Originate Report – November 2020 by Originate Report

NOVEMBER 2020

THE OFFICIAL MAGAZINE OF GERACI

Jason Gilbert David Erard

Armanino LLP

INSIDE:

Remembering

‘Hard Money John’

THE PITFALLS

FRACTIONALIZED DEEDS OF TRUST

YOU’RE LENDING WITH A HANDICAP

Private Lending Data is Still in the Dark Ages

THE NEW NORMAL IN COMMERCIAL REAL ESTATE LENDING

3 STRATEGIES TO FREE UP

CAPITAL AND FUND NEW LOANS November 2020 Originate Report 1

CONTENTS NOVEMBER 2020

Who To Know 6

Armanino LLP: At the Forefront of

Real Estate Technology

By Charles Peckman, Contributing Writer

14 Wisdom from the CEO

Ryan Craft, Founder and CEO of Saluda Grade

22 Industry Spotlight

Renee Lewis, Managing Partner of Bloomfield Capital

Features

12 Remembering ‘Hard Money John’ and

Persevering through COVID-19

By Charles Peckman, Contributing Writer

18 The Pitfalls of Fractionalized Deeds of Trust

By Edward Brown, Pacific Private Money

26 You’re Lending With A Handicap: Private Lending

Data is Still in the Dark Ages

By Kat Hungerford, American Association of Private Lenders

30 The New Normal in Commercial Real Estate Lending

By Nema Daghbandan, Esq., Geraci LLP

34 3 Strategies to Free up Capital and Fund New Loans

By Dennis R. Baranowski, Esq., Geraci LLP

In Every Issue 38 Lender Directory

26 November 2020 Originate Report 3

MAKE WAVES AT

FEBRUARY 18 - 19, 2021 NEWPORT BEACH, CA In te re s ted in at t ending or sponsoring? C o n ta c t A licia C a rt er at A.Cart er@GeraciLLP.com Balboa Bay Resort 1221 West Coast Hwy. Newport Beach, CA 92663 949.379.2600 | www.geracicon.com 4

Letter from the

CEO Geraci LLP ANTHONY GERACI a.geraci@geracillp.com

Senior Vice President, Marketing & Media LESLEY BOYD l.boyd@geracillp.com

Lead Graphic Designer LYNDA HIGHT l.hight@geracillp.com

CONTRIBUTORS Charles Peckman • Ryan Craft Renee Lewis • Edward Brown Kat Hungerford • Nema Daghbandan Dennis R. Baranowski

FOUNDING UNDERWRITERS

MARK HANF President, Pacific Private Money

ORIGINATE WEBSITE www.originate.report GERACI LAW FIRM www.geracilawfirm.com MEDIA WEBSITE www.geracimediagroup.com CONFERENCE WEBSITE www.geracicon.com

Editor

Welcome to the November Edition of Originate Report!

2020 will not soon be forgotten, yet I’m sure most will welcome 2021 with open arms. Its impact will be felt for years to come and some of our daily routines may never change. During this year of uncertainty, both in daily life and in our industry, we have been forced to adapt our ways of thinking and living to address ongoing concerns and new needs from our clients. At Geraci, we pivoted from in-person to virtual events; counseled clients regarding salient information from local and nationwide regulations; advocated on behalf of our clients and the industry as whole against measures that would negatively impact your businesses; and supported our clients through the tumultuous times. We’ve solidified our place in the industry as your constant through the chaos by focusing on adaptation, flexibility, and willingness to change All three of these strategies have proven invaluable over the past 9 months as we’ve continued to work within the confines of the pandemic. Our friends at Armanino, the Originate Report’s November cover story, have adapted nearly seamlessly to a remote, technologically driven workforce. Harnessing existing and emerging technology to adapt to and address client needs for years, they were well-equipped to adapt to the coronavirus pandemic. One of the top 25 largest independent accounting and business consulting firms in the US, Armanino has long relied on technology to produce paperless processes. With an eye to the future, and equipped with lessons learned from the past, the team is working together to “create a positive, holistic approach to any period of difficulty at hand”. Looking to emerging technology, they are moving forward to incorporate blockchain functionality for common transactions as well as taking steps to create a fund administration platform that will streamline their processes even further. Speaking about flexibility and change, we at Originate Report are embracing this concept for the new year. This will be our last issue for 2020. Looking ahead, we want to ensure you get the insider industry knowledge you want and need, targeted to your business. We will be adding new columns and new content and will move to a bi-monthly distribution schedule. Our first issue of 2021 will focus on Up and Coming Trends in the Industry and will be available at our IN-PERSON event, Innovate. Want to be featured in our next issue? Reach out today! We would love to hear from you with your ideas on the coming year! Till Next Year…

Lesley Lesley Boyd Senior Vice President, Marketing & Media

November 2020 www.originate.report Originate Report 5

PROFILE

Armanino LLP

AT THE FOREFRONT OF REAL ESTATE TECHNOLOGY By Charles Peckman, Contributing Writer

Jason Gilbert (left) & David Erard (right) Partners at Armanino LLP

rmanino LLP, one of the

nonprofit,

top 25 largest independent

estate, and consumer business.

accounting

consulting

firms

and in

the

business United

States, understands the importance of staying on top of emerging trends

private

schools,

real

the

The firm is a member of the American

Institute

Certified

Public Accountants, an affiliate firm in the California Society of Certified

in consumer and professional-facing

Public Accountants, a member of

technology.

the Center for Audit Quality, and

With

four

primary

areas of service – assurance/audit, business management, consulting,

Affiliate member of multiple state accounting associations. Originate

of industries, including technology,

virtually – with Partners David

sat

firm’s

implementation

technologically-driven practices to the real estate sphere and discern how Armanino has adapted to the coronavirus pandemic. Jason, who has been part of ‘the Armanino

family’

for

years,

started his career with the firm’s

and tax – the firm works with a litany

Report

Erard and Jason Gilbert to discuss

down

–

outsourced

accounting

consulting

practice where he found his passion

for the real estate investing sector.

tumult – such as the housing crash

This desire to more closely advise,

With a focus on private equity debt

of 2008 or the coronavirus pandemic

Jason said, was the impetus for

funds and mortgage real estate

– offer opportunities to showcase

creating

investment

currently

Armanino’s ability to perform under

platform within the accounting firm.

the

pressure, providing the best service

The ultimate vision for the platform,

possible for clients.

he added, is to create a ‘more holistic

co-leads

trusts,

(with

David)

Real

Estate Investment Fund practice within Armanino.

fund

administration

approach’ to relationship building “There’s a lot of navigation necessary

and fund management. This includes

David began his career in 1999 with

when considering distressed debt on

an integrated tax, audit concierge,

a “Big 4” accounting firm and has

top of the general economic issues

and

always worked in the private equity

that clients were facing,” he said.

solution

area with a focus on real estate.

“I would say my biggest takeaway

Armanino expertise.

Back in

from the last downturn was learning

2006-7, the peak of the

software that

implementation builds

the

housing market would soon become

complex

“I think that the platform we’re

one of the largest recessions on file;

issues thoroughly, helping clients

creating adds a lot of value, not

this period of uncertainty, however,

navigate and understand different

only because we understand the

allowed him to sharpen his skills

situations so any challenges can be

business

in several complex business and

addressed effectively.”

accounting

evolve

and

tackle

tax areas, and he now has over 20 This

Although

periods

included

can

challenging,

uncertainty

standpoint,”

from he

an said.

“But also, because we will be a

years of experience in the industry. of

transactions

adaptation,

Jason

complex transactions, whether that

added

the way funds were structured so

is carried interest, master feeder,

that downturns can be learning

clients could not only act, but pivot

blocker, or distressed debt. We’re a

opportunities

professionals

if needed – this mindset also kept

CPA firm, so we’re not a standard

in a variety of spaces, especially

the fund manager in mind, making

fund administrator that is plugging

accounting and real estate.

sure protections were in place for

information into a software program

both parties.

and managing data. We understand

for

flexibility

single source of advisory for your

increased

added,

“The biggest learning experience for me from the last downturn was how important it is to adapt and look forward, in order to help our clients address the issues they may be facing,” David said. “Looking forward is always critical, but especially after a period of recession when there are changes in relief packages and tax laws and so on. We were in

the “The learnings from that period, the housing crash…led to growing our

involvement

the

day-to-

day advisory, sitting side-by-side with fund managers to make sure everything is in check. Our oversight became that security blanket that allowed Fund Managers to sleep

a position on the tax side to help

at night, allowing them to wake up

clients navigate these difficulties.”

each morning to focus on finding the next deal and delivering a yield that

Outside the realm of government-

is marketable and of interest to the

provided relief, David said periods of

existing and future capital base.”

inner

workings

these

complicated transactions and their implications on the allocations to the investors.” One rewarding, albeit challenging aspect of creating this platform, Jason added, is building a platform that has the flexibility to work with a wide variety of fund structures including

private

equity,

real

estate, or private equity debt funds. Laying this foundation will provide Armanino LLP: Continues on pg. 8

November 2020 Originate Report 7

Armanino LLP: Continued from pg. 7

Armanino with the ‘required runway’ to assist any type of fund manager. In addition to laying this foundation, David said that it is impossible to overstate the value of ‘being able to offer flexibility with clients.’ At the end of the day, he added, being in a relationship-driven business requires any group to have a variety of options and maintain a unique, customized

relationship

with

every client. “I just think what we find, as a general proposition, is that there is an increasing value on flexibility,” he said. “Just about everything you do now in life requires some level of flexibility, and of course this is more important now with the coronavirus. What I’ve found is that clients appreciate this not only because it customizes the things we do for them, but it also helps solidify those

“In the last decade there’s been a movement towards a technologydriven business environment,” he said. “I think it’s not just the way that information is delivered that is important, but also our clients have to build relationships with their investors. To a certain degree, the user experience of any tech platform

encompasses

how

you

share information, what information is being shared, and how data is packaged in a format that the end user needs. These changes in technology, and we’re keeping an eye on them, are driving a lot of what we’re doing with this new platform.” Technology, of course, has played a critical role in the facilitation of communication throughout the coronavirus pandemic. Adapting to a remote work landscape, David said, has allowed Armanino to learn about the communication preferences and

relationships. From our standpoint,

patterns that exist internally and

I think it’s really important to

externally. The group, he added,

understand the industry and have

has been well-equipped to a remote,

us fit into the puzzle in whichever

technologically driven landscape.

way it works best for each client and for us.”

