Originate Report - February 2021

FEBRUARY 2021

THE OFFICIAL MAGAZINE OF GERACI

INSIDE:

Capital Fund 1

Providing Value in the Grand Canyon State and Beyond

Raising Capital with Inbound Marketing BUILDING LONG-TERM WEALTH

30-Year Fixed Rate Loan

Moving Forward, Looking Back

WHAT TO EXPECT 2021 Real Estate Market

How Arixa Capital Turned a Pandemic Year Into One of its Best Yet SHIFTING THE PARADIGM...AGAIN February 2021 Originate Report 1

2

CONTENTS FEBRUARY 2021

Who To Know 6

Capital Fund 1: Providing Value in the Grand

Canyon State and Beyond

By Charles Peckman, Contributing Writer

6

14 Wisdom from the CEO

Adham Sbeih, Socotra Capital

22 Industry Spotlight

Avalon McLeod, McLeod Capital Fund Inc.

Features

14

12 Raising Capital with Inbound Marketing

By Rocky Butani, Private Lender Link

18 Business as Usual? What to Expect in the 2021

Real Estate Market

By Rick Sharga, RealtyTrac

26 Building Long-Term Wealth with a 30-Year Fixed Rate Loan

By Grayson Wester, Corridor Funding

22

28 Shifting the Paradigm...Again

By Kevin S. Kim, Esq., Geraci LLP

30 Moving Forward, Looking Back

By Tony Ingoglia, Socotra Capital

32 How Arixa Capital Turned a Pandemic Year Into One

of its Best Yet

By Emily Rappleye, Contributing Writer for Originate Report

26

34 Be in the Know

By Kevin S. Kim, Esq. and Julia Chang, Esq. of Geraci LLP

In Every Issue 38 Lender Directory

30 February 2021 Originate Report 3

MAKE WAVES AT

APRIL 15 -16, 2021 NEWPORT BEACH, CA In te re s ted in at t ending or sponsoring?

C o n tac t R u b y Keys at r.keys@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

Editor

Welcome to the February Issue of Originate Report!

With 2020 in the rearview, we welcomed the new year with a mixture of hope and lessons learned from what may go down as one of the most tumultuous years in recent American history. From the pandemic, to riots, to a contentious election, we have all had to

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

adjust to new ways of doing business in uncertain times.

That said, our first issue of 2021 focuses on the central, most important element of our industry: capital. Many traditional loan buyers paused their purchases over the course of 2020 which caused

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

a lot of disruption in the industry and companies were forced to find new capital relationships. Some of them went back to a mortgage fund model, some pivoted toward putting individual investors on deals, and others found alternative deep pockets. This issue takes a look at companies who weathered the storm and give an insiders’ look at mortgage funds and their ability to insulate lenders better

CONTRIBUTORS Charles Peckman • Julia Chang Adham Sbeih • Avalon McLeod Rocky Butani • Rick Sharga Grayson Wester • Tony Ingoglia Emily Rappleye • Kevin S. Kim

than those captive to Wall Street capital.

Capital Fund 1, our February cover story, is a growing presence in our industry due in large part to their company model which relies on keeping everything in-house relating to capital and administering their fund with complete autonomy. With a diverse leadership team already accustomed to pivoting when the market warrants, Capital Fund 1 was poised to address the long-term ramifications of

FOUNDING UNDERWRITERS

COVID-19 on the housing market and was somewhat insulated with their fund. From requiring prepaid interest on loans to fine-tuning interest rates, the company also relies on strategic partnerships they’ve cultivated over the years to weather any economic storms that may arise.

MARK HANF President, Pacific Private Money

Want to learn more? Join Noah Brocious and Capital Fund 1 at Geraci Media’s Innovate Conference taking place April 15-16th in Newport Beach where we focus on the up-and-coming trends shaping our industry. At Originate Report, we are also looking for the most

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

innovative companies and employees to feature in our next Originate Report Magazine that will be available at our conference in April. I’d love to hear from you!

Till Next Month…

Lesley Lesley Boyd Senior Vice President, Marketing & Media

February 2021 www.originate.report Originate Report 5

PROFILE

Capital Fund 1

PROVIDING VALUE IN THE GRAND CANYON STATE AND BEYOND

By Charles Peckman, Contributing Writer

C

(Left to right) Kevin Highmark, Michael C. Anderson, Noah Brocious, Tyler Larson Principals at Capital Fund 1

apital Fund 1, a private money

expanding

outside

been innately driven to succeed.

lender

the

the realm of the group’s Arizona

A basketball player at California

real estate industry, knows

home base, and the continuation of

Lutheran

the value of reliability, honesty,

service throughout the uncertainty

business with an emphasis in finance.

and customer service reaped from

of COVID-19.

He credits his time on the court,

dedicated

decades of experience.

to

their

offices

Originate

University,

he

studied

though, as the impetus that instilled

Report sat down with Principal and

Noah, who was born and raised in

within him the skills necessary to

President, Noah Brocious, to discuss

Arizona, wasn’t always focused on

help usher Capital Fund 1 to become

the origins of Capital Fund 1's values,

real estate, although he has always

the company it is today. Through

6

the years, Noah has drawn many

one competitive advantage of the

example,

parallels between his time playing

group is its ability to work on a wide

housing crisis in 2008, he would have

basketball and the real estate sphere

variety of real estate transactions in

been leerier of single-family homes.

through the years.

the group's primary market, Arizona.

