Originate Report – October 2020

OCTOBER 2020

THE OFFICIAL MAGAZINE OF GERACI

INSIDE:

CULTURE CORNER Pacific Private Money

REMEMBERING

‘Hard Money John’ Assessing the COMMERCIAL REAL ESTATE COVID-19 Recovery

INDUSTRY SPOTLIGHT

Ani Kamikyan

Fred Assini

Alpha Funding Partners

MARKET UPDATE See the Investment Potential of IRAs

BREAKING DOWN Breach of Fiduciary Duty & Fraud in a Securities Context

UBTI and Mortgage Debt Funds October 2020 Originate Report 1

2

CONTENTS OCTOBER 2020

Who To Know 6

Eddie Wilson, American Association of Private Lenders

By Charles Peckman, Contributing Writer

12 Remembering ‘Hard Money John’

and Persevering Through COVID-19

By Charles Peckman, Contributing Writer

6

18 Industry Spotlight

By Ani Kamikyan, LBC Capital

Features

12

14 Culture Corner: Pacific Private Money

By Originate Report Staff

22 See the Investment Potential of IRAs

By Clay Malcolm, Advanta IRA

14

26 Market Update: Status of Residential Bridge Loans

By Melissa C. Martorella, Esq., Geraci LLP

30 Breaking Down Breach of Fiduciary

Duty & Fraud in a Securities Context

By Darlene Hernandez, Esq., Geraci LLP

18

34 UBTI and Mortgage Debt Funds

By Edward Brown, Pacific Private Money

In Every Issue 38 Lender Directory

22 October 2020 Originate Report 3

GERACI L AW - MEDI A - CONSULT ING

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4

Letter

from the

Editor

According to Confucius, “If you are positive, you’ll see opportunities instead of obstacles.”

CEO ANTHONY GERACI, ESQ. a.geraci@geracillp.com Senior Vice President, Marketing and Media LESLEY BOYD l.boyd@geracillp.com Lead Graphic Designer LYNDA HIGHT l.hight@geracillp.com CONTRIBUTORS Fred Assini • Ani Kamikyan Charles Peckman • Edward Brown Darlene Hernandez • Clay Malcolm Melissa C. Martorella

FOUNDING UNDERWRITERS

MARK HANF President, Pacific Private Money ORIGINATE WEBSITE https://originate.report GERACI LAW FIRM https://geracilawfirm.com MEDIA WEBSITE https://geracimediagroup.com CONFERENCE WEBSITE https://geracicon.com

Welcome to the September Issue of Originate Report! As the economic impacts of Covid continue to wreak havoc across the nation, many companies are focusing inward to boost the morale of their employees and tap into their creativity to meet changing demands in the marketplace. Company heads who are willing and able to cultivate a positive environment despite what’s going on in the world around them are the ones who will be able to capitalize on the opportunities that could present themselves down the road.

From philanthropic endeavors to leading not only a multi-faceted realty corporation, but also the original private lending trade organization, Eddie Wilson is a well-respected industry insider. The CEO of the American Association of Private Lenders and ThinkRealty, our September Cover story, Eddie Wilson, has dedicated his life to causes dear to his heart, creating a sense of positivity in his wake.

Drawing on lessons learned from our last recession, Eddie recognized that both AAPL and ThinkRealty are uniquely poised “to position themselves to be ready to help those who are going to take advantage of the opportunities that present themselves”. His innate, positive desire to help further the goals of the private lending industry as a whole is shown through his actions in both of his posts. Focusing inward, he has not only set up a sustainable culture for remote employees to continue to engage them during months away from the office, but also through consistent check-ins with members in the private lending industry at large to determine how best to support them. Drawing parallels between the 2008 recession and the current economic climate, Eddie is choosing to focus on the ultimate goal of future opportunities for the private lending industry.

Consistently searching ways to add value to the private lending industry, Originate Report and Geraci Media as a whole are always working hard to create innovative ways to advance your causes.

Because of this, we have designed an upcoming networking and educational event called Evolve: The State of the Market. Our goal is, as always, to maximize your time, new industry connections, and access to new information. Check out www.geracicon.com for more information.

Till next month…

Lesley Lesley Boyd Senior Vice President, Marketing & Media

October 2020 www.originate.report Originate Report 5

PROFILE

Eddie Wilson, CEO American Association of Private Lenders

Eddie Wilson

Preserving positivity in the age of COVID-19

By Charles Peckman, Contributing Writer

E

ddie Wilson, CEO of the

sity, Eddie served as the president

The American Association of Private

American

of

of Affinity Worldwide and contin-

Private Lenders, describes

Lenders, or AAPL, was formed in

ues to head Think Reality as the

2009 as the first national organiza-

himself as a serial entrepreneur.

group’s CEO in addition to several

tion that represents private real es-

After completing a degree in busi-

philanthropic efforts with his wife,

tate and peer-to-peer lending. Since

ness management at Emory Univer-

Misty Wilson.

its inception, the organization has

6

Association

One of my main missions is trying to keep our team engaged and keep them positive. I believe that a leader should always be the positive voice of the organization.”

This positivity, he said, remains crucial during a global health crisis such as the coronavirus. Whether this means checking in with team members during Zoom calls to make sure everyone is adapting to new realities and new work environments, or determining areas of opportunity for the association, Wilson said that as CEO he takes a measured, holistic approach to internal and external areas of concern. Ultimately, he said that his focus is “keeping everyone positive and moving forward.”

