Originate Report - October 2020 by Originate Report

October 2020 Originate Report 1

12 Hypothecations and Participations:

Securities Exemptions in Private Lending

By Tae Kim, Esq., Geraci LLP

October 2020 Originate Report 3

Tae Kim

October 2020 Originate Report 5

PROFILE

Fred Assini CEO of Alpha Funding Partners

Fred Assini

Alpha Funding Partners

SERVICE AND DEDICATION DURING CHALLENGING TIMES By Charles Peckman, Originate Report

red Assini, CEO of Alpha

lending industry, Assini completed a

managing a nationwide mortgage

Funding

says

degree in finance from Saint John’s

business known as First Rehab

the lending field is one of

University and laced up for the world

Lending. Additionally, Assini has

of private lending.

experience

Partners,

the most challenging – yet most rewarding – career paths a person

managing

general

contractor company, which helps

can venture down. A native New

In October 2019, he took on the

with understanding the needs of his

Yorker with over 30 years in the

position

clients. Alpha Funding Partners, the

Alpha’s

CEO

after

direct private asset-based lender,

ratio,] your own private money, and

every aspect of a given deal from

began serving the Northeast United

your own book of business. That grew

selling capital to working with

States in 2007 and has expanded

to the point when you would loan

institutional lenders to work within

operations to California and Florida

someone money, the banks began

guidelines and service loans. He

in an effort to work with realty

paying attention to that, and the

added that Alpha’s approach is highly

companies directly – the group meets

government also stepped in and gave

involved, as investors themselves

the needs of real estate investors,

people capital to buy and renovate

are on the ground – this not only

developers, and builders nationwide.

dilapidated housing,” Fred said. “The

leads to involved customer service,

business wasn’t as strong during this

but a litany of repeat business from

Alpha Funding Partners has a focus

transition period, and then of course

borrowers of every stripe.

things came to a grinding halt during

residential

and

commercial

properties and has provided $150

the housing crisis in 2007-8.

“It’s a cliché to say that I’ve seen it

million in funding ranging from

all, but it’s important to remember

$100,000 to $10 million. Currently,

Like so many lending professionals,

that no two loans are alike,” he said.

Alpha offers an array of products

Assini said the tumultuous aftermath

from

of the housing bubble cast doubt

“Part of what makes private lending

mixed-use, multi-family, fix and flip,

on the future of private lending.

buy and hold, and rental properties.

Despite this trepidation, he said that

ground-up

construction

he adapted to the depressed market Looking back on his early days in

and moved forward with a positive

private lending, Assini said the

attitude, an attitude that was often

mentorship he received at the onset

not shared by other professionals in

of his career was invaluable, adding

the space.

and compassion for clients have

“Eventually,

stuck with him to this day.

to correct, and lenders and their

the

markets

began

borrowers dug out of the recession,” spent

whole

life

so many factors that can influence a development, both for the better and for the worse.” One aspect Fred said has changed drastically during his tenure so far in the space is the ubiquity of technology and Alpha’s focus on automation.

that mantras such as adaptability

“I’ve

an exciting career is that there are

he said. “I have been impressed with

lending, from home improvement

the ways in which private lending

to mortgages, and it all began with

has grown over the last decade.

an invaluable opportunity,” he said.

Institutions began coming in, which

“When I was really young, a vice

was interesting because it was never

president took me under his wing and

hedge funds that would take interest

showed me the different blossoming

in private money. After the housing

areas of lending, igniting my passion

crash, however, they took interest

for the industry from the start.”

and said ‘we like this asset class.’”