Today, with the COVID-19 pandemic

about

the

impending

questioning the future of in-person “I think the name of the game is

“Arizona has a number of attributes

office work, Noah said Capital Fund

discipline,” he said. “You always

that

1 is being 'more conservative' when

have to work a little bit harder than

for a wide variety of real estate

the next person on the court or to

transactions,” he said. “One specific

make the team. When you know the

statute allows for a trustee sale

This strategic thinking, Noah said,

game, the discipline aspect comes

buyer to put down a $10,000 cash

puts Capital Fund 1 in a position

into play, and that relates to the time

deposit on a property when they are

far-removed from the naïve and

management components of working

the winning bidder and return the

discombobulated thought processes

on multiple real estate transactions

next day with the rest of the funds.

that often plague small to mid-sized

at once. When I was [in school] I

This is a positive because it opens

real estate operations.

had to study, attend classes, and

foreclosure auction properties us

play basketball and that forced me to

up to a larger buyer pool giving us

"We

learn time management; I couldn’t

a larger pool of investors to lend to.”

organization’s

make

it

a

great

location

considering office and retail spaces.

take

great

pride

abilities,

in

our

which

are systematized to a degree that

play video games all day when I had "We work with everyone from the

outshines a lot of the lenders we

developer to the investor. From fix

compete with. We have 22 full-time

carried

and flip properties and single-family

employees now, and although most

over from the sports realm, Noah

residential rentals, to working with

of our competitors are smaller shops,

mentioned, is knowing when a path

people on bridge loans until our

there was a point in time where

(or a play) does not work. Case in

partners can secure lower interest

we were there, too. We have since

point, Noah tried his hand at selling

rate financing, Capital Fund 1 has

weathered the storm, grown, and

insurance upon graduation, which

seen it all,” said Noah. “We work

prospered, and we continue to do

he quickly learned did not spark

with ground-up construction, spec

so," he said. "We're organized into

the passion he has since found in

homes, and land and commercial

different departments, and everyone

real estate.

properties as well – in fact, we

has their own role, but at the same

have also worked with multifamily

time, we often communicate between

On the heels of the 2008 financial

developments of five to 50 units. One

departments to create a more holistic

crisis, Noah, along with Michael C.

of the many things that separate us

picture of any given deal."

Anderson, the founder of Capital

from other the players in this field

Fund 1, sought capital from friends

is our ability to adapt to different

The

and

transaction types and deal structures

departmental

to best serve our clients.”

said, is because of the fast-paced

to be at the library!”

Another

attribute

family,

that

developed

systems

and procedures and best practices, and

formed

the

company

behind

this

inter-

communication,

he

nature of the real estate sphere – a

that

exists today.

reason

When considering a new project,

pace that has only increased during

Noah said it is of the utmost

the internet age.

Speaking to the various products

importance to assess current market

offered by Capital Fund 1, Noah said

conditions. If he had known, for

Capital Fund 1: Continues on pg. 8

February 2021 Originate Report 7

Capital Fund 1: Continued from pg. 7

“We keep everything in-house, and we administer our fund with complete autonomy,” Noah said. “This allows us to keep everything tight and moving quickly; we’re not relying on third parties, which we like, and it serves as a competitive advantage for us as well. We can close within 24 hours if the deal requires that kind of expediency. We have lines of credit in place that allow us to move on a deal that may have a barrier to entry for others in the space. Nothing kills a hard money lender faster than the [lack of an ability] to lend because of capital constraints.”

of the business. Additionally, our

that may have seemed obscure in

founder and CEO, Mike Anderson,

previous years. Of course, this was

has participated in many different

accelerated by factors like HGTV,

aspects of real estate throughout

which really brought ‘rehabbing’

his career, but we also have 3 other

a home into the spotlight,” he said.

senior partners who have a ton

“With that said, our team did an

of applicable experience in their

excellent

careers. Mike Lofton is the owner

services to investors that were

of Loftco, Inc., a framing contractor,

finding deals and capitalizing on

Dean Bloxom was a founder of

the inventory that came after the

iMortgage a conventional mortgage

downturn. Real estate is always

shop that merged with Loan Depot,

changing, and I think we’re seeing

and Buddy Satterfield was the former

that now with COVID and are

AZ President of Shea Homes.

responding to that by expanding

job

of

marketing

our

our operations to different areas of In the aftermath of the 2008 housing

the country.”

crisis, an abundance of distressed assets meant focusing on other

Although Capital Fund 1’s expansion

deal structures, such as fix and flip

into Texas, Colorado, and other

One aspect of the team in place at

properties. Based on the collective

markets was not in direct response

Capital Fund 1 that contributes to

backgrounds

leadership

to the pandemic, he added that the

the group's success is the variety

team, Capital Fund 1 recognized the

appreciation of property values in

of experience and insight amongst

opportunity and immediately began

Arizona – paired with an increased

staff members. “I am blessed to

to cater to the fix and flip market.

presence across the Western United

of

the

have a great team and partners.

States – has been a welcome reprieve

Kevin Highmark manages our Sales

"There were always people doing

from the anxiety of the pandemic’s

and Marketing team, and Tyler

fix and flips, but after the Great

early days.