During a period of collective concern, Wilson said it can be difficult to find a silver lining among the seemingly never-ending stream of nationwide angst. He added that little things, such as checking in with employees, make a world of difference. As important as these individual measures, he added, is looking served as a touchstone for private

sure members are on the same page

back at how private lending survived

money lenders, hard money lenders,

with the organization’s best practic-

– and thrived – after previous periods

mortgage managers, and brokers

es. This relative normalcy, however,

from across the U.S.

quickly dissipated at the onset of the 2019 novel coronavirus.

lenders’ association, Wilson said his

“When

day-to-day operations can be broken

spreading across the country, my

down into three distinct categories:

focus went more towards our in-

the culture, or keeping a keen eye on

ternal team, creating a culture that

the attributes of the company that

was sustainable internally, because

matter the most; advocacy, which

everybody went to a remote work-

includes time spent in Washington

space,” Wilson said. “For the most

D.C. fighting for private lenders; and

part, everybody worked from home

ethics, which encapsulates making

for the better part of two months.

coronavirus

“Private lending found an extreme opportunity on the other side of the

As the chief executive of a national the

of economic downturn.

began

last recession, so I say to myself and my team ‘let’s position ourselves to be ready to help those who are going to take advantage of the opportunities that present themselves,’” he said. “I also believe that it’s important to turn outward and focus on philanthropy as well. I own orEddie Wilson: Continues on pg. 8

October 2020 Originate Report 7

Eddie Wilson: Continued from pg. 7

phanages and feeding centers all around the world; they are part of my outreach, and I have a great passion for them. I think that in tough times, you have to take the focus off of yourself and begin to help others.

Once you do that, your outlook and perspective changes."

Speaking to this mindset, Wilson said that at the core of AAPL is a desire to help private lenders from across the country through every possible scenario, whether those situations are positive or incredibly difficult.

"Yes, we have to look towards the future and the opportunities that are coming down the road, but even more so we are focusing on our constituents. We have hundreds and hundreds of private lenders across the country who rely on us for data, rely on us for information, and news and networking," he said. "We get on the phone with our members and see if there is anything they need,

try. Because of this positioning, he

and now. There are certainly bet-

added that it is important to perpet-

ter days ahead, and going back to

ually be at the cutting edge of the

AAPL as an industry leader, there is

lending field.

a huge onus on us to not paint the current situation in a negative light.

"One thing we have to stay focused

If we were to do that, there would be

on is that one lender doesn't repre-

implications throughout the broad

sent the entire industry," he said.

spectrum of private lending.”

"We have to look at the collective whole. Even though many lenders

When thinking about how times of

are struggling, there are many more

stress – or times of opportunity –

lenders who are still finding oppor-

impact lending professionals, Wilson

tunities – we have to make sure that

said it is important to extrapolate

our messaging is broad enough so

upon the ethics component of the

it doesn't highlight a singular per-

association. When new members

son's plight, we have to function as

of AAPL are brought on board, they

the universal voice of reason that

agree to follow the association’s code

says 'look, the industry as a whole

of ethics, which was created and

is struggling to a degree, and some

is updated as needed by an elected

have lost secondary market capital

board. In addition to lessening some

that allowed us to thrive and survive

of the stigma surrounding private

in the time before the coronavirus.’

lending that endures today, the eth-

More important than this, howev-

ics pledge ensures that every mem-

er, is serving as a beacon towards

ber is on the same page in terms of

the future.”

the association’s goals.

Wilson, who has been in real estate

"We have a member database that

in various forms for nearly two de-

many people use to look for pri-

cades, said he remembers all too

vate lenders," he said. "The AAPL

if there is anywhere they are strug-

well the tumultuous period of the

member emblem does hold clout in

gling and we could offer support. At

2008 housing crash. Even though

the industry, and the first thing we

the end of the day, we are going to

that series of events had disastrous

do when borrowers call us to vet a

move forward healthy and strong,

consequences on some areas of fi-

particular lender is to check to see

looking towards the future and pur-

nance, he added that private lending

if that individual has ever received

suing opportunities as they come our

thrived in its aftermath as investors

an ethics violation. Part of the rea-

way. An association should function

shied away from institutional capital.

son we do this is because when we

like this, and an association should serve as the backbone of an industry.”

go to Washington and advocate for “There were many people who suf-

less governmental regulation on

fered [during that time], but that

private lending – in order for us to

When thinking about the role that

downturn was the single greatest

keep strong and nimble – we need to

AAPL plays in the private lending

catalyst for growth in the private

be able to show the legislators that

sphere, Wilson said that there is a

lending industry. For those who sur-

there is a code of ethics our members

large onus on the association be-

vived and then saw their strongest

abide by. This helps show lawmakers

cause of its position as the largest

days after, I think there are import-

that we take the ethics of the industry

group of private lenders in the coun-

ant parallels to draw between 2008

very seriously.”

8

Returning to the aftermath of the 2008 crash, Wilson said that some people were skeptical of the blossoming private lending sphere. Intermittently referred to as hard money lending, the institutional failure of the housing market left some borrowers with a bad taste in their mouths. Even though Wilson said he is the first to admit that there is no easy “remedy” for a negative perception of private lending, he added that time – paired with the ethics component and dissemination of information about private lending – helps even the toughest skeptics see the many positive attributes of private lending.

“In the aftermath of 2008-2009, the government was overreaching in its regulation and was really restricting potential growth for real estate investors,” he said. “That curtailed progress led to a vacuum, a vacuum that allowed private lending to really step up and fill a void in the market. If there are great deals, the money will always follow, and money always finds opportunity – that’s how we got to where we are today.”

Wilson said that private lenders were able to offer capital at only a percent or two higher than tradi-

Eddie Wilson, CEO American Association of Private Lenders

tional bank lending; this opportunity helped bolster the economy after 2008, and in his eyes assisted in the

poised and ready," he said. "There

that capital. There is massive growth

pre-coronavirus

is ample capital moving out of other

right now in the private lending in-

discretionary funds and moving to-

dustry; yes, there are traditional

economic

boom.

When thinking about the aftermath of the pandemic, Wilson said that he believes private lending will step up to the plate again.

wards the single-family rental market right now. To some degree, banks are regulating to take advantage of

"I think that our sphere will play a

amazing developments, and private

major role again, and I think we're

lending is becoming the conduit for

hard money lenders, maybe someone who has raised discretionary capital and they’re lending it, but there are also many people who are Eddie Wilson: Continues on pg. 10

October 2020 Originate Report 9

ErEddie Wilson: Continued from pg. 9

becoming involved with wholesaling and fix and flip properties. There is more self-directed IRA money today than ever before in history, and that capital is waiting to be injected into the marketplace.”

