second lien position with first right of refusal on first lien sale

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SUMMER 2020

SPECIAL FEATURE

We ended up purchasing one home with three of our IRA accounts, each one owning

a percentage. After closing, we did owner-finance that

property. The property was in a secondary market, so

the days on market were a

bit longer than we usually

see in the DFW area. We’re happy to report the buyer is on time with payments

and, as of this writing, has not asked for forbearance.

On the second property, we

finished the rehab and refi-

nanced out of the hard money

with our private investors. We have a network of individuals

who are happy to lend us funds out of their IRAs. We’re up

front about our exit strategy and negotiate a longer term

and lower rates. This allows

us to market the property for

owner financing, get a sizable

down payment and season the note a minimum of 12 months. We then sell off a portion of the note, pay off our private

investor and continue to receive a monthly note payment.

Our third property ran into some contractor issues. We met the general contractor

we hired through our hard money lender; he was one

of their inspectors. I cannot

stress enough a responsibility

to run a check on contractors. We ran into serious problems 56

PRIVATE LENDER

with our rehab under this GC and ended up firing him. Thankfully, our lender was supportive of our report about this person’s integrity and agreed the inspector would no longer have access to other investors who are their clients. Due to the problem we ran into on the rehab, we were not able to finish the property before the due date of the note with the hard money lender. We also noted a change in the market with our ownerfinance potential buyers. Although we had plenty of interest, people were reluctant to let go of the 10% down payment we were requesting. So, here’s what we did. First, we reached out to our hard money lender. They extended our loan without any additional points or higher interest rate. As long as we continue to make the monthly interest payments, they are willing to work with us and not penalize us for what is happening in the market. By now, we had a lot of our personal money tied up in this property. With a price point of under $200,000, the government announcement of forbearance guidelines and holds on evictions, we knew we would have no problem selling it. In fact, when it went on the market, we had 52 showings

(many of them virtual) and 10 offers in four days. The property is under contract.

WHAT WE LEARNED No matter what’s happening in the market, people will always need to sell their home. We continued to do business as usual. We had to get a bit creative with sellers, doing video walk-throughs and lots of Zoom calls. We purchased two more properties within the first 30 days of shelter-inplace and used private investors to secure the properties. The lessons learned from this crazy shift in the market?

01 You can never have

too much cash on hand. Be ready to take full advantage of a shifting market.

02 I f you build your lender network when things are going well, you will still have those relationships and access to lenders in a downturn.

03 L enders need to

work with their real estate investor clients. Most are hardworking and want to grow their business.

Never get too complacent in the market. Leverage your debt wisely. Always complete

due diligence, not just on your properties and contractors but also on your lenders. Are they able to weather the storms with you? Remember, we are all in this together! ∞

ABOUT THE AUTHOR

NANCY WALLACE-LAABS Nancy Wallace-Laabs is a

licensed real estate broker in

the state of Texas. She has more than 15 years of real estate

investing experience, owns

several rental properties and manages properties in

the north Dallas-Fort Worth

area. Her new book “Winning Deals in Heels” hit No. 1 on

Amazon’s Best Seller List for Real Estate Sales & Selling.

She and her husband own KBN

Homes LLC. By actively seeking homes that are difficult to sell and compassionately repre-

senting owners in distress, KBN Homes offers hope, relief and options to sellers and creates opportunities for investors.

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SUMMER 2020

SPECIAL FEATURE

MORTGAGE PAYMENT DEFERMENT GOTCHAS How will they affect borrowers in the long run? by Edward Brown

When Congress passed section 4021 of the CARES Act in response to the effects of COVID-19, the intent was to help borrowers who were having problems making their mortgage payments. Little did Congress realize they were potentially setting up borrowers for trouble in the future when it comes to credit worthiness.

most likely not deny the loan on its face due to the deferment, as this would violate the law; however, banks are

notorious for coming up with myriad reasons for denying a loan and still staying within

the guidelines set out for them. Conventional lenders desire

THE “GOTCHA” Section 4021 of the CARES Act contained a regulation that loan servicers “shall report the credit obligation or account for those participating in forbearance as current.” In other words, those participating in a forbearance program should not see their credit scores drop. However, there is a loophole that allows lenders to discover whether a borrower is actually

PRIVATE LENDER

making payments. It is the “comments” section of a credit report. The CARES Act does not mention the comments section of credit reports, and that’s where forbearance notations are going. What borrowers are not being told is that any reference in a credit report to forbearance can be a Scarlet Letter for an applicant seeking a new mortgage, according to Kathleen Howley in an article she wrote in early May 2020.

According to Mark Hanf, president of Pacific Private Money, within a week of Howley’s article, his company received a loan request from a homebuyer who was denied credit from a major bank for this very situation. Although the bank sees the existing mortgage as “current,” the forbearance has let the world know via the comment section that this borrower has requested a deferment. The major bank involved would

to have plain vanilla borrowers who pay back loans in a timely manner. When a borrower

changes loan terms by requesting principal forgiveness or other aspects of the loan, the lenders generally do not usually extend credit again to these borrowers and can negatively affect the borrower’s ability to borrow again from unrelated lenders. Such was the case during the Great Recession when some borrowers took advantage of

the economic climate by asking their lender to reduce the

principal of their loan [total forgiveness rather than just

a deferment]. The borrowers may have gotten a reprieve, but the long-term effects

may have been more drastic.

Similarly to when a borrower files bankruptcy, the bor-

rower may get out of paying creditors, but their ability to borrow in the future is

usually severely hampered. In one case, back in 2009, during the heart of the Great Recession, one banker tells a story of how a wealthy borrower first asked for a principal loan reduction of $500,000 because the value of his collateralized real estate had decreased. His request was granted. But, when this borrower was faced with the

prospect of having the reduction reported on his credit report or the fact that he would have to inform any new lender that he requested a principal reduction [as this question is usually on bank applications], he voluntarily requested that the $500,000 abatement be reinstated. He decided his ability to borrow in the future was worth more than the $500,000 principal reduction.

IS IT WORTH IT?

likely will not see a change in approval based on having a past forbearance listed in their credit comments. Most private

ABOUT THE AUTHOR

lenders—if they evaluate credit at all—will rely on the loan to value of the collateral. Like a one-time medical issue that racks up high hospital bills, private lenders have more freedom to evaluate the specific situation involved.

EDWARD BROWN

As in other areas, banks and

Edward Brown is in the Investor

credit unions’ additional strictures usually create oppor-

Borrowers will have to decide whether requesting deferments is worth the risk of potential future lending restrictions. Whoever said “there’s no free lunch” must have been talking about these very situations.

tunity for private lenders to

From a private lender perspective, borrowers seeking credit

will likely find these borrowers

fill the gap. When borrowers cannot find credit via traditional means, savvy private lenders who know about the potential issues and can get in front of them at the right time to be perfectly acceptable.

Relations department at Pacific Private Money and is host of

the long-running radio show

The Best of Investing. He has multiple published works,

appeared on CNN and has served as chairman of the

Shareholder Equity Committee, protecting 29,000 shareholders in a $500 million REIT. Brown was also a recipient of a

prestigious MBA Tax Award.

∞

SUMMER 2020

SPECIAL FEATURE

My Borrower Is in Default—Now What? In the post-coronavirus crisis world, a one-size-fits-all solution does not work for borrowers in default.

90-day payment deferral or an agreement not to enforce a maturity default

The lending world has been turned upside down by the COVID-19 pandemic. All normal strategies a mortgage lender relied upon to understand borrower defaults are no longer reliable. In this new normal, a lender must be tactical when understanding what to do when a borrower defaults. A onesize-fits-all solution does not work in a post-crisis world.

want to know their options when a borrower defaults.

Foreclosure is one of those

options, but it is not necessarily always the most attractive one. Lenders can also offer borrowers a forbearance,

modification or deed in lieu.

