2020 Fall (Q4)

SPECIAL FEATURE: AAPL ANNUAL CONFERENCE LINEUP

The Official Magazine of AAPL | Fall 2020

ETHICS Are You Accidentally Bait-and-Switching?

INDUSTRY BENCHMARK AAPL Launches Private Lending’s First Benchmark Survey

SPECIAL FOCUS

LENDER LIMELIGHT

Whit McCarthy His “Civic”Mindedness Is a Calling

Q4 Private Lending Market Outlook

FALL 2020

1

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PRIVATE LENDER

RESIDENTIAL CAPITAL PARTNERS

CONTENTS

FALL 2020

28

06 BUSINESS S TR ATEGY

0 6 3 Key s to Growing Your Busines s in a

C ompe t i t i ve Env ironment

10 R ever s e Mor tgages

14 W ha t W ill t he Fu t ure

Inc reas e in Popular i t y

of Lending Look L ike?

18 MARKET TRENDS

Housing Mar ke t s Ripe

2 4 A Deep Di ve into

Resilient

32 CONFERENCE OVERVIEW

C oas t al Lu xur y

C i v ic Engagement

wi th W hi t Mc C ar thy

T he Acc ident al Bai t-and Swi tc h: I s T his You?

62 LEGAL

84 TECHNOLOGY

62 T i t le Polic y

Endor s ement s 101

66 M y t hbus t ing for Pr i va te

Lender s: Sec ur i t ies Edi t ion

5 Tec h - Dr i ven St r ategies for Acceler a t ing Reac h and Revenue

88 EDUC ATION

T ITA N

TA LK

T he T i t an of Loc al C api t al wi th Tom Meade

94 RESOURCE GUIDE 98 L A S T C ALL

I f I t Sounds Too

Good to be Tr ue... wi th L ance Wells

70 LEGISL ATION

70 C ali for nia’s Tenant ,

Homeowner, and Small L andlord Relief and St abiliz a t ion Ac t of 2020 Becomes L aw

44 C A SE S TUDY

for A A PL C ommi t tees

88

58 ETHIC S

2 8 Q 4 Mar ke t Ou t look: Housing Remains

A pplic a t ions O pen

52 LENDER LIMELIGHT

C api t al Mar ke t s and t he Lending Food Chain

48 A APL AUSE

18 ‘ Highway s and H edges’ for Rent al Re t ur ns

52

Rehab O ver per for ms

76 W ha t I s t he Bigges t

Legisla t i ve Challenge Fac ing t he Pr i va te Lending Indus t r y?

8 2 S EC Publishes Final Ruling on E x panded Def ini t ion

of “Acc redi ted Inves tor ” FALL 2020

3

#

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”

“Always seem to go the extra ”

Not All AMC’ AMC’s are Created Equal

Only one AMC has been rated one of America’s fasted growing businesses five years in a row, voted top mortgage services provider, and received Morningstar’s highest industry ranking for quality.

-7354

PRIVATE LENDER

FROM THE CORNER OFFICE

YOUR ASSOCIATION UPDATE As 2020 closes, any reflection of the past months reaches the same conclusion: This. Year. Has. Been. Hard.

EDDIE WILSON

The thing that’s held us together is that regardless of what’s going on in the wider world, we know our members and the industry count on us to keep going.

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, Nema Daghbandan, Kevin Earnest, Abhi Golhar, Mike Hanna, Kat Hungerford, Marcia Kauffman, Kevin Kim, Mary Jo Lafaye, Lauren Lee, Jadon Newman, Ray Sturm, Lance Wells, Kelli White

COVER PHOTOGRAPHY Elizabeth Trujillo

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.

Especially during the coronavirus crisis, we have provided triage to businesses looking for resources to help them navigate the ever-changing landscape. And during it all, we have kept an eye on initiatives that will build up the industry when the recent crisis is in the rearview mirror.

As always, our recent work falls into our association pillars of Education, Ethics, and Advocacy.

Education // Outside of this magazine, our annual conference (aaplconference.com) remains one of our largest, regular education initiatives. And, yes, we are hosting the conference in Las Vegas Nov. 15-16, and livestreaming it for those who can’t attend in person. Check out the Conference Preview on page 32.

On Nov. 16, we will be launching the industry’s first benchmark survey from an impartial, nonpartisan organization (read more about it on page 22). With the help of our Education Advisory Committee, we designed a streamlined survey to dial into the data that lenders, researchers, and legislators have been asking for. Sign up at aaplonline.com/survey.

Ethics // AAPL continues to be the only national organization setting—and enforcing— ethical standards for the private lending industry. Year to date, we’ve received two formal complaints against members, and a slew of informal complaints against non-members. The member complaints were resolved to the satisfaction of the parties involved. The informal complaints were largely made against scammers, and AAPL directed affected parties to the appropriate legal remedies.

SUBSCRIPTIONS

We’ve expanded our Code of Ethics with advice on what such violations might look like and how to avoid them. The most recent discussion from Ethics Committee member Mike Hanna is on page 58.

BACK ISSUES

Advocacy // It’s been a big year for our Government Relations Committee. It launched a battle in New York against a steep fix-and-flip transfer tax, had their comments cited in the Securities and Exchange Commission’s final rules on the expanded definition of “accredited investor” (see the recap on page 82) and won a battle in California against mandatory 12-month forbearances (see article on page 70). See what the GRC considers to be the industry’s biggest upcoming legislative challenges on page 76.

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

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.

If you’re thinking, “It sounds like AAPL’s advisory committees are impacting the industry,” I couldn’t have put it better myself. See why they do what they do on page 48, and then consider applying for a 2021-2022 committee position.

Finally, thank you for being dedicated to keeping the pulse of the private lending industry. We look forward to serving you in the years to come.

www.aaplonline.com Copyright © 2020 American Association of Private Lenders. All rights reserved.

LINDA HYDE

Managing Director, American Association of Private Lenders

FALL 2020

5

BUSINESS STR ATEGY

3 Keys to Growing Your Business in a Competitive Environment Understanding your investors, borrowers, and platforms is critical to achieving growth during turbulent times.

by Jadon Newman

D

uring the past

few years, the landscape for

private lenders

has changed dramatically.

If you’ve been in the industry for a while, this probably is not news to you. Even before the current challenges businesses are facing, the private lending industry was experiencing an influx of capital and new players seeking to gain from private investing.

Many private lenders are struggling to figure out how to continue growing their operations responsibly in this new environment. Here are three 6

PRIVATE LENDER

perspectives from which you should be constantly evaluating your business in order to achieve ongoing, responsible growth: your investors, your borrowers, and your platform.

YOUR INVESTORS Communication with your investors and other capital partners is always important for growing your business, but it is paramount in times like these. You should set a regular schedule for communication with your capital providers in any environment, but especially when there’s a market down-

turn. Whether the outlook is good, bad, or ugly, you must be transparent about the performance of their investment and how the economic outlook will impact the expected outcome.

but also have a clear plan for

Your investors should understand your current business strategy. Though many processes and protocols for securing their investments may already be built into your investment strategies, it never hurts to reiterate these safeguards. Even your longtime investors may not recall or fully understand them. You need to not only communicate your current business strategies

investors and capital partners.

adjusting it to compensate for anticipated market changes in the upcoming months or years.

This will help preserve, or even boost, confidence among your Reporting is the most critical aspect of communication with your investors. Their No. 1 priority is the performance of their investments. Even when results for the reporting period aren’t positive, providing regular reports shows both transparency and accountability.

Reporting can cover a lot of ground, including data about

investment performance, diversi-

fication, asset-level detail, market data, or business forecasts. The

type of reporting your firm does

should align with your business’s and your investors’ expectations.

The frequency and regularity of your reporting is also

important to investors. Whether you report quarterly, monthly, weekly, or all the above,

adhering to a reliable reporting schedule brings peace of mind.

YOUR BORROWERS Your relationship with your

borrowers is a partnership, and

they should know you’re there to help. Communication, of course, goes both ways. Your support can help make their investment successful and make them a client for life, so listen to them. If you’re not in tune with your borrowers and their pain points, then your offer is just another number.

Knowing their pain points and solving for that is the key.

Always aim to deliver hightouch loan servicing and understand your processes from the borrower’s perspective.

You may even lose clients if they perceive your servicing processes to be too burden-

some. As lenders, it can be hard to put yourself in your clients’ shoes, but you must.

takes borrowers no more than

One way to live through the borrower’s journey is to submit a draw request and work through the process. You may learn that the burden of submitting a draw request is so high that borrowers may avoid it—to the detriment of their project. Piecing together dozens of documents, reconciling a spreadsheet and obtaining notarized signatures can be intimidating, so borrowers may procrastinate.

If this is your case, develop a streamlined process that

within days (if not hours).

a few minutes to complete and delivers their money Conducting periodic borrower surveys can give you insight into the challenges your borrowers are facing. That, in turn, will better equip you to identify and address potential problems in your loan portfolio, treat problems individually, and minimize the likelihood of foreclosures and other issues.

Communication with your borrowers can be instructive for your business strategy as well.

Your borrowers’ success is your FALL 2020

7

BUSINESS STR ATEGY

“In times of economic turmoil, you have as much responsibility to your borrowers as you do to your investors and your own business to ensure the success of every investment in your portfolio.” business’s success. In times of economic turmoil, you have as much responsibility to your borrowers as you do to your investors and your own business to ensure the success of every investment in your portfolio.

This means lenders must try

When you have more accurate expectations for your portfolio, you can work them into its performance projections. Every real estate project has its own unique set of circumstances.

You won’t know what to expect unless you communicate early and often with your borrowers.

differentiate your product.

ment, such as new construction

YOUR PLATFORM

In addition to developing the

harder to compete. Lenders

can compete on a number of fronts (i.e., service, pricing, and marketing); however, a

key strategy to competing in the current landscape is to

Developing unique offerings that capture uncontested

loan opportunities makes the competition irrelevant. For

example, if most lenders are

financing fix-and-flip projects, aim for a different market seg-

or community development.

right products for your market, When it comes to building and growing a successful investment platform, offering the right product mix is crucial.

Over the past few years, there has been a flood of new private lending operations washing across the country. This is good news because it’s an indicator there is more capital available for real estate investors.

8

PRIVATE LENDER

it’s important to develop the

service side of your platform,

especially your loan servicing

processes, to ensure the great-

est chance of success. Although we’ve mentioned loan servicing from the borrower’s perspective, you should ensure the

speed and accuracy of all loan servicing protocols in order to guarantee the ease of the bor-

rower’s experience and protect the underlying asset. Monitoring construction progress, insurance, taxes, and a variety of other indicators can help your loan servicing operation proactively minimize delinquencies and loan defaults.

All these efforts are bolstered by having the appropriate technology platforms in place.

Integrated technology platforms keep everyone in your business on the same page, and the increase these platforms bring to the speed and accuracy of your processes gives you a competitive edge.

If you’ve developed your own technology platform such as a dedicated app for reporting or making and managing investments, you’ve created an even bigger differentiator.

Finally, if knowledge is king, business intelligence gives you a competitive advantage, if you use it properly. Consolidating and accessing data from your business systems and a well-de-

fined business intelligence reporting process can uncover and inform much about the operation of your business.

This is obviously not an exhaustive list of how your business can achieve growth in a highly competitive environment. What’s important is that you remain persistent and creative in your approach to improving and evolving your business as you scale. ∞

ABOUT THE AUTHOR

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.

For more information, visit www.noblecapital.com.

®

OPPORTUNITY UNLEASHED ®

YOUR TRUSTED LENDING PARTNER Amidst all of the changes in today’s market, one thing remains the same ...

CIVIC’s commitment to all of our valued partners.

We are operating as strong as ever and our robust pace of funding continues undaunted.

If you need an experienced lender that provides superior service, quick closings, and competitive rates, you’re in the right place.

BRIDGE

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 FALL 2020 9

BUSINESS STR ATEGY

Reverse Mortgages Increase in Popularity Reverse mortgages offer advantages to private lenders who understand how they work, even when not part of lenders’ product offerings.

by Edward Brown and Mary Jo Lafaye

W

ith the

relatively little attention

crisis still

Why? The simple answer is

coronavirus looming,

conventional loans requiring monthly mortgage pay-

ments have been getting a lot of attention. Laws have

been passed on both local

and national levels to ensure homeowners are not evicted for nonpayment on FHA loans.

during the pandemic. that no monthly payments are required for reverse mortgages, and there is no risk for a foreclosure for nonpayment of a mortgage. Still, but for the foreclosure moratorium, homeowners with reverse mortgages could risk losing their house in certain circumstances.

Reverse mortgages, on the

Although private lenders typi-

other hand, have garnered

cally don’t offer reverse mort-

10

PRIVATE LENDER

gages themselves, they can still benefit from them. For example, borrowers may be able to use a reverse mortgage as an exit strategy with private lenders or in order to pay a private lender back faster. And, private lenders who wish to build their reputations as trusted advisors to their clients can benefit by being able to provide reverse mortgage referrals.

Here are some basics to know about reverse mortgages to best position yourself to reap their benefits.

REVERSE MORTGAGES AND FORECLOSURES Under normal circumstances, the borrower on a reverse mortgage does not have to worry about the lender foreclosing, because no monthly payments are required. The loan balance just keeps increasing as interest accrues over time. It is required to be paid back only upon the death of the last remaining borrower, move out by the borrower, or death of the nonborrowing spouse if the borrowing spouse predeceased them.

The borrower’s only requirement for yearly payments are real estate taxes and insurance, HOA dues if applicable, plus maintenance and utilities.

If the borrower fails to pay these, technically, they are

FALL 2020

11

BUSINESS STR ATEGY

in default and the loan may be called. This could lead to a foreclosure. In addition, the house may not be left vacant or abandoned.

Borrowers who take a lump sum reverse mortgage and whose income is estimated to be too low to maintain the real estate taxes and insurance may be required to have a Life Expectancy Set Aside (LESA).

LESA is similar to an escrow account that is set aside for future real estate taxes and insurance; it is based on the life expectancy of the borrower. These future expenses are deducted from the lump sum and held by the reverse mortgage company. The funds in the LESA become part of the loan balance once the lender disburses them to pay the property charges on behalf of the borrower. Thus, those borrowers who have LESA, for all intents and purposes, would not typically face foreclosure during their expected lifetime.

Many conventional borrowers who have fallen on hard times during the pandemic have requested deferments from their lending institu-

“Although private lenders typically don’t offer reverse mortgages themselves, they can still benefit from them.” tions. The need for deferment requests is all but eliminated for reverse mortgages.

REVERSE MORTGAGES VS. HELOCS Older homeowners’ largest retirement asset, by far, is their home equity. These same homeowners may not qualify for a HELOC (Home Equity Line of Credit), and they may not want one after considering the benefits of a reverse mortgage versus a HELOC. A HELOC, unlike a reverse mortgage, requires monthly mortgage payments. In addition, the bank can freeze (or reduce) the HELOC line and not allow access to it. This puts the homeowner in the precarious position of having debt against the property (because the HELOC is recorded against

the property for the maximum potential draw of the line) without any benefit.

A bank may freeze or reduce a HELOC because it’s a fast way to shore up its balance sheet— the bank does not have to set aside reserves for the HELOC until the homeowner draws on it because it is just a “potential loan.” The loan technically only exists as the borrower draws upon it. If the bank freezes (or reduces) the line, the bank has not loaned the money yet and can stop it before the borrower accesses the money that was available to them.

Most major banks have seriously curtailed the issuance of HELOCs during the pandemic crisis, and those that continue to offer HELOCs have imposed stringent borrowing qualifications.

Many borrowers are realizing reverse mortgages offer advantages over HELOCs in

this regard. There are limited income and credit qualifi-

cations to obtain a reverse mortgage. Reverse mort-

gage lines of credit cannot be frozen or reduced, and

because there are no monthly mortgage payments, the risk of foreclosure (even after the moratorium) is slim.

REVERSE MORTGAGES AND IN-HOME CARE Most people would like to be

in their own home instead of a care facility given the choice.

Unfortunately, many people

cannot afford the around-theclock care required to remain at home and hire the care.

Once considered an alternative to in-home care (which

is usually two to three times the cost of a nursing home), nursing homes and care

facilities received a lot of

press about COVID-19 deaths among their residents.

12

PRIVATE LENDER

Loved ones, especially during the virus, are looking for a way to keep their elders in the safety of their own home and receive the quality and quantity of care needed. Many are looking toward a reverse mortgage to fill this need. Many people have enough equity in their homes, especially because real estate has tremendously rebounded, to allow them a large enough reverse mortgage to afford the costs associated with in-home care.

The National Reverse Mortgage Lenders Association (NRMLA) reports there have been significant increases in draws on reverse mortgage lines of credit by retirees who lost their part-time jobs and need to make ends meet, who are helping family affected by the pandemic, and who are just generally concerned about their future finances.

NRMLA states there has been a 55% increase in the number of draws and 14% in the size of the draws. In fact, they notice that some borrowers who had never previously drawn on their line of credit are fully drawing the line now.

As the COVID-19 crisis continues to impact the economy and peoples’ lives in general, the interest in reverse mortgages will continue

to grow, especially before interest rates increase.

PRIVATE LENDERS AND REVERSE MORTGAGES As stated, private lenders

typically do not offer reverse mortgages as part of their

product offerings. But having a general knowledge about

reverse mortgages—property eligibility, income and credit

requirements—and how they may be an exit strategy for

If you have a younger client who can’t perform, perhaps that person’s parent would obtain a reverse mortgage to assist their adult children.

Need money in the millions? If a reverse mortgage’s $300,000 to $500,000 loan amounts can’t fix the problem, perhaps a HomeSafe proprietary reverse mortgage, with loan amounts up to $3 million, is the solution. They have the same minimal credit and income requirements, and they

are nonrecourse, federally regulated, with no monthly repayment required for the entire loan term. In addition to providing cash flow and liquidity, these loans can also solve for BK13 and foreclosure.

Private money lenders who view themselves as advisers to clients and potential clients will find that even if they cannot transact the loan, directing borrowers to other helpful resources can earn loyalty and word-of-mouth referrals. ∞

older private money borrowers and for private money lenders wanting to receive prompt

ABOUT THE AUTHORS

repayment can be valuable.