During the 1990s, Fred said there

When institutional players began

were rarely institutional buyers and

taking an interest in private money,

the industry looks nothing like it

Fred said that he partnered with

does today – the focus, he added, was

institutions

on private capital.

servicing

loans,

in-house

inspections

and

hedge and

funds,

performing and

draw

“Lending was all private capital, and

administration. Assini’s experience

it was based on your [loan-to-value

in the field, he said, has encompassed

Far-removed from the hand-written spreadsheets and reams of paper that

were

commonplace

even

20 years ago, he added that the dissemination of technology has bolstered communication during the coronavirus pandemic. “Technology, I think, is everything now. Right now, we’re in the midst of not only having some good technology, we’re even upgrading it,” he said. “We’re upgrading it because once we’re in a post-COVID marketplace, there are going to be a lot of new players coming in, and some older players moving out. Some larger, more institutional lenders were forced to pause when the virus began spreading across the country, Fred Assini: Continues on pg. 8

October 2020 Originate Report 7

Fred Assini: Continued from pg. 7

so during that time of pause was an opportunity to upgrade.”

Fred said he thinks it was much easier to receive capital for a deal. with

exercised

more when

caution

Fred considers this feat especially

with clients throughout the pandemic.

remarkable given Alpha Funding Partners’ geographic location, New

“There are a lot of people right

Before the coronavirus pandemic,

Now,

has been ‘virtually shaking hands’

being

now who are looking to diversify their portfolios and say, purchase a house to rehab,” he said. “When we look at potential borrowers, it is all about experience in the field. In

York. One of the early epicenters of coronavirus in the country – not to mention a state with one of the most populous cities in the world – the uncertainty surrounding the spread of the virus caused a certain amount of angst among New York-based lenders.

disseminating

my opinion, Alpha Funding Partners

loans, paired with new borrower

has done a phenomenal job securing

metrics like a FICA score, it is of the

“I don’t think anyone knew it would

our book of business and we have

spread across the country like it

utmost importance to stay on top of

had no disruptions in our draws

has,” he said. “The early hotspots

technological trends. Alpha, he added,

and inspections.”

have been replaced with different areas of the country, and I think the best path forward is to keep our ear to the ground and realize we all have to do our part.” When thinking about the economic ramifications of COVID-19, Fred said he has been surprised by some of the areas that have seemingly expanded this year – Alpha is on track to reach $200 million in funding in 2020. “You’re always going to have people who are looking for deals during a depressed period, some people are going into the stock market and others are looking at real estate,” he said. “At first, we were worried about the prospects of single-family homes in New York, but we quickly realized that some people are moving away from major areas and are choosing to settle down in single-family housing in more suburban settings.” Paired with this boon, however, is a current lack of fix and flip

Fred Assini CEO of Alpha Funding Partners

properties, he added. Coming out of the 2008 recession this asset class was immensely popular because of

widespread foreclosure surplus, but

at with different projects, and we

ability to adapt to a rapidly changing

this excess has since dissipated to

supported our customers throughout

situation. A tower is only as strong

a certain extent. Moving forward,

every step of the process,” he said.

as its foundation, he added, and

however,

feels

“You don’t want to be stuck with a

he said he ‘couldn’t be prouder’

confident about the housing market’s

bunch of houses that aren’t finished;

of the work that has been done

ability to correct after a period

no one wants that. So, we worked with

behind the scenes so far during the

of uncertainty.

borrowers to put a framework in place

coronavirus pandemic.

Assini

said

that ensured our projects continued.” “The housing market is great right

“Our employees are doing great,” he

now, and the fact of the matter is

This

customer

said. “I think everyone was so scared

that people are always going to

communication, Assini said, was a

going into this, myself included,

need a place to live,” he said. “Right

critical aspect of the group’s early

because we didn’t know what sort

now, we’re seeing that people don’t

coronavirus response. While less

of consequences a pandemic would

necessarily want to live in apartment

seasoned professionals approached

have on our bottom line. With the

buildings and higher density housing

the crisis with intense apprehension,

technology we have today, and the

because of the pandemic, but those

Fred added that his experience during

people running that technology, our

choices and preferences are likely to change. It is a highly fluid market and

such as the financial crash of

what we try to do at [Alpha Funding

2008 – allowed him to approach

Partners] is work with our borrowers

this period of uncertainty with a

to adapt to different markets.”

levelheaded attitude.