OPTION 1: FORBEARANCE A forbearance allows the bor-

rower to temporarily postpone payments or waive payments 60

PRIVATE LENDER

altogether. It gives the borrower some grace during a time of hardship. Lenders will need to evaluate a particular borrower’s facts and decide whether to proceed with a loan forbearance. If you choose this option, make sure the agreement is properly documented. AAPL and Geraci LLP have prepared a standard forbearance request form lenders can put on their websites or provide to borrowers to help evaluate whether a borrower qualifies for a forbearance.

Note that best practices during this time for borrowers in need are to grant forbearances on the following terms:

01 P roviding a 60- to

by Nema Daghbandan and Melissa Martorella

In this uncertain time, lenders

lender agrees to delay, defer or waive loan payments, a formal forbearance agreement needs to be used to make sure the parties are agreeing on what is being waived and what is not.

This form can be found at aaplonline.com/covid19. Assuming your borrower completes the forbearance request form or otherwise provides sufficient documentation to qualify for a forbearance, lenders should bear in mind that formality is extremely important when lenders are modifying or waiving any rights under the loan documents. Oral misrepresentations were often the cause of borrower lawsuits against lenders during the Great Recession. If the

02 A utomatic lender dis-

cretionary extensions of the forbearance period

03 N o late charges or

default interest on deferred payments

04 D eferral of payment

for missed payments to the maturity date of the loan

05 N o forbearance fees or charges other than to third parties providing services to document the forbearance

OPTION 2: MODIFICATION A modification of the loan can be just that—modifying the loan—including increasing the amount loaned to the borrower, a change to the interest rate

or an extension of the maturity date. This may be a viable option if a larger restructure of the loan is necessary. Lenders will want to formally document the modification and potentially record the modification depending on its terms.

OPTION 3: DEED IN LIEU A deed in lieu is an agreement in which the borrower essentially just walks away from the loan, handing over to the lender their keys to the property used as collateral for the loan. The borrower may have determined that there is no “out” to their current situation and that their best option is to simply walk away. Sometimes, deeds in lieu can be drafted in conjunction with a forbearance or modification agreement, with the documents held by a neutral third party who will wait for the parties to verify that any preconditions triggering the deed in lieu have been met.

OPTION 4: FORECLOSURE If a lender decides to move forward with a foreclosure, there are two primary types of foreclosure: judicial and trustee sale. Judicial foreclosures are not realistically available at this time due to the courts in many states being closed for

COVID-19 except for emergent matters, although a nonjudicial foreclosure is an available option even during this crisis. Many states have restrictions at the state, county or city level with regard to nonjudicial foreclosures, so making sure you understand current restrictions can help guide how you navigate a foreclosure. Other states, including California, have pending legislation that would prevent any lender from taking any step toward completing a nonjudicial foreclosure. If you can start the process at this time, it is recommended you do so if other default options are not viable—in case further restrictions are put into place. Finally, it is advisable to postpone the actual sale date until current stay-at-home orders are lifted in the jurisdiction where your sale is taking place. Completing the actual sale is problematic at this time due to the requirement that there be a public auction. Since at the time of this publishing, public gatherings are currently banned, even if a lender is able to complete all other steps in a nonjudicial foreclosure, it is strongly recommended to postpone the actual sale date until restrictions on gatherings are lifted. Then, there is no argument by the borrower that the sale was improper or that bids were artificially low due to the lack of attendees at the sale.

If your state requires a judicial foreclosure (and courts are open to process these matters), the lender should be aware of antideficiency rules and consider the implications of combining it with another action such as a quiet title action. Judicial foreclosures are often pursued in conjunction with receivership and can run at the same time as a trustee sale. Typically, courts are reticent to provide receivership to lenders, and they are often financially implausible due to the costs associated with appointing the receiver. Plus, with COVID-19, receivership may be alto-

gether unavailable right now. Therefore, lenders should rule out all other options before pursuing receivership. Lenders should take care to understand all their options when a borrower is in default. There is no one-size-fits-all solution. If you decide to proceed with a forbearance or modification, make sure you formally document those agreements so that all parties are on the same page about what has changed in the loan. If you choose to foreclose, act now rather than later before more executive orders with further restrictions are issued. ∞

ABOUT THE AUTHORS NEMA DAGHBANDAN Nema Daghbandan, Esq., a partner with

Geraci LLP manages the Real Estate Finance

Group at the law firm. Daghbandan’s practice entails all facets of lending matters across

the country, and he advises financial institutions on various lending matters, including

licensing, usury and foreclosure. Daghbandan is also an expert in default management and leads the firm’s nonjudicial trustee group. You may reach him at nema@geracillp.com.

MELISSA MARTORELLA Melissa Martorella, Esq., is a senior banking

and finance attorney with the firm and focuses on representing nationwide private lenders

who transact throughout the country. You may reach her at martorella@geracillp.com.

Geraci LLP, AAPL’s general counsel, is the nation’s largest law firm that focuses on the representation of nonconventional lenders.

SUMMER 2020

SPECIAL FEATURE

What the Coronavirus Pandemic Can Teach Us About Marketing As many brands have learned recently, marketing and crisis communications are not the same. Do you know the difference? by Eddie Wilson

If COVID-19 has taught us nothing else about marketing, it is that planning campaigns and budgeting media for an entire year is old-school strategy that should find its final resting place between printed phone books and promotional-only social media. 62

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Although it is certainly easier

Worse, continuing “operations as normal” during a crisis can make your brand look out of touch and insensitive. Even if your customers’ worries— like tenants not paying rent, contractors not being able to finish jobs, or property days on market stretching longer— don’t affect you yet, you need to be sensitive to where their minds are and be able to reach them accordingly. If you did not have them already, you need a new set of crisis communication moves for your marketing playbook. Whether the crisis you’re dealing with is internal or external, look to these phases as you navigate it:

to plan far in advance, the pandemic has demonstrated that when hard times unexpectedly

CONTAINMENT

hit, it is not smart. You spend more time and money—and potentially alienate your customers—when you cannot react quickly to changes.

Assess your current and upcoming risks. Interview and catalogue the feelings and thoughts of those who

are most affected by the crisis, including customers, affiliates and partners. From there, create a document that contains specific answers to common concerns as well as practices for speaking to customers and the press. Circulate the document to anyone who has an externally facing role, or who handles external communication. All touchpoints the public can have with your brand should be covered, including phone, interpersonal emails, website, social media, eblasts, newsletters, digital ads, outdoor ads and print media. Shift the focus of your other communication toward the ethos of the customer instead of only generating sales. If you focus too much on sales and retention during a crisis, you will look insensitive and out of touch, permanently damaging your brand in the minds of consumers. It is important to find a balance between the two ends of the spectrum: harping too much on the crisis and refusing to talk about it at all. During the COVID-19 crisis, some of the most successful campaigns gave their audiences a “break” from dealing with and thinking about the pandemic. One practice we all saw a lot of during the pandemic and should be put to bed is the blanket “how we are handling

the crisis” email. Segment your audience according to who crucially must know the information and when they need to know it, rather than to your whole list.

Especially for internal crises, include any new procedures put into place to prevent it from happening again.

You should also direct your audience to a place other than your usual sales or customer service channels. Instead, pave a direct path to a person who speaks on behalf of your company. Typically, this is the leader of the company or someone who is wellversed in public relations.

ASSESSMENT

Finally, do not forget internal communication. What do your employees need to know? While you may not be able to tell them everything about how the crisis will be handled, they do need to know you are handling it, which policies and procedures have changed, and what you expect of them.

RESOLUTION Once the crisis begins to move toward an end point, your communication should change tone and start to focus on rebuilding or advancement. Think of it as a bridge back to your normal communication—you’re trying to strike a tone between respecting that people are still dealing with the aftermath of the crisis while working to put it behind you.

When the crisis is well and truly put to bed, review your company’s performance. Did your communication work effectively? What could you have done better? What worked well? Are there things you learned that you could bring into your daily marketing practices? Document and add them to your records for future use.

In the end, the best thing you can do to protect your company against future crises is to take advantage of your hard-won COVID-19 experience. You did not get through this for nothing. You saw, you learned and you are better equipped to handle something similar in the future. But, only if you use that experience and digest those lessons into a new modus operandi. ∞

ABOUT THE AUTHOR

Importantly, revisit your crisis plan at least annually with an eye toward: T he do’s and do not’s

you have seen from other companies as they have handled crises that your own company may eventually need to navigate.