Given America’s aging

demographic, and the unde-

niable fact that most retirees hold, on average, 70%-80% of their net worth in the

form of home equity, having a reliable reverse mortgage resource on tap can help

private lenders present a wider range of solutions to their

clients and referral sources.

For example, an older client who had planned to pay off

a private money loan with a

HELOC may be surprised to learn their bank is no longer extending this type of credit. Perhaps this client

would qualify for funds from a non-recourse HECM.

EDWARD BROWN Edward Brown is in the investor relations department at Pacific Private Money and is host of the long-running radio show The Best of Investing. He has multiple

published works, appeared on CNN, and served as chairman of the Shareholder

Equity Committee protecting 29,000 shareholders in a $500 million REIT. Brown was also a recipient of a prestigious MBA Tax Award.

MARY JO LAFAYE Mary Jo Lafaye is a home equity retirement specialist with Mutual of Omaha Reverse Mortgage. Since 2003, she has helped

financial and legal professionals and the retirees they serve incorporate housing

wealth into their retirement income stream

as a tool to manage cash-flow and liquidity and to improve financial

outcomes throughout retirement. Lafaye is a well-known educator in

her field—she offers continuing education credits to certified financial

planners, realtors, fiduciaries, CPAs, attorneys, and other professional groups. She is a noted speaker and has delivered seminars and

webinars to professional groups nationally.

FALL 2020

13

BUSINESS STR ATEGY

WHAT WILL THE FUTURE OF LENDING LOOK LIKE? Here’s how the economic crisis will change lending as lenders and their borrowers recover.

by Marcia Kaufman

2021 AND BEYOND Lenders have and will continue to adjust their underwriting

guidelines. We have already experienced industrywide

lower leverage across the board

(LTC, LTV and ARV), increased liquidity requirements, mandatory interest reserves, and an increased focus on sponsors’ real estate track records.

Lenders have also narrowed their asset box to the bread-

and-butter 1-4 unit residential/ family fix-and-flip or buyand-hold. Many lenders have eliminated bridge lending

for ground up construction, multifamily, and mixed use.

Lenders are now more focused on credit, liquidity, leverage, and appraisals. An appraisal

pre-COVID may not be valid

As we navigate “The New Abnormal,” otherwise known as the post-COVID era, there is much conversation about recovery in the lending community. Both lenders and borrowers should be focused not only on “recovering” but also on managing and adapting to a fluid market. In addition to its health impact, COVID-19 brought a lack of liquidity to the market, lenders pressing pause, and a flight to asset management.

post-COVID. The rental

income might be lower, and

comps before May 2020 might not be strong comps now.

Geographic location also needs to be evaluated in terms of added risk factors. Most states placed moratoriums on evictions and foreclosures. That has had several effects on lending: I f the lender is bridging

a sponsor from acquisi-

tion to stabilization and permanent financing, is there an exit lender?

14

PRIVATE LENDER

W hat are the underwrit-

ing guidelines of the permanent lender, and did the bridge lender take this into consideration in the underwriting of the bridge loan?

D oes the sponsor have

a large rental portfolio, what is the performance of the portfolio, and what are the sponsor’s debt obligations? If the sponsor’s rents are already down due to nonpayment and the states have eviction moratoriums, the impact can be devastating.

Sponsor experience is more relevant than ever. An experienced borrower should know how to navigate a fluid market.

Two key factors to focus on are leverage and liquidity. Leverage ensures a sponsor’s appropriate equity stake in a transaction if downward compression on margins comes into play.

Liquidity is critical if funds are needed to finish a project while carrying the sponsor’s overall debt service obligations.

As lenders again begin to regain market share and revenue, it is imperative not give up guidelines for the sake of volume. This will be a challenge because everyone is eager to lend and some competitors will make moves

to lower their guidelines.

Although you might feel the need to run up next to them, this can be a big mistake.

Be cautious about lending at 90% LTC and 100% rehab.

Equally vital is that borrowers should not lever to the max. There are simply too many unknowns, and you do not want debt service to overrun your profitability.

As borrowers and sponsors recover and adjust to the new economy, the first knee-jerk reaction will be for them to seek opportunities in the cur-

rent market. Sponsors will face higher equity commitments, interest reserve requirements, and increased post-closing liquidity. Even though the market data is showing an increase in demand for 1-4 family housing brought on by the flight from urban to suburban areas, sponsors should be cognizant of another possible shutdown due to COVID. Requiring a deeper liquidity position would be prudent.

Sponsors who have large single-family rental (SFR) portfolios are looking to add product to their current

portfolios. Industry data is showing that this market sector is performing well.

This data is driving more investors, including large Wall Street type funds, to acquire more of this asset class.

expensive, and scarcity has led

Sponsors also face the changing landscape of short-term bridge financing and permanent financing availability.

With the onset of COVID, many big lenders pressed pause, and some lenders disappeared from the landscape.

As a result of tighter liquidity, pricing has widened. Bottom line, the cost of funds is more

market is not widely open for

to upward pressure on pricing.

When shopping for permanent exit loans, sponsors should be prepared for lower LTV and

higher interest rates for SFR

loans. Since the securitization business right now, the result is a higher price to the borrower.

IMPACT OF INCOME REDUCTIONS How do sponsors and bor-

rowers prepare for renters

or prospective homeowners FALL 2020

15

BUSINESS STR ATEGY

who are not able to meet their monthly payments?

“Compared to other commer-

The good news is that approximately 93.3% of the 11.4 million units surveyed by the National Multifamily Housing Council made full or partial rent payments by July 27. This was just slightly down from the 94.2% last month, and it was 2 percentage points lower than the 95.3% of tenants who paid

by July 27, 2019. However, it equaled the collection rate seen in May 2020, and it exceeded the rate in April, reflecting the multifamily market’s resiliency four months after the national emergency declaration.

500, treasury notes and the

There is widespread concern about unemployment numbers climbing to a record high, coupled with a moratorium on evictions. However, data in this sector has been positive and has even led to robust demand on the SFR front.

According to GlobeST.com: “Single-family rentals may be one of the few asset classes to see demand growth following the pandemic. According to Jeff Cline of SVN/SFRhub Advisors, demand for single-family portfolios, defined as five or more homes, has skyrocketed in the last month, up 650%.

cial real estate segments, S&P stock market, SFR investment is typically more stable and profitable,” Cline, director

and principal at the firm, tells

GlobeSt.com. ‘As we’ve seen for decades SFR investment typ-

ically grows during economic downturns, we expect this

downturn to be no different.

We have seen a 650% increase in buyer and seller activity

this past month. SVN/SFRhub

Advisors is onboarding 10,000

assets to keep up with demand.’”

What is evidenced in the

market is not only that the

rental market is performing

but also that the demand for home ownership is up drastically year over year. The

Mortgage Bankers Association

reported that applications for

new home purchase mortgage

money is up 39% over last July.

“THE NEW ABNORMAL” To paraphrase Shakespeare: “To lend, or not to lend?”

It’s not exactly what he

wrote, but it’s an appropriate question, nonetheless.

Some lenders never stopped lending with the onset of

COVID. Some have already implemented the measures

16

PRIVATE LENDER

suggested above. And though there is a temptation to revert to pre-COVID lending guidelines, it is wise to be cautiously aggressive.

Some lenders are taking a conservative approach and limiting lending while focusing on asset management and liquidity. Lenders that have the ability and willingness to lend at reduced LTC, LTV, and ARV leverage amounts are requiring increased liquidity from borrowers and an increased level of sponsorship experience. For proven borrowers, lenders may not need to change leverage requirements, but you should consider implementing an expanded reserve requirement.

Some lending areas are opening more rapidly than others, because responses to the pandemic differ from state to state.

Still, from an underwriting measure, lenders are estimating longer loan times due to potential shutdowns. Sponsors in certain municipalities will have to budget for delays as building departments are backlogged with inspections and sign offs. This added time will reduce the potential profitability on deals, and private lenders should underwrite accordingly.

In a business climate that changes daily, “The New Abnormal” has shifted focus to experienced sponsors with

a proven track record, a firm stance on liquidity requirements, lower leverage on loan programs, and interest reserve requirements. As with most crises, lenders must remain more conservative in their lending approach until more certainty in the market resumes. ∞

ABOUT THE AUTHOR

MARCIA KAUFMAN Marcia Kaufman has more than

three decades of experience in the mortgage banking

and real estate industry, with expertise in identifying real

estate opportunities, valuation,

development, management, and exit strategy for assets.

Kaufman owned her own

real estate investment and

brokerage firm in addition to

serving in senior leadership

positions at American Home

Mortgage Ventures, Preferred

Empire Mortgage Company

and Arbor National Mortgage.

Most recently she was securing bridge financing for real estate investors for fix-and-

flip opportunities and for the

purchase of rental properties for eventual stabilization.

MEMBERSHIP

MEANS SOMETHING. Join the oldest national association representing the private lending industry as a viable alternative for borrowing and investing.

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FALL 2020

17

MARKET TRENDS

‘Highways and Hedges’ Housing Markets Ripe for Rental Returns Investors in Dayton, Ohio, provide template for converting distressed homes into cash-flowing rentals.

by Daren Blomquist

18

PRIVATE LENDER

N

ot commonly known as a

housing hot spot, Day-

ton, Ohio, has become the market of choice for real

estate investors Scott Stu-

ber and Tyrone Velasquez.

The Denver-based married couple employs an investing strategy in which they purchase distressed properties at a discount and perform quality rehab to convert the homes into cash-flowing rentals that are still affordable for tenants in the West Dayton neighborhoods where they invest.

“Our goal is to find a decent deal that requires some work, some investment in it, that’s a good price,” said Stuber.

“Something that once we have the initial investment in, and our repair costs … we can be cash positive on our costs within three years’ time.”

from the U.S. Department of Housing and Urban Development (HUD) and the average sales price for REO properties sold on the Auction.com platform—and then factoring in 40% for expenses such as property taxes, maintenance, and property management.

TOP RENTAL MARKETS According to the analysis, the top five counties with the highest potential rental returns were Comanche County (Lawton), Oklahoma; Broome County (Bingham-

ton), New York; Trumbull County (Youngstown), Ohio; Peoria County, Illinois; and Madison County, Illinois, in the St. Louis metro area.

Montgomery County, Ohio, in the Dayton metro area ranked 37th on the list with a potential cap rate of 15.2%.

Stuber and Velasquez have been able to achieve even greater rental returns in the Dayton area because they are buying in down-and-out neighborhoods where the REO properties and other distressed properties are selling at an extremely low price point.

“We have bought houses on auction for as low as $6,000, and as high as $26,000,” said Stuber, noting that the homes the couple buys usually need extensive rehab. “For the most part, we put at least as much in the rehab as the property cost.”

Stuber grew up 60 miles north of Dayton and was familiar with the city, which was hit hard by the 2008 Great Recession, further removing an already down-and-out Rust Belt market from its former glory as an auto industry powerhouse.

“We found there were a lot of foreclosures in the market,” he

Online REO Auction Purchases Potential Rental Returns by County Potential Rental Cap Rate - REO Auction -9.7%

69.0%

An Auction.com analysis of 199 U.S. counties with at least 10 online auction sales of bank-owned (REO) properties in the first seven months of 2020 found many often-overlooked “highways and hedges” markets like Dayton at the top of the list in terms of potential rental returns.

The analysis calculated a potential rental cap rate using the average fair market rent for a three-bedroom property

Sources: Auction.com, HUD © 2020 Mapbox © OpenStreetMap

FALL 2020

19

MARKET TRENDS

said, explaining the research

he and Velasquez performed in

trying to identify which market to target with their investing

strategy. “So I flew to Ohio for

about four days and looked at a few properties on Auction.com to get a list ready. Did some investigating, looked at the

properties, drove by to see what the condition of the properties are, what the neighborhoods are like. We actually ended

up buying all three properties within about three weeks.”

Velasquez, who grew up in

Florida, wasn’t immediately

convinced that Dayton was a

good market in which to invest.

But after due diligence and

spending time in the city, he quickly changed his mind.

“Once we started doing the

research, we found that the Cincinnati-Dayton area is

just growing … there’s other

companies that are moving in.

…they have the Air Force base, they are doing a lot of things

with the city,” he said. “Once …

I came here I was like ‘Oh wow, it’s not as bad as I thought.

They have these rivers coming

through, they have this beautiful skyline.’ … And I was sold.”

REHAB-AND-RENT INVESTORS MORE CONFIDENT Nearly one-third of real estate investors buying on the Auction.com platform (31%) said their primary investing strategy is the rehab-and-rent approach Stuber and Velasquez employ, according to a buyer survey conducted by the online distressed property marketplace in April 2020. That was compared to 66% who said their primary investing strategy is rehab-and-resell (fix-and-flip).

Rehab-and-rent investors like Stuber and Velasquez were much more likely to be confident in their investing strategy than rehab-and-resell investors, according to the survey, which was conducted in April, shortly after the declaration of the COVID-19 pandemic.

More than half of rehab-andrent investors (64%) said they planned to continue acquiring as many or more properties in 2020 as they had in 2019, while the reverse was true for rehab-and-resell investors. More than half of those fix-and-flip investors (59%) said they planned to decrease their acquisitions in 2020.

Rental investors were likely less shaken by the pandemic-

20

PRIVATE LENDER

WHAT IS YOUR REAL ES TATE ACQUISITION S TR ATEGY? Increase or Remain the Same

D ecrease

70% 60% 50% 40% 30% 20% 10% 0%

Rehab-and-Rent Investors

Rehab-and-Resell Investors

Source: Auction.com April 2020 Buyer Survey

induced crisis because their investing strategy is not as subject to volatility in home sales and price appreciation as the rehab-and-resell strategy.

Furthermore, the potential rental returns available in often-overlooked markets like Dayton provide plenty of cushion, even if rental rates decline or vacancies increase.

RUSH TO ONLINE BUYING Since they began buying in Dayton back in 2017, Stuber and Velasquez have been focused on buying at online REO auction, something more investors are turning to given the pandemic-triggered foreclosure moratorium

and growing competition for properties listed on the Multiple Listing Service (MLS).

The April 2020 Auction.com buyer survey found that 61% of investors selected online REO auctions as their top acquisition strategy, beating out inperson foreclosure auctions, off-market, and MLS. The April buyer survey represented a significant shift from a buyer survey conducted just two months earlier, before the pandemic, in which inperson foreclosure auction was the top acquisition strategy for 49% of investors, the most of any acquisition strategy. In that survey, only 29% of investors

said online REO auctions were their top acquisition strategy.

Turnkey rentals represent another acquisition source, particularly for more passive real estate investors who don’t have the time or ability to perform their own rehab like Stuber and Velasquez. Turnkey rentals also represent an investing strategy: in the Auction.com survey, 6% of buyers said their primary investment strategy was to rehab and resell to other investors.

Demand for those turnkey rentals has increased since the pandemic hit, according to Kathy Fettke, co-CEO of Real Wealth Network, a company that connects passive individual investors—most holding full-time day jobs—with turnkey rental properties.

“Our sales have not slowed down. Prices have not come down. Rental applications are up. Rents are stable or increasing,” said Fettke in a May interview. “Our teams do not have enough inventory to meet demand. And we were only doing property management updates to keep our members informed of rent collections, but they begged us to start showing properties. So we have.”

With the extensive rehab they perform, Stuber and Velasquez are in effect creating turnkey rentals for their own portfolio.

HAPPY TENANT, HAPPY LANDLORD “We expect the house to be a

mess when we get in there, and

we can just go in and make it beautiful,” said Velasquez, noting that it’s a nice surprise when properties are not as bad as anticipated. “What we’re finding with a lot of these houses is what they need is a lot of cosmetic work, and that we can do ourselves. …

We haven’t had any huge surprises or huge gotchas.”

Because Stuber and Velasquez do most of the rehab work themselves, they’re able to keep the rents affordable for people living in the lower-income neighborhoods where they invest, even while generating a healthy monthly cash flow.

“We try to keep all of our rents around $800 a month, and we’re finding now that average rent on like a two- or three-bedroom place in Dayton, depend-

ing on location, is $950 to maybe $1,050 a month,” Stuber said. “As long as we can keep a good tenant, we’re happy.” ∞

ABOUT THE AUTHOR

DAREN BLOMQUIST Daren Blomquist is vice president of market economics at

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

economic data trends within

the marketplace and greater industry to provide value to

OVER ALL ACQUISITION S TR ATEGY Post-Pandemic Survey (April 2020)

both buyers and sellers using

P re-Pandemic Survey (Feb 2020)

the Auction.com platform.

Blomquist’s reports and anal-

70%

ysis have been cited by thou-

60%

sands of media outlets nation-

50%

news networks and publications

wide, including all the major

such as The Wall Street Journal,

40%

The New York Times, and USA TODAY. Blomquist has been

30%

quoted in hundreds of national

20%

and local publications and has appeared on many national

10% 0%

network broadcasts, including Online REO Auctions

In-Person Foreclosure Auctions

Off-Market (direct to owners)

Multiple Listing Services (MLS)

CBS, ABC, CNN, CNBC, FOX Business, and Bloomberg.

Source: Auction.com Buyer Surveys

FALL 2020

21

BENCHMARK SURVEY

AAPL TO LAUNCH PRIVATE LENDING INDUSTRY’S FIRST IMPARTIAL BENCHMARK SURVEY

A

s the oldest and largest association representing the private and peer-topeer lending industry, we regularly receive requests from lenders, researchers, and legislators about everything from the size and scope of the industry all the way down to the minutiae of origination fees and average loan terms.

While this data is readily available for the conventional mortgage industry, which by law is required to report transaction details to various federal agencies, private lenders for the most part do not have such reporting requirements. And to date, there has been little specific research into the private lending industry as a unique niche within the larger finance market.

As the private lending industry has exploded, so too has the need for measurable, statistically relevant data, both so lenders can benchmark themselves against others and so that the industry can gain relevance. We have learned this firsthand when advocating to legislators on behalf of private lenders: money speaks. And until we can do more than guesstimate the details, it is hard to be taken seriously.

While AAPL has long understood the need for such research and information,

the means and capability to begin such an undertaking remained out of reach—until now. We have designed survey questions that will maximize data quality and relevance, and built a platform to enable us to regularly collect responses.