During the onset of the pandemic,

Working with borrowers to resolve

Assini

had

concerns around funding and project

numerous discussions about how

completion was largely hassle-free,

lending

he said, given the ‘all-star clients,’

impacted. Instead of focusing on the

including the group’s work with

negative ramifications of a depressed

institutions to finance loans. More

market, however, he added that

than 50 percent of clients in the book

the Alpha Funding Partners team

are repeat customers, he added.

said

that

would

his most

team likely

change

downturns

–

the firm. Paired with this forward-

“I

thinking attitude was a commitment

between borrowers and lenders is

to providing the best for Alpha’s

critical. because that trust can lead

borrowers,

social

to a deal going well even during

media and digital marketing to share

hard times,” he said. “I think…we

updates and important information.

implemented all of the right tools

implementing

having

relationship

pre-COIVD, because none of us knew “Being situated on the East Coast,

how good or bad this was going to be,

where a lot of the early cases were,

and we have been able to support our

we first determined that we needed

customers and support the market.”

to protect our assets. We made of

the

transition to remote work.” Although

technology

sure that we reached out to all of

Outside

borrower/lender

our customers, we asked them how

relationship, Assini said that he has

they were doing, where they were

been blown away by his employees’

–

and

its

presence in the lending field – is constantly

focused on potential pivot points for think

operations were seamless during the

changing,

Assini

said

there are still some aspects of the remote landscape that seem peculiar, such as visiting a doctor via Zoom. Even though this is the case, Fred added

that

remote

functionality

has allowed his team to facilitate communication – both internally and externally – in ways that would have seemed outlandish a decade ago. “The products that we have now would have made my head spin 20 years ago,” he said. “Recently we had a marketing meeting where we had one person in California, one in Florida, another person in London and I was in New York. It’s fantastic – I’ve found that these meetings are so much more productive over Zoom then they are in a meeting room, and during the pandemic so far my whole way of thinking and working and Fred Assini: Continues on pg. 10

October 2020 Originate Report 9

Fred Assini: Continued from pg. 9

utilizing technology has changed.” Technological advances aside, Fred said a crucial aspect of Alpha Funding Partners’ ability to provide value for its clients is the experience his team brings to the table. From his first day as a bright-eyed, fresh college graduate to his current position as the group’s CEO, he added that every period of triumph – or period of uncertainty – is an opportunity to grow a knowledge base that ultimately assists both the clients and Alpha. “Every

challenge

opportunity,”

said.

learning “It

tremendous to build relationships with buyers, with employees, and co-workers. I always find myself looking back on deals that have been completed and saying, ‘how could I

Fred Assini CEO of Alpha Funding Partners

have approached this differently?’ I think looking back but also looking towards the future is important in our industry.” In addition to viewing the lending industry through a holistic lens, Assini said a major differentiator of Alpha Funding Partners is the inhouse draw administration process. Some firms, he added, have a detached mindset towards the loans they service, which leads to a less personal borrower/lender relationship.

so we can provide the best value

it get on its feet like it was before,

possible. Having a good customer

and it’s already starting to move in

relationship is a huge part of that

that direction,” he said. “Values are

process, and part of what makes Alpha

already high in some markets and

such a successful group in the space.”

because of that, speculators are

Many CEOs, he said, are experiencing periods of strife during the pandemic. At Alpha, however, strong borrower relationships – paired with an allstar servicing team – make his job ‘a whole lot easier.’ But like so many professionals in the private lending

“We’re boots on the ground people,

sphere, Assini said he is looking

and we are the type of people who

forward to a return to normalcy.