One area of private lending Wilson said he is keeping a close eye on, however, is governmental regulation of the space. Over the next five years, he said that varying degrees of regulation will either assist or hinder private lending.

“As a whole, regulation will either help us deploy capital, or it will create a roadblock or bottleneck for capital re-entering the marketplace.

The way we look at this, at least

government scrutiny has made it

– if you can tie causes to capitalism,

more difficult for these people to

it really puts life into perspective in

inject capital into an otherwise

a number of ways.”

thriving marketplace.

Putting life into perspective, Wilson "Many residents in Florida, who of-

said, may seem difficult during the

ten skew older, have high amounts

current period of collective strain.

of wealth and are trying to find yield

Although this may be the case, he

for their retirement dollars, and

added that focusing on the future,

the regulation is to a degree that

his family, and the state of private

they cannot deploy that capital in

lending helps alleviate anxiety about

a meaningful way into investment

the 2019 novel coronavirus.

opportunities," he said. "As any industry grows there is naturally go-

“We don’t know for sure when the

ing to be a certain amount of scru-

economy will clearly open back up,”

tiny, but what we want to prevent

he said. “Economists make differ-

is overzealous regulation masked as

ent forecasts about reopening, but

consumer protection.”

there are so many contributing fac-

When Wilson is not fighting these battles on behalf of AAPL’s nationwide network, he said that he takes

from AAPL’s perspective, is that re-

great pride in the philanthropic work

ducing regulations allows for the

he engages in with his wife. Togeth-

better flow of capital getting from

er they have founded over a dozen

the source to the intended user,” he

orphanages

said. “Because we’re not servicing the consumer market, we should be released from even some of the current regulation that is on us. Of course, from a legislative perspective, risk has to be managed, but we are going to continue to fight to reduce regulations that sit over the top of the market.”

These battles, Wilson said, are being

and

feeding

centers

around the world and have found a passion for what Wilson calls ‘cause capitalism.’

tors. There are many variables, but I think in a short time we will begin to see a correction to what the market is experiencing. The reality of our current situation is that I believe private lending will play an expansive role in our nation’s recovery, and the degree to which we can deploy capital through private lending will potentially make that recovery quicker.”

"I am a capitalistic person and believe that a business should have a

As for Wilson's work-from-home

purpose and make money for every-

routine, he said that it has been

one involved," he said. "But in addition to this component, I am a firm believer that the cause side remains important, especially today. I believe that capital should advance humani-

amusing to watch parents flood social media feeds with questions like "how on Earth do I solve this geometry question?" On a more serious

fought in Washington – but as in-

ty as a whole, and all of the business-

note, he added that he commends his

dividual states review and regulate

es I have been involved with have

team for their ability to adapt to new

the private lending space, he added

a cause component embedded in

workplace realities.

that more concentrated lobbying ef-

them. I have a coffee roastery called

forts are needed in order to curtail

Because Coffee that brews great cof-

“I know and fully realize the level of

stringent regulation. In Florida, for

fee and supports great causes. In the

stress that my staff is under by try-

example, where there is a litany of

end, what I want to do with my fam-

ing to maintain productivity levels

self-directed IRA lenders, recent

ily is create change in people's lives

while also homeschooling their chil-

10

dren. With both parents working at

bership bolstered with the best and

“I’m proud of what the association

home and e-learning happening at

brightest private lenders in the

has become, and I know we will get

the same time, there are bound to

country. Although the rest of 2020’s

through this situation together and

events, such as the association’s an-

emerge stronger than before.”

be some humorous moments but I can’t wait for all of this to end and for us to return to some sort of normalcy. With that said, however, I don’t think we will ever return to the ‘workplace’ as we know it, and the functionality of in-person office space will change.”

nual conference, are likely to look different than past years, he added

For more information about the

that the ‘small but mighty’ team at

American

AAPL is working diligently to stay on

Lenders, or information on how to

top of not only the coronavirus, but

join, visit aaplonline.com

trends in private lending.

Looking forward, Wilson said he

“We strive to offer the best for our

hopes to see the association’s mem-

hundreds of members,” he said.

Association

of

Private

Eddie Wilson CEO American Association of Private Lenders https://aaplonline.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.

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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

October 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

T

his year has been a whirlwind for many – between a global pandemic and an often-tee-

to discuss John's legacy and the im-

are now our own individual way of

portance of perseverance throughout

honoring John’s legacy at Socotra

the health crisis.

Capital,” he said. “I feel like he de-

tering economy, 2020 has put even

veloped an amazing team along with

the most hardened private lending

John founded Socotra Capital in

his partner Adham, and there were

professionals to the test. The team

2008 with his partner Adham Sbeih

so many amazing life lessons he im-

at Socotra Capital, a premier private

and grew the firm into the leading

printed upon us.”

lender based in California, certainly

provider it is today. John’s cousin

knows this.

and Socotra Chief Strategy Officer,

This sentiment is echoed by Se-

Tony Ingoglia, said that the company

nior Vice President Chris Baumann,

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.

ing partner, John Ingoglia. Socotra’s

“He instilled life lessons in each of

“John was big on systems and struc-

team sat down with Originate Report

us that are still with us today and

ture and knew how to get the best

with the sudden passing of its found-

12

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 percent, which Vice President Kerati Apilak-

Chris Baumann Sr. Vice President of Socotra Capital

vanichakit 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, Tony explained, stems from the firm’s ability to be an island of refuge for borrowers. He added that John always said the best loans are those made in the ‘depths of uncertainty.’

At the end of the day, however, Tony said that the team remains steadfast 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

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 are in this for the long-haul – we know where we are right now and where we’re trying to be.”