“Armanino grew up near Silicon Valley, and from my standpoint, we

When setting out to create a new

had a number of really good systems

platform, David said that the evolving

in place pre-COVID that allowed us to

role of technology – paired with its

react to this situation very well,” he

dissemination throughout different

said. “For the group that I work with

fields – played a role in making sure

specifically, I’ve lived and worked

that customers have instant access

primarily remotely for a number

to readily-available information, and

of years now. So, for the team I’m

also ensuring that processes are not

working with, and our clients, a lot

manually-driven or delayed.

of our functionality didn’t change.

But we understand that so many

continuing to grow, to adapt, and to

of our client’s lives have changed

overcome,” Jason said.

because of the pandemic.” Moving

forward,

Jason

said

Having traveled on a very limited

doubts that a sense of ‘normalcy’

basis since February, David said, has

will ever return to office work. Many

been an adjustment. Even though

businesses, he added, have already

he said that the more ‘personal

switched from permanent brick and

touches’ of the business have been

mortar locations to rented or shared

diminished, he added that the health

space. Once the gathering limitations

of the Armanino family is of the

and social distancing mandates have

utmost importance.

passed, both Jason and David said that scheduled in-person meeting times

“I think for us, I like to look at

and split home/office schedules will

Armanino as a complete picture,”

foster a feeling of regularity in an

Jason said. “We’re very fortunate

otherwise uncertain time.

to already have such a focus on technology and paperless processes, and as a transient CPA firm, we can pick up just about anywhere and start working. So that aspect of the transition hasn’t been very difficult. What

has

been

strange

the

adaptation to not interacting face-toface with clients and colleagues. The conversations

themselves

change

pace as well.”

Despite the shift in work locale, David said the pandemic has allowed different facets of Armanino to continue

explore

emerging

technologies, such as blockchain. This growing aspect of technology, ostensibly,

modification-

resistant list of records that are linked by cryptography. The open, distributed ledger, for example, can record transactions between two parties, which could have lasting and

Working from home, both David

widespread applications in the real

and Jason said, has emphasized the

estate space.

importance of segmenting the work and life balance. When the home

An advantage of blockchain, Jason

becomes the office, Jason added, it

explained,

can be difficult to separate the two.

ability to store records without

Although that may be the case, both said they feel ‘very fortunate’ to be in a situation where they can continue their work from home. “We’re continuing to manage, right? That’s all any of us can do! We’re

the

technology’s

fear of retroactive alteration. This functionality, he added, can clearly showcase the transactions between two parties – it is important to note that ‘blocks’ of data cannot be changed without all previous Armanino LLP: Continues on pg. 10

November 2020 Originate Report 9

Armanino LLP: Continued from pg. 9

data points being impacted. When thinking about the implementation of

this

Jason

functionality,

said

some

however,

industries

are

more conducive to changes in the technological landscape.

to see some eyes opening and people

the changing demands of investors

being more willing to explore tools

and

that make workflow more seamless

with clients.

to be sleepier when it comes to advances in technology,” Jason said. “But now, technological solutions are

Armanino

the

maybe on their own, to try and tackle

fund

these changing demands,” David

Jason

said. “One of the things that I think

said it will be important to keep

is appealing about our approach is

in mind that some clients may

that we can help them set up the

have trepidation about a change

technology and make sure that the

in operationality. With that said,

systems are in place so that they

functionality

implements of

its

new

platform,

however, he added that both fund managers and prospective clients

definitely people who are adopting

are continuously looking for ways

the opportunities that are out there.

to differentiate themselves from

When it comes to blockchain, one

the competition.

practical potential in the real estate

“What differentiates you in the eyes

world is in the process of working

of the investor can be everything,”

with the county recorder.”

Jason said. “Our data exchange room and investor portal can be

Historically, these routine processes

applied in a number of situations.

have been paper-driven and rife with

Another point we’re thinking about

potential issues. With blockchain,

often is concentrating our ability

Jason said, a real estate professional

could easily discern title information

meaningful analytics, for example,

such

providing line of sight into where

encumbrances because the signed

the fund is having the most success

transactions live on the blockchain.

raising

ownership

aggregate

data

capital

analytics

and

provide

predictive

where

the

“There are a lot of firms, not just

geographic

in real estate, that have had to

should be based on the current

adapt in the last six months to be

portfolio success.”

investment

expansion

their peers. Clients love dealing with their investments and running their portfolios, and I think we try to take

technology,” David said. “I think a

David echoed this sentiment, adding

lot of people in the real estate sector

that it may seem difficult, from the

now have a newfound appreciation

perspective of a more established,

for how technology can help advance

traditional

their businesses and investments

technological

because of the adjustments that have

investors.

been made. It wouldn’t surprise me

firm,

customize the processes so that the interface works for them and their investors and there is less hassle with the back office and technology side of their shop.” Regardless of any trepidation on the

client-side,

both

Jason

and

David agreed that Armanino is wellequipped to assist clients with an ever-changing

technological

and

regulatory landscape. Although the coronavirus pandemic’s future in the United States is uncertain as of now, David said that one lesson he learned from the housing crash of 2008 is that patience – paired with a keen

more flexible and take advantage of

are in line with and even ahead of

the other side of their business and

thing that gets me excited about its

information

“It can be scary for these firms,

showing up everywhere and there are

that

for everyone.”

administration

“As we all know, real estate tends

sharing

needs

meet

– can lead to a more positive, holistic approach to any period of difficulty at hand.

potential

“We want to provide the best service

added,

available to our clients,” he said. “We

takes great pride in learning about

fully realize that things are strange

Armanino,

the

sense of changes in the marketplace

right now, but we’re moving forward

standards, Armanino complies with

“We work hard to learn about

and

all of the professional education

emerging

our new tools, such as the online

requirements

industry and share those with our

fund administration platform, to

undergoes

seamlessly integrate best practices

independent public accounting firm.

into the work we do every day.”

Both Jason and David said they could

To learn more about the services

not be prouder of the firm’s continued

offered

In an effort to ensure the highest

growth and success in a number of

armaninollp.com today.

quality

areas, including real estate.

are

excited

control

and

implement

operational

peer

and

regularly

reviews

opportunities

the

clients,” Jason said.

Armanino

LLP,

visit

CONTACT: https://www.armaninollp.com/

INDUSTRY JOB WATCH

LOOK WHO’S HIRING!

Looking to fill a position? Advertise it here in Originate Report’s Industry Jobs to get it in front of thousands of qualified candidates. Contact us at (949) 629-3961. Fidelity Mortgage Lenders, Inc. has been funding real estate loans in Southern California since 1971. Founded as Fidelity Home Loan Co. Inc., we originally specialized in residential equity loans, and later expanded in to commercial lending. We make loans on both commercial and residential properties in the state of California, providing first trust deeds, refinances, and/or purchases. Now in our fifth decade, Fidelity Mortgage provides loans to borrowers which larger institutions are unable to fund. We grew by responding to the needs of a changing real estate marketplace while serving a growing community of property owners and investors. Our reputation for fairness and reliability brings us referrals from our borrowers and other professionals. As a result, we service a network of real estate brokers, attorneys, accountants and business managers who seek our professional help for their clients. All of our combined departments work together to completely service loans. From loan advisers to escrow officers to loan servicing, there is only one goal… our clients’ total satisfaction. The Role: We are seeking a candidate with knowledge of commercial lending to be part of our loan servicing team. Responsibilities: • Service Loans - Monthly payments processed and scanned - Monthly check to investors • Collections - Track and file late notices - Read fees and statements, and conduct appropriate follow-ups - Use judgement to escalate concerns to immediate Manager or to the Company’s Chief Operating Officer • Insurance - Read and understand Property Fire Insurance - Track insurance notifications - Monitor requisite insurance on properties - Communicate to investors and property owners • Customer Service with Investors and Borrowers - Answer general questions, and display problem-solving skills • Knowledge “The Mortgage Office*” loan servicing software system Qualifications: • 3 years Real Estate Loan Service Specialist • Knowledge “The Mortgage Office” loan servicing software system • Familiarity with foreclosures • People skills and rapport with borrowers, customers • Computer skills: proficient in Word, Outlook and excel • Able to manage multiple projects, deliverables, milestones, and schedule