Larson manages the Underwriting,

Recession, our team really had to

Default, Loan Draw, and REO aspect

expand segments of the operation

“Like everyone else, we got nervous

Michael C. Anderson Capital Fund 1 CEO/Principal

Noah Brocious Capital Fund 1 President/Principal

Kevin Highmark Capital Fund 1 SVP, Marketing & Sales/Principal

8

about what was going on in the world, and rightfully so,” he said. “We as a leadership team immediately sat down and had multiple meetings and calls to just talk amongst the partners about a game plan. We had many candid conversations about our thoughts going into the pandemic, and we took stock of our assets, the assets we might have issues with, and what sort of situation we were looking at.”

As the pandemic spread across the country, Noah said Capital Fund 1 began thinking about the long-term

Kevin Highmark SVP, Marketing & Sales/Principal at Capital Fund 1

our credibility. We perhaps erred on

returns to our investors, and we pay

the conservative side with some of

our investors monthly.”

the adjustments we made, but that has to be done when a black swan

In addition to consistent returns,

housing market.

event like this occurs.”

Noah added that Capital Fund 1 holds

“We immediately made adjustments

Noah added that these adjustments,

which leads to bountiful investor

such as requiring prepaid interest

relations in the long run.

ramifications of COVID-19 on the

on the loan side of our operation,” he said. “Even though there was much uncertainty in the market, March of 2020 was a record month for us.

We had a very healthy pipeline in place, and we have been so fortunate to have healthy partnerships with borrowers. We funded all of the loans we were committed to, which was a huge step in continuing to establish

accountability in the highest regard,

on loans and fine-tuning interest rates, could not have been possible without the strategic partnerships Capital Fund 1 has in place. These relationships

reap

benefits

far

beyond flexibility during high-stress times like the COVID-19 pandemic.

“We work with a variety of different

our competitors is the difficulty they have raising consistent capital,” Noah said. “We have agreements in place where we help provide capital for other private lenders if they’re in a situation where they’ve got a great

groups, including our line of credit,

loan but a lack of capital available.

and fortunately, we have a great group

We continually look for the best

of investors that includes a number of

ways to offer a robust return for

high net-worth individuals," he said.

the people in our network. As we

"At the beginning of this venture, of

have built credibility and a growing

course, it was difficult to raise the necessary capital. Mike Anderson who was the one out raising money at the beginning got a lot of “no’s” but he was persistent and was able to raise capital so we could grow. We Tyler Larson Capital Fund 1 SVP, Asset Management/Principal

“One of the constraints of many of

now have established a track record of reliability and attention to detail that sets us apart. We pride ourselves on our ability to provide consistent

network, it has become easier to navigate the ins and outs of building a safe and sustainable portfolio. Not only do the Capital Fund 1 partners have significant skin in the game which

makes

our

investors

for

comfortable, but we also require skin in the game from our borrowers Capital Fund 1: Continues on pg. 10

February 2021 Originate Report 9

Capital Fund 1: Continued from pg. 9

which makes a safer portfolio and instills confidence in our investors.”

show the competition that they’ve

living in San Francisco and earning

done that.”

a healthy income but can work remotely, why not move somewhere

This

attention

to

stakeholders

from a deal’s introduction to its Establishing this track record, Noah

conclusion, Noah added, has resulted

said, is especially important in the

in Capital Fund 1’s expansion to

crowded real estate space.

different markets.

"We always do what we say we are

“There is always uncertainty in the

going to do and deliver news, good or bad, quickly. I don't know what the exact percentage is, but a majority of new businesses fail in the first two years," he said. "You have to work so hard just to get a venture off the ground, and many people are under the impression that the work will continue by itself after that. That is certainly not the case. We have two types of customers at Capital Fund 1: the people who have trusted us with their funds and the people we lend to.

We have to be open and honest with people – both when things are going well and when we run into kinks, because there's no replacement for that. You can develop sophisticated models and pro forma projections to get rich on paper, but the people who

caused many people to reassess their position in the marketplace, but what we've seen is consistent and

your money? Also, we are seeing an increased focus on what our metro areas offer, like a diversified economy, major universities, and

market, and the current situation

inventory

where you can get more space with

healthy

demand

great people.”

Speaking to the continued growth of Capital Fund 1, Noah said that it is essential to realize there are many competitors in the private

because of some national measures

money

such as low-interest rates and a

with this realization is a continued

desire to move out of traditionally

commitment to inject confidence and

'popular' markets.”

honesty into every deal, he added.

Noah said that the relatively low

“Obviously, this space is very popular.

cost of buying a home in Arizona's

There is competition coming in from

metro areas, (compared to other

high net-worth individuals, Wall

west

San

Street, and institutional money,” he

Francisco or Seattle), coupled with

said. “There are some people who

work-from-home

that

may not agree with this, but I think

conduct

that competition is what makes

business remotely, are factors that

people better. I love competition, and

have positively impacted his home

I love people nipping at your heels

state’s market.

because it makes you work harder

coast

allow

markets

like

policies

professionals

to

are actually successful want to work

“I

with others, grow the network, and

affordability," he said. "If someone is

think

the

main

thing

is

space.

However,

paired

and be more innovative. With the current situation, we must keep a continued focus on what's changing, for better or worse, in the market. I believe that challenges, though, can also be opportunities."

Moving forward, Noah said his team is looking forward to continued expansion into emerging markets.