With over $200 million assets under management, Socotra Capital provides loans ranging in size from $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

October 2020 Originate Report 13

CULTURE CORNER

Pacific Private Money

14

Pacific Private Money: Seriously Committed to Work & Fun A

By Originate Report Staff

t Pacific Private Money, Inc.,

ic Private Money. The firm’s found-

a real estate lender based in

ing ethos — to improve people’s fu-

Novato, Calif., what you see

tures — continues to distinguish its

is what you get, and that’s a good

relationships with investors, bor-

thing. Its cultural DNA is built on in-

rowers, referral sources, and its

ternal values of respect, reliability,

own employees.

transparency, authenticity, resourcefulness and drive — values that also define the way Pacific Private Money has done business since Day One. Pacific Private Money was founded in 2008 on the heels of the financial crisis. The lender built a reputation as a leader in the private capital space by providing fast, reliable alternative financing options for borrowers and short-term loans.

Pacific Private Money finances loans with private capital raised by discretionary debt fund structures. Now, 12 years later, the entrepreneurial spirit is still alive and well at Pacif-

This entrepreneurial spirit shows up in the work ethic of the Pacific Private Money team. The team is future-oriented, sets big goals and commits to clients and each other. Employees come to work ready to grind and put in the hours, even if it means working on a weekend.

Most recently, the team completed a large securitization, accomplishing a year’s worth of work in 2 months.

Even though the process was taxing, the team rolled up their sleeves to make it a success.

Pacific Private Money: Continues on pg. 16

October 2020 Originate Report 15

Pacific Private Money: Continued from pg. 15

While Pacific Private Money employees are seriously committed to their work, they’re not overly serious. The culture at Pacific Private Money is friendly, informal and fun. Only the office dogs wear ties, and new hires are welcomed with open arms and often a new nickname — welcome, Captain Morgan and Crash — so long as they can keep up with the office snark. The team is working remotely through the pandemic, but continues to laugh with each other, check in on work and provide emotional support through the internal team chat, daily Zoom meetings, and RingCentral platform, which it also uses with clients.

The leadership at Pacific Private Money knows the hard-working, fun-loving and genuine culture of its team is a huge part of what attracts business. Good communication and appreciation go a long way toward maintaining this culture and ensuring employees are happy at work.

Long hours are recognized with flexible schedules and time off. Work is balanced with biannual pool parties, holiday parties, potlucks and birthday celebrations. At Pacific Private Money, culture trumps strategy, and it’s inextricable from the core values of respect, reliability, transparency, authenticity, resourcefulness, and drive.

Pacific Private Money https://www.pacificprivatemoney.com

16

Pacific Private Money

Pacific Private Money

Pacific Private Money

Pacific Private Money

October 2020 Originate Report 17

SPOTLIGHT SPOTLIGHT

INDUSTRY SPOTLIGHT Ani Kamikyan

Loan Underwriter, LBC Capital

18

tions more tightly. We are very flexible and always look for solutions in any situation. As Charles Darwin said, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change”.

How has your company evolved since its inception? (ie: new products, new divisions, grown, merged, etc?)

I Joined LBC Capital in December 2015. The company was already very established. Currently, our fund manager is working on opening a new higher-yield fund and we are all very excited about our new fund.

What is something most people don’t know about your company?

Most people don’t know that We have been in business since 2003 and still have same 3 friends/partners as we did in 2003. Our company underwrites primarily on “feel good” underwriting guidelines, so sometimes for best borrowers, best locations and best properties we can go very aggressive. We approach each and every loan scenario individually and Ani Kamikyan Loan Underwriter for LBC Capital

come up with possible ways or creative structures of closing the loans.

In addition, we are currently work-

How has your outlook of the private

The “new normal” is a déjà vu

lending industry changed in light

for me.

of the new normal?

My outlook in the light of “the new

What are you doing differently to-

normal” hasn’t changed much. I have

day to move your company forward

been in private lending industry for 5

than you were 6 months ago?

years already and “the new normal”

We have tightened up our geograph-

is how it used to be when I joined

ical area and only lend in Primary

LBC Capital. The LTV’s were capped

and Secondary markets now. We are

at 65%, points and rates were high.

also looking at borrower qualifica-

ing on creating a new higher yielding fund (12%+ return. Our current fund targets 8% ROI) What has been the highlight so far in your career?

To be featured in Geraci’s Originate Report and to be nominated to Rising Star at AAPL. Ani Kamikyan : Continues on pg. 20

October 2020 Originate Report 19

Ani Kamikyan : Continued from pg. 19

What advice would you give to your younger self?

Save more, invest in real estate, and believe in yourself.

What piece of advice did you personally receive early in your career that has helped shaped decisions you’ve made?

Well, I can remember couple of them: “Be consistent”, “Do what is

at the right time and he is my men-

more money supply. I am very opti-

tor. This person is our fund manager,

mistic about the future.

Boris Dorfman.

How have you turned a career mistake or failure into success in your career?

I have grown quite a bit over the past 5 years. Mistakes and failures were part of my growth. Today, I look at the mistakes as an opportunity for growth, to be better. The main thing

right, not what is easy”.

to remember is to stay the course

Tell us about a person or organiza-

the mistakes themselves; it’s how

tion you admire. How have they made an important impact on you, the industry, or the world?

I can think of a few people who made an impact on me, but I will mention one of them. I work with this person very closely and he has guided me and made me into a true professional. He always gives the right advice

20

and not to get discouraged. It’s not you react, adapt, and move forward.

What do you predict for the future in private lending throughout the end of this year and beyond?

I see “new Normal” being here for another year. Institutional investors will adapt, adjust, and get back to lending and buying loans, creating

If you had a clean slate to start over and do anything you wanted to do, what would that be?

I would join LBC Capital sooner.

How do you want to be remembered?

What have you done to cultivate that feeling from others?

As a friend, I want to be remembered as someone who was kind and respectful. As a professional, I want to be remembered as someone who went above and beyond her job responsibilities. I want to be remembered as a team member who helped others through hard work and dedication; as someone who made a difference in private lending industry.