November 2020 Originate Report 11

SPECIAL FEATURE

John Ingoglia President of Socotra Capital

Remembering ‘Hard Money John’ and Persevering through COVID-19 By Charles Peckman, Contributing Writer

his year has been a whirlwind

Report to discuss John’s legacy and

are now our own individual way of

for many – between a global

the

honoring John’s legacy at Socotra

pandemic

throughout the health crisis.

and

often-

importance

perseverance

teetering economy, 2020 has put

Capital,” he said. “I feel like he developed an amazing team along

even the most hardened private

John founded Socotra Capital in

with his partner Adham, and there

lending professionals to the test. The

2008 with his partner Adham Sbeih

were so many amazing life lessons

team at Socotra Capital, a premier

and grew the firm into the leading

he imprinted upon us.”

private lender based in California,

provider it is today. John’s cousin

certainly knows this.

and Socotra Chief Strategy Officer,

This sentiment is echoed by Senior

Tony Ingoglia, said that the company

Vice

While navigating the coronavirus

‘wouldn’t be in the space if it wasn’t

who added that John’s presence and

pandemic, the firm also had to deal

for John’.

mentorship were ‘formative’ for him.

Socotra’s

“He instilled life lessons in each of

“John was big on systems and

Originate

us that are still with us today and

structure and knew how to get the

President

Chris

Baumann,

with the sudden passing of its founding partner, team

sat

John

Ingoglia.

down

with

best from people. He really grew the company from the ground up,” Baumann said. “John put the building blocks in place that allowed all of us to run.” Socotra Vice President Matthew Yu said he will be forever grateful for John taking him under his wing right after college, adding that John’s wit and energy were infectious. “He had a very specific way of understanding people and knowing what motivates them,” Yu said. “I think he was a great, great leader. Through the course of his time with us, he instilled in each of us knowledge

about

the

business,

how to operate and manage so that we would be able to succeed. We realize that we can’t fill his shoes, but together we can take what he’s trained us with and get the wheels moving towards the right direction.” Socotra Capital’s team agreed that John’s ability to handle difficult situations with a forward-thinking attitude has carried over into the firm’s adaptation to the coronavirus pandemic. The firm’s collections, for example, have remained at 95

Chris Baumann Sr. Vice President of Socotra Capital

percent, which Vice President Kerati Apilakvanichakit said is remarkable given the economic hardships some have faced this year. “I think that metric stands out because we are a hard money or private money lender, and with the uncertainty in the market banks have been naturally tightening up and getting stricter on their underwriting parameters,” he said. “I do think that in the next 6 to 18 months this will give private money lenders opportunities to fill gaps in the market on what would be bankable notes or bankable properties, properties that say nine months ago would have otherwise gone the route of traditional financiers.” The impetus of the name Socotra,

our approach to the space, which is to give our borrowers options,” Tony said. “We want to be that place of refuge, we want to be the boat that brings the islanders to the coast. Even during difficult times, I could always see that excitement in John, that twinkle in his eye.” Engrained within the DNA of Socotra, Chris said, is the ability to adapt to anything that is thrown their way. “These are the times when we can make the game, this is the opportunity,” he said. “This is the time when the other athletes take a break, but this is when we train and sharpen our saw. We’re a relatively young company with goals and we

Tony explained, stems from the

are in this for the long-haul – we

firm’s ability to be an island of refuge

know where we are right now and

for borrowers. He added that John

where we’re trying to be.”

always said the best loans are those made in the ‘depths of uncertainty.’

With

At the end of the day, however, Tony

under management, Socotra Capital

said that the team remains steadfast

provides loans ranging in size from

in their commitment to borrowers and the Socotra family. “Yes, COVID is a challenge but I don’t think it’s swayed our philosophy and

Matt Yu Vice President of Socotra Capital

over

$200

million

assets

$100,000 to $12,000,000. For more information on the group, visit socotracapital.com today. https://socotracapital.com/

Tony Ingoglia Chief Strategy Officer of Socotra Capital

November 2020 Originate Report 13

WISDOM FROM THE CEO Ryan Craft

Founder and CEO of Saluda Grade

capital markets services with a growth equity fund and a debt asset management business.

So, there’s

not a lot of road maps to build off, and that’s what made it risky – but without risk, where’s the fun?! Our courage and confidence is driven by the conviction that most of the lending markets we focus on are simply imperative to the American housing and homeowner landscape – and without American housing, there

simply

isn’t

America.

Forgive the hyperbole, but so much of the American Dream is the goal of homeownership – and we believe we are playing a vital role in that ecosystem.

Ryan Craft , Founder & CEO Saluda Grade

Q: What habits, mindset, or perspective have helped you Q: Can you explain a time where

about people.

you faced adversity or had

that many things are simply out of

Jerry Rice often gets credited with

struggles early on in your career?

our own personal control, and the

“Do today what others won’t, so

During the summer of 2008, I was

only rational and productive concern

tomorrow you can do what others

a Non-Agency & Subprime mortgage

a person can have daily are the very

can’t.” There are mental games that

bond trader at Merrill Lynch, and

limited things that are actually

everyone plays inside their own

it felt like we were on the wrong

within our control, and that can be

head; to fuel themselves to work

side of recurring tsunamis.

changed by our actions.

harder, prepare more, and strive to

Every

It honed my belief

It’s this

succeed as a business owner?

couple of months, there was a new

ability to focus, and distill down key

outperform their competition.

disastrous

upon

priorities, that I believe allow leaders

still have a long way to go, but if

us in the mortgage and securitized

and teams to thrive – regardless of

we focus daily on the things we can

bond markets, the resulting global

broader challenges put in their path.

control while working harder and

wave

unfolding

preparing more than our competition

financial crisis was beginning to erupt, and I was sitting at ground

Q: What did you do in the beginning

zero.

of starting your business? What

Much of that year, I spent

many days, actually every day, in the

risks did you have to take and

trading floor trenches simply trying

how did you have the courage to

to survive - while hoping our firm

continue to push forward?

would survive.

Many years later,

Saluda Grade is a unique player

I look back fondly, as they taught

in the alternative lending market,

me so much about the markets and

deploying a strategy of combining

– I am confident about our chances. Q: What excites you about your role as CEO currently today? The best part about being CEO is that you get to pick your team. Our team does things the right way, Ryan Craft: Continues on pg. 16

November 2020 Originate Report 15

Ryan Craft: Continued from pg. 15

and our clients and investors feel it. My partners Tim Carr and Brian Brennan are experienced and savvy operators that anchor our team with a foundation of gravitas and competence.

Jay Ford and Brad

Hartung are the gasoline in our engines, pushing our many strategies forward while keeping a team, now working remotely, aligned and in sync.

We have been building a

much deeper bench around this core initial group, but when there are low moments, it’s been the conviction this group has in our mission that keeps me perpetually excited.

Q: What piece of advice do

from our originator lending partners

you have to share with other

on what they are seeing “on the

entrepreneurs and CEO’s that are

ground” from their borrowers. Those

in the early stages of building their company? I can only offer something we are struggling with ourselves right now as a company. We are working hard to try to remember to try to take a moment to truly celebrate a “win,” and not sprint to the next goal that needs to get done. COVID is making this extremely hard, and with the market on a tear lately, we are constantly just trying to keep up with it all – like drinking from a fire hose. While these are great problems, as there are “wins” to be celebrated, it can truly grind on your team if there

Q: What has been your favorite

are the real estate entrepreneurs that are seeing trends happen as consumer demand for different products is constantly shifting.

By translating

that feedback up the chain, and then providing the cheapest and most flexible institutional capital to solve those problems – we can continue to build our originators by helping them grow their borrowers’ businesses – regardless of how housing demand will evolve. Q: Who is someone that has had a significant effect on your career and why?

is no release. So, we are all trying

Ted Oberwager was my college

to remember to “enjoy the journey,”

roommate at Georgetown and is

The intoxicating part of being an

and remember that the end result is

now one of the rising stars in KKR’s

entrepreneur is the process of creating

never as fulfilling as the hard work it

private equity division. He usually

an idea from scratch, engineering

took to get there.

is the smartest guy in the room,

aspect of being an entrepreneur over the years?

but he leaves nothing to chance and

it from design to deployment, and eventually seeing it succeed as a

Q: What activities or resources would

outworks everyone just in case. His

viable branded entity in the market.

you recommend other entrepreneurs

relentless work ethic has challenged

The first time you overhear someone

to invest their time in?

me over the years to constantly push

else discussing your company, or

I’ve found that most entrepreneurs

myself further, and his insights on

see it affirmed out in the market –

are always on - wheels spinning,

business and markets have helped

it absolutely floors you - that’s a

thinking through new ideas, or

shape how I view the world.

concept that once lived in your mind,

trying to solve a problem in their

and now it thrives in the market. It’s

head. The best advice given to me

an incredibly empowering moment

has been to just make sure you are

of pride that begins a virtuous cycle

finding time for yourself, for your

at the inception of your company?

to challenge what else is possible

family, and allow your mind to pause

Enjoy every minute of it.