However, there are two factors that require your participation to make this a success: Large Sample Size // A few respondents does not make for a statistically relevant report. Some of the most impactful research surveys into the housing industry began small but grew through the organization’s ability to reach the right people. Through our own reach and those of participating partners, AAPL is positioned to do just that, with our survey signups already numbering in the hundreds pre-launch. Sign up to respond at aaplonline.com/survey.

Regular Reporting // A benchmark survey that accurately measures an industry must not only have a long list of respondents; it must have respondents who respond regularly. Within longer market cycles, we know the private lending industry ebbs and flows as a reflection of the larger housing market. While an annual survey cannot capture these vagaries and a monthly survey is too burdensome for smaller lenders, we settled on a quarterly survey to capture seasonal market cycles.

WHY PARTICIPATE? From a purely business-oriented standpoint, companies that respond to the survey have a leg up in terms of being able to regularly benchmark their business both regionally and nationally. Instead of setting interest rates and other loan terms based on guesses or anecdotal information (like visiting their main competitors’ websites), participating companies receive anonymized and aggregated data compiled from all survey responders. Lenders will also gain a better understanding of their true market share, enabling them to set goals based on hard data.

But who it is that originates the survey is also important. AAPL is an impartial, nonpartisan association—the first and only such organization to launch a private lending industry survey. We will never sell your survey responses, and data tendered outside AAPL will always be anonymized and aggregated. We will not use your survey responses to sell products or services to you. Our goal, rather, is to better enable us to position the industry— in essence, to better do the job we promised we would: support your private lending business and the industry. ∞

Sign up to respond at aaplonline.com/survey. After the survey launch, you will receive information about how to anonymously respond to the survey on a quarterly basis.

22

PRIVATE LENDER

Your journey to private lending industry data begins here.

Benchmark

AAPL is launching the industry’s first benchmark data survey from an impartial organization. The quarterly survey will gather information on everything from origination volume to loan terms and foreclosure rates.

Respondents will receive FREE aggregated and anonymized results on a quarterly basis, providing a national and regional snapshot of the private lending industry.

The survey launches at AAPL’s Annual Conference on November 16, 2020.

Sign up today at aaplonline.com/survey.

FALL 2020

23

MARKET TRENDS

A DEEP DIVE INTO CAPITAL MARKETS AND THE LENDING FOOD CHAIN It’s 9 p.m.—do you know where your capital is?

by Kevin Earnest

T

he novel coro-

in the future and better equip

had some very

in capital market confidence.

navirus has

bad effects

on the non-bank lending

business. Never before has the lender food chain become so apparent. It’s become obvious who has their own capital and who’s scrambling to find it as the coronavirus economic crisis has continued to freeze many sources.

In the private lender ecosystem, where does the money come from—and why have we seen the freezes we have?

Understanding the capital food chain can help both borrowers and lenders mitigate and prevent the impact of such freezes 24

PRIVATE LENDER

the market for rapid changes

WHAT’S WHAT AND WHO’S WHO? Let’s start with some definitions: A broker is someone who

shops many lenders to

find the right fit for their client. Although brokers often get a bad rap for

not adding value, many do a great job finding

capital for their clients when one source dries up. This became very

apparent in March when

the impact of the coronavirus started to be felt.

C orrespondent lenders

(CLs) are one step closer to the capital. Many times, they provide some of their own money temporarily.

Some CLs stay in the loan with some of their own skin in the game. This is called participation.

Others use their money to lend and then sell the loan after a few months.

N on-bank lenders (i.e.,

private and hard money lenders), often local, may fund loans using their own capital and/or capital they raise from investors. They typically hold the loans

for the entire term but can sell some of the portfolio to refresh their supply of capital. Most private lenders are stricter about what and how they lend, but they primarily fund loans based on collateral rather than credit.

To keep things simple, let’s just refer to all the above as non-bank funding.

Getting capital for your investments starts in the capital market. This market is the source for the actual funds when dealing with large and medium-size non-banking funding. One category of people who are immune to the capital markets is true

private lenders who use their own capital to fund deals.

Non-bank lending does not share the same organized secondary markets that Fannie and Freddie do. It is more disorganized and harder to define.

Basically, there is no government to step in and provide liquidity. Fannie and Freddie are public/private. The government backs them and regulates them, but technically they are a private company.

Yes, there are rules that exist.

But, there is no set framework for the non-bank money—it is more of a free market.

There are also “buy boxes” that differ between different capital

sources. A buy box is defined

identical terms. This is because

of a loan. Some of these are

likely behind those lenders.

as the qualifying conditions location, minimum credit

Why this distinction is import-

the same capital source is most

ant is illustrated when a fund

A non-qualified mortgage

money lending company stops

not conforming to standards.

see a handful of similar lenders

hard money and bank/govern-

freeze up. This is because that

bank lending capital markets

spondent lenders, and brokers

loans, but even less organized.

offered to many segments of

don’t follow the same guidelines

that capital source stops opera-

ment agencies. Some capital will

the way back to the person try-

outside the normal qualifying

Many of the intermediate

non-bank space doesn’t have some-

this the hard way and have

that buys loans from a hard

(non-QM) means the loan is

buying. Many times, you will

It is the gray area between

that offer similar terms also

flexible in some areas but

ment-backed money. The non-

buy box used by lenders, corre-

that are one step removed from

are slightly similar to non-QM

to fill loan orders is usually

That’s because they usually

the space. So, obviously, when

as government or semi-govern-

tions, it has a domino effect all

go after higher yields by going

ing to get a loan to flip a house.

space. It bears repeating that the

non-bank lenders discovered

score, loan-to-value ratios

(LTV), rehab size to purchase price ratio, and a few others.

Local lenders may be more stricter in others. Most lenders the actual capital have to be

strict about their box. Offering anything outside of what their capital source has told them

can cause potential problems for the lender, like not being

able to sell it, or worse, having

to eat it if the borrower doesn’t

pay. Because of these “boxes” or parameters, many lenders offer

one to step in and provide liquidity.

now doubled down on finding FALL 2020

25

MARKET TRENDS

multiple and more durable sources. Another option for them is to raise money themselves through a fund, which is another world altogether.

POST-COVID IMPACT So, what has happened since February in the capital markets and has trickled down to the broker trying to place a lender with a borrower?

In February, lenders were super competitive with their terms.

More money was available than we had deals. When the large capital sources hit pause, this caused terms to change overnight. Many lenders stopped lending for months.

Some lenders out West were lending in the low 6% range for fix-and-flip back in February. There were also some rehab advances large enough to keep down payments close to zero. In other words, the lender was funding 100% of the deal. Around April, many lenders that were still open started increasing down payments, charging reserves, raising origination fees/points, charging higher interest rates, and becoming less competitive. And, for the

most part, they have been

able to get away with that.

Everyone’s big question is this: Is this sustain-

able, or are we seeing the calm before the storm?

No one knows for sure,

but the first fracture will be seen in the non-banking space, if there is one.

What does that mean? Simply

this: If we see a drastic increase in the number of defaulted

loans hitting the market, then the primary housing mar-

ket could be next. Non-bank

funding is very agile and can be shut off almost immediately.

Why is non-bank lend-

ing the proverbial canary in the coal mine?

As we saw in February and

March, hard money lenders stopped lending in one day.

Normal lending market (i.e., banks) don’t stop on a dime.

The government steps in during questionable times. During

recessions, FHA becomes the go-to lender, but in private lending, there is no FHA.

The secondary markets for hard money exist, but they

are much more unregulated

and less defined. In addition,

laws don’t exist laws to protect homeowners in busines-to-

business hard money lending.

26

PRIVATE LENDER

Consumer protection doesn’t exist, so this sector can proceed quickly with foreclosures if they choose. And, there are no official forbearance rules by state, and so forth.

Capital markets for loans (both performing and non-performing), loans in forbearance, and non-QM loans are all trading right now, though the discounts do not seem extreme.

Although there was a short dip, most non-QM paper is trading close to par in many cases. There have been many trades north of 95%-97%. Also, the current market makes it difficult to find deals. PostCOVID, lenders hope to mitigate risk where they can, many looking for cleaner deals with smaller rehabs where the duration of the loan is shorter.

Why is this important?

If deals are already harder to find, and capital becomes pickier, then funding your deals could be more challenging. Be prepared to come up with more money for your down payment and reserves. The market will likely be fine in 2020, but if we don’t see the normal spring spike in housing sales or appreciation in 2021, then many lenders will be even more nervous.

We will likely start feeling the real impacts of the coronavirus economic crisis in the housing market by fall 2021. ∞

ABOUT THE AUTHOR

KEVIN EARNEST Kevin Earnest is the vice president of Connected

Investors Exchange. He has

spent the last 30 years com-

pleting over 2,000 real estate deals across the country.

In his current role at

Connected Investors,

Earnest focuses on bridging investors and lenders with new technology during economic shifts.

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FALL 2020

27

MARKET TRENDS

Q4 Market Outlook: Housing Remains Resilient Despite the pandemic, the U.S. housing market continues to outpace last year’s performances in new home sales, existing home sales, and housing starts.

by Ray Sturm

Resilient. It’s the word that keeps coming up in industry conversations with contractors, lenders, and even portfolio managers at Wall Street titans.

In the face of an economy-crushing pandemic, the U.S. housing market has been extraordinarily resilient.

28

PRIVATE LENDER

In July, new home sales jumped an astonishing 36% compared

to one year ago. Existing home sales jumped more than 9%.

And housing starts vaulted an incredible 22%. It’s been quite the trifecta for real estate.

We now find ourselves in a housing market that is not

only steadfast in the face of

“We now find ourselves in a housing market that is not only steadfast in the face of this health crisis, but is in fact exploding in many markets.”

HOUSING STARTS With a longer-term outlook in mind, housing starts are finally on a strong trajectory. Rising lumber costs

have builders grumbling,

but they can read the market and are running to capture

this health crisis, but is in fact

the market’s overwhelming

exploding in many markets.

demand for new homes.

The lenders who fared best

Some have worried that we’ll

during the summer were

those with their own form

of resiliency—internal funds

that enabled them to continue doing some level of volume as

the capital markets froze. The industry generally saw repays freeze in May and June, but

been the largest turnaround

since the spring. Large firms driving an increase in new

construction are gaining con-

fidence as demand for housing continues to outpace supply.

There doesn’t appear to be a

then saw a huge jump in homes

change ahead in the tailwinds

paid off in July. Lenders

low interest rates and a desire

being sold and loans being

quickly put that capital back

driving this demand surge: by many buyers to move to

to work with eager borrow-

areas that offer more space.

to grow without the support

pushing new home supply has

ers, but it was challenging

Perhaps the biggest factor

many lenders had counted on

been a shrinking inventory

Street. In the meantime, the

flying off the market and push-

the past few years from Wall

of existing homes, which are

housing market was roaring

ing buyers to instead build.

on traditional mortgages.

EXISTING HOMES

back to life behind low rates

NEW HOMES The sentiment around new home supply has perhaps

housing transactions, so a jump of almost 10% represents an enormous increase.

Things may have slowed dramatically in March and April with shelter-in-place orders, but as it became clear the pandemic was not going to go away anytime soon, people began to adjust. Looking forward, we see increasing

have an overabundance of

supply, as these are a clear

indicator of future housing inventory, but it’s unlikely.

Between 1980 and 2006, the country averaged 4.4 single-family housing starts

per 1,000 people. Today, that

number is down to only 2.7 per

1,000 people, so we have plenty of growth available in today’s incredibly hot market before

evidence of buyers who are no

we run into demand issues.

longer commuting on a daily

New construction, however,

basis and are now ready to move farther away from cities.

We see a growing trend of people looking to live closer to family. And, of course, as with new home sales, we’re seeing a surge in families looking for homes that offer

In fact, existing sales this

more space both inside and

seen since 2006. These sales

great rush to the suburbs is

summer reached a pace not

outside the home. So, the

make up almost 90% of all

happening with full force.

remains a challenge for many private lenders who rely on capital partners with Wall Street funding. While the

builder market is heating up,

the large institutions that ultimately purchase many of the

industry’s loans have been shy to accept ground-up construction loans so far. The private

lending industry was built on

an ability to execute on atypical

FALL 2020

29

MARKET TRENDS

loans. In this case, the industry is facing headwinds, and many

builders have been forced to go

through bank channels instead.

FIRST-TIME BUYERS Behind this trifecta of growth we have a group that many

assumed would rent forever but

is now driving home-ownership demand: millennials. First-

time buyers made up just over a third of sales this summer, and they are having trouble

finding enough homes to buy.

“Although mortgage rates have ticked up recently, mort-

gage rates for purchases are likely to remain low for the

foreseeable future as the Fed has pledged to maintain its

stimulus commitment,” said Jason van den Brand, chief

lending officer of Reali Loans.

“While refinance activity has remained strong, the only

thing holding back even more

purchase activity is a shortage of entry-level homes for sale.”

Van den Brand’s comments are an enormous call to action for the private lending industry.

Although large commercial homebuilders rely on bank financing, the private lending industry has served as the fuel behind America’s housing rehab economy. Banks are always slow to adapt coming out of economic shocks, so borrowers are increasingly looking to private lenders to fund their projects.

With families moving from the cities to the suburbs for more space, lenders are seeing a decrease of days-on-market in many markets. The resulting price stability (and growth) has led to a rebound in leverage that lenders are willing to take, not quite to pre-COVID levels, but significantly higher than what was being offered in April and May’s conservative markets.

POTENTIAL CHALLENGES The biggest potential challenge in the fourth quarter might be uncertainty around the election. History says home purchases typically drop at about twice the normal rate in the November of election years.

The industry is hurt by a desire to defer major financial deci-

sions until there is certainty in who will win the election.

The impact is temporary and more about pushing out sales of homes to the following year than truly increasing or decreasing demand.

One particular area of uncertainty in the private lending industry is around the longterm rental product, which many lenders rolled out in the last few years. Such loans enabled borrowers to purchase and rehab a home, but instead of selling, they had the ability to roll their loan over into longer term financ-

ing and place a borrower in the home. The pandemic and the ensuing moratoriums on evictions quickly shut down the asset class in the spring. Since then, even the largest capital providers in the space have been inconsistent in renewing their appetite for funding these loans. With moratoriums continuing, a once-hot product remains on shaky ground.

Ultimately, the outlook on the housing market is a sharp turnaround from the spring. If mortgage rates remain as low as they are, unemployment continues to decrease, and the economy continues to recover, the housing market should remain vigorous through whatever happens in November. ∞

30

PRIVATE LENDER

ABOUT THE AUTHOR

RAY STURM Ray Sturm is the CEO of

AlphaFlow, 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. Before launching AlphaFlow, he

founded RealtyShares, one

of the industry’s top platforms 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 BBA in finance from the

University of Notre Dame

and a JD and MBA from the University of Chicago.

FALL 2020

31

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PRIVATE LENDER

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IL SON EDDIE W C ha ir m an

& C EO

Fo r o u r 11t h A n n u a l C o n f e r e n c e, COV I D -19 b r i n g s a d d i t i o n a l c h a l l e n g e s . B u t we c o n t i n u e undeterred to uphold our reputation of hosting t h e s i n g l e - b e s t eve n t f o r p r i v a t e l e n d e r e d u c a t i o n a n d n e t wo r k i n g .

LI N D A H Y DE

M an ag in g

D ire ct or

T h i s ye a r we b r i n g yo u t h e i n d u s t r y ’s f i r s t t r u e hy b r i d eve n t , h o s t i n g i n - p e r s o n a t t e n d e e s i n L a s Ve g a s w h i l e l i ve s t r e a m i n g wo r l d w i d e t o vir tual at tendees — and connec ting both through o u r o f f i c i a l A A PL C o n f e r e n c e A p p.

GERF K AT H U N

Pr oj ec t D

ORD

t M an ag ev el op m en

er

FALL 2020

33

SPONSORS GO WITH THE FLOW WITH ALPHAFLOW - TITLE SPONSOR

In 2015, in a small, windowless office in the least expensive temporary space available just outside of San Francisco, the founders of AlphaFlow began building the foundation of their new, tech-driven investment platform. Six months later, their first fund was live.

Today, AlphaFlow partners with private real estate lenders who provide 6- to 12-month bridge loans on single-family and multifamily properties, buying their loans and growing their businesses. AlphaFlow was the first company to make the fix-and-flip industry available to institutional investors at scale and quality. They put technology and data at the forefront of their strategy—streamlining workflow and finding simple and straightforward solutions to the unique challenges that lenders in the industry face.

Just like the work they do, the AlphaFlow team is streamlined and efficient. With a staff of fewer than 25 software engineers and former lenders, they attract and keep great borrowers, underwrite loans with skill, and help clients quickly recycle their capital back into their businesses.

AlphaFlow has seen its strategy succeed time and time again. At the end of the day, they gauge success by the clearest sign out there: when each party involved has made more money—plain and simple. And this has become a trend they’re accustomed to seeing.

T R A N S F O R M O B S TA C L E S I N T O O P P O R T U N I T I E S W I T H R E S I D E N T I A L C A P I TA L PA R T N E R S - T I T L E S P O N S O R

The unforgiving economic environment immediately following the 2008 financial crisis was one in which nearly everyone in the housing industry—from lenders and investors to flippers and contractors—had to find and secure new footing. So, in 2009, when Residential Capital Partners, LLC opened its doors, they focused on building a strong foundation right out of the gate—and merged it with a desire to manufacture thoughtful and creative financial tools on behalf of their borrowers.

“Our firm was born out of the global financial crisis,” said Paul Jackson, principal of Residential Capital. “With roots in the commercial real estate investment and development business, we turned our attention to buying distressed debt during the downturn and underwrote every asset type offered by the major banks during that period.”

With a focus on hard, thoughtful, client-centered work, Residential Capital quickly made a name for itself in the years following the global economic downturn. They entered the industry offering innovative solutions to help customers weather the storm with bridge rental products, specifically a hard money, fix-and-flip solution and a rehab-to-rental solution, both of which positively benefited the industry upon launch. Both solutions have been tailored and tweaked over the past 10 years to maintain efficiency as the economy evolves.