“The lion’s share of our portfolio is here in Arizona, but we did open an

Noah Brocious President/Principal at Capital Fund 1

office in Denver about five months ago. We’ve learned a lot from our continued expansion, and we

10

have our eye on other expanding

Noah added that he knows existing

chemistry and a great vibe. We all

markets,” he said. “We’re continuing

and prospective investors are in

love working together, and we have

to grow, which means that there

good hands as the group continues

fun along the way while we're doing

to grow.

it. You can't put a price on that.”

will be a continued need for capital, but we’re working with our existing investor pool and reaching out to new partners as well.”

When thinking about what has made

“We have four senior partners, and we have a staff that has decades of real estate experience," Noah said.

Capital Fund 1 prides itself on working directly with investors and borrowers, thus cutting the red tape and intermediaries that can often

Capital Fund 1 successful thus far,

"They know the relationships…with

Noah insisted it is critical to have a

investors, and I think we have a

their offerings and loan types, visit

talented, well-rounded team in place.

strong team in place that has great

https://capitalfund1.com/ today.

hinder a deal. To learn more about

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February 2021 Originate Report 11

FEATURE

Raising Capital with Inbound Marketing C

By Rocky Butani, Private Lender Link a

offering to the public. Here are a few

It's more impaction to direct potential

constant grind for many

options for generating “inbound”

mortgage investors to a website

private mortgage originators

investor leads with a low budget.

where they are not distracted by

apital

raising

is

(“Lenders”). Whether they target mortgage investors for individual trust deeds or a mortgage fund, many tell me the most challenging

part of the process is generating investor leads. After the initial contact, it’s just a matter of building a relationship with the investor until they are ready to deploy their capital.

While lenders still need to work hard to seek new mortgage investors, it

content that is not relevant to their needs. The site doesn’t have to be too

Create a Separate Website I have seen so many lender websites with one basic page for capital raising. While it’s relatively easy to add one “invest” page to your existing

website,

I

recommend

building a separate website to focus on the investment offering. Keep your primary site focused on loan origination. Simply add a link to

elaborate, but I recommend including the following pages or sections: • Benefits of Investing Tell investors what’s in it for them.

What’s the average return? What’s the risk profile? Do you service the loans in-house or outsource? What happens if a loan defaults?

could be so much easier if it were the

the new investment website, which

other way around. Many investors

should have a separate domain name

search online to find companies to

— XYZlending.com for origination

loans their money will be funding:

invest with, but most lenders do a

and

(or

geographic areas, LTV, LTC, credit

poor job presenting their investment

XYZtrustdeed.com) for capital raising.

requirements, etc. Be transparent

12

XYZmortgagefund.com

• Lending Guidelines Tell investors about the types of

about the origination fee you charge

investing with you. Get five at

if they fill out a short form on

to borrowers, even if your investors

the very least to start, and 15-20

the website.

don’t get any of it.

would be a good target. Get more

• Track Record

testimonials from newer investors

Videos

after they’ve invested for some time.

Produce

• Performance Reports

overall performance. Disclose how

I

many loans have defaulted. List

quarterly

every single loan you’ve ever closed

offer full transparency about your

with the following details: city/

portfolio’s performance. The reports

state, property type, loan type, loan

are a great marketing piece that

amount, LTV, funding date. If you

may help attract new investors. This

don’t have photos, a list format will

suggestion mainly applies to fund

be sufficient.

managers, but it could also apply to

recommend or

publishing annual

your

reports

to

originators who broker loans and retain the servicing.

Whether you’re raising capital for a investor needs to know you and trust you. Talk about the company’s history, accomplishments, the team, company culture, and show photos of everyone in the company. Show pictures of your office and encourage investors to visit.

• Testimonials Ask existing clients to write up a testimonial about their experience

to

The company principal(s) should be

originated in the past and the

fund or individual deals, the mortgage

videos

promote the investment opportunity.

Brag about all the loans you’ve

• About

high-quality

talking to the camera; don’t even think about making an animated cartoon video. A quality video will give your company credibility and help build trust before, or without, meeting in person. These videos should live on YouTube, optimized for searches.

Investment Directories List your company on websites that offer a platform to promote

Pitch Deck

mortgage investment opportunities.

Design a pitch deck with all the

These sites typically already have

same information included on your

an

investment website. Offer to send

SEO for inbound traffic, which you

it to potential mortgage investors

can leverage.

investor

audience

and

good

ABOUT THE AUTHOR: Rocky Butani is the Founder & CEO of PrivateLenderLink.com, a website where investors and brokers can easily find direct private lending companies, mortgage investment opportunities, and industry service providers. He has been in the private mortgage industry for 10+ years, focusing on lead gen for lenders. CA DRE Broker Lic. 01893537. CONTACT: Rocky@privatelenderlink.com | https://privatelenderlink.com/

February 2021 Originate Report 13

WISDOM FROM THE CEO Adham Sbeih CEO of Socotra Capital

14

the loan documents, and collected the payments from the borrower.

Q: What risks did you have to take and how did you have the courage to continue to push forward?