– what else can we create? It was

and recharge.

Saluda Grade’s launch that has led

Q: Is there anything that you wish you could go back and tell yourself

Q: What tools do you use to aid you in your role as CEO to be most

to us launching and spinning out

Q: How do you make sure

Unlock Technologies (Unlock.com),

your company stays ahead in

efficient, organized, and focused?

and it will be Unlock’s success that

this industry?

Calendly.com – I can’t recommend it

will lead to the next launch.

We really work hard to take feedback

more strongly.

CONTACT: https://www.saludagrade.com/

PRESS RELEASE

Applied Business Software Completes Private Equity Transaction with Lometa Capital Partners LONG BEACH, Calif., November 10, 2020 – Applied Business Software, Inc. (“ABS”), the leading provider of loan servicing software to the private lending industry, today announced the closing of a strategic growth investment from Lometa Capital Partners (“Lometa”). Lometa’s investment, made alongside a significant investment from existing management and ownership, will allow ABS to accelerate the development of its web-based platform, expand its development team and extend its recent momentum in markets adjacent to ABS’ historical mortgage core. “We could not be more excited to partner with Lometa. In selecting a partner to invest alongside our long-tenured and tight-knit team, cultural fit was a primary focus. Lometa’s unique fund model and approach to investing was a perfect fit for our family-run business. Lometa and its partners have the experience and resources to accelerate ABS’ growth into adjacent markets,” said Carlos Nodarse, CEO of Applied Business Software. “The closing of this transaction represents the beginning of the next chapter in our journey as we work towards automating everything for the private lending industry.” Founded in 1978, ABS provides loan servicing and origination software globally for private lending institutions, non-profits, municipalities, fund administrators, franchisors and many other businesses. Over 1,000 customers use ABS’ comprehensive suite of loan servicing products and add-on modules to automate the loan servicing process and scale their loan portfolios. “We are grateful that the ABS management team chose to partner with Lometa for their next stage of growth. We look forward to expanding the business while continuing to focus on the quality and customer service that has been a trademark of ABS,” said Neal Jain, a Managing Partner at Lometa. “Our partnership will accelerate ABS’ recent momentum as it innovates on behalf of lenders with the ultimate goal of helping customers achieve automation, scalability and success in their business.” Tom Friel, a Managing Partner at Lometa, added, “We have long been impressed with ABS’s unique position as the leader in core operating software for private lenders. Jerry & Eddy Delgado along with the rest of the long-tenured ABS “family” have built a world-class business. ABS’ exceptional products and deep commitment to customer service have allowed ABS to maintain the preeminent position in an industry undergoing extensive digital transformation. Lometa’s investment in ABS is both the culmination of many years of hard work and the beginning of a new phase of growth.” In closing the transaction, Lometa was supported by Aldine Capital, Quabbin Capital and Byline Bank. The Lometa team responsible for closing the transaction was: Neal Jain, Tom Friel, Kevin Williams, and Cramer Williams. About Applied Business Software ABS is the leading cloud-based platform provider for the private lending industry. ABS’s technology solutions enable lenders to service more loans, lower servicing costs, and reduce the time to close, all while ensuring the highest levels of compliance, quality, and efficiency. Visit themortgageoffice. com to learn more. About Lometa Capital Partners Lometa Capital is a multi-family office enabling industry leaders to pool both their capital and their networks to source and add value to private investment opportunities without a hold period constraint. Lometa has a flexible mandate across growth markets, but primarily targets recapitalizations in rapidly growing services companies. Visit lometacapital.com to learn more.

Applied Business Software, Inc.

Lometa Capital Partners

Elizabeth Morales, Chief Marketing Officer (800) 833-3343 | elizabeth@absnetwork.com www.themortgageoffice.com

Neal Jain, Managing Partner c. 832-758-1269 | neal@lometacapital.com www.lometacapital.com

November 2020 Originate Report 17

FEATURE

The Pitfalls of Fractionalized Deeds of Trust

By Edward Brown, Pacific Private Money any investors like the

similar to a mutual fund or owning

situation of owning an individual

alternative lending space

the deed of trust on a specific piece

deed of trust, the investor chooses

where they can invest

of real estate, similar to owning an

which specific loan to invest in and

individual stock.

is recorded on title. It is the latter

in mortgages, otherwise know as, Trust Deed investing, whereby they

that is the focus of this article, and

become the lender on real estate.

In the case of investing in a Fund,

specifically

The two major ways to invest in

the investor invests in the Fund,

of trust where the investor shares

these mortgages is either in some

and the manager chooses which

ownership in the investment with on

kind of pooled investment [a Fund],

loans to make to borrowers. In the

or more other parties.

fractionalized

deeds

their protection as evidence for their

borrowers were quick to refinance.

loan]. When the borrower pays the

One investor tells the story of how

loan off, each investor is required to

a 12%, $1.2M loan was trying to be

reconvey their interest in the loan

refinanced by the borrower at 9%

[notarized signature] in a timely

with a new lender. The fractionalized

manner [California requires this be

note had 5 owners. 4 of the 5 had

done within 21 days of the request].

their reconveyances notarized and

The reconveyances are deposited in

delivered to the escrow company in

escrow, and each lender is paid off in

a timely manner. The last investor

escrow as well.

had $500,000 in the note and did not want to lose his 12% rate; he

If everything goes smoothly, no one

was under the misconception that

complains; however, what happens

he could just keep coming up with

if things don’t go according to plan?

excuses as to why he was not able

What if a lender is unavailable to

to get to a notary [he was a busy

sign off in a timely manner? What

surgeon]. After more than a month

if a lender refuses to sign? What

went by, the borrower sued all of the

happens if the borrower defaults on

lenders for the difference in the rates

a fractionalized loan? What happens

[3%] plus attorney fees. Although

if you have a minority interest

the lone holdout was ultimately

[less than 50% ownership] in a fractionalized loan? These are just a few instances where a fractionalized lender faces challenges, and these challenges can be monumental. First, let’s look at a simple situation where a $900,000 loan has been fractionalized into 9 different lenders [each having $100,000 ownership in Most note brokers [in California; other states may vary] are licensed to fractionalize a deed of trust [notes] with up to 10 owners [beneficiaries]. Other brokers have licenses from the Department of Corporations to have more than 10 beneficiaries. The reason brokers fractionalize notes is usually because they are too big for one investor. A $40,000 note may be able to find a home with

the loan] and 8 of the 9 lenders signs the reconveyance paperwork in a timely manner but one chooses not to sign [in time, or not at all]. Why would the lone lender choose not sign? What if the loan was very well secured and the note was yielding a higher than market rate of interest? A naïve lender may think that they can enjoy the higher interest for longer than allowed [not signing in a timely manner]. This situation is not

one investor, but a $700,000 note

as far fetched as one might think. In

may need more than one investor

the 1990s, first deed of trust notes

in order to be funded. Each investor

yielding 12% were not uncommon.

receives a recorded deed of trust [for

When rates dropped dramatically,

responsible, all of the other lenders had to defend themselves, which put undue burdens upon the innocent 4 lenders. Next, let’s look at a situation where a majority [over 50%] lender chooses to extend a loan when it matures, and a minority lender does not. Unless the minority lender requests a partition action so as to separate himself from the majority lender, the majority lender is in control of the fate of that loan. Dealing with foreclosures by the lenders introduces an entirely new set of challenges; first, who is going to front the money to pay the trustee fees for the filing and publishing of the foreclosure notices? What if there are no majority owners of the note? Even where there is a majority owner, most title companies are not The Pitfalls: Continues on pg. 20

November 2020 Originate Report 19

The Pitfalls: Continued from pg. 19

only requiring every beneficiary to sign; powers of attorneys [POAs] may not be useful, as many title companies are stating that POAs are not valid unless they are signed within a small window of time that the reconveyance is to be signed [you might as well have the beneficiary sign the reconveyances in front of a notary if you can get them to sign a POA in front of a notary]. In fact, many title companies are not accepting service agreements that were set up at the time of issuing the note and deed of trust. Too many title companies have been sued by beneficiaries and, the only way to protect themselves, in their opinion, is to have beneficiaries sign their reconveyances; even to the extent that the title companies will choose which notaries are acceptable for signatory verification. Thus, foreclosing may not even be possible if the note holders cannot agree to their destiny or come up with the funds needed to file the paperwork to foreclose [which can be many thousands, depending on the size of the loan]. Other issues arise even if foreclosure has been started; one lender tells the story of how the borrower stopped making payments to both the 1st and 2nd mortgage. This particular lender was one of many in the 2nd mortgage. The 1st started the foreclosure

process.