34

PRIVATE LENDER

P L AT I N U M

EXHIBITORS

GOLD

S I LV E R

L A N YA R D

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35

E VENT OV ERVIE W CONFERENCE SESSIONS With three session tracks interspersed with main stage presentations, the 11th Annual Conference gives attendees the ability to choose from more than 45 top-of-their-field experts. Sessions feature topics tailored to private lenders and ranging from legal and compliance issues, to data analytics, market trends and forecasts, business strategy and more. Following the conference—and for the first time ever—A APL members will be able to re-watch session recordings.

NETWORKING OPPORTUNITIES PRE-, DURING,

A A PL A N N UA L CO N FE R E N C E A PP | Connect and chat with attendees virtually with our app. Our

CONFERENCE

anywhere in the world—who is also actively using the feature. “Tap to Connect” lets in-person

S U N , N O V. 15

V I P R EC E P T I O N | Enjoy cocktails and hors d’oeuvres while meeting— or catching up with—VIPs from

7: 3 0 P M

across the country. This exclusive reception requires RSVP ahead of the conference. Location TBA.

M O N , N O V . 16

SOC I A LLY- D I S TA N C E D P OW E R N E T WO R K I N G | This fun, fast-paced 45 minutes will put you on

& P O S T-

5 :15 P M

“Shake to Connect” feature allows attendees to quickly exchange contact information with anyone— attendees tap their phones to exchange info —no need for stacks of business cards.

a first-name basis (if you can remember them all!) with nearly everyone at the conference. This year the line of networking pros will wind further than ever as people pair off six feet apart. No business cards needed this year either; come logged into the A APL Annual Conference app to use the “Shake to Connect” and “Tap to Connect” features.

M O N , N O V . 16 6:00PM

A F T E R- H O U R S R EC E P T I O N | Continue conversations at this after-hours networking reception,

where attendees, sponsors, and speakers can enjoy complimentary hors d’oeuvres and two drink tokens (or perhaps more if you buddy up with the reception sponsor).

A A P L D E S I G N AT I O N C O U R S E S A APL offers its members two certifications: Certified Private Lender Associate (CPL A) and Certified Fund Manager (CFM).

These full-day courses, held Sunday, Nov. 15, offer comprehensive overviews and learning. Members who pass the final exam may use the official A APL designation and corresponding emblem in marketing and promotion.

36

PRIVATE LENDER

AWA R D N O M I N E E S 2020 E X C E L L E N C E A W A R D S N O M I N E E S As your association, A APL is pledged to champion the private lending industry as a viable alternative to conventional finance and to promote the industry’s reputation and future growth. We believe, as part of that mission, that it’s crucial to recognize those in the industry who look beyond the bounds of their own businesses and elevate the private lending profession.

Our Excellence Awards showcase peer-nominated members who have leveraged their resources to solve problems, advance the industry and professional performance, kick-start innovation, and improve their communities. Each year, we gather nominations for Lender Member of the Year, Service Provider Member of the Year, Rising Star and Community Impact Awards.

We’ll announce winners—by popular vote—at our 11th Annual Conference. Check out the nominees below.

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

A N I K A M I K YA N | LBC Capital Income Fund

E LI N OV E Y | Toorak Capital Partners

“In four short years, Ani became a superstar

“In March 2020, Toorak Capital Partners securitized

relationships in the private lending community and

the largest securitization to date for the company

underwriter for LBC Capital. She developed a lot of attends various industry events, while working on her real estate brokers license. She is truly one of the future stars and mentors in this industry.”

— Boris Dorfman, LBC Capital Income Fund C A M I LO N I Ñ O | LV Lending ”Camilo’s strong leadership skills and effective

strategic plan have played an integral role in LV Lending achieving a 27% growth rate over the

past three years (Originations - 2017: $59 million,

a $400 million Toorak Mortgage Trust 2020-1, and in the bridge lending space to date. This

securitization was a project championed and led

by Eli. In addition, approximately $5 billion of

structured transactions in the bridge and singlefamily rental space have been closed under his leadership as chief financial officer.”

— E mily Meringolo, Stanton Public Relations & Marketing

B E N S H A E V IT Z | Civic Financial Services

2019: $75 million). Among the many accolades

“Ben took over CIVIC’s wholesale channel on

for Camilo has been LV Lending’s inclusion on the

growing the company’s presence and partnerships

the firm has received, a standout accomplishment South Florida Business Journal’s list of Top 20 South Florida Commercial Mortgage Lenders for the past two years in a row.”

— Jennifer Becker, BKR Media Consultants

February 1, 2020. Ben has played a major role in

in the private lending space. In just over six months,

he has led the company to achieve over $60.7 million in first-time fundings for new broker partners. He has also onboarded 676 new brokers in this short time, personally welcoming each new partner to ensure their path to success with CIVIC.”

— William Tessar, Civic Financial Services

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37

AWA R D N O M I N E E S MEMBER OF THE YEAR This award goes to one lender and one service provider based on their deep expertise, unique value, and strong commitment to clients and growing the industry.

LENDERS

J O H N B E AC H A M |

Toorak Capital Partners “John is the founder and CEO of Toorak Capital Partners and is a recognized industry leader

who has participated in AAPL webinars and its in-person events. John’s contributions to the industry have had a long-lasting impact. At

Toorak, he established a standardized set of

underwriting guidelines and credit criteria which have been adopted by much of the industry.

This framework and insight improved and

institutionalized credit standards industry-wide.”

— E mily Meringolo, Stanton Public Relations & Marketing

C A R R I E COO K | Ignite Funding “Carrie's client commitment has always been the forefront of Ignite Funding's operation. Ignite

nurtures long-term relationships with its borrowers so that even during uncertain times, borrowers

know they can look to Ignite to help keep them on the track. During the pandemic, Ignite launched a tranche program allowing investors to keep their

funds deployed by mitigating principal paydowns and reducing the overall cost to borrowers.”

— Stephanie Fryar, Ignite Funding

38

PRIVATE LENDER

C H R I S DO R I N | RCN Capital “Chris has been integral to the growth of

RCN Capital. He is tireless in his dedication to learning, coaching, and supporting both new

and seasoned loan officers while balancing the

needs and goals of our management and service teams. Our success is a direct result of this. His commitment and dedication to protecting our

brand while providing top-notch service to our partners, clients, and team members have set the pace for long-term success.”

— Tiffany Walker, RCN Capital

W I LLI A M T E SSA R |

Civic Financial Services “I am nominating William based on his response, internally and externally, to COVID-19. The insight, educational discussions, and the

straightforward communication he delivers is

leadership at its finest. He has released regular video broadcasts, emails, and social posts

conveying his knowledge and current market

conditions. Internally, he continues to prioritize

the health, safety, and well-being of all employees and has helped keep everyone motivated.”

— Elizabeth Hillestad, Civic Financial Services

SERVICE PROVIDERS

B E E TA LEC H A | Spiegel Accountancy Corp.

A LLE N S H AY E N FE K R | Sharestates

“Beeta has provided a steadfast, proactive, and

“Allen is the CEO of Sharestates and is committed

of the AAPL community. She has contributed

intimately involved in creating a variety of products

responsive commitment to the continued success excellent advice and information by serving on

AAPL's Education Advisory Committee, publishing articles in their Private Lender magazine,

presenting webinars, and speaking at conferences to support lenders in their endeavors to stabilize and expand their success, especially during this uncertain COVID-19 period.”

— J eff Spiegel, Spiegel Accountancy Corp.

SA M K A D DA H | Liquid Logics

to advancing the private lending space. He is

and tech-led solutions to continue making real

estate investment accessible to everyone. In the

wake of COVID-19, Sharestates was one of the first lenders to offer a margin call relief program to assist lenders experiencing margin calls.”

— Dominique Ingram, Sharestates R AY S T U R M | AlphaFlow “Ray has focused on finding ways to better connect those

with capital to those with investment opportunities. By

Since 2014, Sam has driven the entire technology

doing so, he has helped increase capital to lenders/

dedication to providing education and connec-

providing quicker paths to growth for companies

industry peers. His contribution to this industry has

have helped to more quickly redevelop communities

shown in-depth knowledge and best practices that

betterment of many across the country.”

sector of our industry to the next level. His constant

borrowers and lower the cost of doing business while

tion to all has made him a leader in the eyes of his

serving the fix-and-flip industry. These activities

provided innovative insight to all, and he has also

and increase the amount of housing supply to the

will be used in the industry for years to come.

— Hanna Soskina, Alphaflow

— Brigette Havard, Liquid Logics R A N DY N E W M A N |

Total Lender Solutions, Inc. “Randy is the perfect example of what it means

to be a leader. He runs himself and his business

with integrity and it shows in his continued growth personally and professionally. He never turns

down an opportunity to speak or educate, and he regularly holds classes for California foreclosure processing. He often volunteers to stand on

committees to show support (including AAPL's Education Advisory Committee). Randy is incredibly deserving of recognition.”

— Katie TerBush, MK Consultants Inc.

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39

AWA R D N O M I N E E S CO M M U NIT Y IM PAC T This award honors dedicated and innovative professionals and their commitment to bettering their local and/or private lending communities through volunteering, community development programs, or civic/legislative efforts.

E R I C A B R A M OV I C H | Roc Capital “Roc Capital, a capital provider for private lenders, and a subsidiary on the Roc360 platform worked

through the COVID-19 pandemic to continue funding and supporting those in the industry. Services of Roc as a whole continued to fund and worked

with larger institutions to fund loans and provide resources to the community.”

— Lipika Raghunathan, Roc Capital

J O H N B E AC H A M | Toorak Capital Partners “Toorak Capital Partners and its founder and

CEO John Beacham are proud to directly address housing shortages as it funds home renovations

and rehabilitations. Toorak projects are expected to stabilize housing units for 17,000 families at a

rate of more than 500 units per month. Each home supports entrepreneurs, creates jobs, rebuilds

communities, and increases the available supply of affordable housing.”

— E mily Meringolo, Stanton Public Relations & Marketing

N E M A DAG H BA N DA N | Geraci LLP “In a year of uncertainty and change, Nema has

remained dedicated to providing timely updates on

legislation crafted to harm private lenders, including attempts to prevent foreclosures, require forbear-

ances, and otherwise prevent private lenders from

enforcing their rights. Nema has worked with AAPL to craft the industry-standard forbearance request

template and has provided countless webinars, panels, and learning opportunities for members.”

— Kevin Kim, Geraci LLP

40

PRIVATE LENDER

SO PH I E K I M | Civic Financial Services

A LLE N S H AYA N FE K R | Sharestates

“Sophie is the SVP of People & Culture at Civic

“Allen, the CEO of Sharestates, is committed to

munities’ to our company's Core Purpose, putting

through private lending. Recently, alongside his

Financial Services. She led the way in adding ‘comwords into action via a partnership with Habitat for Humanity and Wounded Warrior Project, as well

as our military discount program. Sophie initiated

the George Floyd fundraiser as well, knowing that

Civic employees wanted to respond to injustice with giving.”

— Gina Comeaux, Civic Financial Services

C I N DY N A SS E R | PCV Murcor “Cindy is a role model of corporate social responsibility, demonstrating that it starts from the top.

Through PCV Murcor's nonprofit program, PCV|VRM Seeds of Hope, Cindy has fostered many of the relationships with the community charities PCV Murcor supports. She is passionate about giving a voice

to those in need, including homelessness, at-risk youth, and empowering women.”

— Charles Beatley, PCV Murcor

charitable works as well as community revitalization co-founders, Allen founded Share4Kids, a not-forprofit organization that raises funds for various

charities focused on children. Together, they have raised over $100,000 for the kids.”

— Dominique Ingram, Sharestates

R AY S T U R M | AlphaFlow “Ray has focused on finding ways to better connect those with capital to those with investment oppor-

tunities. By doing so, he has helped increase capital to lenders/borrowers and lower the cost of doing business while providing quicker paths to growth for companies serving the fix-and-flip industry.

These activities have helped to more quickly

redevelop communities and increase the amount of housing supply to the betterment of many across the country.”

— Hanna Soskina, Alphaflow

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41

42

PRIVATE LENDER

FALL 2020

43

CASE STUDYÂ

COASTAL LUXURY REHAB OVERPERFORMS A fix-and-flip in opulent Montecito, California,

exceeds value expectations during coronavirus pandemic.

44

PRIVATE LENDER

BEFORE

A

BEFORE

s COVID-19 and the subsequent stay-at-home

past, their fund portfolio consisted of 50% commercial and 50%

reacted differently. Some stayed on the

residential and 40% commercial.

orders it triggered took hold, private lenders sidelines not wanting to repeat the mistakes

of the Great Recession. Others moved forward

cautiously with new mechanisms and processes in place for evaluating opportunities.

One lender that proceeded was Rodeo Lending.

As the market shifted, Rodeo Lending formed a new strategy committee to keep a close eye on all files in servicing and new files coming in on the origination side. They implemented new procedures, requiring an interest reserve through the life of the loan, rental income loss insurance, and a mechanism for getting a finger on the pulse of the markets they were lending in.

They began to look at incoming deals differently, specifically the nature of the property, the transaction structure, activity in the region, the borrower’s employment security, and activity in the greater economy.

The company noticed the shifts occurring in the residential real estate market, notably the city dwellers that headed to suburbia seeking more space. Aware of this trend, Rodeo

residential properties. Its originations are now a mix of 60% One of the opportunities Rodeo Lending moved forward on was a luxury fix-and-flip single-family residence in Montecito, California. Montecito saw one of the largest surges in real estate transactions on the southern coast of California, with rising values and a markedly increased demand.

The borrower, a talented designer and developer, approached Rodeo Lending in January 2020. The borrower needed a purchase and rehab loan for a property that was to close in five days. Due to the quick close, the rehab portion of the transaction was put off until March.

Then COVID-19 turned the world upside down. When it came time to revisit this property’s facelift, the underwriting of the rehab portion needed to be thorough, protective, and proactive.

Rodeo, through a third party, performed a feasibility study on the budget and reappraised the property. One of the principals did an on-site visit that included reviewing the comparable and underwrote the borrower’s financials and their experience with vigilance.

Lending redirected its focus to residential real estate, including

Even though the borrower has a strong financial profile,

the fix-and-flip market and rental markets nationwide. In the

Rodeo required a 12-month interest reserve, a property tax

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45

CASE STUDY

reserve for the life of the loan, appropriate insurance coverage, and an increased contingency line item on the budget. When Rodeo received the updated appraisal, they were surprised.

Within six months, the as-completed value had increased by almost $1 million.

In looking at the local market, it will be even higher when the rehab is completed and listed because the competition for quick-moving inventory is ramping up.

Although the concerns on this project during the pandemic are starting to decrease, risk is always a factor. As of the time of this writing, the property is about 50% complete, and Rodeo is confident the borrower will come out of the project profitably.

During the time this loan was originated, many famous people have decided to call Montecito their home, including Prince Harry and Meghan Markle, which has further increased the profile of the neighborhood.

Lender // Rodeo Lending Location // Montecito, California Predicted Marketing Time // Under 3 months Architecture Style // Traditional design Square Feet // 7,673 square feet—and this does not include

the 500-square-foot solarium or the 476-square-foot pool room with bathroom

DURING

Lot Size // 36,590 square feet As-Is Value // $5,000,000 1st Round ARV // $8,500,000 2nd Round ARV // $9,300,000 Loan Amount // $5,102,500 LTV // 55% on the after-repair value Borrower Experience // Very experienced bankable

borrower with a high FICO and portfolio; however, with

the speed needed to close, coupled with the construction component and tightening of bank loans, the borrower was a perfect fit for Rodeo’s product.

Interest Rate // 7.99% (lower than most construction deals

during COVID-19 and non-COVID-19 times; however, to

maintain repeat business and negotiate other projects with this borrower, the rate was kept low) Loan Term // 12 months Rehab Budget // $1,090,000

DURING 46

PRIVATE LENDER

real state investors

nationwide financing .

We’ve got your back

...AND your funds small-balance commercial

fix & flip / bridge

%

%

%

% %

ground-up construction

30 year rental

%

% /

%

% %

BUILD Š

evolve

succeed

#

# FALL 2020

47

A APL AUSE

APPLICATIONS OPEN FOR AAPL COMMITTEES Nearly all the American Association of Private Lender’s efforts to support the private lending industry operate under our three pillars: Education, Ethics, and Advocacy.

Applications for all three

To support these pillars, we appoint AAPL members from across the nation to provide guidance and lead initiatives.

Together, these three committees are the drivers for the future of our industry.

Education // These commit-

committees are open for 2021-2022 seats. Here’s a little information about each committee as well as a word from two current committee members about what volunteering has meant for them. tee members write for Private Lender magazine, lead live educational webinars, moderate panels, and present during certification classes as needed at our Annual Conference (aaplonline.com/conference).

They also provide insight to help guide myriad industry-changing initiatives (such as our private lender industry survey). Apply at aaplonline. com/committee-app.

48

PRIVATE LENDER

Ethics // This ad hoc committee reviews Code of Ethics complaints (aaplonline.com/ standards) and advises on outcomes and consequences for members who break our code. They also write about ethics topics for Private Lender magazine. Apply at aaplonline.com/committee-app.

Advocacy // The Government Relations Committee helps guide federal and state advocacy efforts. Members provide feedback and strategy regarding specific bill support or opposition responses, help drive grassroots contact campaigns, coordinate with ally organizations, and lead quarterly virtual Legislative Town Halls. Apply at aaplonline. com/gov/volunteer/

WHY I VOLUNTEER CHRIS RAGLAND

ERICA LaCENTRA

I volunteer in several

I volunteer for AAPL’s

Government Relations and

I recognize the value and good

capacities for AAPL’s

Education Committee because

Education committees because I believe in what we are doing

it brings to our industry and, frankly, AAPL is a resource I

for the private lending space. Educating, connecting, and

wish I had access to when I was starting out in the private

each other and the industry up. Through our annual curricu-

have a group of leaders who can share their expertise and

holding each other accountable are all ways we can build lum development and certifications, we have educated hundreds of new private lending professionals. There’s

nothing more rewarding than seeing newly minted lenders close their first big deals. Meanwhile, our government

relations committee works on the frontlines to bring awareness of potential new legislation that could impact us all.

I’ve formed some of my most valuable connections in the private lending industry while volunteering with AAPL.