Ani Kamikyan Loan Underwriter for LBC ani@lbccapital.com https://lbccapital.com

Private Money Loan Servicing Software Powerful, Flexible and Easy to Use! Multi-Lender Loans

Online Investor Access

Mortgage Pools

RESPA Compliant Escrow Analysis

Enhanced Reporting and Forecasting

Rehab, Commercial, Construction, HELOC, ARM

Integration Borrower and Investor Text Alerts

Online and Over The Phone Payments

The ® Your Ultimate Lending Platform

(800) 833-3343

www.TheMortgageOffice.com

Applied Business Software, Inc. 2847 Gundry Avenue, Long Beach, CA 90755 sales@absnetwork.com

October 2020 Originate Report 21

FEATURE

See the Investment Potential of IRAs

By Clay Malcolm, Advanta IRA

M

ey from their retirement plans to invest in alternatives. The assets are purchased by the IRA, titled in the name of the IRA, and thereby owned by the IRA. Investments such as private notes provide tax-advantaged growth that can exceed the ROI of typical stocks, bonds, or

ost people in the US are unaware that tax-advantaged accounts, like Tra-

ditional or Roth IRAs or old 401(k) s, can invest in “alternative” assets such as private loans.

How-

ever, the IRS actually does allow

self-direction offers. The most well-

Private Lending investments, real estate, private placements, gold, and For private lenders,

mutual funds.

known bank and brokerage house retirement plan custodians restrict IRA holdings to assets they sell, which are typically stocks, bonds, and mutual funds.

“self-directed” accounts to invest in

much more.

Individuals do not have to take mon-

The self-directed IRA custodians that handle alternative assets give indi-

Investing in Private Notes with a Self-Directed IRA Self-directed plans can invest in tangible assets like real estate, as well as private notes that hold property as collateral. If property is used as collateral to back a note and the note goes into default, an IRA has the abil-

viduals the ability to control their re-

ity to take possession of the proper-

very large source of capital.

tirement account investment choices

ty. The IRA can rent or even sell the

in a way that can mitigate (and pos-

property to recoup the balance owed

It is not surprising that many indi-

sibly avoid altogether) the highs and

on the note. In the event of the sale

viduals are not aware of the power

lows of the stock market.

of property, capital gains fall under

this knowledge can create a new and

22

IRA Investment possibilities in

The IRA owner is responsible for

notes include:

performing all due diligence includ-

•

Originating or buying existing

ing but not limited to vetting the

notes – whole or fractional

borrower or existing note. The IRA

•

Selling Notes - whole or fractional

•

Investing in a debt-based fund

There are two key elements for an IRA to successfully engage in private lending investment strategies. First, the IRA holder must have their account’s funds with a custodian that handles private notes and/or funds.

Moving funds to such a custodian can

That said, collateral is not required by the IRS, but is an oft preferred

or Company This private lending investment is characterized by the pooling of money from different sources under the umbrella of one fund/entity that extends loans to others. Here, the IRA ing decisions are made by fund man-

uments need to use the name of the

al IRA) or tax free (in a Roth IRA).

2. An IRA as an investor in a Fund

alty to the account. Second, because

the investment, all investment doc-

gains are tax deferred (in a tradition-

she/he deems necessary.

is typically more passive, as all lend-

and because it is the entity making

Depending on the type of plan—these

and can deny funding to anyone as

be accomplished without tax or penan IRA is a legal and financial entity,

the tax-sheltered status of the IRA.

owner also sets the terms of the loan

IRA, not the name of the IRA holder.

Let’s focus on two popular examples:

agers. The IRA is simply an investor in the fund or entity. Income earned on these investments is disbursed by the fund/entity and gets deposited into the IRA. Keep IRAs in mind The Private Lending industry is a key

1. An IRA as a Note holder

part of our economic landscape. It

These transactions involve an IRA

allocates capital in a way that most

holding a note (originated by the

large lending institutions don’t or

feature for IRA investors. The fact

IRA holder or purchased by the IRA

is, the IRA investor can participate in

holder after origination) for a loan

numerous lending options.

made to an individual, a company, or other entity. The borrower may have

can’t.

The entrepreneurial spirit

endemic to Private Lending professionals is similar to the mindset of self-directed IRA investors. Knowing the ability of IRAs to invest in

An IRA is a separate legal and

desired a mortgage loan, a bridge

financial entity from an individual’s

loan, construction loan, or cash for

personal money, but the individual

any number of other needs. The IRA

source of capital, the borrower gets

controls the IRA’s investment activ-

grows by receiving the principle and

their loan, and an IRA holder grows

ity. It is, therefore, helpful to recog-

interest payments.

their retirement savings.

nize that an individual investor may have two (or more) sources of capital to invest: their personal funds and their IRA funds. When speaking to a potential investor, a lender who offers an investment opportunity is addressing one person but two investors—the person and the IRA.

private lending may provide a “winwin-win”. The Private Lender gets a

ABOUT THE AUTHOR: Clay Malcolm has been in the self-directed IRA and 401(k) industry since 2011, both as an educator and investor. He combines his 20+ years of education experience and his expertise in self-directed account strategies to educate clients, CPAs, CFPs, and real estate professionals throughout the county on the benefits of self-direction. Clay has served on the American Bankers Association IRA steering committee and received his Bachelor of Science degree in Communications from Northwestern University.

CONTACT: cmalcolm@advantaira.com | www.advantaira.com

October 2020 Originate Report 23

PRESS RELEASE

ABS Appoints Jasen Portero as Chief Operations Officer LONG BEACH, Calif., May 5, 2020 - Applied Business Software, Inc., (“ABS”), leader in loan servicing and origination software in the private lending space, announced today that Jasen Portero, its current Vice President of Development for the last 12 years, has been appointed Chief Operations Officer.

As a Full Stack Developer, Jasen oversees the Development Department, manages all online services, and spearheads all new projects. As VP of Development he has created a multitude of Front-End Service capabilities: iPad app, electronic signature, online loan application and borrower portal, text notifications, loan geo-mapping, API, and the first fully browser based version of The Loan Office® servicing software. As a Chief Operations Officer he will be extending the online services and will oversee development of both products, The Mortgage Office® and the Loan Office®. Prior to joining ABS, Jasen spent 18 years working for Universal Music Group, WellPoint, Warner Bros., and Evite where he took part in developing some of the technology people around the world have come to use and love.