Nobody

the 2nd mortgage wanted to cure the 1st. There was an offer by an independent 3rd party to purchase

the property for the $100,000 over

would be buyer of the property will

the1st mortgage, which would have

walk away.

been given to the 2nd [which would have paid its loan down but not off]. There were 25 beneficiaries on the 2nd DOT. 24 of them chose to allow the sale and take the $100,000, which would have amounted to a

Another issue is that an investor in a note does not have to come up with his fair share of the money it takes to file foreclosure, and there is no provision that states that other

short sale; however, the one lone

investors who come up with more

holdout, who represented only 4%

money get a preference, so it is

of the 2nd, refused to sign off on the sale. His reasoning? He stated that he believed that, at the foreclosure sale, someone would bid the property up more than $100,000 over the 1st.

difficult to maneuver a foreclosure unless each person comes up with his percentage required. Other not infrequent situations come up where the borrower wants to do

Not only was this illogical [based

a loan workout or re-write the note.

upon the value of the property],

Unless all parties agree, everything

but it went against his previously signed documents stating that he would go along with the majority, opening himself up to a lawsuit by the other lenders. The title company refused to give title insurance to the potential buyer, and the sale never went through. At the trustee sale, one bidder bid just over the 1stâ&#x20AC;&#x2122;s credit bid, and the 2nd walked away with zero.

is at a standstill. Some unethical fractionalize

note

holders

with

sometimes hold this over on the rest of the note holders by demanding a larger share than they are entitled to or demand that the other investors buy them out. For these reasons, many investors have turned to Funds where the Fund manager handles the foreclosure paperwork, pays the fees, and sees the entire process through.

Many individual trust deed investors believe they are protected from many

The takeaway here is that one needs to be extremely careful if one wants

perils if they own over 50% of the

to invest in a fractionalized note â&#x20AC;&#x201C;

note, as most states have a rule that

not only do you want to own more

the majority holder makes the rules;

than 50% of the note, but make sure

however, title companies are not

you know every other owner and have

bound by such laws. If they refuse

like minds, which, in todayâ&#x20AC;&#x2122;s world, is

to give title insurance, any prudent

more than a daunting task.

ABOUT THE AUTHOR: Edward Brown is in the Investor Relations department at Pacific Private Money in Novato, Calif. CONTACT: edward@pacificprivatemoney.com https://www.pacificprivatemoney.com/

November 2020 Originate Report 21

SPOTLIGHT

INDUSTRY SPOTLIGHT

Renee Lewis

Managing Partner of Bloomfield Capital

and to thoroughly underwrite the opportunity.

From a borrower’s

perspective, it is also important to understand your lender – to know where their capital is coming from, their experience in more challenging markets,

and

their

reputation

for fairness. Q: What are you doing differently today to move your company forward than you were 6 months ago? As we had staff in several offices across

the

country,

already

had a fairly robust system and practice regarding communication, videoconferencing,

and

working

across offices, which has become even more developed and engrained over the past six months.

There

have been some changes in the types of deals we are seeing, such as increased multifamily and industrial as some other funding sources have become less active. Q: How has your company evolved since its inception? (ie: new products, new divisions, grown, merged, etc?) Bloomfield is over 12 years old and

has

grown

significantly

–

with transactions in 36 states and counting. In 2017, a company I had Renee Lewis, Managing Partner Bloomfield Capital

founded, Var Capital, merged into Bloomfield which led to a significant increase in staff and support of

Q: How has your outlook of the

reminder of the basics. As a lender,

offices in Portland, ME, as well as

private lending industry changed

it is important to understand the

NYC, Chicago, and Denver. We also

in light of the new normal?

business plan on the property, to

opened a Los Angeles office in 2018

I’m not sure if it is a change or a

ensure that interests are aligned,

Renee Lewis: Continues on pg. 24

November 2020 Originate Report 23

Renee Lewis: Continued from pg. 23

and have grown our West coast presence significantly. Q: What is something most people don’t know about your company? There are more women employed at Bloomfield than men! Q: What has been the highlight so far in your career? There have been several iterations or projects that were particularly memorable: In an effort to blend an interest in public policy with my real estate career, I grew a government services division of one of companies I founded. I had several interesting

decisions you’ve made?

and the path, particularly for women,

My father had a sign in his office that

to be bleak. Taking the position was

said, “Experience is what you get

a mistake in many ways. However,

when you expected something else.”

that

It was a message about keeping

impetus for me to leave the company

perspective, finding the lesson in the

and, with one of my colleagues, to

experience and applying it next time.

begin a new, woman-owned firm.

Q: Tell us about a person or

Q: What do you predict for the

organization you admire. How

future in private lending through

have they made an important

the end of this year and beyond?

impact on you, the industry, or

I anticipate a busy year with projects

the world?

having some level of business or

When I was in college, I had the

capital distress. Rescue capital and

opportunity to work as an intern

distressed

for John Glenn, the astronaut and

balanced with lending opportunities

Senator.

on higher quality transactions.

While there is so much

frustration

served

opportunities

will

the

be I

to admire about Sen. Glenn – from

think it will take time for markets

the Right Stuff it took to join the

assignments including working as

to recover, and the opportunity will

space program and become the

be with those who have ready capital

part of the team that developed and

first person to orbit the Earth, to

and a bit of patience.

implemented HUD’s Mark to Market

his terms as Senator even a short

program,

affordable

run for the presidency. His impact

Q: If you had a clean slate to start

housing and saving the government

on the world was significant. More

over and do anything you wanted

significant

personally, the impact he had on me

to do, what would that be?

today’s opportunities, I developed

related to his curiosity, intelligence,

Well, I wanted to be a veterinarian –

and humble demeanor.

but this has worked out pretty well!

specialty

promoting money. in

Closer

distressed

debt

He honed

acquisitions and was responsible for

in on the essence of an issue, asked

the underwriting and purchase of

great questions, made decisions, and

Q: How do you want to be

over 1,000 commercial real estate

treated everyone well.

remembered? What have you

loans during the last cycle.

done to cultivate that feeling Q: How have you turned a career

from others?

Q: What advice would you give to

mistake or failure into success in

I think it is incredibly important

your younger self?

your career?

to give back to the community –

I would advise myself to jump

I joined a large company several

however you define that community

at opportunities.

years into my career for which I

(your

relocated and took on a plethora of

college, etc.).

Q: What piece of advice did you

new areas and responsibilities.

remembered for helping others, and

personally receive early in your

learned an incredible amount, but

for bringing insight, humor, and

career that has helped shaped

found the organization to be difficult

ethics to my endeavors.

CONTACT: https://bloomfieldcapital.com/about-us/

city,

industry,

charities,

I hope that I am

November 2020 Originate Report 25

FEATURE

You’re Lending With A Handicap:

PRIVATE LENDING DATA IS STILL IN THE DARK AGES

By Kat Hungerford, American Association of Private Lenders rivate lending has become

All good things, and a huge leap

still only guesstimate their true

more tech-savvy than ever,

forward from lenders’ capabilities

market share. And loan terms are

even a decade ago. But where

primarily cobbled together from

conventional mortgage companies

internal metrics, putting eyeballs

platforms

have private lenders beat – and what

on competitors’ published rates,

enable lenders to transact loans

causes lenders to continue to leave

and piecing out indirect data from

faster and more efficiently while

money on the table on Every. Single.

REI and housing market research.

providing internal metrics that allow

Deal. – is industry data.

Doing it right is time consuming and

with

numerous

software

options to market, originate, and service

loans.

These

businesses to know exactly where

– when purchasing data rather than

a deal falls within their guidelines

Even

throughout the life of the loan.

hungry private lending giants can

the

most

dialed-in,

data-

relying on incomplete or secondhand accounts – expensive.

Street money lasts only as long as Wall Street confidence. In other words, it’s fickle. It can also hamstring a lender when everything they know about a deal says it’s solid, but it doesn’t fit into a capital investor’s buy box. As an industry, private lenders’ ability to pony up the data on the true risk of different kinds of deals brings with it the possibility of more money and expanded parameters. And as historical industry data builds and its stability is better understood, the capital market’s ability to tolerate vagaries increases in tandem. Individual Investor Confidence: Lenders hoping to sell loans outside the capital markets will also find the same premises hold true on the individual investor level. While investors build confidence based on a lender’s personal track record In

short,

unlike

every

other

grown (again, entirely guesstimated)

and their own risk tolerance, being

into the billions.

able to educate an investor about the

While lenders have prospered in the

and deals fit into it will do much to

the total loan volume? Unknown.

past decade, filling a need as more

What types of loans earn what

stringent government regulation and

portion of the market? Unknown.

banks’ own risk tolerance limited

Average interest rate? Fees? Terms?

their ability to finance real estate

Unknown. Unknown. Unknown.

investment activities, this prosperity

financial field, there is no industry-

industry and how the lender’s terms

specific data. How many loans are originated?

Unknown.

What

has

occurred

despite

severe

We do not know our industry’s

lack of data. Armed with reliable

foreclosure or delinquency rates. We

information based on hard data, the

have no true idea of the supply or

industry would arguably be far more

demand. And because we do not even

advanced than it is today.

know the broad, national numbers, we have not a statistically relevant

The Case for Better Data

clue of what’s happening regionally,

So what, specifically, are private

or locally.

lenders missing out on?