If you value the network effect, there’s no better way to

super charge it than volunteering. I encourage everyone to become more involved and see what a positive difference you can make.

lending industry. I think it’s important for our industry to

knowledge with those who are just starting out and needing guidance. I’m honored to be part of a committee that does

just that. I hope the content and classes we provide inspire

individuals to get more involved and grow within the world of private lending.

I also greatly appreciate the exposure that the Education

Committee provides for me in the private lending Industry. It

is a great vehicle for showcasing my expertise and experience.

It has allowed me to connect with other experts in this field

and meet some truly incredible people that I might not have

connected with or worked with otherwise. There really is not a single downside to being a member of the committee. ∞

FALL 2020

49

A APL AUSEÂ

AAPL needs subject matter experts to guide initiatives that will shape the future of the private lending industry.

Volunteer for our 2021-2022 Education, Ethics, and Government Relations Committees today.

Visit aaplonline.com/gov/volunteer for the Government Relations Committee, and aaplonline.com/committee-app for the Education and Ethics Committees.

50

PRIVATE LENDER

A SPECIAL THANK YOU TO OUR 2019-2020 COMMITTEES! AAPL would not be where it is today without their dedication and expertise.

GOVERNMENT RELATIONS COMMITTEE CORT CHALFANT, Nexus Private Capital NEMA DAGHBANDAN, ESQ., Geraci LLP EDWIN EPPERSON, Blue Bay Capital MIKE FALLOT, MM Lending LLC

EDUCATION ADVISORY COMMITTEE

MATT GUNTER, RCN Capital

SAM KADDAH, Liquid Logics

CHRIS RAGLAND, MBA

STEVE KUPTZ, Trinity Mortgage Fund

JOHN TEDESCO, Appraisal Nation

ERICA LACENTRA, RCN Capital BEETA LECHA, Spiegel Accountancy Corp JEFF LEVIN, Specialty Lending Group CLAY MALCOLM, Advanta IRA

ETHICS ADVISORY COMMITTEE

MELISSA MARTORELLA, ESQ., Geraci LLP

KELLEN JONES, Prospera

RANDY NEWMAN, Total Lender Solutions

MIKE HANNA, Investmark Mortgage

CHRIS RAGLAND, MBA

KEVIN KIM, ESQ., Geraci LLP BOBBY MONTAGNE, Walnut Street Finance SUSAN NAFTULIN, Rehab Financial Group JEFFREY TESCH, RCN Capital

FALL 2020

51

LENDER LIMELIGHTÂ WITH WHIT McCARTHY

Civic Engagement Entrepreneurial drive finds a home in real estate lending.

by Katie Bean

W

hen Whit McCarthy, senior vice

president of Civic Financial Services, graduated from Colby College in

2010, he was ready for new experi-

ences. So, he left the Northeast and began to blaze his own trail in Southern California.

Originally from Connecticut, McCarthy said he didn’t want to follow the path he saw so many others tread growing up—commuting to New York City and working on Wall Street. After spending his college years in Maine— and coming off an especially cold winter, he joked—he ended up in the South Bay area, the beach-side suburbs of Los Angeles.

He embraced the SoCal life, surfing and starting a granola company.

“I wanted to have some entrepreneurial freedom to chart my own course,” McCarthy said.

Because he didn’t have a network in the area to help him with a job search, he decided to launch a business based on his mother’s granola recipe.

He cultivated the company, serving about 45 accounts in the Los Angeles region. As the business grew, McCarthy had two

FALL 2020

53

LENDER LIMELIGHT WITH WHIT McCARTHY

DOWNTIME When he’s not developing business for Civic Financial Services, Whit McCarthy enjoys outdoor pursuits, including fly fishing, hiking, golfing, and snowboarding.

He grew up playing lacrosse and even played professionally when he moved to California.

He and his wife love to travel. Though they enjoy active trips, such as their visit to the Patagonia region of South America, “I’m not against sitting on a beach, drinking a Mai Tai,” McCarthy said.

THIS OR THAT ?

TEXT OR CALL? ANDROID OR APPLE? APPLE PHONE, MICROSOFT COMPU TER

HOT CHOCOL ATE OR EGG NOG? HOT CHOCOLATE WITH BAILEY’S

NIGHT OWL OR EARLY BIRD? R AIN OR SHINE?

WE HAVE SO M UCH SHINE HERE, A GOOD RAIN Y DAY IS AN AMAZING THING.

MOUNTAIN OR BEACH?

A TIME AND A PLACE FOR BOTH! LOVE AND NEED THEM BOTH.

DOG OR CAT?

DOG. I HAVE T WO DOGS AND GREW UP WITH DOGS. WE HAVE AN AUSTRALIAN SHEPHERD AND A LABRADOODLE. THEY’RE PERFECT. THEY’RE CRAZY, BU T WE LOVE THEM. THEY COMPLEMEN T EACH OTHER, AND I LOVE BOTH SIDES OF IT.

54

PRIVATE LENDER

important revelations. The first was that he and the business could not continue to grow if he didn’t make the time to learn from others. And he realized that as a solopreneur, he wasn’t able to focus on the aspects of the business he most enjoyed.

“I know there’s been more

“I needed to gain some bandwidth so I could focus on what it is that I think I do best, which is really the sales and business development side of the business,” McCarthy said.

“Relationship management—I love that. I could go and pick up new accounts all day long.”

A wise mentor told McCarthy

As someone who thrives

parlay those skills to pretty

on building relationships, McCarthy said it was tough to work alone.

“I probably went to Starbucks four times a day and was way over-caffeinated just because I needed personal interaction,” he said.

Another factor: “I was not raking in the dough slinging granola,” McCarthy said. So, he found a buyer for the granola company and looked for an opportunity to focus his talents.

‘THAT’S WHERE I KNEW I WAS GOING TO END UP’

wealth generated in the history of wealth through the owning

and holding of real estate than anything else. So that’s where

I knew I was going to end up,” he said. He had been exposed to it through his family.

to start on the lending and

financing side as he made the transition to the industry.

“It’s typically the hardest part to understand in a real estate transaction, so once you get an understanding of how

the finances work, you can

much anything inside of the

real estate world,” McCarthy

said. “So that’s why I decided to come into a lending envi-

ronment, and I’m happy I did because I love it. I live for it.”

McCarthy joined Wedgewood,

a vertically integrated network of real estate companies, to

do business development for home loans. The company

quickly realized traditional lending, with its razor-thin margins and compliance red tape, was not a good

fit and sold the division.

But McCarthy stayed. Along

with Jack Helfrich, he started McCarthy spent time in technology sales, but he felt a calling to the real estate industry.

“putting pieces to this puzzle

together.” Those pieces became Civic Financial Services.

EXPLOSIVE GROWTH When it launched in 2014, Civic Financial Services focused on the fix-and-flip space: bridge lending, short-term loans, bridge loans and other products geared toward real estate investors.

Clearly, McCarthy and Helfrich hit on a winning formula.

The company now employs about 300 people and has expanded to 21 states. It hit a big milestone last year: $1.3 billion in originations, a goal the founders had set early on.

rental properties. One of the hallmarks that sets the company apart, McCarthy said, is

investor loans. Correspondent lenders represent themselves as a direct lender, closing

the speed and efficiency in its

loans in their own name.

processes. Civic can accommo-

What started as an exciting

date short timelines and can even process a loan in seven days for a repeat customer.

opportunity quickly became

one the biggest challenges in

McCarthy’s career as the coro-

At the beginning of 2020, Civic

navirus pandemic took hold.

implemented changes to help

“As soon as I took the reins,

streamline operations. In that shift, McCarthy took over the correspondent lending division with the goal of scaling it up.

His division partners with other lenders, allowing them to leverage Civic’s capital, prod-

In 2019, Civic released a prod-

ucts, and operations team to

uct for investors focused on

fund their non-owner-occupied

I immediately got to work

in sourcing some amazing

prospective correspondent

partners. We were gearing up

markets,” he said. “We were immediately frozen in our tracks and forced to put a hold on onboarding any new correspondent accounts. We had to sit and wait for the capital markets to open back up.”

Civic was fortunate. With its strong financial position and capital partnerships, McCarthy said, the company didn’t skip a beat with retail clients, broker partners, and approved correspondent lenders.

hit, which had an amazingly

“We did not have to stop originating, nor lay off any of our staff,” he said.

Wall Street and the secondary

Like so many others during the early days of the pandemic,

the channel and looking to

scale quickly when COVID-19 swift and decisive effect on

FALL 2020

55

LENDER LIMELIGHT WITH WHIT McCARTHY

FAVORITES? T V SHOW? PARKS AND REC, THE OFFICE, YELLO WSTONE

“It presented our team with

was wait. For Civic, the

an opportunity to recalibrate

turnaround came relatively quickly: After about two and a half months, McCarthy said, the market began to bounce back, and the company resumed onboarding

PL ACE YOU’VE TR AVELED? PATAGONIA

new correspondent lenders.

WAS AN ALL-STAR TRIP, ON THE CHILE SIDE. THE SCENERY IS U NLIKE AN YTHING YO U’VE EVER SEEN. WE WEN T FLY FISHING AND HIKING. IT’S A VERY ACTIVE PLACE, REMARKABLY AND STU NNINGLY BEAU TIFUL.

“We are absolutely back on

BOOK? THE MITCH RAPP SPY NOVEL SERIES BY VINCE FLYNN

SEASON? I LOVE THE FALL. GUILT Y PLEASURE? I LOVE A GOOD CLASS OF TEQ UILA.

56

what they did have to do

PRIVATE LENDER

track and are aligning ourselves with some of the best in the business,” he said.

The uncertainty caused by the pandemic and the delay in growing his division was frustrating at first, McCarthy

our processes, programs, and systems to make Civic’s correspondent lending platform best-in-class,” he said.

PRIDE AND PURPOSE McCarthy is proud of the time and effort he’s invested in Civic. Culture is paramount.

The core values tell employees and clients alike what the company stands for and what’s expected: Act with honor, be a great partner, communicate

said, but he’s come to see the

clearly, create smiles, and sim-

silver lining in the gift of time.

plify. Like branches of the U.S.

military, the company issues employees a Civic Coin with the core values and company purpose: to enrich our people, partners, and communities.

“It’s something we all carry with us all the time. It’s just a reminder to live by those core values every single day,” McCarthy said.

The purpose of “enriching” isn’t “lining your pockets,” he said. It speaks to investing in the employees.

“It’s our duty to make sure that we’re growing everyone as an individual as well,” he said. “What I love, and I think it’s the most gratifying thing in my experience here, is just the elevation and empowerment of the people around me. I do need to lead, but my job is also to create leaders.”

With that goal in mind, Civic has created a robust Top Gun training program for those new to the industry.

The six-week course covers industry essentials as well as how to be successful at Civic.

The course is no cakewalk.

There are quizzes, and participants must pass the midterm and final exams to join the sales floor. Graduates shadow experienced salespeople to learn the ropes.

“I think just throwing someone into the sales team and

hoping they can swim is tough when they don’t have prior experience,” McCarthy said. “But we’ve found that we have some amazing talent going through this Top Gun program that come out and be successful account executives inside their first year.”

“What I love, and I think it’s the most gratifying thing in my experience here, is just the elevation

STRIVE FOR MORE

and empowerment of the

In the spirit of empowering others in the industry, McCarthy shared some advice for those early in their career:

people around me. I do

I mmerse yourself. “There’s

so much information out there for you to consume,” McCarthy said. He recommended joining real estate investor organizations and associations to network with others in the industry. “You just have to jump two feet in. I think a lot of people procrastinate when it comes to bettering themselves. The people that are successful are the ones that just have an insatiable appetite to consume material and educate themselves.”

A lign yourself with an

organization, and, specifically, a leader. “Whether it’s a CEO or the person that’s going to be your direct manager, make

need to lead, but my job is also to create leaders.”

— WHIT McCARTHY

sure that person has a clear vision, someone

ABOUT THE AUTHOR

that you want to follow,” he said. Choosing the

right leader will help with continued personal and professional growth.

McCarthy said he, too, still strives for more.

“At the end of the day, I feel like I’ve always got something to prove,” he said.

“We’ve been able to find some success here at Civic, but

KATIE BEAN Katie Bean is a former newspaper and magazine editor

who loves telling the stories of businesses and great leaders.

She is based in Kansas City.

we are in no way done.” ∞

FALL 2020

57

ETHICSÂ

The Accidental Bait-and-Switch: Is This You? Bait-and-switch lending is one of the most significant ethical challenges private lenders face today.

by Mike Hanna

58

PRIVATE LENDER

There are more lenders now than there were just a few years ago, and the lending environment has become hypercompetitive in many markets.

Most borrowers are looking at multiple lending programs and shopping for lower rates, better terms, and lower fees, before making their final decision.

But if they aren’t careful comparing apples to apples, they may be served a lemon instead.

WHAT BAIT-ANDSWITCH LOOKS LIKE IN PRIVATE LENDING Hard money loans can be extremely flexible. Interest rates, points, fees, terms, and overall loan structure can make or break a deal—and make or break your bottom line.

Explaining the nuances of a hard money loan can create a lot of confusion, especially with new borrowers who do not yet fully grasp hard money or techniques that could potentially be used to baitand-switch them. This has been an ongoing issue, and lenders need to be cautious not to put their business or clients in a compromising position.

Here are some common examples of real-world baitand-switch lending practices:

01 O ffering a very low

interest rate (the bait), not disclosing the qualification terms, which in many cases are unattainable for your primary target audience, with the effect of putting the borrower in a more expensive loan (the switch), as they could not qualify for the advertised program.

02 A dvertising “no

appraisal required” on the subject property, collecting a nonrefundable commitment fee upfront, and then forcing the borrower to move forward with a lower LTV based on an internal evaluation.

03 D isclosing the attractive rate, fees and/or terms, without fully explaining the actual details in the note where penalties and extension fees can easily be overlooked by the borrower.

It can get tricky for lenders in competitive, head-to-head situations where the lender doesn’t have enough information on the competitor’s program. The borrower may challenge you to beat some rate

or fee structure the borrower does not fully understand. To win the business, you agree to the assumed competitive terms and have to adjust your own terms so you don’t lose money. In doing so, you fail to disclose charging interest on the full loan amount, including the funds that haven’t been drawn for the rehab.

Whether the failure to disclose is intentional or unintentional, the borrower will probably be frustrated and unhappy when they see the first invoice.

Any of these practices can give the impression that the lender’s attitude is “buyer beware.”

Setting the wrong expectations, whether intentionally or not, is still bait-and-switch and can get you sideways with both the borrower and the law.

PRACTICES TO AVOID Current lending environment // Rates have compressed and the coronavirus crisis has slowed buyers. So, lenders are using aggressive and novel advertising techniques such as offering below market interest rates, no payments required, and limited due diligence to attract new investors and retain existing customers.

FALL 2020

59

ETHICS

If the program being adver-

to communicate their loan pro-

at face value. The details that

tised is exactly as intended,

gram to a borrower. The best

there is no need for you to be

way to avoid any accusations of

are not visible in the adver-

concerned as a lender. How-

bait-and-switch is to be clear in

ever, if you have additional

your advertising and stick to it.

stipulations about how you will

Do your homework // To cre-

actually structure the loan or apply interest and fees, your customer could find themselves in a bait-and-switch situation.

Most lenders are not purposely employing bait-and-switch tactics, but they can easily fall into a trap of accidentally miscommunicating or failing

ate an effective loan program, lenders need to do their due diligence on the competition

before advertising any offering.

Gather as much information as you can, and don’t try to

tising are most likely in your competitor’s loan docs.

Know your value // Understand the value you bring to your client beyond the funding.

Selling on price alone is almost

If a competitor’s program sounds too good to be true, it most likely is. In the private lending space, any loan program offered needs to be com-

always a losing proposition.

As a lender, you must be able to articulate the value you can deliver (i.e., rehab experience, expertise in a given market,

mensurate with the risk taken

years in the business, etc.).

by the lender. Any lender low-

Change is inevitable // At

ering their rate, fee(s), etc., just

some point, you will need

to get more business, is ulti-

to alter your program(s)

Furthermore, don’t take what

mately asking for trouble if or

to adapt to changes in the

you see from the competition

when the loan goes into default.

market. To make this easier,

guess what another offering is.

WE CAN HELP YOU BETTER MANAGE YOUR BORROWERS AND INVESTORS Specializing in Audit, Tax & Fund Accounting CPAs with over 20 years experience working with Private Lenders.

ACCOUNTANCY

spiegelcorp.com

60

PRIVATE LENDER

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(925) 977-4000

|

info@spiegelcorp.com

“Legal implications of bait-and-switch lending range from a slap on the wrist from a regulator for misleading potential borrowers up to full-blown lawsuits and regulatory investigations if the offense is great enough.”

start by offering the same program to every customer and use the same criteria for loan approval that works within your business model.

Create a limited number of programs (two or three max) that are well defined and you can consistently provide to

clear in your vetting process,

licenses (if the state requires a

the project, so they know

leading information is resolved.

both of the customer and what to expect through

the duration of the loan.

LEGAL IMPLICATIONS OF BAIT-AND-SWITCH LENDING

Let’s consider another exam-

As you can see, bait-and-switch is not only dishonest, it’s an illegal practice that can land a lender in trouble and even cost them their business. Keep in mind, even accidental bait-andswitch is illegal, and the consequences are no different than if it was intentional. Review your processes and take the advice given here, so you don’t get yourself in a situation that harms your borrower and ultimately your lending business. ∞

ple. Say a borrower thought

they were getting XYZ terms and at the closing table they

received ABC terms that were more extreme (higher points

ABOUT THE AUTHOR

and fees, higher interest rate,

your clients. Too many options can lead to confusion for you,

mortgage license) until the mis-

the Ethics Committee will definitely want to hear about it.

Legal implications of bait-

a more onerous prepay, etc.).

from a slap on the wrist

detrimental reliance, breach of

ing potential borrowers up

or unfair business practices if

regulatory investigations if

the original terms and didn’t

and-switch lending range

There could be a lawsuit for

from a regulator for mislead-

contract (if an LOI was issued),

to full-blown lawsuits and

the borrower had relied upon

offering a better rate or reduc-

the offense is great enough.

have other options to close

Mike Hanna is a real estate

ing a fee to keep a good client

For example, if you advertise

results of the action, the case

mentor, and author. He is a

your team, and your clients and may cause unforeseen bait-and-switch scenarios. If you really want or need to, you can always sweeten the deal.