I burned the boats so to speak; there wasn’t any other option. I had left a good paying job and had to work, or I would be homeless. I knew I could originate loans; I wasn’t so sure about raising money. My partner John, however, was confident he could raise money, until it took us three months to raise $580,000. I still have the first check we ever received for $10k after five months of work. I remember our first full year in business I earned $3,000 and Adham Sbeih CEO of Socotra Capital

I didn’t have any other sources of income. I lived off the absolute bare minimum. For me, at 35 years old, I

Q: Can you explain a time where

actually played the voicemail for the

spent $18,000 all in on everything:

you faced adversity or had struggles

whole office to hear as “an example

rent, health insurance, car insurance,

early on in your career?

of what not to do”. Then, he called

gas, food, clothing, internet, cell

There were so many, I could write a

me in for a meeting and put me in an

phone, and car repairs. Everything.

book on it. I honestly thought I was

all-glass conference room. He left me

put on the planet to ride a bike fast

in there for half an hour, and allowed

and never thought about anything

his employees to poke their heads

else. In fact, I didn’t even get started

around the corner, point at me, and

in commercial real estate lending

laugh. Obviously, I did not “close the

until I was in my late twenties.

sale” on that one!

mindset. The possibilities are endless

In my first commercial real estate

Q: What did you do in the beginning

am a big fan of the “aggregation of

job, I was supposed to do business

to start your business?

marginal gains”.

development for a bank. I cold-called

I sold my house in 2005 to raise money

local developers and commercial real

and waited for the opportunity that I

estate investors beginning at 6 AM

knew would be coming. I sat for two

every morning. It was not my most

years before I quit my day job and

effective marketing attempt, but it

began working at Socotra fulltime,

was worth a try. Unbeknownst to me,

the week Lehman brothers collapsed.

I was leaving messages with thirty or

Back then, I did everything: found

more "ums" in them. The prospect

the loans, found the lenders, drew

Q: What habits, mindset, or perspective have helped you succeed as a business owner?

I work to have a growth-oriented and opportunities are infinite.

doing better?

I

What can we be

Where can we find

additional opportunities? What can be improved? It is a constant push and it never leaves my brain.

It’s

what I am thinking of when I wake up in the morning and it is what I think of when I go to sleep at night.

Adham Sbeih: Continues on pg. 16

February 2021 Originate Report 15

Adham Sbeih: Continued from pg. 15

Q: What excites you about your role as CEO currently today?

saying “um!”), I have won numerous

office at his friend’s law practice to

speaking

about

do hobby work as an attorney. For

meeting,

several years, I would spend every

leadership,

learned

running

criticisms.

Thursday afternoon with him. We mostly were working on his real

very early on in my career and have

estate projects, but we would discuss

continued working with him to this

all sorts of topics. It was the first

day as do a few of our key people.

time I had ever spent significant

I got involved with local non-profits

amount of time around a highly

and was on the Sacramento Zoo

to our investors, good loans to our

effective leader. I would listen to

board for nearly ten years. It put

borrowers, and solid careers for our team.

his war stories and his strategy and

me around other successful people

thoughts on some of our existing

from our city, and I got to see how

issues. Sadly, he passed away in a

some great opportunities coming out of the pandemic. I enjoy challenging our team, seeing them grow and respond.

I am excited to continue

to grow Socotra and provide value

Q: What has been your favorite aspect of being an entrepreneur over the years?

I have enjoyed watching our team grow. We hire a lot of college kids as interns – close to a hundred now. Some of them have stayed on with us after college and have become superstars.

I really enjoy watching people grow and develop.

Q: What piece of advice do you have to share with other entrepreneurs and CEO’s that are in the early stages of building their company?

If it were easy, everyone would do it.

It’s hard work. It’s lonely. You must embrace being uncomfortable, not knowing the answers, being unclear of the path forward, and make very difficult

decisions

with

limited

information on short timelines. It’s definitely not for everyone.

Q: What activities or resources would you recommend other entrepreneurs to invest their time in?

and

a

Additionally, I hired a business coach

I think in the near term, we will have

listening,

awards,

giving

they think and operate while making lifelong friends with a passion for animals. Finally, I joined Vistage which is a peer-based CEO group.

Just feeling like there is someone else out there that runs into the same issues you deal with daily can help you feel a lot better.

tragic car accident in 2013.

Q: Is there anything that you wish you could go back and tell yourself at the inception of your company?

Hang in there.

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

Q: How do you make sure your company stays ahead in

efficient, organized, and focused?

this industry?

I find that if I am doing the right

We do all the normal things – go

things

to industry events, talk to folks in

follows suit.

our business, use our resources

pandemic, I created an activity

and network within the industry.

We are not afraid to look for third parties that may have an expertise in an area we don’t yet understand.

I take time away from the office to work on the business. We also have an advisory board made up of people from a variety of industries who help hold me accountable.

Q: Who is someone that has had a significant effect on your career and why?

personally,

the

business

At the start of the

tracker. It’s basically a spreadsheet with about twenty items that make for a successful day. It includes items like taking my vitamins, going to bed by 10 PM, writing in my gratitude journal, telling someone thank you, calling my parents, logging my food, exercising, hitting balls at the driving range, and drinking 100 ounces of water. Each item is worth a point.

Ten points is a successful day, and 65 points is a successful week. When you are the CEO, your business is

I spend a lot of time and money

My deceased partner, John Ingoglia’s

on learning both for our staff and

father – Donald Ingoglia.

myself.

I have personally been

been the CEO of a food distribution

on the business stuff and ignore the

attending toastmasters for 16 years

business with 700 employees. He

personal. The two are integrated and

(in part due to my propensity for

had essentially retired and had an

need to be viewed together.

He had

CONTACT: https://socotracapital.com/

16

part of you.