R efreshing your media/

touchpoint checklist for what your crisis plan covers (changing accounts, new social media outlets, etc.) so you can tackle communication in these areas quickly.

C reating or expanding

your crisis communication documentation to include how you will respond to different kinds of crises.

EDDIE WILSON An entrepreneur and vision-

ary by nature, Eddie Wilson’s

widespread interests have led to successful ventures across the globe, from operating

non-profits and owning an ad agency, to investing in

hundreds of real estate projects and building a nationally

syndicated radio show. Today, he guides AAPL and Think

Realty with his marketing, funding and real estate investing knowledge to ensure their

establishment as the premier

organizations in their sectors.

SUMMER 2020

SPECIAL FEATURE

Some Aspects of Remote Work Could Become Part of Our Future What did we learn about working and managing remotely during COVID-19? by Lawrence Schwartz

There’s always been something of a butts-in-seats workplace mentality in the private lending industry. And it makes sense. When you are dealing with sensitive client information, it can be hard to ensure security and know where everything stands operationally if your employees aren’t physically present in your office.

PRIVATE LENDER

Enter COVID-19. You know how that went. Almost overnight, we were all scrambling to move our businesses to the cloud (or at least make them accessible off-site). Under different circumstances, most employees would say that working from home would be the ideal environment. But amid the stress of the pandemic and the chaos of kids and other family members being confined at home too, the adage the grass is greener on the other side proved true. What did this emergency scramble to shelter-in-place and work remotely teach us, and what should we think about bringing back into an office setting as the crisis (hopefully) draws to a close?

THINGS WE’RE GLAD WILL STAY AT HOME Staying connected with your team is the No.1 challenge of remote work // Networking just works better in person, and remote work can be really isolating. Aside from the fact that humans are social creatures, “communication overhead” can slow any team down. Quick questions for a colleague become a laborious wait for an email response, an uphill struggle to get all the detail into a chat, or an awkward phone

call for something that doesn’t quite feel worthy of a call. There’s a real distance to technology, and although there are solutions to some of the symptoms (looking at you, endless Zoom meeting that helps as much as it hurts), companies considering the possibility of letting employees permanently work from home must weigh the long-term effects. Remote work is kind of … remote // Back to humans being social creatures. Remote work can be very demotivating, especially for high-powered teams that thrive on each other’s energy. The overall mental stress of the pandemic will fade, but employees who move to permanent remote work may still struggle to keep their morale up. Fortunately, we have the pandemic to thank for the prevalence of some fun team-building activities beyond the cheese and gimmicks of the past. Some of these (e.g., Google “virtual team building activities” to send yourself down a rabbit hole) are worth bringing into an office environment.

HOW THE PANDEMIC MADE US BETTER The fear of every boss who suddenly didn’t have butts-in-

seats as a way to track work ethic is by now (hopefully) permanently laid to rest. If they weren’t using them already, during the stay-at-home orders, most private lenders began implementing systems to track tasks and progress, find bottlenecks and create checks-andbalances to prevent things from falling through the cracks. The pandemic was something of a boon for these platforms. Lenders who had previously been content to keep things on paper (in the dreaded Excel spreadsheet!) or spread over multiple systems realized they needed to organize their processes, increase efficiency and implement tracking so their remote work teams could get things done. The side benefit is these systems work just as well back in an office environ-

ment (and help crisis-proof the future). They also allow lenders to both sustain their processes and scale to take advantage of new opportunities in a post-pandemic market. Many end-to-end loan origination and servicing platforms allow lenders to overview all deals in a pipeline along with their status, manage documents and billing, report to investors and much more. The ability to keep all information, files and loans in one system accessible from anywhere was suddenly of paramount importance during the pandemic. And if they didn’t have them already, smart servicing platforms launched features to allow borrowers to easily make deferral requests and provide documentation to support their case.

As with any drastic change, the pandemic put under a microscope how private lenders managed their daily operations. So many external forces—economic stress, forced shutdown, new remote work, families at home, worries about potential illness—created a crucible that showed us what we were made of. Coming out the other side is its own win, but bringing the good we learned out of it makes businesses stronger and more adaptable against future crises. We don’t know if we will ever go back to our normal office lives. We don’t know if—or how—other aspects of our lives will change. But one thing is certain: If you create scalable and sustainable processes to run your lending business, adapting to those new changes will not be a problem. ∞

ABOUT THE AUTHOR

LAWRENCE SCHWARTZ Lawrence Schwartz is the co-founder of Mortgage

Automator and the co-owner of the Toronto-based private

lending company JV Capital.

With an extensive background in real estate and private

lending, Schwartz works with

lenders across North America to help them focus on growth

and become more efficient by streamlining and automating their business processes.

SUMMER 2020

SPECIAL FEATURE

UNDERSTANDING SBA CORONAVIRUS DISASTER RELIEF PROGRAMS Be aware of the modifications and their implications. by Dina Kroshkin

The federal coronavirus stimulus bill—the Paycheck Protection Program (PPP)—provided two rounds of funds totaling $660 billion for small businesses. The relief was designed to support job retention and other specified expenses.

MODIFICATIONS On June 8, 2020, the secretary of the treasury and SBA administrator issued a statement on the enactment of the PPP. According to the SBA, the modification included the following changes:

The PPP program was an

The intent of the program was

loan programs, including

small businesses; the execu-

addition to existing federal

to offer fast relief to American

SBA’s traditional 7(a) loan

tion, however, did not go as fast

ter Loans (EIDL). Businesses

lenges. The program guidelines

and the Economic Injury Disascould apply for an EIDL in

conjunction with the PPP loan if the use of funds was for different purposes. 66

PRIVATE LENDER

as planned due to various chalhave undergone numerous

changes since inception. The

final date to obtain a PPP loan was June 30, 2020.

E xtend the covered period

for loan forgiveness from eight weeks after the date of loan disbursement to 24 weeks after the date of loan disbursement, providing substantially greater flexibility for borrowers to qualify for loan forgiveness. Borrowers who have already

received PPP loans retain the option to use an eightweek covered period. L ower the requirements

that 75% of a borrower’s loan proceeds must be used for payroll costs and that 75% of the loan forgiveness amount must have been spent on payroll costs during the 24-week loan forgiveness covered period to 60% for each of these requirements. If a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness,

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SUMMER 2020

SPECIAL FEATURE

subject to at least 60% of the loan forgiveness amount having been used for payroll costs. P rovide a safe harbor

from reductions in loan forgiveness based on reductions in full-time equivalent employees for borrowers that are unable to return to the same level of business activity the business was operating at before Feb. 15, 2020, due to compliance with requirements or guidance issued between March 1, 2020, and Dec. 31, 2020 by the secretary of Health and Human Services, the director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to worker or customer safety requirements related to COVID–19.

P rovide a safe harbor from

reductions in loan forgiveness based on reductions in full-time equivalent employees, to provide protections for borrowers that are both unable to rehire individuals who were employees of the borrower on Feb. 15, 2020, and unable to hire similarly qualified employees for unfilled positions by Dec. 31, 2020.

PRIVATE LENDER

I ncrease to five years the

maturity of PPP loans that are approved by SBA (based on the date SBA assigns a loan number) on or after June 5, 2020.

E xtend the deferral

period for borrower payments of principal, interest and fees on PPP loans to the date that SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period).

TRADITIONAL ALTERNATIVES Under the CARES Act,

traditional SBA loans have

specific benefits for borrowers seeking financing for

their business. The program states the SBA will pay the principal, interest and any

should reach out to their lender to confirm eligibility.

ABOUT THE AUTHOR

Businesses primarily engaged in lending are not eligible for the program unless they can meet the following limited circumstances and provide documentation to support it: A mortgage servicing

company that distributes loans and sells them within 14 calendar days of loan closing is eligible.

M ortgage companies

primarily engaged in the business of servicing loans are eligible.