Comparatively

speaking,

private

Capital Market Confidence:

lending is still very much in the dark

As many private lenders learned the

ages, even though the industry has

hard way during the pandemic, Wall

sow confidence. Borrower Confidence: Wow, data and confidence really just … go hand in hand, huh? At the American Association of Private Lenders (AAPL), we get daily calls and emails asking if a lender’s terms sound fishy. Yes, much of the time that’s because it’s a scam (a whole other story), but when the lender is legitimate, it’s also a hard question to answer. What is out of the norm? Why should they believe you that these terms are normal for the variables involved? Being able to back up your terms with external Lending with a Handicap: Continues on pg. 28

November 2020 Originate Report 27

Lending with a Handicap: Continued from pg. 27

data increases a borrower’s trust in you – and the industry. Small Lenders Fighting for a Piece of the Pie: While larger lenders may have the bandwidth, cash, and internal data to collect and extrapolate the available data to make informed decisions, small lenders are truly left in the cold. Knowing where you fit in the market and being able to compare your

underwriting

guidelines,

terms, and foreclosure rates against a benchmark can tell you if you’re falling behind or ahead of the pack. Your gut feeling that things are going ok could become a certainty – if you

… private lenders help affordable

companies that run private lender

housing?” “There are that many

product surveys (loanbidz.com).

small business private lenders?”

Tomorrow is a little brighter. As

“Those are the kinds of projects

the industry has grown, so too has

that private lenders are funding?” Regardless of what side of the aisle policymakers fall on, they start to lean in when they learn what our industry does and how big it has grown to be (which, thinking about how partisan U.S. politics has gotten, is kind of a big deal). The downside is that what we have to say is backed up by … nothing resembling hard data. Trying to convince

legislators

that

their

plan is going to hurt our industry, causing loss of revenue to efforts or

had access to the information.

constituents they care about, is just

Decision-Making Gets Easier:

an asterisk beside everything we

The days of 10% and 2 points as

tell them.

standard

loan

terms

are

not all that believable when there’s

Don’t leave me hanging lender’s ability to react to changes in without a solution! the market is only as good as their

No matter how you shake it, private

knowledge of that market. Regular,

lenders on both an individual and

data

means

better, faster decision-making and

lending market. While to date we know of no such outlet that is doing this research, AAPL receives calls inquiring about available data at a far greater rate than even two years ago. Finally, it would be remiss not to mention AAPL’s own newly launched quarterly survey. Although data is not yet available (the first period surveyed will be Q4 2020), all respondents will receive aggregated and anonymized results. Learn more about the survey and sign up to respond at aaplonline.com/survey. AAPL is the first and largest national

gone.

At least, they should be. Private

industry-specific

research-firm interest in the private

industry level could be scaling faster and smarter if they had a benchmark

organization

representing

the

private real estate and peer-topeer lending industry. Its three core principles – Ethics, Advocacy, and Education – provide a foundation for a new generation of real estate

underwriting, reactions to adverse

from which to measure. So, what’s

capital. The association serves as

developments (both internal and

the solution?

a catalyst for industry growth by

external), and generally more money with less risk. Guesstimating what’s happening is what tied your stomach in knots during the pandemic. Data would have helped.

Your Business: an

association,

talk

legislators to advocate on behalf of the industry. The most common reaction we get is surprise: “Wait

awareness,

promoting

Today, the best a private lender can

best practices, and encouraging a

hope for is paid REI data or market

standardized code of ethics for its

report

membership. More information can

summaries,

competitor

research, and/or to pay the few

Keeping Government Out of As

fostering

be found at aaplonline.com.

ABOUT THE AUTHOR: Kat Hungerford is executive editor of Private Lender magazine and project development manager at the American Association of Private Lenders (AAPL). Hungerford also acts as secretary for the association’s Government Relations Committee, which serves as AAPL’s advocacy arm in state and federal legislatures. CONTACT: kat@aaplonline.com | aaplonline.com

November 2020 Originate Report 29

FEATURE

The New Normal in Commercial Real Estate Lending By Nema Daghbandan, Esq., Geraci LLP

ommercial Real Estate (CRE) continues to be an asset class filled with uncertainties.

Initially,

state

lockdown

orders

decimated many CRE sectors. Unlike residential

assets,

government

financial

assistance

mostly

overlooked

commercial

assets,

leading to higher default rates and forbearances with certain assets. The SBA PPP loans were instrumental in keeping many commercial real estate owners afloat during the worst of the

retailers

the

To some extent, retail owners will

those

have to absorb some of the financial

that do not have online revenue

burdens borne by tenants; however,

current

struggling crisis,

before

especially

streams, are growing. Retail entities demonstrating resilience, and even strength, are those equipped with in-line retail anchored by essential goods including grocery, discount,

the sponsors best positioned to weather the pandemic will be those proactively collaborating with all stakeholders, and

including

investors.

lenders

Commercial

real

and pharmaceutical providers.

estate lenders are continuing to

The CARES Act offered some degree

sector

provide funding options in the retail

of support for rent payments owed by small businesses. As retailers

provided

developers

and

tenants have a viable strategy for sustained revenue.

COVID crisis. Government stimulus

shuttered operations, landlords and

has mostly stopped and CRE lenders

lenders have been actively discussing

must now adapt to making CRE

payment options such as rent relief

mortgage loans in the â&#x20AC;&#x153;new normal.â&#x20AC;?

and

leases,

The industrial sector is expected to

To get a pulse of what it was like to

and addressing lease provisions to

outperform other asset classes as it

be a CRE lender, I interviewed three

prevent tenants from vacating their

becomes more essential for supply

significant CRE mortgage lenders to

lease obligations. CBRE released

chains, e-commerce, and food and

get their take on mortgage lending in

early

that

beverage suppliers. Distribution and

times of uncertainty. Below are a few

approximately 50% to 70% of April

manufacturing facilities are less

questions and observations of the

retail rents were paid on average

prone to business interruptions than

currently state of the CRE market.

at grocery-anchored centers, 20%

other commercial real estate classes

deferrals,

estimates

modifying

indicating

What Types of CRE assets Are Still Attractive?

to 40% in non-grocery anchored

because these entities are typically

Is Retail Truly Dead?

centers, and only 10% to 20% in

less crowded and are located in

As anticipated, the challenges for

malls and outlet centers.

suburban locations.

Accordingly, industrial rents are

to their inflation adjusted mean, do

In these testing times, it is important

anticipated

relatively

episodic fluctuations like Covid-19

stable. Leasing activity has gone

genuinely matter in valuation from

emerging

down as potential tenants employ

a long-term perspective? In reality,

including machine learning-based

a wait-and-see approach and are

the CRE market does care about the

automated valuation methods are

finding it hard to complete the onsite

short run performance of an asset.

during

inspections required for closing.

Investors require a safe exit strategy

in normal operating procedures.

Overall, leasing activity may rise in

and may have a target holding period.

Accordingly, it is important to inject

remain

the near future due to an elevated need from high-demand industries

While some may believe that the

such

distribution,

worldâ&#x20AC;&#x2122;s response to the coronavirus is

cold

storage,

e-commerce.

somewhat exaggerated, there should

Still, these positive effects may be

be no denial that the crisis will persist

somewhat negated by decreased

for many more months, if not years,

interest from non-essential retail/

and will fundamentally alter our

whole companies and third-party

collective worldview of nearly every

logistics that cater to them. The

aspect of personal and professional

industrial sector will experience

daily life. Even if Covid-19 does not

some short-term fluctuations but

lead to a permanent regime shift, its

will likely recover faster than other

impact on cash flow projections must

property sectors.

be incorporated into any valuation.

last-mile and

Commercial real estate valuation has In terms of geographical location,

two primary inputs: (1) How much

suburban areas outside of urban

future cash flow a given property

core

experiencing

is anticipated to generate; and (2)

rapid growth prompted by the mass

The risk profile associated with the

exodus from major metropolitan

given asset.

markets

are

how

ineffective

valuation

this

the

techniques

unique

interruption

some degree of human augmentation and subjectivity to reach a collective industrial consensus as to how to implement

needed

adjustments

to the valuation process. Lenders are taking a more deal-specific approach when it comes to funding. As far as rates go, CRE lenders are maintaining Loan to Value (LTV) at pre-COVID levels of 70-75%, while slightly

increasing

pricing

from

previous averages between 8-9% to closer to 10%. Multifamily Sector Status from a Lending Perspective COVID-19 will impact multifamily communities

varying

degrees

depending on asset and submarket

areas due to the viral outbreak. With the advent of telework and

Assuming

online schooling options, buyers and

fluctuations are relatively minor, the

investors alike are exploring options

data follows a fixed regime, making

outside the city where they can get

predicting future revenue streams

more bang for their buck.

easier. The associated risks including

the

macroeconomic

variables like discount rate and How do you Manage and Trust

capitalization rate are determined

Asset Valuations?

by adding some premium to the

While they are inherently different

exogenous risk-free rate. The risk

in some respects, like other financial

metrics, therefore, are reflective

assets, real estate assets are valued

of the uncertainty in cash flow

as if they implied series of cash

whereas the cash flow estimates

flows in perpetuity. Although unlike

are about their projected levels. The

stocks, commercial real estate will

stakeholders such as the appraisers,

physically depreciate, their owners

clients, and investors must take

reserve funds for periodic capital

any valuations done today with a

expenditure to mitigate the effects

pinch of salt. In coming months,

of depreciation and rendering them

akin to perpetual assets. However, if,

corrections to the valuations being

in the long run, asset values revert

conducted currently.