It is so easy to push

PRODUCT ANNOUNCEMENT

New Resource to Find Private Mortgage Industry Service Providers Private Lender Link, Inc. is pleased to announce the launch of its new Service Provider Directory on PrivateLenderLink.com.

The new directory is a resource to discover a wide variety of companies that offer services to private/hard money lenders, mortgage brokers and real estate investors.

The previous version of the directory, built in 2018, was just a single page with a list of companies. The new version is broken up into 8 main categories, and 50+ sub-categories which have their own separate pages. Over the next few months, most of the sub-category pages will have enough supporting content to generate inbound traffic from Google searches.

Some of the services that private mortgage lenders can find on the directory include: Technology • Capital • Legal • Insurance • Servicing • Marketing

Real estate investors can also find some essential services like: Accounting • Asset Protection • Property Insurance • Self-Directed IRA • Tax Advisory • Investing Software • More

PrivateLenderLink.com, established in 2010, is a website where investors and brokers can easily find direct private lending companies, mortgage investment offerings, and industry service providers.

Visit PrivateLenderLink.com to access the Services Directory: https://privatelenderlink.com/services/

February 2021 Originate Report 17

FEATURE

Business as Usual? What to Expect in the 2021 Real Estate Market

By Rick Sharga, RealtyTrac

B

y any reasonable measure,

Residential Real Estate: Dramatic

than most economists and analysts

2020

Drop, Rapid Recovery

expected during the second half of

year. A global pandemic, a

The residential real estate market

the year. Despite the dramatic drop-

worldwide recession, a contentious

was a roller coaster ride in 2020,

off in sales during the usually crucial

U.S.

and

starting off on a high note, falling off

spring homebuying season, existing

ongoing unrest across the country

a cliff in late March when shelter-

home sales were up by about 2%

ensured that there was no such thing

in-place orders were levied, and

on a year-over-year basis at the

as “business-as-usual.�

then recovering much more rapidly

end of November according to the

18

was

Presidential

an

unusual

election

•

Historically low mortgage rates

with several months of over one

– reaching a low of just over

million housing starts – not enough

2.5% for a 30-year, fixed-rate

to meet demand - but significantly

loan,

purchase

loan

activity

was 26.5% ahead of the prior year according to the Mortgage Bankers Association.

•

And,

the

pandemic

itself

accelerated a trend that had already begun – urban apartment renters

becoming

homeowners.

suburban

Young

families

– especially those with wage earners who could now work from home – began exiting highpriced cities in search of larger homes which could accommodate a home office and provided more space between neighbors.

better than what’s been built since the end of the Great Recession.

Industry analysts also expect to see existing homeowners begin to list more of their homes for sale as COVID-19 vaccines become more widely distributed and there’s more confidence that the pandemic is being brought under control.

The single-family housing market should continue to be strong in 2021, both in terms of sales and price appreciation. While this runs counter to traditional trends (higher unemployment

National Association of Realtors®

keep demand at high levels through

the atypical nature of the recession

2021, although inventory of homes

explains this. The job losses in

for sale – both existing and new

this recession were concentrated

construction – is at the lowest

in a handful of industries – retail,

level since NAR and the National

restaurants,

Association of Homebuilders began

hospitality, and entertainment –

keeping these records. Both indices

where the employees are largely

showed less than a 2 ½ month supply

low, hourly-wage earners who tend

of homes for sale, well below the

to be younger and have less formal

traditional 6 months’ supply.

were even stronger, running almost

inventory – especially severe at the

by three factors: Demographics

–

the

average

age of a first-time homebuyer was 35, and the largest cohort of

the

demand

and

low

entry level – combined to drive prices higher, even as wages stagnated due

was unanticipated demand, driven •

strong

Millennial

generation

travel,

tourism,

education. These factors suggest that many people who lost their jobs were

This

The momentum behind these sales

to

fewer home sales and lower prices)

December numbers. New home sales

end of November.

leads

These drivers should continue to

(NAR), with expectations of strong

21% ahead of 2019 numbers at the

usually

to the COVID-19 recession. Double digit year-over-year price increases, left unchecked, threaten to offset the savings delivered by the sub-3% mortgage rates and pose affordability challenges for many buyers.

was between the ages of 29-

Fortunately, there appears to be

34, rapidly approaching prime

some good news when it comes to

homebuying age.

inventory: homebuilders ended 2020

renters rather than homeowners.

Commercial Market Winners and Losers The Rental market is likely to experience some short-term pain before

recovering

and

regaining

its momentum. The government’s CARE Act, along with state and local legislation, has called for a ban on evictions, which the Biden Administration has indicated should be extended “at least through the Business as Usual: Continues on pg. 20

February 2021 Originate Report 19

small retailers and restaurants. MBS

Business as Usual: Continued from pg. 19

end of March”. This puts landlords – many of whom are small “mom and pop” investors – in a financially precarious position. Many landlords are highly leveraged and need to collect rents to pay their mortgages.

Renters whose income has been disrupted due to the pandemic may not be able to pay their rent now, but landlords can’t replace them with paying tenants, and in many cases won’t ever be able to collect pastdue rents. This situation could drive landlords into bankruptcy; result in their properties being foreclosed on (which puts the tenant’s occupancy at-risk); or lead to the sale of the properties at distressed pricing.

delinquency rates in the retail sector continue to be much higher than at any time since the last recession, and it’s likely that it will take a few years (and probably a lot of adaptive reuse of brick-and-mortar storefronts) for this sector to recover.