M ortgage companies

that make loans and hold them in their portfolio are not eligible.

Mortgage servicing companies should reach out to SBA lenders with a very detailed overview of their business revenue streams to confirm eligibility. Supporting documentation either from a CPA or a business

DINA KROSHKIN Dina Kroshkin has been in the financial services industry since 2001 and has more than 15 years of experience in commercial real estate and business lending. Her background in commercial underwriting ensures a focus on credit quality. Kroshkin has experience underwriting a variety of loans, performing credit and portfolio reviews, loan participations, loan originations and credit union consulting. Most recently, Kroshkin led loan origination and participation programs for an extensive network of lenders—programs designed to maximize financing opportunities for CRE owners and investors while providing additional lending opportunities for the lenders. She also oversaw

“associated fees” borrowers

attorney will strengthen the file for the lender’s review.

ships, securing alternative lend-

504 or microloan programs.

A good resource is an overview

The loan request must meet

of SBA 7(a) program param-

do not fit each lender’s portfolio.

owe on qualified SBA 7(a),

repayment ability qualifica-

eters put together by SBA

ing and fund by Sept. 27, 2020.

ment of the Treasury continues

payments of the loan. Current

resources for both lenders

this program. The borrower

CARES Act programs. ∞

tions for successful underwrit-

Complete. The U.S. Depart-

SBA will make the first six

to update their website with

SBA loans also qualify for

and borrowers related to the

correspondent lender partnering options on loan requests that Kroshkin leads the Complete Loan Sourcing program of SBA Complete and focuses on expanding the National Loan Network. This program is designed to bring quality commercial lending opportunities to grow and diversify SBA and CRE loan portfolios of financial institutions.

OPPORTUNITY UNLEASHED ®

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

BRIDGE

RENTAL

CORRESPONDENT

© 2020 Civic Financial Services All Rights Reserved. This is not a commitment to lend. Restrictions may apply. LTV limit is based on current, accurate appraised value. Civic Financial Services, LLC reserves the right to amend rates and guidelines. All loans are made in compliance with Federal, State, and Local laws. Civic Financial Services, LLC is a California Finance Lender under NMLS 1099109 and the California Department of Business Oversight License #603L321, AZ Mortgage Broker License #092863, FL Mortgage Lender Servicer License #MLD1536, ID Mortgage Broker/Lender License #MBL-9610, NV Mortgage License MB4419, NV Broker License #4443, NV NMLS ID #1410002, OR Mortgage Lending License #ML-5282, UT DRE Mortgage Entity License #10570639. Civic Financial Services, LLC is an equal opportunity lender.

(877) 472-4842 www.civicfs.com SUMMER 2020 69

MANAGE & LEAD

Navigating a Sea Change: Leadership in Times of Uncertainty When the economic landscape is uncertain, you can’t afford to sit dead in the water. by Jadon Newman

PRIVATE LENDER

ompanies

around the world are

reevaluating

how they do business in order to overcome the

storm that we all face in this moment. In times of eco-

nomic uncertainty, com-

panies need to be agile to manage change and pro-

tect—even grow—their busi-

“If you are spending money on something that doesn’t move the ship along or can be achieved at a lower cost to the business, you need to make an immediate course correction.”

ness despite challenges.

In a down economy, it’s important to adjust your strategy based on financial models that consider a variety of scenarios so your strategic approach can be data driven and account for both knowns and unknowns.

BE PROACTIVE WITH YOUR P&L

business operating and making a profit. You will probably have to make some tough choices, especially when it comes to your crew and the perks you offer during times of prosperity. If you are spending money on something that doesn’t move the ship along or can be

No business leader wants their business to contract during an economic downturn. But, sometimes it’s unavoidable if the market is experiencing contraction or turbulence. During these times, take a long, hard look at your company’s profit and loss.

achieved at a lower cost to the

Analyze your expenditures to determine exactly which ones are necessary to keep your

something in between.

business, you need to make an immediate course correction. Develop projections for the performance of your business based on numerous scenarios. Create financial

the actual outcome is better than you planned for, at least you were prepared. You can always readjust your strategic approach. If you had plans for expansion over the coming months and the market won’t accommodate those plans in the near to midterm, then determine the most viable and realistic course of action given the new economic outlook.

REEVALUATE YOUR MARKET

models for best- and worstcase scenarios, as well as It’s wise in times of economic uncertainty to take a conservative approach and aim to

If you have to temporarily suspend your plans for growth, then you probably need to reevaluate the markets in which you operate.

If you’re a lender who finances projects across the country, watch the housing market closely to determine which geographies will likely be the strongest over the next year or so. If you find a significant disparity between the outlook for your target geographic markets, consider shifting your focus and resources toward the markets that present the best opportunity even during an economic downturn. There are many metrics you can use to evaluate any given real estate market. Determine which ones make the most sense for your business. Looking at trends both before and following the onset of an economic downturn, consider population and job growth and the change in the absorption rate, among any number of other factors. Commit the majority of your time and resources to the markets you determine provide the greatest level of opportunity for your business.

ADJUST YOUR OFFERING The way you structure your business and the services or products has probably evolved over time to accommodate

combat the worst outcome. If SUMMER 2020

MANAGE & LEAD

the market and your target audiences. But during an economic downturn, both the market and, in all likelihood, your target audiences have changed dramatically. This is where it pays to be proactive. If you’re simply reacting to the market winds, you’ll struggle to fill your sails. Conduct a thorough analysis of what you are offering and determine whether it will continue to be attractive or to provide the same level of value to your potential clients in the current economic climate as well as the midterm. For example, how are the economic challenges likely to impact interest rates? How do you compare with what your competitors are doing to counteract market conditions? Given the constraints lenders face during times of economic hardship, it might be necessary to adjust your interest rates or your general terms to attract new business and to make sure your current loans are successful. Remember, your borrowers are facing the same challenges. Without offering them a little flexibility, they may not be able to get projects across the finish line.

GET CREATIVE WITH CAPITAL A declining economy creates hardships at every level of 72

PRIVATE LENDER

the financial industry. Many

capital providers in the private lending industry have taken a “wait-and-see” approach,

freezing activity in the sector

COMMUNICATE, COMMUNICATE, COMMUNICATE

until the uncertainty becomes

Communicating with team

tain. If you find that your

partners is paramount. And,

dried up, what do you do?

continue—even improve—

a little less…well…uncer-

members, clients and external

regular capital sources have

there’s no reason you can’t

One thing we learned during

the last recession is how to be

resourceful. Reach out to your

network and external partners to leverage any resources you may have outside of the com-

pany. Many lenders might rely

on only a handful of capital providers to operate their business. If those capital sources pull

back, you have to find new ones. Consider a more “boots on the

ground” approach if necessary. If your company utilized only a few larger capital provid-

ers in the past, now could be the time to cast a wider net.

Though it takes more legwork, you might need to get cre-

ative by building a network of smaller investors. Each

individual investor will likely have different goals, motives

and risk tolerances. Although

your communication despite challenging circumstances.

In fact, it’s absolutely crucial to do so. Take advantage of

posal to stay in front of your clients. Use every option

available to you, including phone calls, video confer-

encing, emails and even text messages when appropriate. Be sure you and your teams have access to those tools

and can use them proficiently. There is no such thing as

overcommunication, only a lack of. Work with your team and your business

leadership to develop the

appropriate communication plan for your business.

PERSIST No single approach is a

ments, you will have a wider

members will know better

audience to appeal to. Don’t

limit yourself to what you’ve

always done. Times like these

require some creative thinking.

ABOUT THE AUTHOR

the technology at your dis-

it will take more investors to fulfill your capital require-

to sit dead in the water. By tightening your belt, reevaluating your market and offering, finding new ways to haul in capital, and expanding your communications efforts, you can do more than just stay the course—you can sail! ∞

panacea. You and your team than anyone what will work best for your business. But

when the economic landscape is uncertain, you can’t afford

JADON NEWMAN Jadon Newman is the founder and CEO of Noble Capital,

an Inc. 5000 company named Private Lender of the Year for

2019 by Think Realty Magazine. With a 20-year career in real

estate and finance, Newman

specializes in private lending,

private equity, investment real estate and strategic venture

capital. More information is at www.noblecapital.com.