“I am honored and humbled to take on this new role and take ABS to a new level. Our software is a testament to hard work, excellence in coding, and continuous innovation. ABS as a trusted brand is experiencing incredible growth, and I am excited to be a part of it and take the company to the next phase.”, said Jasen Portero.

“Since joining in 2008, Jasen has been instrumental in our growth. He is an excellent addition to our senior management team and will play a critical role in ABS’ future product development strategy. His proven track record and ability to build a winning team are a great combination for what lies ahead”, said Carlos Nodarse, ABS’ CEO. About Applied Business Software Applied Business Software is a market leader and global provider of software systems and solutions to the lending industry. ABS offers a complete suite of software products designed from the ground up to specifically address the needs of those who originate and service loans. All our products are consistently rated superior in design, system interface, expandability, and ease of use. ABS is based in Long Beach, California. For additional information about ABS’s products and services, visit https://themortgageoffice.com or call (800) 833-3343.

Elizabeth Morales, Chief Marketing Officer https://themortgageoffice.com | (800) 833-3343 | elizabeth@absnetwork.com 24

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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October 2020 Originate Report 25

FEATURE

Market Update: Status of Residential Bridge Loans

W

By Melissa C. Martorella, Esq., Geraci LLP hile the ongoing coro-

Zoom calls have usurped in-person

implementations—including virtual

navirus pandemic con-

meetings. That once expansive cor-

showings and e-Closings—have had

tinues to impact every

ner office has been replaced by a

advanced launch timelines because

facet of life, businesses across all

laptop on the kitchen table or a Face-

they must be used in the present day

industries have begun to adapt to a

Time call from the couch. Processes

in order to complete a transaction.

‘new normal.’

that were anticipated to be future

Regardless of the specifics, the one

26

certainty is that we are all doing our best to adapt to the new norm for doing business.

COVID’s Impact on the Mortgage Industry and Bridge Loans As the nation slowly emerges from its mandatory lockdowns whilst still practicing social distancing and other measures to flatten the curve, the mortgage industry is actively navigating a broad array of novel issues in light of the COVID-19 health crisis.

The economic fallout from the virus has turned the industry on its head, leading to liquidity concerns, widespread layoffs, increased stress on loan servicers, and a potential spike in defaults that has thrown the industry into an even more heightened level of uncertainty. To provide some clarity on the state of the mortgage industry, we polled some of the best and brightest bridge loan professionals to get some insight into the market and what the expected trends are for the remainder of 2020.

A bridge loan is a type of short-term loan intended to assist businesses or individuals in the gap between two

long-term

financing

loans.

Frequently, companies and investors use bridge loans when necessary to cover cash shortfalls when they must repay one loan before having time to obtain a new longer-term loan. From a real estate investment perspective, bridge loans are commonly used on fix-and-flip projects to cover reno-

flippers. And while some lenders had

loan approvals. Noah Brocious with

taken a more conservative approach

Capital Fund I also initially tightened

in the initial stages of the pandemic

requirements, but since has reverted

to mitigate risk, the majority of them

to pre-COVID operations. His com-

have returned to pre-COVID levels of

pany even recently expanded their

lending without any added stringen-

footprint to the Denver market due

cy in the loan approval process. For example, Allen Marsh with Boomerang Capital Partners initially tight-

vations costs prior to the property

ened lending conditions even though

being re-sold.

demand was there for loans, in order to be conservative with an uncertain

Despite the impact of the virus,

market. By August and September,

bridge lenders are continuing to see a

Boomerang is already back to pre-

demand for bridge loans from house

COVID lending requirements and

to high demand for bridge lenders.

Regarding the government stimulus package, the overall net impact has been generally positive in that it assured all businesses that the government was going to be proactive in addressing the pandemic. For smallMarket Update: Cont. on pg. 28

October 2020 Originate Report 27

Market Update: Cont. from pg. 27

er lenders and businesses, it functioned as a backstop, and for bigger lenders with considerable business outside of the mortgage industry, it offered assurance that borrowers had adequate support. Some lenders are wary about government action at a state level, in particular in states where there are foreclosure or eviction moratoriums that include investment properties in broad definitions. For example, Stephanie Casper with LendingHome is cautious about new loan originations in Oregon due to their new legislation related to foreclosures and forbearances in light of COVID-19. On the other hand, Eric Abramovich with Roc360 is optimistic about the Oregon market and sees an opportunity to help communities rebuild in the aftermath of the devastating fires in the area.

Lenders are also being creative in their approach to tackle areas of their business that were previously conducted in person or by third parties. For example, LendingHome is using virtual property inspections that are completed by their borrowers to verify construction projects are hitting relevant milestones.

ects in certain areas. Noah and Al-

COVID-19 environment is more akin

len’s companies are primarily based

to the market turbulence prompted

in Arizona, and they are seeing a

by a natural disaster which sparks a

high demand for loans in the area

major disruption to a localized econ-

along with low inventory related to

omy and usually has a shorter-term

the aftermath of COVID-19. Many

impact than a full-onset recession

people are taking advantage of a

period. There is a lingering con-

remote workplace that many com-

cern with regards to liquidity, but

panies are leaving permanently in

that has gradually begun to reside

place to move to less expensive loca-

as business operations have started

tions. As a result, the Arizona mar-

to resume.

ket is currently booming, and Noah and Allen are at the forefront to help

Overall Outlook

their borrowers fund new fix and

On the whole, the outlook is positive.

flip projects to turn the final product

The lenders we spoke with all took

over to the end consumer. Eric also

smart action immediately to wait

sees some shifts geographically, as

out initial uncertainty, and then dove

many people leave large cities to the

back into lending with force as soon

suburbs and financing needs to re-

as they had some clarity about how

hab projects in those areas increase.

COVID-19 would affect the industry.

A contentious election, social unrest,

From a historical perspective, the

and a potential spike in COVID cas-

obvious and perhaps only compa-

es may change the market outlook

rable market event is the Great

in the months ahead, but the over-

Recession that spanned between

all attitude is of cautious optimism.

roughly December 2007 and June

LendingHome, Roc360, Capital Fund

2009. Still, there are significant dif-

I, and Boomerang Capital all plan

ferences between the present corona-

to grow their businesses, continue

virus crisis and the prior recession.

lending, and keep a close eye on the

For instance, borrowers have more

national atmosphere in the months

equity in their homes and median

ahead, but are confident they will

credit scores are healthier. Addition-

continue to see positive trends in

ally, there is a lower percentage of

bridge lending.