There’s nothing wrong with

who’s started shopping around.

It will work in your favor to sit down with customers, especially new investors, and explain exactly what your program looks like and how it works. You need to be

on your website that you will

originate loans at 8%, but you extend few or no loans at that rate, regulators in your state

may take investigative action if multiple borrowers complain.

In some states, a regulator may

their transaction. Based on the could be referred to a regula-

tor who could apply fines and

suspend or revoke licenses. In addition, there would be legal

MIKE HANNA investor, hard money lender, certified private lender,

member of the AAPL Ethics Advisory Committee, and the managing partner at Investmark Mortgage.

fees to pay. And if the borrower files a complaint with AAPL,

issue fines or suspend or revoke business and/or mortgage

FALL 2020

61

LEGALÂ

62

PRIVATE LENDER

TITLE POLICY ENDORSEMENTS 101 Lenders should understand the common title policy endorsements to the industry-standard 2006 ALTA Loan Policy.

by Nema Daghbandan and Lauren Lee

T

itle insurance

endorsements to the 2006

mortgage

clients are generally rec-

protects

ALTA that mortgage lender

lenders when

ommended to obtain.

defects in a title to a

property result in financial loss to the lender.

ALTA 3 ZONING ENDORSEMENTS

The 2006 ALTA Loan Policy (2006 ALTA) is considered

the standard title insurance

policy available for mortgage

lenders. The title policy alone

is rarely adequate for most real estate transactions. It almost

always needs to be expanded

through specific title insurance

endorsements based on the specific risks related to the property in the loan transaction.

Below is a list of some of the more common title policy

Commonly referred to as the “zoning” endorsement, ALTA 3 provides coverage related to the zoning classification of the property. This endorsement is recommended when the use of the property will be changed or the current use of the property is in question. The specific zoning endorsement that is applicable depends on whether the land is improved, unimproved, or under development.

ALTA 6 VARIABLE RATE MORTGAGE ENDORSEMENTS

02 T o cover any negative amortization aspects of the loan.

03 To protect against a loss The types of risks covered under ALTA 6 occur when there are changes in the rate of interest or the interest on interest, or the unpaid principal balance of the loan increases due to the addition of unpaid interest pursuant to a provision under the insured mortgage. ALTA 6 endorsements should be considered:

01 W hen loan programs

contain periodic limits or caps on monthly payment increases on the loan.

of priority resulting from a change in interest rate.

04 W hen “interest on

interest” is legal in the relevant state.

ALTA 8 ENVIRONMENTAL PROTECTION LIEN ENDORSEMENTS These endorsements provide coverage against the risk of loss or damage resulting from any recorded environmental lien that is not otherwise shown as an exception to title policy.

FALL 2020

63

LEGAL

There is a specific endorsement for residential real estate (8.106) and one for commercial real estate (8.2-06). This endorsement is very inexpensive and is generally customary to order for all loan transactions.

ALTA 9 RESTRICTIONS, ENCROACHMENTS, AND MINERALS ENDORSEMENTS

origination. These endorse-

ments insure against loss resulting from the terms of a modification agree-

ment rendering a mortgage invalid or unenforceable.

These endorsements also confirm the priority of a

modified mortgage and its

continuance over any defects, liens, or encumbrances on

the title existing at the date of endorsement, including over

ALTA 9 is an endorsement that provides coverage for unrecorded covenants, notices, encroachments, or setbacks at the property.

ALTA 10 ASSIGNMENT ENDORSEMENTS ALTA 10 endorsements insure against loss that results when the assignment fails to vest title to any buyer of the loan. These endorsements should be considered when the loan is assigned to a new lender, or when the loan is assumed to confirm that the new party becomes insured under the title policy.

ALTA 11 MORTGAGE MODIFICATION ENDORSEMENTS

any liens subordinated at the time of the modification.

ALTA 14 FUTURE ADVANCE ENDORSEMENTS ALTA 14 endorsements insure the validity, enforceability,

and priority of a mortgage as security for future advances of principal. “Advance” is

broadly defined as an advance of principal made after the date of the policy, and it

includes protective advances.

These endorsements should

be considered when the loan is a revolving line of credit, there are future advances

that are obligated under the terms of the loan, or it is

highly likely that a lender

may need to make protective ALTA 11 endorsements are issued when the parties agree to modify a mortgage after 64

PRIVATE LENDER

advances to mitigate a bor-

rower’s failure to pay taxes or keep insurance current.

ALTA 17 ACCESS AND ENTRY ENDORSEMENTS ALTA 17 endorsements insure against loss or damage if, as of the date of the policy:

01 T he land does not

provide actual vehicular and pedestrian access to and from a public street, road, or highway (the “Street”),

02 T he Street is not physically open and publicly maintained, and

03 T he insured has no

on the property, or if the map included with the policy is

inaccurate as to the dimensions or location of the property.

These endorsements should be considered when there is con-

fusion about the street address

of the subject property, a street address was recently issued, or there is vacant land. This gen-

erally arises when there is a discrepancy with a United States postal search for the property or if the title report address

conflicts with other information provided during under-

writing, such as an appraisal.

right to use existing curb cuts or entries along the Street.

ALTA 25 SAME AS SURVEY ENDORSEMENTS

These endorsements should be considered when there is concern about access to the property, or when easements that grant access to the property exist.

ALTA 25 endorsements provide

ALTA 22 LOCATION ENDORSEMENTS

coverage for loss or damage

due to a difference in the land insured in the policy and the land described in a survey.

These endorsements should

be considered when there are

concerns about the makeup of the subject property or there

When reviewing a title policy, lenders are often surprised the property address is not identified in the policy, only its legal description, which generally bears no resemblance to the street address of the property.

These endorsements insure against loss or damage due to a street address not located

is vacant land. Generally, the

lender will be required to obtain an ALTA survey of the property to obtain this endorsement.

ALTA 26 SUBDIVISION ENDORSEMENT The ALTA 26 endorsement

should be considered when

the land is located in a state or local jurisdiction that limits the ways in which property can be legally subdivided.

This endorsement insures the land identified in the pol-

icy is separate and lawfully created under the applicable state and local laws.

ALTA 27 USURY ENDORSEMENT The ALTA 27 endorsement

covers against loss or damage resulting from the insured

mortgage becoming invalid

or unenforceable due to the

underlying loan violating the usury law of the state where

the property is located. Factors that should be considered

include high interest rate loans, the type of property securing the loan, whether the state

where the property is located has a low usury cap, and the applicable governing laws.

This endorsement is not applicable in the following states: Texas, Idaho, Kansas, Mis-

souri, New Mexico, New York, Pennsylvania, and Florida.

ALTA 32/33 CONSTRUCTION LOAN ENDORSEMENTS These endorsements are

intended for loan policies

related to loans with construction loan advances. These endorsements help prevent a lender from losing lien priority when making construction advances to ensure those later advances are not considered junior priority to other junior liens and/or mechanic lien claimants.

While only one endorsement is issued from the ALTA 32 Series, a new ALTA 33 endorsement is issued with every advance of construction funds. It is recommended to forecast how many advances will be required under the loan and order the 33 endorsements in bulk to reduce ongoing costs as the loan funds are distributed.

ALTA 4 CONDOMINIUM ENDORSEMENTS These endorsements provide coverage when a unit and its common areas fail to be considered part of the secured collateral. These endorsements also insure against current restrictive covenant violations.

The condominium endorsements should be consid-

02 H as concerns regard-

ing encroachments of common elements.

03 Wants protection

against a right of first

refusal that could have been exercised at the date of the policy.

ALTA 5 PLANNED UNIT DEVELOPMENT “PUD” ENDORSEMENTS These endorsements provide insurance against present violations of restrictive covenants. The PUD

endorsements should be

a partner in the banking and

encompasses all facets of real

estate transactions representing mortgage companies and professionals throughout the

country. He can be reached at

n.daghbandan@geracillp.com.

01 Wants to confirm that

a unit and its common

elements are separately assessed for taxes.

02 H as concerns regard-

ing encroachments of common elements

03 Wants protection

against a right of first

refusal that could have been exercised at the date of the policy.

The is not an exhaustive list of

01 Wants to confirm that

would be wise to work with

assessed for taxes.

Nema Daghbandan, Esq., is

considered when a lender:

ered when a lender:

elements are separately

NEMA DAGHBANDAN

finance practice. His practice

all endorsements available to a

a unit and its common

ABOUT THE AUTHORS

LAUREN LEE Lauren Lee is a summer associate. She is a law

student at the University of California, Irvine School of

Law. She can be reached at l.lee@geracillp.com.

Geraci LLP is the nation’s

largest law firm focusing on

representing private lenders.

title policy. Mortgage lenders counsel in all their transactions to make sure they are

adequately mitigating risks. ∞ FALL 2020

65

LEGAL

Mythbusting for Private Lenders: Securities Edition

by Kevin Kim

Are you a private lender?

Nonconventional lender?

Mortgage broker?

It’s essential for you, as a private lender, to remember that if you are raising capital from investors, you are selling securities, and you need to consider local and/or federal securities regulations.

There are many misconcep-

tions and myths in the private

lending industry when it comes to securities laws. Read further

to make sure you are complying with local and federal securities regulations as necessary.

MY TH 11

MY TH 21

FRIENDS AND FAMILY CAPITAL RAISES ARE NOT SUBJECT TO SECURITIES REGULATIONS.

FALSE.

FALSE.

The Securities and Exchange

First, cousin Bob can become plaintiff Bob in a split second.

Second, the SEC and state regulators are interested in protecting investors, regardless of the existence of any personal relationship between the investor and the sponsor.

securities regulator has made it a point that promissory

notes, when sold to investors, are almost always a security.

This includes unsecured notes, secured notes, mortgages, and PRIVATE LENDER

Legally speaking, the “Reves Test” is the dispositive test to evaluate whether a promissory note is a security. This test comes from a famous case called Reves v. Ernst & Young.

The court explicitly carves out most notes as securities, except when the nature of the transaction and the expectation of the parties indicate it should be treated as a security.

Unfortunately, most regulators, including the SEC, view most of the note investments in our space as securities. For these reasons, this myth is busted.

BROKERING AND SELLING LOANS TO INVESTORS DOES NOT CONSTITUTE A SECURITY.

Commission and every state

66

fractional or participations notes. The facts surrounding the transaction, the expectation of the parties involved, along with the parties themselves all inform the question as to whether these investments are securities.

The law is very clear. If you are offering securities, you must either register or find an exemption. Below are the three most relied upon securities exemptions in private lending.

is exempt from registration with the SEC.

For clients who oper-

ate national fraction-

alized loan offerings, debt offerings, and

debt funds, 99% will

01 R EGULATION D RULE

506b/506c // Regulation D is a federal securities “safe harbor” that establishes that if an “Issuer” (i.e., someone who offers and sells securities to investors) relies on its requirements, it

utilize Regulation D’s Rule 506B or 506C.

Figure 1 shows some key features of both regulations.

02 R EGULATION A // Regulation A was

amended and signifi-

with unique restrictions.

as part of the JOBS Act.

nificantly more popular

cantly expanded in 2014 This amendment essen-

tially opened the door to true “crowdfunding” in

the sense that is permits issuers to raise capital from the public (in a

certain limited fashion).

Notably, Tier 2 is sigbecause it does not

require state-by-state

qualification. Figure 2

shows some key features of both tiers of Reg A.

03 LOCAL SECURITIES

In many ways, Regulation

REGULATIONS //

“semi-public” offering.

capital from one state,

A can be viewed as a Regulation A is com-

prised of two tiers, each

For lenders who raise

state securities regula-

tions can be immensely useful. Many states have variations of

the federal securities

FIG. 1 REGUL ATION D KEY FEATURES RULE 506(B)

RULE 506(C)

Maximum Offering Limit

None

None

Federal Preemption

Yes

Yes

Advertising & General Solicitation

No

Yes

Non-Accredited Investors Permitted?

Yes. Up to 35 Max

No. Verified Accredited Investors Only

Liquidity Restrictions?

Yes. Minimum 1 Year.

Yes. Minimum 1 Year.

Compliance Requirements

Form D with SEC and States

Form D with SEC and States

exemptions set forth above. For example, California has Cali-

fornia Corporations

Code 25102(f), which

is essentially identical to Rule 506(B) of Regulation D but limited to California only.

FALL 2020

67

LEGAL

FIG. 2 REGUL ATION A KEY FEATURES REG A TIER 1

REG 2 TIER 2

Offering Limit

$20,000,000 every 12 months

$50,000,000 every 12 months

Government Qualification

State and Federal (SEC)

Federal Only (SEC)

Advertising & General Solicitation

Yes

Yes

Non-Accredited Investors Permitted?

Yes. Max 500

Yes. Investment limited to 10% of net worth

Audited Financials Required?

No

Yes

Periodic Reporting Required?

No

Yes. Annual, Semi-Annual, Current Event.

MY TH 31

investors without providing

These regulations are highly effective for

raising capital in a single state, but to truly scale

and raise money nationally, the federal options

listed are recommended.

SELLING SECURITIES TO FRIENDS AND FAMILY DOES NOT REQUIRE A PRIVATE PLACEMENT MEMORANDUM.

Today, nonconventional

lenders, debt funds, and

mortgage brokers nationwide

have a broader means to raise investor capital at the private level thanks to the JOBS Act. However, selecting the right

option can often be a challenge.

It is recommended to rely on Regulation D’s Rule 506(B) or 506(C) to establish your

initial capital raise, whether it be friends and family or high net worth investors. From

there, a determination can be made to either remain within the same investor class or

expand to the general pub-

FALSE. First, it is considered best practice to always use some form

of disclosure to investors when offering or selling securities.

This is usually done via a

private placement memoran-

dum. Legally speaking, the SEC requires a properly written

private placement memorandum whenever offering or

selling securities to even one

nonaccredited investor. It also

requires the accredited investors to receive the same disclosures.

Second, it wildly deviates

lic. Thanks to Regulation A,

from industry standards.

is much less burdensome.

to offer or sell securities to

the path to a public offering

68

PRIVATE LENDER

Finally, it is incredibly risky

If you are interested in learning more, please sign up for AAPL’s Certified Fund Manager online course or contact Kevin Kim at k.kim@geracillp.com or (949)379-2600.

ABOUT THE AUTHOR

adequately written offering documents. Why? Because properly written offering documents disclose every material fact as it pertains to the securities being offered.

This includes the terms of the investment, the limitations on liquidity, the fees, the risks, and past malfeasance by the issuer. As an issuer, these documents provide added protection from disputes stemming from a lack of information, which is the fundamental precept to securities fraud allegations.

If you are a private lender, mortgage broker or nonconventional lender, it’s imperative that you consider local and/or federal securities laws whenever investors are involved.

This includes institutional investors. Cutting these corners can easily result in fines, penalties, and even disqualification from the sale of securities. ∞

KEVIN KIM Kevin Kim is an experienced

corporate and securities law

attorney with AAPL’s general

counsel, Geraci Law Firm. He

is dedicated to providing reli-

able and innovative legal solutions. Kim focuses his practice on real estate matters, including private placements and

other alternative investments

for private lenders, real estate developers and other real estate entrepreneurs.

Kim’s work includes seeing

that clients are compliant with

the applicable securities laws, structuring strategic partnerships and creating innovative solutions. His securities

and corporate practice also

includes preparing complex

private and public securities

offerings for alternative investment platforms for clients

throughout the United States and abroad.

Become a Certified Fund Manager from the comfort of anywhere.

Our highly sought after course is now online. CFM bridges industry practices, investment theory, ethical issues and professional standards to provide investment analysis and portfolio management skills. Topics include: •

Pros, Cons & Considerations

•

Fund Structure

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Creation & Launch

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Ongoing Administration

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Using Your CFM Designation

•

AAPL Code of Ethics

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LEGISL ATIONÂ

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PRIVATE LENDER

CALIFORNIA’S TENANT, HOMEOWNER, AND SMALL LANDLORD RELIEF AND STABILIZATION AC T OF 2020 BECOMES LAW Here’s what lenders need to know about how it protects tenants and landlords.

by Nema Daghbandan

On Aug. 31, 2020, AB 3088, known as the Tenant, Homeowner, and Small Landlord Relief and Stabilization Act of 2020, was signed into law. The law went into effect immediately.

concerned about the possible snowball effects of such legislation. California law is traditionally stricter on the mortgage lending industry than other states. The fact that only a watered-down version of the proposed legislation passed in California, even in the midst of

AB 3088 is an omnibus bill that

riums, mandatory lender for-

incorporates many smaller

bearances, and a litany of other

tenant and landlord protection

attacks on the mortgage lending

law’s progression and plan-

bills. The American Associ-

industry. Due to the combined

ning their own responses.

ation of Private Lenders and

efforts of AAPL, Geraci and

its general counsel, Geraci

other reputable mortgage

LLP, fought the passage of

associations, AB 3088 did not

these bills, which included

include many of the harsher

AB 828, AB 2501 and most

measures. The action it does

recently AB 1436. The bills

take will likely have minimal

failed to pass individually.

impacts to many private lenders.

There is no mandatory forbearance requirement.

The previous legislation

The outcome of the act is

included foreclosure morato-

especially reassuring for those

I f a covered borrower

the pandemic, sends a message to other states watching the

AB 3088 HIGHLIGHTS The main takeaways from AB 3088 are as follows:

requests a loan forbear-

ance, the lender/loan

servicer may deny the

request as long as the

lender/servicer provides the reason(s) why the

request was denied along

with any curable defects in the request. For example, if the denial is based on

the fact that the borrower failed to provide bank

statements to demonstrate hardship, then the lender

needs to state the request will be reconsidered upon

receipt of bank statements.

A covered borrower is an

individual borrower or

entity borrower (so long as the entity is not a corpo-

ration, or an entity owned by a corporation) with a

loan secured by 1-4 family

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LEGISL ATION

property. This requirement applies to business purpose and consumer loans.