SUMMER 2020

EDUCATION

WHERE AAPL’S EDUCATION COMMITTEE SEES PRIVATE LENDER KNOW-HOW NEEDING A BOOST Visit aaplonline.com/ education-advisory-committee for more information about our Education Committee.

hat’s next?

Those two syllables are

enough to give any in-the-know lender heartburn: Futureproof-

ing is a dichotomy between an eye-rolling salvo and the secret dream for private lenders everywhere. We balance on a line between the demand of the housing market and the ability of traditional financing to meet it. Our tangible “what’s next” answers are usually measured in months rather than years. So for private lenders who want to know what to start 74

PRIVATE LENDER

learning today to keep their businesses in the black in

years to come, we turned to industry experts on our

Education Committee. These AAPL members guide our

own “what’s next” objectives as we continue to develop AAPL into your resource for Education, Advocacy and Ethics.

We presented all Education Committee members with

this question: What should

private lenders be learning

now to prepare for changes

to the industry over the next one to five years?

SAM KADDAH, President and CEO, liquid logics

The name of the game is not change! It is positioning yourself and your organization for change. I believe private lenders are learning not to listen to the media hype and let fear drive their decisions. More importantly, it is now being proven again that returning to private lending fundamentals, diversification of business lines and longterm product mix are the secrets to long-term success. Relying on one type or source of funds is a recipe for highrisk failure. Having a mix of your own fund/investor resources, your own warehouse line, servicing portfolio and secondary markets sales is the key for a long-term, sustainable operation. No matter the change, position yourself to absorb most of it and evolve. Finally, when things get complicated, having an efficient technology-driven operation that handles origination, docs, servicing and fund management in one comprehensive system makes a world of difference!

STEPHEN L. KUPTZ, Principal/Founder,

Trinity Mortgage Fund LLC My business partners and I are confident the entrepreneurial American Spirit will prevail. We believe a “loan to own” mentality will be critical for success in the private lending industry over the next several years. If we do not want to own the real estate personally, we should not be lending on it. We need to know our markets well and have a clear exit strategy upfront that we understand and can personally execute if necessary. Product-specific operational knowledge is critical. If you or someone on your team does not know how to run a hotel, you should not be lending on it.

Despite best intentions and underwriting, loan challenges will arise over the next several years. Our desire is to work closely with our borrowers for their continued success. Their success is our collective future. Private lenders must have a strong workout skill set and be prepared and willing to be creative to keep loans performing. When all else fails, have a skilled team in place that is experienced in default, foreclosure and bankruptcy matters so that, if necessary, you can efficiently step into the ownership that you carefully planned for upfront.

ERICA LACENTRA, Director of Marketing, RCN Capital

Private lenders should be focused on two “Ts” to prepare for upcoming changes in the industry: trends and technology. First, the COVID-19 pandemic should have taught private lenders that if you are not staying current on industry trends, you will be in serious trouble when change arrives. Private lenders need to not only see where the market is going as it happens but also get ahead of it to ensure they are developing and adjusting programs, terms and guidelines that will set them up for the future. This is a highly competitive industry. If you’re the last to the table, you’ll have trouble getting your share. Technology is something every private lender should be looking into and investing in. The private lending industry has been slow to adopt technology, but living off spreadsheets and Google docs for loan management needs to stay in the past. At minimum, private lenders should be investing in a customer relationship management (CRM) platform and a good loan origination software. These two pieces of technology will be crucial to making their customer experiences smoother, easier and more transparent. SUMMER 2020

EDUCATION

BEETA LECHA, Principal, Spiegel

Accountancy Corp

their company is poised financially not only to recover from a downturn but also to come out ahead.

Now is a good time to shift from reactionary responses to proactive measures. Lenders reacted quickly to transition

The COVID-19 crisis has

their teams to work remotely. I would encourage lenders

focusing on ways to respond

If a stopgap technology (procedural or communication)

many private lenders

to analyze what went well and what needs improvement.

to challenges facing the

was put in place overnight, spend the next year focusing

industry. Several lenders have reached out to us about how

on ways to build upon this strategy rather revert to the old

loan loss reserves. Their focus is on today’s economy and

Moving forward, lenders should evaluate their existing

to handle accounting circumstances for their defaults or

what is happening currently in their business. As the economy begins to recover and restrictions are lifted, private

lenders should take a moment to reflect on what they can do to improve their business model. They should ensure

way of doing business.

professional networks and strive to expand industry

relationships. We had several clients who lacked strong

banking relationships and struggled to apply for the PPP loans. Additionally, lenders should work to strengthen their connections with trusted advisers, attorneys,

bankers and CPAs to ensure they have the right team in place when they need it most.

JEFF LEVIN, Education Committee COVID-19 is forcing

change in private lending. Change is coming in the long term, too, as the industry continues to

proliferate and new technology is developed to further commoditize our product.

The first tranche the industry must prepare for is the post-

COVID lending environment. Preparing for something that is impossible to predict is difficult because nobody knows

whether there will be a second wave. What we do know is the lending environment will tighten, and lenders—even private lenders—should take a more conservative approach.

PRIVATE LENDER

Certainly institutional investors will restrict to experienced

borrowers with higher credit score requirements, as well as lower LTCs and LTVs. This creates a better environment for private lenders and hopefully a reversal of the rate

suppression we have seen. But we, too, should take a more

conservative approach. There will be a lot of delinquencies

in the next 6-12 months, especially if there is a second wave. This will create opportunity for some of your clients, but potentially huge headaches for the lenders.

In the longer term, competition and commoditization

will create pressure. It behooves lenders to keep abreast

of the latest technologies and the implementation of AI in

such things as underwriting. Implementation of the newest technology will be key to remaining competitive.

As always, it is important to know your local market and stay informed of industry trends. One way to do this is to con-

tinue to support the AAPL as the leading industry resource.

CLAY MALCOLM, Business Development

Specialist, Advanta IRA This is an excellent time to be building business con-

nections and increasing your knowledge of businesses

a business ecosystem in which each member is rigidly

that interact with your own. One effect of COVID-19 is the

and blindly performing their function. Change is here, for

an extent that may not have been apparent before the pan-

businessâ&#x20AC;&#x2122;s ability to evolve by learning even more about

lish business relationships and connect with new ones.

I have learned more about the private lending space in

broad understanding that â&#x20AC;&#x153;we are all in this togetherâ&#x20AC;? to

at least the foreseeable future. Why not strengthen your

demic. This shared crisis makes it a natural time to reestab-

your business environment?

A business ecosystem with strong connections and a

the last several weeks, and I hope those to whom I have

the borrowers, the lenders and the financing sources has

interact with their business and how it could impact their

broad understanding of the needs and vulnerabilities of

spoken have learned more about IRA investing, how it can

a better chance of adapting to changing conditions than

own retirement strategy.

SUMMER 2020

EDUCATION

MELISSA C. MARTORELLA, Supervising Attorney—

Banking & Finance, Geraci LLP The private lending community should learn how to harness various capital sources. Having the ability to rely on different options for funding deals, including using individual investors, operating a mortgage fund, or through loan sales or lines of credit will be essential to making sure lenders are able to operate in any circumstance. The COVID-19 pandemic has taught us that lenders who rely solely (or primarily) on loan buyers or lines of credit had a more difficult time pivoting when those resources were unavailable. A balanced capital source “portfolio” is just as essential to making sure your company can thrive as having a balanced loan portfolio.

RANDY NEWMAN, Founder,

Total Lender Solutions Private lenders should be learning everything they can and more. As we find ourselves in this brave new world, we are at a point at which none of us has any experience. Lending guidelines may need to be torn up and rewritten from scratch. Right now, legislatures throughout the country are balancing economic devastation with lenders’ and borrowers’ rights and obligations. If you don’t know who your local and national representatives are, find out immediately. Get in touch with them, make yourself known and become involved. Like most people, legislators respond to the squeaky wheel. If they’re not listening to you, they’re listening to someone whose interest may 78

PRIVATE LENDER

align against yours. Read the legislation that affects you and your industry. Do not rely on some legislator telling you what it means. Sadly, some legislators do not even read the bills before them. They vote along party lines regardless of what is in or what is missing from the legislation. Join AAPL and any other local industry organization to which you belong and visit the senators and representatives on legislation day.