Similarly, the Hospitality sector has suffered tremendously as COVID-19 stopped most travel, particularly business travel. Occupancy rates ended the year 40% below 2019 levels,

causing

severe

financial

hardship for many hoteliers. Many owners of limited-service hotels are small investors who may not have the financial strength to weather a long dry spell; MBS delinquency

the

rates remain extremely high in

government included $25 billion

this segment as well, and we’re

in

the

seeing a surprising number of hotel

January stimulus package and is

properties in the foreclosure pipeline

discussing more financial support

in our RealtyTrac database.

The

good rental

news

is

assistance

that in

in subsequent programs. The better news – is that demographics suggest the market will recover quickly once the recession ends. Household formation rates should rise strongly post-pandemic as young adults move out of their parents’ homes, and the demand for rental properties should be strong.

The Industrial sector has benefitted from the pandemic, as the need for warehouse and distribution facilities to

support

e-commerce

grew

dramatically. The work from home movement also increased the need for cloud computing facilities. Both trends are likely to continue to drive

Two other sectors of the CRE market – Retail and Hospitality – have been decimated by the pandemic.

Retail had already been struggling, but

the

government

and

subsequent

shutdowns

Industrial property sales (albeit at a slightly lower rate) in 2021.

The Office market has not been devastated like Retail or Hospitality,

along

probably due to the longer-term

with a huge acceleration in online

leases its clients have. But there are

shopping have struck a fatal blow

fundamental changes taking place

to many retail brands and scores of

that are worth considering.

20

recession

First,

the

percentage

of

sales

activity in suburban markets has

numerous to detail here, a huge wave of foreclosures is highly unlikely.

grown relative to sales in central business districts (CBDs) during

The Rental market remains a

2020; as more businesses realize

potential weak spot until the

that a distributed workforce may be

economy fully recovers, which

more productive and less expensive,

probably

this trend could continue. Second,

2022. But this segment of the

it’s likely that existing offices will

market may also benefit from

need to be reworked to provide a

the

healthier environment (more space

have been championed by the

between workers, for example), but

Biden Administration.

won’t

numerous

happen

initiatives

until

that

simultaneously find their tenants will require fewer employees to

The CRE market will likely see

come into those offices. It’s too

continued strength in the Industrial

soon to predict the demise of the

sector

CBD office market; but it seems

performance in the Office market,

certain that the pandemic will have

as employees are once again allowed

a lingering impact.

to return to their places of work.

and

relatively

stable

But the geography of future office 2021 Where Do We Go from Here?

growth may shift to secondary and

If 2020 taught us anything, it was not

tertiary urban markets and even

to make predictions with too much

suburban areas rather than high

certainty. But both the residential

cost, high tax bigger cities. The

and commercial real estate markets

recovery of the Retail and Hospitality

appear to be poised for a good – but

sectors are likely to take longer

not necessarily outstanding – year

than the other sectors and are most

in 2021.

directly tied to the country’s ability to get the pandemic under control.

The Residential market should grow

In the interim, it’s reasonable to

this year, benefitting from continuing

expect higher-than-normal levels of

strong demand, low interest rates,

delinquencies and defaults.

reasonable credit availability, and improving inventory levels. There

Hopefully, it’s not too much to ask

will be an increase in mortgage

that at some point in 2021, we can all

defaults,

get back to business as usual.

but

for

reasons

too

ABOUT THE AUTHOR: An accomplished executive with over 25 years of experience, Rick Sharga is the Executive Vice President of RealtyTrac, a leading foreclosure search and discovery website used by real estate agents and investors. One of the country’s most frequently-quoted sources on real estate, mortgage, and foreclosure trends, Rick has appeared regularly over the past 15 years on CNBC, CBS Evening News, NBC Nightly News, CNN, ABC World News, FOX, Bloomberg, and NPR. Rick is a founding member of the Five Star National Mortgage Servicing Association, a member of the Board of Directors of REOMAC, and was included in the Inman News Inman 100, an annual list of the most influential leaders in real estate. CONTACT: rick.sharga@realtytrac.com | https://www.realtytrac.com/

February 2021 Originate Report 21

SPOTLIGHT

INDUSTRY SPOTLIGHT Avalon McLeod

President/Senior Finance Officer at McLeod Capital Fund Inc.

22

competition. McLeod Capital Fund has evolved into a one-stop shop with a diverse set of loan programs both state and nationwide. We have also merged with some of the most competitive and financially strong in the private lending space today.

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

Although we have ben doing business in the financial arena since 2015, McLeod Capital Fund was officially incorporated in 2020. That said, our team has over 20 years of combined industry experience.

Q: What has been the highlight so Avalon McLeod, President/Senior Finance Officer McLeod Capital Fund Inc. Q: How has your outlook of the

campaigns only focusing on states

private lending changed over the

and counties where we predominately

past year?

lend.

My outlook has changed in a positive

everyone who can benefit from our

way. Being a private lender myself,

product, we are now focusing on

I believe that this is a dynamic

a single group of people: new and

opportunity to help more real estate

seasoned investors who are looking

investors when most institutional

for asset-based lending.

Instead

of

marketing

to

lenders are raising the bar when

far in your career?

My highlight so far is building a network of private lenders in a short space of time and partnering with different funds nationwide to give Real Estate Investors access to private money.

Q: What advice would you give to your younger self?