should

realize

expect

retrospective

contexts. The majority of lenders are focused on navigating upcoming rent payment cycles and accommodating tenants

experiencing

hardship

create

financial

deferred

partial payment plans. To date, no state has implemented a rent freeze

and

government

officials

continue to urge landlords to be flexible regarding payments. Major urban areas have rolled out eviction moratoriums for nonpayment of rent and are negotiating extensions of these policies into the fall season. Markets that will face the biggest challenges are those that are primarily reliant

leisure,

hospitality,

and oil and gas industries such as The New Normal: Continues on pg. 32

November 2020 Originate Report 31

The New Normal: Continued from pg. 31

Orlando, San Diego, and Houston. Revenue volatility may be more pronounced than vacancy concerns from a long-term perspective, as tenants navigate lower incomes or unemployment during what appears to be a U-shaped recovery. Stabilized properties will be the least impacted as people remain in their homes in the short term. However,

exhibited

prior

recessionary periods during times of economic turbulence, households

demand while other industries are

It should be noted that, prior to

navigating

revenue

the pandemic, the U.S. real estate

and operations, and may halt hiring,

market was exhibiting manageable

expansions, or purchases.

levels of new supply, low vacancy

compromised

rates, modest leverage, and large cap Recent

unemployment

numbers

rate spread to the 10-year Treasuryâ&#x20AC;&#x201D;

showed in an increase of new jobless

all factors that would support a

claims to 22 million, wiping out a

healthy

decade of hiring gains. Responding

market and mitigate potential value

to the crisis, the U.S. government

declines. While the impact from the

rolled out several unprecedented

COVID-19 crisis is severe, there is

monetary

and

reason for optimism regarding the

packages,

exceeding

fiscal

stimulus the

relief

policies implemented during the

commercial

real

estate

long-term U.S. economic outlook and commercial real estate industry.

2008 economic crisis. All told, the stimulus is estimated to be more than

Final Take

typically downsize to more affordable

$6 trillion, or 29% of annual GDP.

With

housing or double up in occupancy.

While these actions will hopefully

1% and anticipated to stay there

Subsequently, Class B assets are best

help mitigate the long-term economic

for some time, we are clearly in a

positioned to weather the crisis than

fallout, it is premature to estimate

yield-starved world. Even though

the luxury sector as renters become

the severity of the downturn and the

CRE continues to post significant

more price conscious. Class C assets

shape of the recovery as the macro

uncertainties, the fact of the matter

environment is still developing and

is that most investments are even

remains highly uncertain.

more uncertain and speculative.

will also become stressed as lowerincome

households

experience

financial

uncertainty.

increased

treasuries

well

below

The equity markets continue to The U.S. commercial real estate

wildly swing, and valuations appear

market has started to experience the

completely

impact of the pandemic. Hospitality,

underlying economic fundamentals.

healthcare, and retail properties

CRE mortgage lenders must now

challenge of housing affordability.

have seen the most pronounced

underwrite to numerous negative

impact, while other sectors reliant on

contingencies, but ultimately smart

Managing Investor Expectations &

longer-term leases should be better

CRE bridge lenders have always had

insulated. An extended cessation

to navigate a transitionary asset and

of economic activity to subdue the

must rely upon their underwriting

outbreak,

employment

savvy more than ever. Ultimately all

reduction, and declining consumer

mortgage lenders are adapting to

demand would substantially affect

the new normal and learning their

demand for commercial real estate.

lessons in real time.

Before

the

virus,

demand

for

affordable housing greatly exceeded supply. The effects of the pandemic will

only

accentuate

the

focal

Capital Markets Outlook As the COVID-19 crisis pans out, the overall impact on the global economy is becoming increasingly apparent in supply chain disruptions, demand

shocks

distancing,

due

regional

social

spending.

Certain

industries, including tourism, air travel, hospitality, and brick-andmortar the

retail

sharpest

are

with

shutdowns,

travel restrictions, and restricted consumer

continued

disconnected

experiencing

disruptions

ABOUT THE AUTHOR: Nema Daghbandan is a Partner with Geraci LLP. He primarily representing lenders, brokers, and loan servicers nationwide. His practice revolves around the preparation of documents and providing compliance advice. Mr. Daghbandan also possesses a deep expertise in loss mitigation and advises in the management of defaulted loans nationally. CONTACT: nema@geracillp.com | https://geracilawfirm.com/

THE IMPORTANCE OF

your brand or product with the potential to see huge 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 hosting a webinar you’ll have metrics to measure 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 Webinars have grown in popularity in recent years and total views. The webinar can and should be recorded about your training or product in real-time. You can and have become an important marketing tool. for you, the audience, and affiliates to share with customize your presentation to your audience based on These live web-based seminars can connect you with others, growing the results even more. Each time a their questions and feedback to keep them engaged. leads from all over the world. They encourage interacti person completes your webinar’s registration form Ask them to take an action, such as completing a task by allowing the audience to ask questions orJust how they should be considered a new potential lead, or answering a question. This will increase audience beneficial can a webinar be to your business? Here whether it be for a sale or a potential partnership. participation and interest. Include guest speakers, are 7 reasons why webinars are a fantastic marketing Webinars adds a personal interaction that videos and such as industry leaders or affiliates, to speak during strategy. Webinars are a cost-effective way to extend commercials don’t. Webinars put a face and name your webinar. These individuals should be familiar your reach globally. Rather than pay for flights and with your product making you approachable, human, with your industry and value of your product. They hotels to meet with individual leads, you can engage and someone they can trust. Educating them on how will be able to educate the audience on the benefits with a larger group over their computer screens. your product can benefit their company is the first or impact, validating information you have or will People from all over the world can attend, providing step in opening the door to future discussions and be sharing. By inviting a guest speaker, you can also your brand or product with the potential to see partnerships. It is essential to show both new and increase the webinar’s attendance by including your huge results. This global reach creates networking established leads how your product or service can guest’s audience and following. This can grow the opportunities for building relationships and improve or enhance their workplace. Depending number of leads you may gain substantially. Results partnerships. on the prospect, the sales process can be slow. can be seen quickly from webinars. After hosting a our audience has invested time in registering and Businesses want to convert a lead into a cusWhile it’s webinar you’ll have metrics to measure how well it listening to the information you plan to share. certainly important to provide useful information performed. These metrics include the number of at They’re expecting valuable takeaways from the and tips to your audience, it’s equally important to tendees, number of those registered, and total views. webinar, even something they can put into place share how your brand or business can help them The webinar can and should be recorded for you, the at their own company. This positions you and your achieve this. How can your product be a solution audience, and affiliates to share with others, grow brand as an industry leader, or expert. to their problems? Your webinar should show the ing the results even more. Each time a person com audience the value of your brand. Garnering interest pletes your webinar’s registration form they should Webinars can give your audience the chance to ask in the product and its potential impact is the first be considered a new potential lead, whether it be for questions and provide feedback. This is valuable step in completing a sale. a sale or a potential partnership. Webinars adds a because you can address concerns, reservations, or personal interaction that videos and commercials any lingering questions they may have about your There are numerous benefits to hosting a webinar. don’t. Webinars put a face and name with your prod training 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 effective they can trust. Educating them on how your product You can customize your presentation to your tool for engagement and growth. As you take these can benefit their company is the first step in opening audience based on their questions and feedback to benefits into account, you should begin to think the door to future discussions and partnerships. It keep them engaged. Ask them to take an action, such how you can use a webinar for lead generation and is essential to show both new and established leads as completing a task or answering a question. This to increase traffic, which will yield great results for how your product or service can improve or enhance will increase audience participation and interest. your business. Webinars have grown in popularity their workplace.Depending on the prospect, the sales in recent years and have become an important formation and tips to your audience, it’s equally Include guest speakers, such as industry leaders marketing tool. These live web-based seminars can important to share how your brand or business can or affiliates, to speak during your webinar. These connect you with leads from all over the world. They help them achieve this. How can your product be individuals should be familiar with your industry encourage interaction by allowing the audience to a solution to their problems? Your webinar should and value of your product. They will be able to ask questions or provide feedback in real-time. show the audience the value of your brand. Garnering educate the audience on the benefits or impact, Just how beneficial can a webinar be to your interest in the product and its potential impact is the validating information you have or will be sharing. business? Here are 7 reasons why webinars are a first step in completing a sale.There are numerous fantastic marketing strategy. benefits to hosting a webinar. this article Business Development • Fintech/Newest Loan Programs • Automation in Today’s Evolving SocietyThough • Upcoming By inviting a guest speaker, you can also increase only touches on a handful of them, it should be clear the webinar’s attendance by• including your guest’s Webinars are a cost-effective to extend your Trends & Changes Marketing & Outreach • Essential Tools way & Technologies •that New Legal and webinars areIssues an effective toolRegulations for engagement audience and following. This can grow the number reach globally. Rather than pay for flights and hotels and growth. As you take these benefits into account, of 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 webinar larger group over their computer screens. for lead generation and to increase traffic, which 5. Results: will yield great results for your business. Webinars Results can be seen quickly from webinars. After People from all over the world can attend, providing have grown in popularity in recent years and have4.