CHRIS RAGLAND, AAPL Education

Committee Member and Government Relations Committee First Chair

Another decade, another recession. A lot of the difficult learning heading into this recession has already taken place. We have cut budgets, dropped platforms and lost employees and partners. We’ll learn the next set of lessons as we turn the corner of survival and begin the journey down Thrive Avenue. Out of disruption comes opportunity, and there will be plenty of it. Where others fail, be ready to pick up the pieces and capitalize. Real estate value basis, particularly value basis in underlying failed or nonperforming loans, is where the largest opportunity will be. Those of us who built a rental portfolio have seen the power of diversified income streams and will be tempted to double-down on that effort. But real maturity in a business that is built to survive comes through diversification. Resist the temptation to keep it all. Balance your exits and holds to parlay cash from one deal and into the next. Acquire, reposition and exit at least two out of three deals while generating cash flow from the third. Rebuild your team by sharing income opportunities with others. You will be rewarded with loyalty, production and maybe even some good karma. ∞

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*CFM and other AAPL designation courses are available to AAPL Members Only.

SUMMER 2020

EDUCATIONÂ

TITAN TALK: GLENN STROMBERG IS THE MASTER OF MOBILE HOME INVESTING by Kelli White

Filmed on location, Titan Talk is a one-on-one interview between a titan of the real estate investment or a supporting industry and Eddie Wilson, CEO of the American Association of Private Lenders and Think Realty. We invite our readers to look beyond their own private lending businesses to learn how some of the biggest names in the real estate investment industry have made it to where they are today. You can find the video interviews online at aaplonline.com/titan-talk. Our inaugural Titan is Glenn Stromberg.

PRIVATE LENDER

During nearly four decades working in the real estate market, Glenn Stromberg realizes the misconceptions about mobile homes is what has kept most investors and hedge funds out of that niche market. Those misconceptions—and his decision not to believe them—have worked well for Stromberg. Stromberg’s company, Stromberg Investment Group, operates using an “open secret—the most overlooked and undervalued class of real estate: mobile homes.” Stromberg’s strategy and his ability to pivot in perilous times has propelled him to titan status. His company, Stromberg Investment Group, has been providing passive investing opportunities since 2006, although his real estate career started decades earlier. Stromberg began his real estate career in 1982, quickly becoming a top sales manager for a mobile home dealership. During his 38 years in the mobile home industry, he has developed mobile home subdivisions, owned a mobile home park, owned and operated mobile home sales centers, and bought, sold and leased single-family homes. After college, he took a job in corporate America and realized

his vision was to be an entrepreneur. It must have been fate when he answered a newspaper ad about selling mobile homes, because in just two years selling at a dealership, he was promoted to sales manager. His entrepreneurial journey continued when he started a business with a friend, growing it to 13 locations in Texas then selling his portion. Stromberg has owned a mobile home park, developed a mobile home subdivision, and for 15 years had a Clayton franchise, which was one of Warren Buffet’s companies. Stromberg jokes he was partners with Warren Buffett— even though he has never met him! After selling the Clayton franchise, Stromberg started buying manufactured homes, but this time they were on land. Stromberg started with the fix-and-flip method and still does some of that. In 2008, the recession forced him to change his model, and it turned out to be a business blessing. “In our current business model, we keep some mobile home properties and turnkey others to investors. We don’t use banks; we use all private money,” Stromberg said. “Our investors love us because their returns are better than (sometimes double) what they can get with single-family homes.”

“While millions may play in the real estate arena, very few actually understand it to the level Glenn does and few investors create opportunities that are a win-win for both parties ...” — M E L I SSA H A M A K E R , CO O o f St r o m b e r g I nve s t m e n t G r o u p

With more than a dozen employees in four states, Stromberg Investment Group continues to thrive. “While millions may play in the real estate arena, very few actually understand it to the level Glenn does and few investors create opportunities that are a win-win for both parties. Since Stromberg Investment Group’s inception, Glenn has had a strong and well-articulated vision for this company, and I am honored to be the one to execute that vision. There is no titan in the industry more humble than Glenn, and he will continue to prosper for years to come,” said Melissa Hamaker, COO of Stromberg Investment Group. Although he has completed thousands of mobile home deals, Stromberg’s passion

is sharing his knowledge to help others.

A TITAN TALKS REAL ESTATE If you’ve met Glenn Stromberg, you know he’s a fast talker.

And if you’ve talked with him, you know he exudes joy and

a willingness to help others.

Not only a master in his niche

of REI, Stromberg is at the top when it comes to character.

In a fast-paced conversation

with the titan of mobile home investing, Stromberg shared the importance not only of

strategic investing but also of

the things beyond business that bring true success.

Keep up with Stromberg in this fun Q&A!

SUMMER 2020

EDUCATION

Success means many dif-

ferent things to different

people. What does success mean to you?

Simple. It’s being in God’s

will. Ten years ago, I heard the phrase, Is GOD the

CEO of your life? That was a game changer. I get up

every morning with a set of God goals: love life, love

people. When I asked God

to guide me each day, everything did change.

Also, having time to do what you want when you want.

PRIVATE LENDER

That’s a great luxury. To me, that’s success. I tell our team: If we take care of our investors and tenants, the rest will come and the company will be profitable. If you could give your younger self advice, what would it be? I would have gotten in mastermind groups a lot earlier. I’ve learned your network truly becomes your net worth. The connections you make put you on the fast track to success.

I would have read “The Pur-

others and want to create

my life. Outside of the Bible,

do. I enjoy mentoring young

pose Driven Life” earlier in

that’s the book that helped me understand my calling.

win-wins in everything we

people and helping them. My weakness is patience.

Also, “Traction” and “E-Myth”

I’m not the most patient

I’ve ever read. They taught

things done and want them

to delegate properly. I would

ter now than when I was

were the best business books

man in the world. I want

me business skills and how

done now, but I’m bet-

have read them sooner.

younger. I had a temper. I

What is your greatest

but I could still be more

virtue? Your weakest? I have a desire to help and

mentor people. I care about

don’t have that anymore,

patient. But I work on that

every day. I am concentrat-

ing these days on becoming

a better listener and thinking before I talk. I am trying to improve on both those areas. I want to be remembered as an honest man who loved God and loved people and made a difference in peoples’ lives. They say success comes after failure. Can you describe a time you failed and how you persevered or what you learned? In 2008, before the crash, I was buying, fixing and flipping the same type of properties as I do now: doublewides on land. No overhead. I was selling three properties at a time, bringing in $30,000 each. Life was good. When the banks quit lending, I had 18 properties on the field, and I couldn’t give them away. I had to rethink my model. I didn’t want to rent and deal with tenants and toilets, but I learned what others were doing right and came up with a property management system and discovered passive income. It became a blessing in disguise, and the beauty of it is our current model is recession-proof. The fix-andflip method is good, but you have to keep repeating it.

If you want to make money while you’re sleeping, this is the way to go. Our current model is recession-proof because people need affordable housing. Who have been titans—in real estate or otherwise— that you have admired? Why? Obviously, Jesus and the lessons he taught. The golden rule and so forth. My dad taught me about being an entrepreneur and encouraged me to do anything I wanted to do. Also, President Reagan. I admired his character, positive attitude and the way he conducted himself. He was a hero of mine. I also have two spiritual mentors as well—pastors Ron Lyles and Don Gentry—who helped me when I first started going to church. These titans have all made a difference in my life.

“I am always known as The Mobile Home Guy and helped make these property types mainstream. That will be my legacy. I believe I have the best-kept secret in real estate investing, and I want to get the word out and change peoples’ lives.”