California expanded

its Homeowner’s Bill of Rights (HBOR).

There are no foreclo-

(aaplonline.com/covid19), a

where in the bill.

no hardship in order to gain

sure moratoriums any M ortgage lenders may

continue to foreclose in California but will need

Previously, first position

to comply with additional

loans were required to

under HBOR for 1-4 family

period with the borrower

occupied by tenants.

consumer mortgage

notice requirements

go through a notification

residential property

before recording a Notice of Default. The lender

had an affirmative duty to attempt to notify the bor-

AAPL AND GERACI OBJECTIONS CONSIDERED

erty through foreclosure.

T his legislation expands

Previous to the passage of AB 3088, AAPL and Geraci LLP submitted a letter of objec-

the early intervention

tion regarding AB 1436 to

to all loans secured by

member David Chiu. The bill

that are occupied by

ers with loans secured by

unable to pay rent due

automatically eligible for 12

related to COVID-19.

requirement was a statement

notification requirements

the bill’s sponsor, assembly

1-4 family properties

sought to make all borrow-

tenants if the tenants are

1-4 unit residential property

to a reduction in income

months’ forbearance. The only

G enerally, compliance with

HBOR adds 30-60 addi-

tional days to the California foreclosure process.

of hardship from the borrower, with no underlying proof or documentation needed.

Although AAPL forbearance guidelines during this time lay out recommendations when borrower hardship is proven

decimated private lending companies, ended capital investment that is slowly coming back to the state, and amplified the impacts of COVID-19 as capital remained locked in business-purpose loans rather than moving through the housing economy.

In the objection letter, AAPL and Geraci LLP requested collateral be changed to “the principal residence of the borrower.” The new language would have protected California’s primary concern—consumer borrowers and their homes—while exempting most business-purpose loans made by private lenders.

The AB 3088 omnibus bill that included elements of AB 1436 took many of AAPL and Geraci’s objections into consideration although our final recommendation of changing the definition ended up being moot as the passed legislation had no mandatory forbearance requirement whatsoever.

The complete text of the letter is reprinted on the next page. ∞

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PRIVATE LENDER

ABOUT THE AUTHOR

forbearance would have

the definition of the secured

rower of their default and

potential to lose the prop-

bill that effectively requires

NEMA DAGHBANDAN Nema Daghbandan Esq. manages The Real Estate Finance Group at Geraci LLP, where

he is a partner. Daghbandan’s practice entails all facets of lending matters across the country, including but not

limited to the preparation of

loan documents and addenda in all 50 states; loss mitiga-

tion efforts; preparation and negotiation of secondary

market documents, including loan sales and participation agreements; line of credit/

warehouse facilities; hypothecations and securitizations.

Daghbandan advises financial

institutions on various lending matters, including licens-

ing, usury, and foreclosure.

Daghbandan is also an expert in default management and leads the firm’s nonjudicial

trustee group. You may reach Daghbandan at Nema@ GeraciLLP.com

Re: A ssembly Bill 1436 - The Homeowner, Tenant, and Small Landlord Relief Act of 2020

“AB 1436 does not make

American Association of Private Lenders Background

any distinction as to

comprised of non-depository, non-government agency mortgage lenders,

whether a borrower is

American Association of Private Lenders (“AAPL”) is a national association brokers and service providers whose purpose is to provide liquidity to underserved and underbanked real estate investors. Unlike typical bank financing, private lenders commonly provide short term financing also known as bridge financing to professional real estate investors and small

a homeowner, or a real estate investor who

businesses who professionally invest in real estate nationwide.

owns a single-family

Typical Financing Provided by AAPL Members

investment property.”

A common example of the relationship between private lenders and their borrowing constituency is the purchase of an investment property which requires light to significant rehabilitation to be marketable before it can be

sold to aneventual homeowner. Banks are reticent to make this type of loan as the property is not stabilized, often uninhabitable, and rarely generates any cash flow due to its state of disrepair.

Private lenders primarily make business purpose loans to individual and entity borrowers. Whereas banks and other depository institutions, primarily focus on providing mortgage loans to individuals primarily for personal, family or household use, secured by the principal residence of the individual consumer.

AB 1436 and its Unintended Impact on Private Mortgage Lenders

As a preliminary matter AAPL applauds the California legislature and its intent “to avoid widespread economic and social harm by establishing a timeline and framework for tenants, homeowners, and small landlords to defer payments temporarily until after the public health emergency passes and the financial consequences begin to ease.”

The intent of the statute appears to provide homeowners an ability to quickly and easily require their mortgage lender to enter into a forbearance related to their primary residence. Additionally, the statute appears to desire to provide

multifamily borrowers an ability to potentially enter into a partial loan forbearance provided that they provide sufficient evidence of hardship.

The difference in approach of treatment of multifamily borrowers and homeowners makes sense. A multifamily borrower should have to provide evidence of hardship and should provide their net operating income to the mortgage lender even if that income is not sufficient to cover mortgage payments, whereas a homeowner should be afforded greater protections.

However, AB 1436, does not make any distinction as to whether a borrower is a homeowner, or a real estate investor who

owns a single-family investment property. As written, any individual, including an individual who owns hundreds of single family residences and rents all of them could contact their lender and demand the lender place the properties into a C ontinues on next page.

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LEGISL ATION

C ontinued from previous page.

minimum six month forbearance upon providing a basic attestation without evidence of actual rental income hardship.

Similarly, an individual real estate investor who is currently flipping multiple real estate investment properties, could simply contact their lender and demand the mortgage lender forbear even though the property is uninhabitable and the borrower faces no actual economic hardship. The key distinction here is that the statute as written does not require the 1-4 family residential property to be the primary residence of the borrower in order to qualify for relief.

This key distinction and apparent oversight would result in a floodgate of meritless disruption and loss of rights for private lenders.

Unlike large depository financial institutions, private lenders are typically small businesses with their own payroll needs who could not sustain significant income loss through widespread loan forbearance. Similarly, most private lender companies rely on individual investor capital and those individual investors are often retirement investors who rely upon the loan income as a supplement to their monthly household income. The statute as written would necessarily result in a flood of forbearance requests and require many small private lender businesses to close due to the lack of revenue, further exacerbating California’s economic crisis.

Recommended Change to Statutory Language in AB 1436

However, in keeping with the spirit and intent of the legislature which is the protection of homeowners, and a pathway

to assist small landlords in financial distress based on their rent collections, AAPL proposes the following modifications to the current statute which we do not believe are objectionable: Current Section: 3273.2. (a) The provisions of this title apply to specified obligations, as follows:….(1) Article 1 (commencing with Section 3273.10) of Chapter 2 shall apply to a mortgage or deed of trust that is secured by residential property containing no more than four dwelling units, including individual units of condominiums or cooperatives, and that was outstanding as of the enactment date of this title.

Recommended Revision: 3273.2. (a) The provisions of this title apply to specified obligations, as follows:….(1) Article 1 (commencing with Section 3273.10) of Chapter 2 shall apply to a mortgage or deed of trust that is secured by residential property containing no more than four dwelling units, including individual units of condominiums or cooperatives, and that was outstanding as of the enactment date of this title, the principal residence of the Borrower.

This minor change in language would clarify that the protections for Residential Mortgage Loans only carry over to homeowners and not institutional investment property owners who should not have the same protections as vulnerable homeowners.

All real estate investors should instead be regulated under Article 2 of AB 1436 which would require the real estate investor to provide evidence of rental revenue loss.

We appreciate your consideration.

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PRIVATE LENDER

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LEGISL ATIONÂ

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PRIVATE LENDER

WHAT IS THE BIGGEST LEGISLATIVE CHALLENGE FACING THE PRIVATE LENDING INDUSTRY?

T

his year, AAPL’s Government Relations

Committee (GRC)

has tackled a wide range

of issues on behalf of the

private lending community.

In New York, Senate Bill S3060E sought to increase the transfer tax on fix-andflip residential property by 15% to 20%. The bill saw no movement this year, although it is unclear if it was tabled due to AAPL’s opposition efforts or the coronavirus.

Then, the Securities and Exchange Commission cited

the recommendations of AAPL and its general counsel, Geraci LLP, in its final ruling to expand the definition of “accredited investor.” The final rules are expected to create an influx of new investors for private equity funds, venture capital funds, private companies, and specific hedge funds within the industry.

Although COVID-19 stalled most “business-as-usual” legislation in state legislatures, it created additional challenges as regulators scrambled to mitigate its health and economic impacts. Among the most extreme was California Assembly Bill 1436, which would have extended man-

datory 12-month forbearance to any requesting residential

mortgage borrower. Due to the efforts of AAPL, Geraci LLP,

and other reputable mortgage associations, the omnibus AB

3088 that replaced AB 1436 did not include these measures.

AAPL’s GRC continues to keep an eye on state and federal

legislation that seeks to overstep reasonable COVID-19 mitigation efforts. In the meantime, as we slowly move beyond the reactionary coronavirus regulation, we asked the committee members to tell us what they see as the largest legislative challenge facing the private lending industry. Here are their answers.

Interested in getting involved? The Government Relations Committee is accepting new applications for appointment to the 2021-2022 committee.

Apply online at aaplonline.com/gov/volunteer.

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CORTLANDT CHALFANT M anaging Member,

Nexus Private Capital

G RC Region: Four Corners

(AZ, CO, NM, UT)

from being kicked out of their homes. The intention

behind this lesson makes perfect sense and protects the most vulnerable in their time of greatest need.

But, in the rush to act early and powerfully, the legislatures are unable to differentiate between those most

vulnerable (i.e., homeowners in their homes) and those who decided to take a business risk and should live

The biggest legislative chal-

lenge for the private lending industry is “regulation creep”

and the corresponding risks of “unintended consequences.”

with the consequences of that risk.

Unlike many sectors of the economy that are struggling

and will not be propped up by government intervention

Government generally can’t resist the temptation to

(think: hospitality, restaurants, nail salons, gyms, etc.),

is used to fix a “rifle-shot” issue. As a result, much of the

enforcement activities, effectively eliminating a lender’s

by collateral damage.

ing a hardship. This “kick the can” approach will have

regulate. Unfortunately, all too often a “shotgun” approach

legislative bodies are attempting to stop all mortgage

good that comes from addressing the target is diluted

recourse regardless of whether the borrower is experienc-

You can pick many topics to make this point. In New York, for

its own day of reckoning. Unfortunately, when picking

impose a 20% tax on the gross sales price of any home resold

straw” legislatively.

example, a residential resale tax was proposed that would

winners and losers, private lenders are pulling the “short

within one year and 15% if resold within two years. This transfer tax would have eliminated an entire supply chain of fix-and-flip investors while doing nothing to promote affordability.

EDWIN EPPERSON O wner, Blue Bay Capital G RC Region: Southeast

NEMA DAGHBANDAN

(AL, AR, FL, GA, LA, MS)

Partner, Geraci LLP G RC Region: West (AK,

CA, NV, OR, WA)

“To a man with a hammer, everything looks like a nail.” ~Author Unknown

As the current political tensions are causing civil unrest and the government is responding with seemingly knee-jerk reactions, investor, tenant, mortgagor, and lender rights are the biggest concern, now and for the foreseeable future.

Proper representation is critical now. So, communicating

The lesson of the 2008 mortgage crisis for lawmakers is

the concerns of your local real estate investing community

to act early, intervene forcefully, and protect individuals

to the GRC is more important now than ever.

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PRIVATE LENDER

Where will your network take you?

The top echelon of the real estate investment and private lending industries meet in one place: the Presidents’ Circle.

Circle members build deep connections across the REI landscape, learn tomorrow’s trends from leaders driving the industries, and step into the spotlight via Think Realty and the American Association of Private Lenders’ powerful media outlets.

Will you be there? aaplonline.com/presidents-circle

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MIKE FALLOT C EO, MM Lending, LLC G RC Region: Great Lakes

(IL, IN, KY, MI, OH, TN, WI)

faith, as a delay tactic in foreclosure—at least with respect to business purpose loans and single-purpose entities.

Private lenders, big and small, can take a big financial hit

with a single loan that enters bankruptcy protection. Most of these filings occur on the eve of (or the morning of) a

foreclosure sale, delaying the sale by months, at a minimum.

The U.S. faces a significant

shortage of both housing units

To private lenders, it causes major inconvenience and

loss of a larger proportion of revenue than compared to a

and affordable housing. Private lenders across the country

bank or others more able to absorb the blow. To the legal

need to acquire distressed property and complete the

and impair the ability of the bankruptcy courts to efficiently

provide a large portion of the capital real estate investors

system and the country as a whole, these filings degrade

major repairs needed to make the property livable.

mete out real justice.

Private lenders play a vital role in rebuilding the housing

inventory because they provide the funding for these higher risk loans quickly and efficiently.

As elected officials at every level grapple with the housing

shortage, they have proposed legislation that would regulate

CHRIS RAGLAND

private lenders and add excessive taxes on real estate sales

R eal Estate Investor

deemed to be “flips.” Many legislators do not fully under-

and Mentor

stand the role private lenders play in expanding the housing

G RC Region: Near West

market. As a result, most proposals would have significant,

(ID, MT, OK, TX, WY)

unintended consequences that would reduce the amount of investment available for housing and reduce the available housing inventory.

Legislation at all levels is

being crafted and passed rapidly without extensive input.

As a result, private lenders are being unfairly categorized and grouped with major lenders, who are focused on

MATTHEW GUNTER A ssistant General Counsel,

RCN Capital

G RC Region: North-

east (CT, ME, MA, NH, NJ, NY, RI, VT, DC)

The greatest challenge is one that has yet to be taken

seriously: deweaponizing bankruptcy, or using it in bad

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PRIVATE LENDER

homeowners as opposed to commercial purpose loans.

This blanket approach to legislation is the single largest risk to the private lending sector in recent memory. It is vital, as an association, that we continue to advocate,

educate, and participate when it comes to sensible and responsible legislation. ∞

The ® Your Ultimate Lending Platform

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SEC Publishes Final Ruling on Expanded Definition of “Accredited Investor” Comments from the American Association of Private Lenders and Geraci LLP are cited in the final ruling.

private lender association cited. The amended definition will be a game-changer for the private lending industry since it will increase the number of accredited investors.”

DEFINITION CHANGES Under the modernized definition, accredited investor status will no longer be determined solely by income or net worth considerations.

Instead, individuals will attain

by Kat Hungerford

accredited investor status if they meet any of the following: M aintain in good

standing their Series 7, 82, or 65 licenses

More than a year after proposing an expansion of its definition of “accredited investor,” the Securities and Exchange Commission (SEC) has published its final ruling on the matter. This ruling is the first meaningful modification of the definition since its inception in 1982, when it was created in an effort to govern the sale of unregistered investments.

In its final rules, the SEC cited comments from the American Association of Private Lenders (AAPL) and its general counsel Geraci LLP. Nearly all of their recommendations made it into the newly modified accredited investor definition.

“Having our comments specifically cited by the SEC as part of their final ruling is a powerful step forward as we seek to grow our legislative advocacy initiatives,” said

A re a “knowledgeable

employee” of a private-fund issuer of securities as defined under Rule 3c-5(a)(4) of the

Investment Company Act The ruling also expanded the definition to include certain entities:

of AAPL. “It’s rewarding to

S EC- and state-registered

especially as we were the only PRIVATE LENDER

good standing a specific, verifiable professional certification, designation, or credential as designated by the SEC via Commission Order

Linda Hyde, managing director see that our efforts are heard,

82

H old and maintain in

investment advisers and exempt reporting

advisers under Section 203(m) or Section 203(l) of the Advisers act

new definition are financially

The new ruling will also make

sophisticated and able to

the process of raising capital

R ural Business Investment

“The ruling meets the SEC’s

Companies as defined under Section 384A of the Consolidated Farm and Rural Development Act

L LCs with at least $5

million in assets

A ny entity owning “invest-

ments” in excess of $5 million, with “investments” being defined in Rule 2a51-1(b) of the Investment Company Act

C ertain family offices as

defined in the “family office rule” under 17 CFR § 275.202(a)(11)(G)-1 with at least $5 million in

assets under management Finally, the ruling allows for spousal equivalents, as defined under 202(a)(11)(G)-1(d)(9), to pool finances to qualify as an accredited investor under the income/net worth rules.

The changes mark the SEC’s intention to include “knowledge and expertise” criteria. While unregistered investments—also called exempt offerings—pose significant financial risk, the SEC and its supporting commenters, including AAPL and Geraci, contend that the new individuals and entities allowed to invest under the

make informed decisions. original mandate in creating the accredited investor definition,” said Kevin Kim, partner and department head of corporate and securities at Geraci LLP. “The goal has always been to protect consumers against financial loss and liquidity issues should they invest in unregistered funds or ventures for which they are unable to properly evaluate the merits or risks. The modernized definition accounts for the existence of persons who, although they may not meet the income or net worth requirements, are professionally well-versed in evaluating these kinds of investments.”

IMPACT ON PRIVATE LENDING The new ruling is especially significant to the private lending industry as it will increase the number of people and entities able to invest and the amount of capital available. Such investments include private companies, offerings by specific hedge funds, private equity funds, venture capital

more efficient. Under Reg-

ABOUT THE AUTHOR

ulation D, issuers of exempt offerings must reasonably believe their investors are accredited and, in the case of 506(c) investments, take steps to verify that status. Verifying licensure or professional certifications provides an additional and relatively straightforward way to make such assessments.

Expanding the pool of possible investors also makes it easier to find investors, lowering search costs and increasing the cost effectiveness of advertising and solicitation efforts.

Finally, the modified definition will help increase the liquidity of securities issued in exempt offerings. Investors who seek to resell securities

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

development manager at

the American Association of Private Lenders, the oldest and largest association

representing the private

real estate and peer-to-peer

lending industry. Hungerford also acts as secretary for the association’s Government

Relations Committee, which serves as AAPL’s advocacy arm in state and federal legislatures.

will find their pool of qualified purchasers has grown.

“We are excited to have a critical voice in legislation and to be able to effectively advocate for our industry,” said Eddie Wilson, AAPL CEO and chairman. “We look forward to continuing and expanding on our efforts to support our constituents throughout the private lending industry.”