AMR loans presently as compared to

If you have any questions about the a risk of payment shock if and when status of residential bridge loans, actually seeing better results from rates increase in the future. The reach out to Geraci Law Firm.

According to Stephanie, they are

in 2007, which means there is less of

these self-reported inspections, since

borrowers have skin in the game to get the project completed in a timely manner to receive their construction budget draws.

Bridge lenders are also seeing slight shifts geographically leading to a high demand for inventory in proj-

28

ABOUT THE AUTHOR: Melissa Martorella joined Geraci Law Firm as an Associate Attorney in the Banking and Finance section in August 2015. Ms. Martorella’s experience includes representing lenders and brokers, preparing commercial, residential, and construction loan documents, as well as drafting assignments, extensions, modifications, and subordination agreements.

Ms. Martorella also has experience assisting with negotiating the terms of transactions, drafting custom language, and closing loans.

Contact: m.martorella@geracillp.com

O

G

AT I O N

N

E D U C AT I O N • & NE NG TW I K

R

N KI

DUC & E

R

O

O

R

ET W

KI

NG

D U C AT I O N • & E NE

TW

THANK YOU TO OUR SPONSORS!

For More Information About Our Conferences & Events: Alicia Carter • (949) 379-2600 • a.carter@geracillp.com • https://geracicon.com/ October 2020 Originate Report 29

FEATURE

Breaking Down Breach of Fiduciary Duty & Fraud in a Securities Context

By Darlene Hernandez, Esq., Geraci LLP

Breach of Fiduciary Duty

S 30

in such a way that serves their cli-

er—such as a financial adviser or

ents’ best interests. A fiduciary duty

broker who has superior knowledge

mandate that investment ad-

exists when an individual places

in the industry. Typically, these indi-

visers conduct their business

their trust and confidence in anoth-

viduals are classified by the Finan-

tate and federal statutes alike

cial Industry Regulatory Authority

provide financial advice that is suit-

ly, brokers’ fiduciary duties include:

(FINRA) as broker-dealers, which

able regarding the customer’s goals,

(1) Fully and fairly disclosing all ma-

are individuals or corporate entities

financial status, age, and several

terial facts regarding transactions to

that transact securities on behalf of

other pertinent factors. Put simply,

their clients; (2) Ensuring their cli-

its customers. These financial pro-

the

fessionals fall under the purview of

tions should remain consistent with

ents fully comprehend the transac-

the Investment Advisers Act of 1940,

a client’s best interests.

broker-dealer’s

recommenda-

a statute that has been interpreted by the Securities and Exchange Com-

California law also imposes fiduciary

mission (SEC) to impose a fiduciary

obligations between a broker-dealer

obligation on broker-dealers.

and their clientele. Because brokers function as their client’s agents and

Federal law mandates that brokers

agents are generally a fiduciary to

owe a suitability duty to their cli-

their principal, brokers are deemed

ents—meaning that they merely must

fiduciaries in California. According-

tion’s inherent risks with regards to their financial assets; and (3) Keeping the client informed of each transaction conducted.

The specific scope of these duties will vary depending on the level of sophistication of the client as well Breaking Down Breach: Cont. on pg. 32

October 2020 Originate Report 31

Breaking Down Breach: Cont. from pg. 31

as any other relevant facts and circumstances relating to the nature of the relationship between the broker and his or her client, such as if the account is discretionary or nondiscretionary and the client’s ability to weigh the broker’s advice.

Common Law Fraud California law allows individuals to recover damages for instances of common law fraud. Fraud is the act of using deceit or dishonest means for the purpose of depriving another of money, property, or a legal right.

In California, a claim of deceit or intentional fraud requires that each and every one of the following elements be established by the plaintiff:

•

A misrepresentation that can be either written, verbal or implied through conduct (false representation, concealment, or nondisclosure);

•

Defendant’s knowledge of falsity or a false representation made recklessly and without regard for their truth in order to induce action by another (i.e. ‘scienter’);

•

Defendant’s intent to defraud or induce reliance of plaintiff;

•

Plaintiff’s justifiable reliance on the misrepresentation; and

•

Resulting damage caused by plaintiff’s reasonable reliance on the misrepresentation

32

Securities Fraud In the most basic terms, securities

There is a possibility that some

fraud involves providing mislead-

forms of security fraud can be com-

ing or patently false information

mitted unintentionally and therefore

regarding finances or investments

may not lead to criminal penalties

with the intent to encourage another

when securities are transacted in

individual to either sell or purchase

good faith; however, when there is

investments for one’s personal bene-

a verified instance of misleading or

fit. Fraud in the context of securities

false information provided to an in-

refers to deceptive practices in the

vestor, there is no such good faith

stock or commodities markets that

safe harbor as the intent of the ini-

induces investors to make certain

tial misrepresentation was to ma-

transactions premised on false infor-

nipulate either the individual inves-

mation, typically resulting in losses.

tor or market in order to realize a personal profit.

This offense can also include embezzlement,

stock

manipulation,

Wobbler Offense

misstatements on a publicly traded

Per California law, securities fraud is

company’s financial worksheets, and

classified as a ‘wobbler.’ A wobbler

providing false information to audi-

offense means that the crime is pun-

tors. The term can also encompass a

ishable either as a felony or misde-

broad range of related misconduct

meanor. The government is afforded

including insider trading, front run-

discretion in deciding whether the

ning, and similar illegal actions on

offender is charged with a felony or

the trading floor of stock or commod-

misdemeanor. The potential punish-

ity exchanges such as selling unqual-

ment for either individuals or corpo-

ified securities or selling securities

rate entities convicted of securities

that have non-compliant conditions.

fraud could include substantial fi-

Unqualified securities refer to funds

nancial penalties or even imprison-

that are not correctly disclosed to

ment.

the California Department of Corporations or that are non-compliant

If you have any questions about

with the requisite qualification doc-

breaching fiduciary duty, reach out

umentation process.

to Geraci Law Firm.