What growing pains has your company endured? We’ve gone from just me to 15 employees and a lot of 1099 contractors. Learning and growing through masterminds gave me guidance to turn around cashflow issues and grow smart. I read Jim Collins’ book “Good to Great,” which says no more than 20% growth per year. I believe that. SUMMER 2020

EDUCATION

What makes you laugh no matter your mood? Three movies from back in the ‘80s that crack me up every time I watch them: “The Blues Brothers,” “Caddy Shack” and “Animal House.” “Animal House” was an on-screen replica of my own fraternity house! That was back before my Christian days! ∞

Companies get in trouble when they grow too fast. But I love growing a business. It’s fun for me. I heard when I was young, that most millionaires own their own business or get into real estate, so I wanted to do both! It’s a great way to build wealth. With passive income, you get cash flow every month and tax-deferred appreciation over time. Plus, it is fun to employ people, see them prosper and be a part of a winning team. I feel blessed to go to work each day. You have said one reason you began investing in mobile homes is because there is little competition and lots of inventory. Has this changed?

PRIVATE LENDER

That hasn’t changed. There is still lots of inventory. It is hard to finance with conventional lending, so there is a competitive advantage with private lending. The coronavirus will take competition away and provide even more inventory. How do you feel you have influenced the industry? I have been lucky because I got in so long ago. But it all came together in 2008 when I was forced to form a new business model. I am always known as The Mobile Home Guy and helped make these property types mainstream. That will be my legacy. I believe I have the bestkept secret in real estate investing, and I want to get the word out and change peoples’ lives.

What qualities do you admire in other industry influencers? I am attracted to people with character. I don’t like boasters. It’s the quiet one, the humble one that I admire. And honesty is huge. Can you explain to newer investors how strategy is different from niche? Yes, they are absolutely two totally different things. Mobile home investing is the niche, but there are many different strategies to invest in them. We are the only company that buys a mobile home, fixes it up like new, rents it and offers full-time property management. We keep 30% and we turnkey 70% to our investors.

ABOUT THE AUTHORS

KELLI WHITE Kelli White is editor-in-chief of Think Realty Magazine, a

monthly publication for real

estate investors. She is a former college English instructor and writer specializing in business storytelling. Her work has

been featured in regional and

national publications like Good Health KC, Hayden’s Ferry Review, and Sail.

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SUMMER 2020

TECHNOLOGY

How Tech Revolutionized Real Estate Financing The real estate industry is experiencing a sea change as technology redefines what real estate is and who can access it. by Brett Crosby

For a very long time, the American Dream meant owning property, specifically, owning a home to call your own. Since the 2008 financial crisis, the dream of homeownership has changed due to a combination of changing societal norms, market forces and new investing opportunities. Now, following the ongoing COVID-19 health pandemic, achieving this dream might feel even more uncertain for many Americans. 86

PRIVATE LENDER

Real estate has shed many of its long-held notions. Many people live in places they cannot afford to own, many people “own” real estate without calling it their home and many people invest in real estate by buying pieces of it. These new alternative means of ownership would not have been possible without what truly has been a revolution in real estate financing. That revolution was brought on by technology that’s

been applied to the industry in new and ingenious ways.

SETTING THE STAGE FOR THE REVOLUTION The story of the financing revolution begins with the convergence of many distinct, yet interconnected trends. The availability of affordable housing has steadily decreased in America, brought on by

estate in the cities they want to live in, many prefer to continue renting instead. It’s important to note that the largest wealth transfer in history—from boomers to millennials—is set to occur this decade when an estimated $68 trillion will change hands. Whether millennials and later generations use this newfound wealth to invest in real estate will be an interesting trend to follow.

TECHNOLOGY’S ROLE IN LENDING AND INVESTING

tunities to renew and upcycle America’s housing stock by

improving properties in their

local communities. Previously, these entrepreneur-borrowers

were limited to securing

loans either from traditional

lenders such as banks that had inflexible requirements or

from hard money lenders who had limited access to capital. Technology changed the

narrative for these hard money lenders. They evolved to

become an innovative group of private lenders empowered by technologies that streamlined

their operational and analytical

protective local regulation and existing homeowners who aren’t keen on skyscrapers changing the skyline of their communities. Those regulations have played a role in creating a shortage of housing starts. That shortage results in enormous supply constraints in major urban areas where newcomers flock. What housing is available, then, can command high rents and home prices. When you couple this with the

fact that the majority of the U.S. housing stock is between 20 to 70 years old and needing a refresh, you’re looking at an outsized imbalance of housing need and supply. At the same time, millennials have adopted a lifestyle more centered on experiences than on ownership of material things such as homes. Reacting to the high prices and down payments required to own real

Against this backdrop, the real estate industry itself was disrupted by technology in much the same way the financial industry was disrupted by fintech. These “proptech” (property technology) firms applied technology to different areas of real estate that sought to democratize access and level the playing field. With regard to real estate purchasing or investing, technology changed how different players in that ecosystem accessed financing, which in turn expanded their ability to participate in the space and reap returns from those investments.

processes. Private lenders are

Think about real estate entrepreneurs. Many of them are fix-and-flippers who see oppor-

and retail investors, allowing

now able to compete with traditional, institutional lenders and win, by offering their borrow-

ers more efficient and flexible solutions. These advances

in technology have allowed private lenders to finance

real estate entrepreneurs and the craftsmen they employ in ways they could not before.

At the same time, technology also connected these lend-

ers to new sources of capital.

Whether through a two-sided

marketplace model or through crowdfunding platforms, the

lenders suddenly had access to a new universe of institutional them to tap into liquid and

motivated capital sources far

SUMMER 2020

TECHNOLOGY

beyond their immediate

circles of historical investors. In this sense, these lenders

are “diversifying” their capital sources while creating a much more stable financing funnel to their borrowers, the real estate entrepreneurs.

Finally, real estate investors—

once upon a time, real estate home buyers—have also benefited

enormously from technology.

derive value from real estate without having to own property. Investors can now access both the debt and the equity side of real estate, put very little minimum investment down and gain exposure to the

most Americans ever make, yet too little attention is given to in those investments. As the

saying goes, fractional invest-

ing allows people to place their eggs in multiple baskets.

even see the property. These

No matter which market

investors are financing real estate while bypassing all the old rules and processes that made the hurdle to access the

platforms allows investors to

known that purchasing a home

industry so high. It’s well-

participants you consider—

lenders, borrowers, investors—

BRETT CROSBY

being applied to the real

and chief operating officer of

the innovations in technology estate industry today have

essentially “freed the money.” As we navigate this uncertain economic environment, this

idea might be more important today than ever before.

Financing a home or an investment property was once

We’re Picky Too. Originating Only High Quality Loans

prohibitively expensive for many, but the industry has

found a way to solve some of

these problems by connecting the players in entirely new

ways. We’re in the midst of a sea change in which pre-

viously held conceptions of

PRIVATE LENDER

He crafts the company’s strategy, product and messaging.

Crosby was previously director of product marketing at

Google, where his 10-year career spanned many of

Google’s most prominent

products. Most notably he

co-founded Google Analytics, helped start Google’s mobile advertising business, ran the founding product marketing

team that launched Google+ and, more recently, ran the

global marketing teams responsible for the dramatic growth of

Chrome, Gmail, Docs and Drive.

Corporation, a web analytics

It’s anyone’s guess what our

2005. Brett advises and invests

thing is certain: Technology

www.walnutstreetfinance.com

ing in real estate-backed loans.

being turned on its head.

end of this new decade, but one

703-260-9620

PeerStreet, a platform for invest-

Before his tenure at Google, he

industry will look like at the

Call For Investment Opportunities 703-260-9620

Brett Crosby is the co-founder

real estate—what it means and who can access it—is

Call For Investment Opportunities

ABOUT THE AUTHOR

the concentration risk inherent

asset class without needing to

The advent of fractional investing in real estate via proptech

is the largest investment that

innovation will continue to play a major role in reshaping it. ∞

co-founded Urchin Software

business acquired by Google in in startups and is an active real estate investor.