The ruling will become effec-

funds, and other opportu-

tive 60 days after it is published

nities within the industry.

in the Federal Register. ∞ FALL 2020

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TECHNOLOGYÂ

5 TECH-DRIVEN STRATEGIES FOR ACCELERATING REACH AND REVENUE Private lenders that leverage technology can realize tremendous business growth.

by Abhi Golhar

L

ending busi-

nesses can trans-

form their results by using tech-

nology-enabled strategies

that increase their reach and boost bottomline revenue.

Technology makes interactions between financial institutions

and their customers frictionless and effortless. With tech being the harbinger of innovation in

the lending space, here are five

tech-driven approaches private

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PRIVATE LENDER

lenders can use to accelerate their reach and revenue.

USE TECHNOLOGY FOR LEAD GENERATION The era of cold calling borrowers and real estate investors and telling them about your offerings is over. If you are not leveraging content to generate leads or, worse, if you don’t have a website, you are missing

out on significant opportunities. Using content marketing to generate leads is a powerful strategy that forward-look-

Having access to all the data

CAPITALIZE ON DATA ANALYTICS

For most people using the internet, the discovery or purchase of a service or product begins with a search engine.

The same holds true for real estate investors looking for private lenders. Search engine optimization (SEO), therefore, is critical to your company’s success online; it results in organic lead generation.

With Google constantly updating its algorithms, staying on top of the SEO game can be challenging for private lending firms. High-quality content that provides value and ranks high on the SERP (search engine result pages) is crucial for bringing in leads for your business. Content that targets

ation of a foolproof borrower persona, which is critical to your marketing efforts and

ing financial organizations are already leveraging.

points can result in the cre-

Fintech lenders increased their market share of U.S. mortgage lending space from 2% to 8% between 2010 and 2016. They also managed to process their mortgage applications 20 percent faster than other mortgage lenders. All this was made possible by leveraging marketwide loan data on U.S. mortgage applications and originations.

Lending businesses are increasingly leaning on technology to decipher the plethora of data available today and to help them make smarter decisions.

We are in the midst of a data explosion, but our access to the data is meaningless unless it can be leveraged to draw actionable inferences.

This is where data analytics comes into the picture.

can amplify your reach.

LEVERAGE THE POWER OF CLOUD COMPUTING From health care to fintech, organizations across a wide spectrum of industries are

increasingly turning to the cloud because of the compelling benefits it offers.

Cloud technology provides the benefits of software without

requiring lending businesses to invest in IT infrastruc-

ture. Cloud technology also

allows you to keep operational overhead such as system

administration under control.

It helps too in the quicker

deployment of data, which in

the right keywords and produces in traffic, conversions, and ultimately revenue is the secret to widespread reach.

Taking a software-led approach can help streamline the keywords you choose to target with your content and ensures it reaches your target audience, regardless of their geographic location.

“Lending businesses are increasingly leaning on technology to decipher the plethora of data available today and to help them make smarter decisions.�

the case of legacy systems can take ages. And, with remote work becoming the new normal in the wake of the COVID19 pandemic, the web-based user interface the cloud offers makes managing distributed teams a seamless experience.

Applied to the lending sphere, cloud computing means all the documentation required for processing a loan can be made available from virtually anywhere in the world. Cloud technology also makes it possible for loan processing to occur without the borrower having to make repeated rounds to your office. And, because the application process is streamlined, it also results in better customer experience. Satisfied customers result in positive word-of-mouth and organic marketing, which directly translates to increased revenue.

Cloud-based loan processing software also offers your lending business scalability. It is more capable of accommodating increasing processing requirements and data accumulation while keeping the associated costs in check. Since the software is swiftly and continually updated on the cloud, lenders can take advantage of bug fixes and functional enhancements. For example, a lender can make updates in response

FALL 2020

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TECHNOLOGY

to customer requests and, therefore, process loan applications even more efficiently.

AUTOMATE YOUR WAY FORWARD Automation removes inefficiencies and routine manual steps from the lending process, resulting in faster processing of loans.

Faster processing times give lenders a competitive advantage.

Keep in mind that automation in lending is not aimed at removing humans from the process. Instead, it allows human expertise to be applied where it is needed.

Automation relies on a predetermined decision-making process that replaces numerous manual decisions and tasks, hastens the loan origination process, and enables lenders to quickly and consistently determine which applications to fund. Automation can be used to evaluate the qualifying criteria for the appropriate level of funding, interest rate, and time period for the loan.

For example, if an application scores high on the key criteria, automated decision rules fast-track the approval process.

Conversely, if criteria levels are not met, then the application is automatically stalled. Some86

PRIVATE LENDER

times, automated decision rules may also recommend that questionable applications be sent to a loan professional for review.

The CRM is an indispensable

At the end of the day, automation allows applications to be processed quickly and efficiently. It also allows lenders to focus their efforts on applications that are more profitable, adding to the business bottom line.

retention stage. You can use

software from the marketing and lead generation phase to

the conversion and customer CRM data for analytics-driven marketing, lead scoring and

microsegment targeting. All of these can take your lend-

ing business to new heights.

Access to your CRM data

allows you to personalize your

offering borrower preferences,

USE A CRM FOR AN ENHANCED CUSTOMER EXPERIENCE Customer acquisition may be the basis for revenue, but customer retention and advocacy are the key to excellence. The data within your customer relationship management (CRM) software is a goldmine that you must learn to use to your advantage.

A CRM provides vital insights into the entire lending process and helps identify areas of backlog and potential bottlenecks. It also identifies opportunities for upselling and cross-selling. The bottom line is a lending CRM can help disburse loans faster and boost borrower experience and team efficiency.

A digital foundation can accelerate the overall loan cycle.

leading to greater closure rates.

It also allows you to predict

the churn rate in advance— and helps you strategize to reduce that churn. If the

CRM comes with a mobile

Certainly, the adoption time for market-ready software is lower, but the personalization and flexibility custom software offers makes it an ideal choice for some businesses. Custom-built software solutions also give you the freedom to incorporate a wider range of technology, and you can adapt it to meet your changing requirements as your business scales.

Whether you choose to custom-built software or a market ready version, technology undisputedly gives you an edge over your competitors. Be sure to make the best of it. ∞

app, your staff can access the

data and documentation they need while on the go, further boosting the efficiency and

contributing to the revenue.

ABOUT THE AUTHOR

A NOTE ABOUT CUSTOM VS. MARKETREADY SOFTWARE Although software integra-

tion is crucial to increasing

the revenue and reach of your private lending business, a

ABHI GOLHAR

one-size-fits-all approach does

Abhi Golhar is a three-time

businesses may benefit from

host, author, and investor. For

not guarantee success. Some using off-the-shelf software solutions, and others may

need custom software to meet their unique requirements.

nationally syndicated radio

tips on how to develop smarter software that provides better leads and quicker brand

visibility, visit AbhiGolhar.com.

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EDUCATION

TITAN TALK: THE TITAN OF LOCAL CAPITAL Tom Meade is dominating the Boston market

by Kelli White

Filmed on location, Titan Talk is a one-on-one interview between a titan of either the real estate investment or a supporting industry and Eddie Wilson, CEO of the American Association of Private Lenders and Think Realty.

B

orn and raised

went to Disney World once as a

Massachusetts,

time of year to visit Florida),”

in Quincy,

family, in August (the cheapest

just a few miles

he recalled.

south of Boston, Tom Meade and his three siblings were

children of working parents.

His dad was a nursing-home administrator, and his mom was a registered nurse and

clinical director of programs for autistic young adults.

“I like to say I never missed

a meal as a kid, but we didn’t

have a lot of extra money. We

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PRIVATE LENDER

His childhood home was a

two-family house. His aunt

and grandmother lived on the first floor, and Tom’s family

lived upstairs. When he was in fifth grade, Tom’s par-

ents bought “a serious fixer

upper,” an 11-room Victorian

house built in the late 1800s.

That’s how Meade got his first real estate and construction

experience. He saw the major remodeling work his parents did on their new home, and throughout his formative years, Tom helped his dad do small projects around the house.

falls in the summer!), learned a new language and culture, and attended school and church fully immersed in Spanish. Coming back from that year, I had a new outlook,” he said.

In high school, Meade participated in a foreign exchange student program and lived in Argentina for a year with a host family, an experience that affected his life perspective.

Among those was a greater appreciation for his family and friends. He also gained self-confidence and independence as well as the value in “learning things from the bottom up.”

“As a 16-year old kid, I moved to a foreign country in a different hemisphere (Christmas

“I had to relearn everything about day-to-day life. Beyond the obvious language barrier,

they had bidets and ate dinner at 8 or 9 every night!” he said.

Meade didn’t know it at the time, but learning from the bottom would turn out to be the strategy that helped him build a successful career.

After college, Meade went to work for Merrill Lynch, where he had interned in the mailroom when he was still in school. This time, he worked full time at the Boston office of their institutional money market fund. It was 1999.

Meade worked his way up and transferred to a sales job at the Merrill Lynch asset management headquarters in Princeton, New Jersey. As a 25-year-old, he was making a good income with a title of assistant vice president. But he was miserable.

“I realized I’m not really built to work for someone else,” he said.

He wanted to move back home to Boston, so he bought a house in Braintree, while still

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working at Merrill Lynch in New Jersey.

“This was in the early 2000s before Dodd Frank, and we got really creative with how to buy the house. The realtor rolled in his commission as my down payment, and I had prenegotiated with a neighbor to subdivide and sell off a portion of the land at the back of the lot. I did my first creative real estate deal and I was hooked. Back then, I bought a set of Carlton Sheets audio and video tapes to learn about how to invest with no money down,” he said.

To learn the business from the ground up, Meade quit his job in financial services and went to work for a friend of his family who had a small residential contracting business.

“I went from making pretty good money as an AVP at Merrill Lynch to a laborer on a construction crew, making $100 a day,” Meade said. “I learned a lot about the trade and the business. I got my general contractor license and started my own contracting business, although I invested in a few deals on the side during these years.”

In 2008, he went to work for Boston Capital, one of the

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“When we think of a Titan, we often think on a national scale.

But sometimes we need to look for Titans who are dominating a specific market. Tom Meade is just that. He is dominating the market of Boston in a way that other national lenders and developers can only dream of.”

— E D D I E W I L SO N , O w n e r a n d C EO o f t h e A m e r i c a n A s s o c i a t i o n o f Pr i v a t e L e n d e r s a n d T h i n k Re a l t y

largest owners of affordable housing in the country. They raise tax credit equity funds and partner with the developers who build the apartment complexes.

“I looked at this opportunity to learn how the big guys do it, as far as partnership structure, syndicating real estate funds, and asset management,” Meade said.

At the same time, he earned a certificate in real estate finance through Boston University.

After a couple of years at Boston Capital, he got a call from a recruiter and went to work for CW Capital, which was then a national mortgage banking shop. They were a big FNMA/

Freddie/FHA lender on the multifamily side. CW Capital was subsequently bought by Walker and Dunlop, an even bigger national lender. In his years there, Meade held roles in asset management, underwriting, and originations.

Then, on New Year’s Eve 2014, Meade received an unexpected call that, at the time, seemed like a low point in his career.

It ended up being a blessing in disguise. Walker and Dunlop was heading in a different direction, and Meade was told there wasn’t a spot for him.

Once again, Meade gained life-changing perspective and

learned that what hurts at the moment almost always provides a valuable lesson.

Meade had formed Touchstone Capital Partners LLC in 2010, when he and some partners were buying distressed debt from the 2008 downturn and doing small volume fix-andflip lending. During that time, Meade met his business partner Ray Loughlin. Together they continued doing one-off deals until 2014, when they launched what has become Touchstone’s flagship fund, TCP Fund II, a pooled mortgage fund. After the distressing news on the last day of 2014, Meade went all in with Touchstone Capital.

“Looking back, that’s how my life has gone. I have gained perspective and life lessons from negative situations,” he said.

A LOCAL GAME Touchstone Capital is a flexible, full-service capital provider. And, with the current economic situation, flexibility has been imperative.

“During this pandemic, instead of tightening down on leverage, increasing cash requirements, and lowering

LTVs, we are leaning in. We

see an opportunity to provide liquidity into the market. We are looking for ways to help

borrowers recapitalize their projects and put them on

firmer footing coming out of

this crazy time,” Meade said.

The markets in Meade’s

hometown are not unlike other markets across the nation in

that values are not dropping.

Demand is high and supply is lacking, which has prices

increasing and bidding wars escalating. Touchstone is

answering with solutions in

ways other lenders are not.

Meade attributes much of

“While everybody else is

Touchstone’s success on lend-

buy distressed debt, we are

comes to small balance con-

our existing pooled mortgage

“In my view it’s very difficult

to invest up to 20% of its

scale. There is the obvious

raising money for funds to

ing locally, especially when it

raising additional funds for

struction and bridge loans.

fund, which has the ability

to do this well at a national

assets in mezzanine debt

and preferred equity. We

think putting some money to work deeper in the capital

stack provides an excellent risk-adjusted return for

investors, and some much-

needed relief for borrowers,” Meade said.

issue about ‘knowing your

market’ and understanding

that you cannot underwrite

based on ZIP codes,” he said.

“You can find very different

values from street to street in

a given city, town, or neighborhood. Hopefully, we learned some lessons coming out of

the 2008 debacle as far as ‘desktop underwriting’ and relying on appraisers.”

He said they do their own construction inspections and the majority of their deals come from referrals.

“We know our borrowers, we know our markets, and we know our deals,” he said.

SUCCESS COMES FROM STARTING AT THE BOTTOM Three values Meade admires in others is perseverance, integrity,

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EDUCATION

“Do the right thing, whether anyone is watching or not. If you can get through some adversity with perseverance and integrity, you are bound to find success.”

— T OM MEADE

and success. To him, these qualities are intertwined.

“Integrity to me means being

“When I talk to potential borrowers or partners in real estate deals, I am very skeptical when they tell me ‘I have never lost money on a deal.’ This is a very difficult business,” he said. There is no easy money,

same set of values at work, at

the same person and having the home, and in social settings,” he said. “Do the right thing,

whether anyone is watching

or not. If you can get through some adversity with perse-

verance and integrity, you are

and when you fail (and lose your own money), it should make you a better investor, lender, and business owner.”

bound to find success.”

Meade noted that especially

someone else.

in real estate, which is a cyclical industry, having been through previous downturns is a big asset because it teaches perseverance.

The definition of success is subjective—what it means

for one person is different for Meade said, “Success in the real estate industry, to me, means proving you can invest and

preserve capital and survive a

full cycle. Touchstone has now

operated and invested through a full cycle. Certainly, we’ve

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taken our lumps, but we’ve come out the other side better and smarter, and I think our partners appreciate that.”

He attributes his success as an individual to curiosity and perseverance.

“I always want to know how stuff works,” he said, “and I’m always willing to dive in and start from the bottom.”

excel at? Does a titan have an exit strategy?

“As far as exiting, that’s what I love about this business, I don’t feel it’s ever one I’m going to exit or retire from,” he said.

For Meade, it’s more about evolution than an exit. ∞

ADVICE FROM A TITAN Like any profession, real estate investing takes hard work.

Meade acknowledges the valuable resources out there that help investors build a good foundation of research.

He noted that he has learned by doing—by doing deals on his own and by working for other companies in the industry.

“Despite what you may see or hear in slick online marketing and radio commercials,” he cautioned, “you can’t take a free weekend seminar and become a real estate investor, flipping houses with other people’s money. The way I think about it is this: if it were that easy, then everyone would do it, and there would be no margin in it.”

So, does a titan ever stop doing what he has proven to

ABOUT THE AUTHOR

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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L AST CALL WITH L ANCE WELLS

IF IT SOUNDS TOO GOOD TO BE TRUE...

As lending restrictions tighten, make sure you aren’t being contacted about a great offer by a scammer impersonating a legitimate lender.

by Lance Wells

I

guide investors on how to

make money in the real estate business. I’ve traveled nation-

ally presenting seminars to both beginners and experienced investors. As a licensed, HUD-approved mortgage lender/ broker, private lender, contractor, and developer, I’ve personally been involved in countless successful real estate transactions.

While wearing all those hats during the last 40 years, I’ve always prided myself on my honesty and integrity. You can imagine my surprise and angst when an investor/ borrower I was speaking with for the first time accused me of being a thief and threatened to sue me.

I soon discovered the reason behind the call. The investor was being preyed upon by a scammer impersonating me, using my good reputation and a spoofed version of my website as well as an alternate phone and email.

It was the first of many calls and emails I’ve received this year from investors who were irate, dumbfounded, or both. Some calls began, “Before I wire the money to you, I 98

PRIVATE LENDER

just want to go over the final details of the loan approval I received.” At least two had already wired funds and were angry that I’d ignored their calls to finalize the closing, and others threatened me with lawsuits.

Needless to say, they were all shocked at my response, “I’m sorry but I’ve never had any communication with you or your company.”

The investor would ask, “Aren’t you Lance Wells from Property Deals, the private lender?” Although I confirmed that, the ensuing conversation was to point out how our contact information differs from what they had been using with the imposter.

Many investors are ready and willing to send this upfront money. Thankfully, most of them researched and called our company directly or called AAPL for a reference.

Linda Hyde at AAPL deserves a huge thanks for recognizing potential victims and routing them to us, so the majority have been spared from swindle. For anyone who sent the wire, the money is forever lost.

These impostors are quite skilled in the art of deception, and my company isn’t the only one that’s been targeted.

We’ve reported this to federal, state, and local law enforcement, and we encourage the investors to also call. Unfortunately, we receive the same response from all the authorities: The thieves are organized, smart, and virtually untraceable because they use VPN’s in foreign countries and different banks and account names for each scam.

The culprits “hide” on websites that offer little other than lists of private lenders. When the investor inputs his contact information, the imposters pounce, using a legitimate private lender’s identity and a real officer’s name. On fake letterhead, they send out an approval letter with unbelievably good terms and request a wire transfer as proof of acceptance. (Our callers reported up to $8,500.)

Private lenders have tightened requirements out of necessity, and that makes the unrealistic offers the scammers are making even more attractive. They prey on investors’ trust by impersonating reputable companies. The calls are less frequent now, but they haven’t stopped. Don’t be surprised if you get similar calls. Just be happy if you can spare the investor a loss! ∞

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