holding onto the properties in those areas. As a whole, the rental market is growing, and younger people are showing an interest in rental properties. Like I said before, I think our team is well-situated to keep our eyes on trends in the industry.” Keeping an eye on these trends, Assini said, will ultimately allow

want to get to know our area, our clients, and any project we fund,” he

“I hope, and I think I can speak for

Alpha Funding Partners to expand its

said. “We want to know our market

everyone in lending, that we see

current operations, continuing the

top-tier customer service that has

into, and we’re focusing on a holistic

you have to see the forest through the

allowed the firm to provide over 350

approach to entering those markets.”

trees,” he said. “I think we’re on the

loans so far.

right path to create the best value for Looking forward – to the not-so-

“We’re planning on expanding this

distant future when the coronavirus

year. We’re in a number of states right

is in our collective rearview mirror –

now, including New York and New

Assini said he is excited to continue

Jersey. Ideally, we want to become

providing the very best for Alpha’s

a more regional private money

borrowers and employees.

lender,” he said. “We’re zeroing in on different areas we want to expand

“This year has thrown a lot at us, but

our borrowers and continue to grow those relationships that are vital to our expanding book of business.” To learn more about the services offered by Alpha Funding Partners, visit alphafunding.com

CONTACT: https://alphafunding.com/

October 2020 Originate Report 11

FEATURE

Hypothecations and Participations:

SECURITIES EXEMPTIONS IN PRIVATE LENDING By Tae Kim, Esq., Geraci LLP

are

with expectation of profits from

whether the interests are considered

considering hypothecation,

that investment; (3) to a common

securities.

participation, a fund,

enterprise;

are

determining if an investment is a

or any other type of capital-raising

derived from a promoter or a third

security is whether the investor

activity, there are a variety of

party. The Howey test is reiterated

controls such investment.

exemptions that the sponsor or

in the multi-beneficiary loan settings

broker may rely on.

in People v. Schock, which clearly

Are There Any Exemptions within

indicates that fractional interest

Securities Laws?

This article discusses the securities

in a promissory note constitutes

Yes.

exemptions related to these types

a security because the investor

potential

is “committing relatively modest

trade-offs, limitations, and legal

sums” with the expectation of a

implications

profit based on the reliance of

hether

investments,

exemptions

you

and

among that

securities

managers

and

servicers should be aware of when

and

(4)

profits

“skill, services, and solvency” of a promoter or a company.

facilitating these investments. If the promoter goes out to the market

The

key

element

California Corporations Code Section 25102(f) In California, a manager or a company may rely on a 25102(f) exemption. California Corporations Code section 25102(f) exempts an Issuer for up to 35 investors who have a pre-existing

Are Hypothecations and

to seek investors to arrange the loans

Participations Securities?

funded to borrowers, hypothecation

Generally, yes, hypothecation and

and/or participation interests are

participation interests are securities.

generally constituted as purchase

making an investment for its own

Under the Howey test, a transaction

of securities. On the other hand, if

account and that the Issuer has not

is considered a security if: (1) it

the lender also actively controls

made any advertisement to offer

is an investment of money; (2)

these investments, it is arguable

the security. California requires the

or business relationship with the Issuer, provided that the investor is

come into play, there is a higher risk

and the control of the loans and

of violating state securities laws. The

underlying property is all within the

Issuer must conduct due diligence

control of the Fund and its manager.

in any state an investor resides to

The

determine whether the Issuer is in compliance with the securities laws in that state. Along with the possible integration doctrine that may be applied, establishing a fund is likely the proper route to take.

investors

become

“passive”

because of limited control on the governance of the Fund, as reflected in the governance documents. On the other hand, investors have certain remedies under the securities laws, including allegations of a violation of Rule 10b-5. The SEC, as a matter

Fund Investments On a long-term basis, investments by way of establishing a fund would be more feasible for both the Issuer and investors. The most popular and cost-

of public policy, disallows Fund managers from circumventing Rule 10b-5 violations.

efficient rule that an Issuer generally

Conclusion

relies on is Rule 506 of Regulation D.