The Â® Your Ultimate Lending Platform

SUMMER 2020

TECHNOLOGY

HOW ARTIFICIAL INTELLIGENCE IS TRANSFORMING LENDING

information and notify the

help people who have no

does meet those criteria.

The best part about using

lender when the borrower

LOAN APPLICATION SCORING

credit history secure a loan. AI for credit evaluation is

that it saves time and moun-

tains of paperwork. Results

can be nearly instantaneous Traditional credit scores

only consider a borrower’s past ability to pay back what had

instead of taking weeks.

CHURN PREDICTION

been borrowed; they do not

AI offers advantages to both lenders and borrowers, offering speedy, accurate and convenient transactions.

take into account a borrower’s present ability to pay back

owed money. For example, a person with poor credit

could experience a sudden windfall from any number

by Jim Garlock

of sources and be perfectly

capable of making monthly

payments even if that person’s credit history were poor.

Conversely, someone with rtificial intel-

ligence (AI) is changing the way lenders

assess creditworthiness.

Instead of the usual credit check, which requires borrowers to have an actual credit history, lenders can input material such as a borrower’s mobile phone and utility bills. These can prove a borrower’s on-time payment history. So can credit card statements, which show how much and how

often a borrower spends money. Both are useful in determining a borrower’s creditworthiness. AI also gives lenders more opportunities. It is faster and more accurate. And when AI is properly programmed, it is immune to bias. By analyzing nontraditional data about borrowers, the computer program can nearly instantly assess that person’s ability to repay any loan. Additionally, if the borrower in question does not meet the criteria currently, AI can track the borrower’s

stellar credit could suddenly be without income or the prospect of acquiring an

income and be completely unable to make monthly

payments. In either case, AI can accurately assess each

person’s monetary situation.

PRIVATE LENDER

come and go, no matter the

business or kind of relationship they have with that business.

Churn can torpedo a business in short order if it’s not con-

trolled. Even for those who are

experts in attracting customers, churn is a problem if more

people leave than show up. AI is a terrific tool for con-

trolling churn. It can analyze gigantic chunks of raw data very quickly, and it can be

reprogrammed to accommodate changing trends within

the industry. Most AI is equally good at finding short-term

and long-term solutions, based

Lending software has come a

upon the data analysis param-

The newest lending soft-

AI can be adept at spotting

er-provided information into

churn based upon the behav-

long way since its inception.

eters the programmers set.

ware takes not only borrow-

customers who are likely to

account but also the person’s social media presence and

other attributes that indicate creditworthiness or unwor-

thiness. The process can also 90

Churn itself is just when people

ior of previous customers who have either left the company

for good or returned at a later

date. AI can recommend appropriate courses of action based upon its analyses. Of course, borrowing money is seldom a short-term prospect, unless it involves payday loans or other similar products. When it comes to lending, churn occurs at 10-year, 15-year or even longer intervals. Still, lending software must predict these outcomes

RISK MANAGEMENT Even the savviest of all lenders cannot anticipate every trend, accurately forecast every possibility or plan for every contingency. The 21st-century world of business is too fastpaced to be able to do that with any frequency. AI, however, with its ability to store everything it’s learned, can perform

accurately for the lender to

the risk assessment for any

remain on solid ground.

business. And, when it comes to

lending, risk assessment is perhaps the most important thing.

good risks despite their lack of

Risk management, particularly when measured against ROI, is at the core of any lending relationship. Under traditional lending practices, people without credit scores, with poor credit scores or in similar situations would automatically be poor risks. They would not be able to gain access to credit.

by lending to these people, a

With AI, however, it’s possible to extend credit to these people, many of whom are

appropriate credit. Better still, business will help them build credit. That, in turn, will likely build a good relationship between the customer and the lender, reducing churn and creating a long-term relationship. The big advantage of AI over human prognostication is that it can work with data that wouldn’t appear on a normal spreadsheet. It’s a whiz at extrapolation, which is why it’s

SUMMER 2020

TECHNOLOGY

so useful in situations where the borrower has little or no credit and must rely on other data to prove worthiness.

CREDIT INSIGHTS

AI is also capable of learning from AI-human interaction. For example, if the AI deems a customer a poor risk when the customer truly is not a poor risk, then a human being could later input data proving why the person was actually a good risk. The AI could take that correction and learn from it. In the future, then, it would not name others in similar circumstances as poor risks.

business world, which involves

P ast lending relationships.

Unlike marketing in today’s segments, demographics and other groups, lenders must instead focus on each individual separately because every customer will be different. That means AI has to be able to process lending applications based on an individual’s data and not on the data of any group to which that individual belongs.

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C urrent lending

relationships.

P ayment history in

these relationships.

I ncome. D ebt-to-income ratio. P ast adverse

credit events.

A bility to repay loans

irrespective of traditional creditworthiness.

To be effective with these data, lenders must consolidate their channels. For example, the “behind-thedesk” lending officers must be able to access the same data as the people in the lender’s call center. Instead of being competitive, the channels must work together. Lenders also must be able to interact with borrowers, prospective or otherwise, in real time. They must know the right time to extend a lending offer. As an example, a borrower wants a loan in August but does not meet any criteria. It would not pay to extend an offer to that borrower. If, however, the borrower is good to go in October, that would be the right time to reach out. AI can monitor that borrower’s

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These data include a borrower’s:

information until the right time and then notify the lender. AI lets lenders make all processes customer centric. Customers prefer speedy, accurate and convenient transactions. AI provides them with all three. Lending has moved beyond stuffy offices, power suits and three briefcases of paper. Through AI, loan approval can be instantaneous. AI also allows people who would previously be poor risks to obtain credit and contribute to their local and national economies. AI learns on the go, too, so it gets better over time at performing these tasks. ∞

ABOUT THE AUTHOR

JIM GARLOCK Jim Garlock is a vice president of Sales at Chetu, a global

provider of software development solutions and support

services that specializes in the financial technology space.

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L AST CALL WITH JASON HARRIS

PATH TO SUCCESS BYPASSES COMFORT ZONE by Jason Harris

Stepping outside your comfort zone can be scary for most people, but for me it was a necessity. If I wanted to achieve my goals, I could not accept the status quo of climb-

ing the corporate ladder. I was raised to work hard, not expect anything to be given to me and put in the effort necessary to achieve your goals.

I pushed myself to hone the skills neces-

sary to achieve my goal: to develop my first commercial project—50,000 square feet

of industrial buildings—by the age of 30. My initial success was the result of not

accepting the status quo. I stretched myself to solve problems, gather the necessary

resources and develop a strong mindset. I was not always sure where I would find

the answers, but my previous experience managing development projects for a

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regional developer gave me the confidence to push forward. However, I did realize while conducting a post-mortem on my development business that I was very proficient in certain areas of the business and to a lesser extent in other areas. I noticed that the areas where I struggled seemed to monopolize my time, ultimately hurting my ability to expand the business and allow it to reach its full potential. This was a tremendous lesson learned. It was clear that to get better, I needed to push myself outside of my comfort zone again. I needed to do things differently and continue evolving. I set up a plan to align myself with smart, driven, likeminded people who wanted to achieve success. My next step would be important in determining the trajectory of my career. In March 2015 I joined a fintech start up, PeerStreet, which was very different from anything I had done before. During this time, I learned a number of valuable lessons, best practices and strategies that will prove valuable in any business endeavor

I pursue. Some of them include creating a strong culture of ownership, hiring smart and talented people and letting them thrive, and applying technology to manage data and measure your business. But probably the most important lesson I learned is developing a large network within the industry. My network led me to my current opportunity at Jcap Private Lending and 1st Cast opportunity Fund. If you want to achieve more and grow, you should step out of your comfort zone, take control of your situation and push yourself to grow and achieve a new level of expertise in your field. Making the jump from developer to a fintech startup, and then ultimately to Jcap may seem unconventional and risky to some. But in hindsight, they were all excellent decisions. You do not need to know the outcome; you must trust in yourself that the outcome is right for you. If you are stagnant, make a move and work hard. The opportunities will present themselves. It worked for me—and it can work for you. ∞

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