ABOUT THE AUTHOR: Darlene Hernandez is a Sr. Litigation Associate Attorney at Geraci Law Firm. She has represented various institutional clients in the consumer financial services industry for national and regional foreclosure/real estate and bankruptcy firms since 2008. Her practice covers a broad range of mortgage lending and banking litigation, including litigation relating to loan servicing, title, loan origination, post-foreclosure and REO, nuisance abatement, and foreclosure trustee and predatory lending defense, RESPA/TILA issues, title defects/ claims, judicial foreclosure, deficiency judgments, and receivership.

CONTACT: d.hernandez@geracillp.com | https://geracilawfirm.com

October 2020 Originate Report 33

FEATURED

UBTI and Mortgage Debt Funds

By Edward Brown, Pacific Private Money

A

Most forms of passive income, such as dividends, interest income, and capital gains from the sale of capital assets, are not treated as UBTI. Many investors use their IRAs to invest in Mortgage Debt Funds [MDF]. MDF

ccording to Investopedia, Unre-

empt entities from engaging in busi-

lend money similar to a bank where

lated Business Taxable Income

nesses that are unrelated to their

they take a deed of trust as collateral

primary purposes.

for the loans they make to borrowers.

[UBTI] is income regularly generated by a tax-exempt entity by means of

Typically, income derived from MDF

taxable activities. This income is not

UBTI greater than $1,000 is subject to

are not subject to UBTI even though the

related to the main function of the

taxation. For 2019, the highest tax rate

income derived at the MDF level is not

entity and prevents or limits tax-ex-

was 37%.

passive in and by itself. The IRA inves-

34

out at 8%, there is a 3% arbitrage in favor of the MDF; however, this may possibly put undue risk in its portfolio - depending on how much leverage is used and the bank covenants required to obtain this leverage. In addition, for those investors in the MDF who use their IRAs [or 401(k)s, pension, or profit-sharing plans], this leverage may subject the income derived to create UBTI. Certain key factors for the investor’s IRA are; how much the IRA has invested in the MDF [because the first $1,000 of UBTI is not taxable to the IRA, the income derived by the MDF, and how much leverage was used to produce that income. In addition, it is important the length of time that leverage was used, as the UBTI will be calculated using a formula.

For example, Chart 1 shows an IRA investor having $100,000 in a MDF generating a rate of return of 6.5% [without leverage] will not have its $6,500 income subject to UBTI as no leverage was used. If the MDF chooses to levertor, however, is a passive investor; con-

not be treated as being in the business

sequently, it is not usually subject to

of buying and selling real estate by the

UBTI. There are times, however, when

IRS under normal circumstances]. The

this is not so.

first risk [the IRA borrows to invest in the MDF] is also not a normal risk, and

age the Fund 50% [50% investor funds and 50% bank funds] for the entire year and can borrow at 5% and invest that portion at 8%, the net income to the IRA [after subtracting the bank interest expense and UBTI tax ] would

Ways that UBTI can be triggered for

the investor has control over this by

the investor in a MDF can involve a few

not borrowing to invest in the MDF]. It

different scenarios; if the IRA borrows

is the second risk that is the main one,

Many IRA investors may not feel that

on margin to purchase the MDF; if the

as the MDF controls how much [if at

the extra $2,760 earned in this exam-

MDF borrows within itself to generate

all] it borrows.

ple is worth the risk. When a real es-

be $8,760.

tate syndication goes bad, it is usually

income [called a leveraged MDF], or if the MDF ends up foreclosing on too

Most MDFs that use leverage usually

many assets and the IRS treats the MDF

center around attempting to enhance

as a dealer in real estate. [This last risk

its yield to investors. If the MDF can

is relatively small, as most MDFs would

borrow from a bank at 5% and lend it

only for one reason – leverage. If no leverage is used, then, usually, the only way for a real estate investor to lose UBTI & Mortgage Debt Funds: Cont. on pg. 36

October 2020 Originate Report 35

UBTI & Mortgage Debt Funds: Cont. from pg. 35

substantially most or all of his/her in-

basis for his MDF for specific reasons;

to obtain the leverage is less than the

vestment in these types of investments

mostly, to help fund short term loans in

income derived from it, his Fund still

[be they REITS, Limited Partnerships,

his Fund when he is expecting payoffs

benefits from a small amount of posi-

Limited Liability Companies, etc.] is if

on other loans or anticipated investor

tive arbitrage.

the real estate taxes associated with

money flowing in. As soon as payoffs

the underlying real estate are not paid.

or investor money comes in, he imme-

The retirement investor would be wise

diately pays down line of credit [lever-

to look for Funds that conservative-

age]. This creates the benefit of having

ly use leverage in their MDF to avoid

the ability to close deals that he might

UBTI as well as undue risk. In addition,

not otherwise have been able. The

the investor should calculate the an-

short-term nature of this leverage does

ticipated UBTI ahead of time to deter-

not usually create enough UBTI in-

mine how much should be invested, as

come to concern the retirement inves-

only the first $1,000 of UBTI income is

tor. In addition, the short duration of

tax free; The investor can then decide

the leverage puts his Fund at minimal

the risk reward of investing in a MDF

risk; however, since the rate of interest

that uses leverage.

When leverage is used, the banks have first priority over the assets. Simply, the more leverage that is used, the riskier the investment.

It is important for those investors using their retirement savings to invest in assets that can produce UBTI to ask the manager how much debt/leverage is used in the investment. A small amount of leverage is not usually taking on undue risk, especially if that leverage is used sparingly. Mark Hanf, president of Pacific Private Money, says that he likes to use a small amount of leverage, and on a very short term

36

ABOUT THE AUTHOR: Edward Brown is in the Investor Relations department at Pacific Private Money in Novato, Calif.

CONTACT: edward@pacificprivatemoney.com https://pacificprivatemoney.com

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