There

From a securities law perspective,

law

the reason a fund should be created

investments

is two-fold – it creates an exemption Issuer to file a 25102(f) notice with

participations, and fund investments.

from registration with the SEC, and it preempts state laws, in that the

the DBO and pay a filing fee.

fund manager is not concerned about Many other states provide similar

state regulations. In the event an

exemptions.

investor resides in a different state

than the Issuer, the manager need

exempted from registration if the

not be concerned about out-of-state

Issuer complies with and ensures

securities laws compliance.

Delaware,

For the

example,

Issuer

may

and ensures that the Issuer has sold

are

various

implications

certain

securities

when

making

hypothecations,

instances,

securities

laws may not apply, as “control” appears to one of the main aspects in determining whether an investment is a security. When making these types of investments, issuers and investors alike should be cognizant of the securities implications and consult with securities counsel

its securities to no more than 25

Fund investments also have practical

persons in the state during any 12

implications. First, investor funds

consecutive month period, among

are more centralized. They are all

other things. The Issuer must also

in one account, and deployment of

If you have any questions about

reasonably believe all investors are

capital becomes much easier and

the securities exemptions above,

purchasing for investment using

more efficient to fund loans. The

reach out to Geraci Law Firm at

their own account.

Fund becomes the lender of record,

https://geracilawfirm.com/

Limitations on State Exemptions One-off

transactions,

transactions, target

securities

appear these

or to

limited be

limited

exemptions.

the state

However,

when multiple deals with numerous

for assistance.

ABOUT THE AUTHOR: Tae Kim is a Corporate and Securities Attorney at Geraci LLP, whose practice involves advising clients on securities compliance in private and public offerings, fund designing, and preparing offering documents. Mr. Kim works closely with clients to establish mortgage funds, real estate acquisition funds, syndications, real estate investment trusts (REITs), and Qualified Opportunity Funds. CONTACT: t.kim@geracillp.com