CONTENT L E T U S H E L P YO U !

CURRENTLY ACCEPTING ARTICLES

Share your ideas! Email submissions@originate.report for more information.

November 2020 Originate Report 33

FEATURE

3 Strategies to Free up Capital and Fund New Loans By Dennis R. Baranowski, Esq., Geraci LLP

ince the onset of the pandemic,

fear that rents will not be consistent

non-conventional lenders have

nor sufficient to service a loan,

faced two primary hurdles to

especially in the retail, restaurant,

making new loans.

•

Sales of loan portfolios to institutional investors; and

•

Collateralized loan obligations.

and hospitality sectors. It should be noted that Geraci has witnessed

With the trend appearing to be a

The First Challenge

a slow increase in the number

gradual uptick in loan originations,

The first challenge has been a

of originations in the form of

limited access to capital becomes

decrease in originations due to

loan transactions that we handle

that much more of an issue. In

restrictions aimed at curbing the

each month.

order to free up funds to fund new

spread of COVID-19 and a reluctance

originations,

many

lenders

are

The Second Challenge

turning back the clock to a time

with purchase transactions. Their

The second challenge has been a

when

reluctance is due to uncertainty

reduction in available funds to make

often relied on raising their own

surrounding

loans. Specifically, capital has been

capital through private investors,

pay rent combined with eviction

scarce for many lenders that rely on

rather than looking to institutions.

moratoriums.

one or more of the following:

Despite the limited availability of

•

capital markets, lenders can still

borrowers

move

tenants’

forward

ability

Commercial

originations have slowed due to

Lines of credit from banks;

non-conventional

lenders

leverage their existing pool of loans

and

originating lender can sell 100% of

to create liquidity. The three most

fractional sale is memorialized at a

the loan, but still retain origination

common

are

minimum by an assignment of the

fees and collect a residual income

the sale of fractional interests, the

mortgage/deed of trust and allonge

from the monthly debt service.

sale of participation interests, and

to the promissory note.

leverage

strategies

hypothecations.

Which

method

depend

real

property

collateral.

This arrangement is not appealing

the

While there is no prohibition against

preferences and tolerances of the

selling all of the ownership interest

lender and its investors.

in a loan to multiple investors in

chosen

will

the

aggregate,

many

originating

Selling Fractional Interests

lenders opt to reserve an interest

Selling fractional interests in a

for themselves (please note that,

loan is the most common approach

as used throughout this article,

utilized, as this structure is the

â&#x20AC;&#x153;originating

easiest for both lender and investor

lender

to understand. This method is quite

loan(s), regardless of whether or

like brokering a multi-beneficiary

not it was originated by them). The

loan;

the

originating lender can sell the loan

investor being named in the loan

interests but retain the servicing

documents from the outset, the

rights so it can collect a spread

investorâ&#x20AC;&#x2122;s interest is documented

between the note rate and the return

post-closing. In a fractional sale,

being realized by the fractionalized

an investor is purchasing a direct

lenders. This arrangement works

ownership interest in the loan and

well for originating lenders that have

loan documents, and therefore has

experience servicing loans, or at least

a direct connection to the borrower

working with servicers, since the

however,

rather

than

lenderâ&#x20AC;?

that currently

means

the

owns

the

to originating lenders that want to maintain complete control of a loan and realize any and all upside from a foreclosure. In addition, some investors may prefer to passively invest and remain anonymous, which is not consistent with purchasing a fractional loan interest. Selling Participation Interests On the opposite side of the spectrum from the sale of fractional loan interests,

selling

participation

interests is a great vehicle for (a) originating lenders that do not want to cede any interest or control in the loans in its loan pool and (b) investors that wish to passively 3 Strategies: Continues on pg. 36

November 2020 Originate Report 35

3 Strategies: Continued from pg. 35

invest and remain anonymous. selling the

participation

originating

lender

interest, is

only

transferring a right to the income stream created by the debt service from the borrower. The sale of a participation interest is usually accomplished through a

participation

agreement

and

certificate of participation. Since the subject interest is only in an income stream, participants have no connection to the underlying borrower(s) and the loans in the loan pool. The sale of participation interests the

quite

originating

favorable

lender

to that

performance is tied to the income stream from the underlying loan, but there is no actual or collateral

the hypothecation note should be low

state’s licensing and securities

enough that debt service from the

laws

loan(s) securing the hypothecation

each method involves a security,

is sufficient to cover debt service

the

required under the hypothecation.

either comply with registration

and

regulations.

originating

requirements

Since

lender

must exempt

Many investors prefer hypothecation

therefrom. In addition, some

to participation because it allows

states may require that the

them to realize a return in the

originating

form of interest payments that the

investor be licensed in order to

originating lender must pay unless

be a party to the transaction.

lender

and/or

the terms of the hypothecation make the originating lender’s performance

Conclusion

contingent on receipt of payment

Although the pandemic has made

from

it difficult for many lenders to

the

underlying

borrower.

Hypothecations also provide the investor with collateral to ensure that the hypothecation is repaid. In order to mitigate potential liability, an originating lender will often limit the investor’s recourse to the collateral loan(s).

access

capital

from

institutional

lenders and capital markets, there are options. The sale of fractional and

participation

interests

loans, along with hypothecations, offer

opportunity

capital

strapped lenders to obtain funds by leveraging their loan pool. The

interest given to the participant

Additional Considerations

to ensure performance. As a result

1. The discussion of each strategy

desired strategy will vary depending

their

on the proclivities of each lender and

concepts.

their respective investors. Even if

of the increased risk faced by the

above

participants,

respective

basic

superior terms in the form of priority

Since

transactions

are

the descriptions of each method do

of payment of their participation

highly customizable and often

not seem to fit a lender’s needs, each

and/or a return that actually exceeds

negotiated, there is really no

one can be tailored to address them.

the underlying note rate.

“standard” transaction. There

they

often

receive

Hypothecations

only the

addresses

are only common threads that

If you have any questions about

are present for each.

the sale of fractional interests, participation

interests,

and

Simply put, a hypothecation is a

2. All three vehicles for raising

loan secured by another loan. In a

capital outlined in this article

hypothecations, reach out to Geraci

hypothecation, the originating lender

are subject to the applicable

at https://geracilawfirm.com/.

obtains a loan from an investor, whose loan is secured by some or all the originating lender’s interest in a loan or multiple loans. Typically, the transaction is documented by a note, collateral security agreement, and collateral assignment(s) of mortgage given by originating lender in favor of the investor. The interest rate of

ABOUT THE AUTHOR: Dennis Baranowski has extensive experience in helping banks, credit unions, mortgage funds, private lenders, brokers, developers, and loan servicers navigate through complex transactions, including negotiation of terms, transaction review, and drafting of documents. Mr. Baranowski reviews, negotiates and drafts custom loan documents, construction loan agreements, loan workout agreements, leases, loan purchase and sale agreements, subordination agreements, intercreditor agreements, hypothecations, loan servicing agreements, investor agreements. He has authored articles on loan purchase and sale agreements, investment in private loans, and loss mitigation after default. CONTACT: d.baranowski@geracillp.com | https://geracilawfirm.com/

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:

November 2020 Originate Report 37

Direct Lender

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Redwood Mortgage Corp. www.redwoodmortgage.com RMC@redwoodmartgage.com (800) 659-6593 San Mateo, CA 94402

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MI NI MU M LO MA AN XIM $ UM Co LO mm AN er $ Co ns cial um Br e r idg Co e rp or at i Ac on qu s/ i Tru No sitio s ns te s a n ts/ L Pu eg dD rc h a ev e l o l Ent Re ased itie pm ha s en b/ ts Bla Re m nk o e de t Se c o Lo a n l e d / nd s Re Jo M no int or va tg V te d a e Fo ge nt re i g n u re s s Ot h e N at i r on als MA XL OA NCh TO ur -VA ch LU es La E( /T nd % em (B )/M Au ar p AX l es to m e / /S TE Co o RM Re mm yn tiv ag t ai e (YR er l( cia ogu S) Sh En es l/ o te r Lo t ai ps/ t) Ga St nm rip sS en Ma Le t at i o t lls isu ns ) re Ho (G sp olf it a Mi lity Cou xe rs e (H d R e - u s e o te s / M ls) sid ar Pr ina I Ra entia oper ndu ) nc st r tie l I he nv s ial sa Se es t lfnd me s Fa nt R e to ra Pr ge rms st a op u er ra Of tie nt fic s s e

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November 2020 Originate Report 39

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Originate Report – November 2020

Articles inside

By Nema Daghbandan, Esq., Geraci LLP

Persevering through COVID

By Edward Brown, Pacific Private Money

By Kat Hungerford, American Association of Private Lenders

Ryan Craft, Founder and CEO of Saluda Grade

By Charles Peckman, Contributing Writer

Remembering ‘Hard Money John’ and

By Charles Peckman, Contributing Writer

Armanino LLP: At the Forefront of Real Estate Technology