investors across the United States October 2020 Originate Report 13

CULTURE CORNER

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SPOTLIGHT SPOTLIGHT

INDUSTRY SPOTLIGHT

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THE IMPORTANCE OF

results. This global reach creates networking opportunities for building relationships and partnerships. Your audi ence has invested time in registering and listening to the information you plan to share. They’re expecting valuable takeaways from the webinar, even some thing they can put into place at their own company. This positions you and your brand as an industry lead er, or expert. Webinars can give your audience the chance to ask questions and provide feedback. This how well it performed. These metrics include the is valuable because you can address concerns, reser number of attendees, number of those registered, vations, or any lingering questions they may have and total views. The webinar can and should be recorded about your training or product in real-time. You can Webinars have grown in popularity in recent years for you, the audience, and affiliates to share with customize your presentation to your audience based on and have become an important marketing tool. others, growing the results even more. Each time a their questions and feedback to keep them engaged. These live web-based seminars can connect you with person completes your webinar’s registration form Ask them to take an action, such as completing a task leads from all over the world. They encourage interacti they should be considered a new potential lead, or answering a question. This will increase audience by allowing the audience to ask questions orJust how whether it be for a sale or a potential partnership. participation and interest. Include guest speakers, beneficial can a webinar be to your business? Here Webinars adds a personal interaction that videos and such as industry leaders or affiliates, to speak during are 7 reasons why webinars are a fantastic marketing commercials don’t. Webinars put a face and name your webinar. These individuals should be familiar strategy. Webinars are a cost-effective way to extend with your product making you approachable, human, with your industry and value of your product. They your reach globally. Rather than pay for flights and and someone they can trust. Educating them on how will be able to educate the audience on the benefits hotels to meet with individual leads, you can engage your product can benefit their company is the first or impact, validating information you have or will with a larger group over their computer screens. step in opening the door to future discussions and be sharing. By inviting a guest speaker, you can also People from all over the world can attend, providing partnerships. It is essential to show both new and increase the webinar’s attendance by including your your brand or product with the potential to see huge established leads how your product or service can guest’s audience and following. This can grow the results. This global reach creates networking opporimprove or enhance their workplace. Depending on number of leads you may gain substantially. Results tunities for building relationships and partnerships. the prospect, the sales process can be slow. Businesscan be seen quickly from webinars. After hosting a our audience has invested time in registering and lises want to convert a lead into a cusWhile it’s cerwebinar you’ll have metrics to measure how well it tening to the information you plan to share. They’re tainly important to provide useful information and performed. These metrics include the number of at expecting valuable takeaways from the webinar, tips to your audience, it’s equally important to share tendees, number of those registered, and total views. even something they can put into place at their own how your brand or business can help them achieve The webinar can and should be recorded for you, the company. This positions you and your brand as an this. How can your product be a solution to their audience, and affiliates to share with others, grow industry leader, or expert. problems? Your webinar should show the audience ing the results even more. Each time a person com the value of your brand. Garnering interest in the pletes your webinar’s registration form they should Webinars can give your audience the chance to ask product and its potential impact is the first step in be considered a new potential lead, whether it be for questions and provide feedback. This is valuable becompleting a sale. a sale or a potential partnership. Webinars adds a cause you can address concerns, reservations, or any personal interaction that videos and commercials lingering questions they may have about your trainThere are numerous benefits to hosting a webinar. don’t. Webinars put a face and name with your prod ing or product in real-time. Though this article only touches on a handful of uct making you approachable, human, and someone them, it should be clear that webinars are an effecthey can trust. Educating them on how your product You can customize your presentation to your auditive tool for engagement and growth. As you take can benefit their company is the first step in opening ence based on their questions and feedback to keep these benefits into account, you should begin to the door to future discussions and partnerships. It them engaged. Ask them to take an action, such as think how you can use a webinar for lead generation is essential to show both new and established leads completing a task or answering a question. This will and to increase traffic, which will yield great results how your product or service can improve or enhance increase audience participation and interest. for your business. Webinars have grown in populartheir workplace.Depending on the prospect, the ity in recent years and have become an important sales formation and tips to your audience, it’s equalInclude guest speakers, such as industry leaders or marketing tool. These live web-based seminars can ly important to share how your brand or business affiliates, to speak during your webinar. These inconnect you with leads from all over the world. They can help them achieve this. How can your product be dividuals should be familiar with your industry and encourage interaction by allowing the audience to a solution to their problems? Your webinar should value of your product. They will be able to educate ask questions or provide feedback in real-time. show the audience the value of your brand. Garnerthe audience on the benefits or impact, validating inJust how beneficial can a webinar be to your busiing interest in the product and its potential impact is formation you have or will be sharing. ness? Here are 7 reasons why webinars are a fantasthe first step in completing a sale.There are numertic marketing strategy. ous benefits to hosting a webinar. Though this article By inviting a guest speaker, you can also increase the only touches on a handful of them, •it Upcoming should be clear Business Development • Fintech/Newest Loan Programs • Automation in Today’s Evolving Society webinar’s attendance by including your guest’s auWebinars are a cost-effective way to extend your that webinars are an effective tool for engagement dience and & following. This can grow the number of reach globally. Rather than pay for ights and hotels Trends Changes • Marketing & Outreach • Essential Tools & flTechnologies •and New Legal Issues and Regulations growth. As you take these benefi ts into account, leads you may gain substantially. to meet with individual leads, you can engage with a you should begin to think how you can use a webilarger group over their computer screens. nar for lead generation and to increase traffic, which 5. Results: will yield great results for your business. WebiResults can be seen quickly from webinars. After People from all over the world can attend, providnars have grown in popularity in recent years and hosting a webinar you’ll have metrics to measure ing your brand or product with the potential to see huge have become an important marketing tool. These

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FEATURE

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hild

P oe x

I side J

Celebr ti

& Al

ide

rk New Yoiit C tyy de de l o I siid Also

M y:

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LENDER DIRECTORY

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LOAN DOCUMENTS For More Information Visit: https://geracilawfirm.com/