Stick to doing what you are great at; however, do not stay in a box. Always broaden your horizons even if it is

it comes to credit and real estate

Q: How has your company evolved

experience. We, as true private

since its inception?

lenders, can still focus on being

McLeod Capital Fund has evolved in

become a private lender a long time

predominately asset-based and be

a tremendous way over the past year.

ago. But as they always say‌nothing

able to capitalize on this even during

Our biggest accomplishment to date

beats time for experience!

a pandemic.

is being able to build up a network of private lenders who lend from

Q: What are you doing differently

their own funds, who underwrite

today to move your company forward

the deals, and do the valuation

than you were 6 months ago?

themselves. I realize that if you want been

to be successful in this business, you

focusing more on niche marketing,

must put yourself in a position where

including

you can close deals faster than your

McLeod

Capital

Fund

targeted

has

marketing

outside of your current field of work.

If I had known better, I would have

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

I would have attended AAPL in 2019 because I learned so much at the conference in 2020!

Avalon McLeod: Continues on pg. 24

February 2021 Originate Report 23

Avalon McLeod: Continued from pg. 23

Q: What piece of advice did you receive early in your career that has helped shape decision you’ve made?

A.B.N.

Always

be

networking!

Remember, the more you network in this business, the more you can help your next potential investor to acquire their investment property.

I received this advice at a seminar.

Also, time waits on no man. This is a business based on the idea of urgency. Carpe Diem!

do, and do it with a burning desire,

Q: What do you predict for the

you will succeed. This is the Whit

future in private lending throughout

McCarthy story. He started from the

the end of this year and beyond?

bottom like everybody else, didn’t

Well, it definitely won’t be one of the

know that he would enter into Real

easiest roads to take with everything

Estate on the finance side, but he fell

being so unpredictable from the

in love with it and stuck to it. And,

lenders’ standpoint. However, if we

look at his success story now!

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

I have had downtime in this business where I made mistakes and I felt as if I was failing. Then, I remembered that

look at the glass half full, we would see a dramatic influx of Fix and Flip Investors, Foreclosure and Short Sale Investors, Cash Out Equity and Bridge Rental Loans, all of which would tremendously benefit our industry.

Q: Tell us about a person or

failure is not an option and it really

organization you admire. How have

does not exist unless you pursue it. I

them made an important impact on

turned this around by reaching out

you, the industry, or the world?

to people who do the same thing I

I

Civic

do everyday for a living. One of my

Financial Services, especially Whit

private lending partners who has

of integrity, passion, wisdom, and

McCarthy who is currently an SVP.

been in the business for many years

zeal. I try my best on a day-to-

It’s astonishing to see the growth and

shared with me his advice. I started

day basis to interact with as many

what the company has accomplished

doing things differently, focusing on

people as I can, so these values can

since 2014. It shows you that once

private money vs institutional hard

be portrayed; hence boosting my

you put the pedal to the metal, and

money and this is where my entire

productivity, longevity, and success

you genuinely believe in what you

business pivoted to adapt.

in this business.

have

always

admired

CONTACT: https://mcapfunding.info/

SHARE YOUR STORY! If you would like to be our next featured Industry Spotlight, reach out to us at: submissions@originate.report

24

Q: How do you want to be remembered? What have you done to cultivate that feeling from others?

I want to be remembered as a man

February 2021 Originate Report 25

FEATURE

Building Long-Term Wealth with a 30-Year Fixed Rate Loan

By Grayson Wester, Corridor Funding

W

ith rising home values

qualified 30-year mortgage on an

put a real estate investor in a bind

and strong demand in

investment home from a bank isn’t

as they move from a short-term

many markets across

always easy. A bank wants to ensure

renovation loan to conventional long-

the country, real estate investors are

that your loan is secured with your

term financing.

shifting their strategy for building

personal income, even if you already

long-term wealth from fix-and-flip

have rental income that offsets your

Loans Catering to Real Estate

to Buy, Rehab, Rent, Refinance and

payments on the loan.

Investors

Repeat (BRRRR).

That’s where a non-qualifying 30When it comes to a traditional

Year Fixed Rate Loan comes in. This

The first step to any successful

bank mortgage, your W2 income is

loan offers several advantages to

BRRRR investment is getting the

everything. That’s why bank loan

help BRRRR investors acquire, hold

financing you need to transition out

officers review your income, assets,

and rent residential properties.

of a short-term rehab or fix-and-

tax returns, credit history, debt-

flip loan.

Refinancing with a 30-

to-income ratios (DTI) and other

A Non-QM 30-Year loan is similar

year fixed rate mortgage is an ideal

documentation, and why they’re

in many ways to a conventional 30-

solution,

interest

less likely to approve your loan if

year mortgage from a bank. It’s fully

rates and the payment terms that

you’re newly self-employed or have

amortized like a 30-year bank loan,

allow investors to keep existing

inconsistent income.

with no balloon payments at the end

offering

lower

of the loan.

rental properties and continue to purchase new ones.

Another disadvantage to traditional bank loans is how much time it takes

But unlike a bank, the lender uses

The Downside of Bank Financing

to close. Traditional bank loans

only a few criteria to determine your

The only problem is that getting a

can take 3 to 4 months, which can

eligibility: the loan-to-value ratio

26

A few additional differences make

If you plan to buy an investment

a Non-QM 30-Year Fixed Rate Loan

property anytime in the next 12

a smart choice for investors. First,

months, now is a good time to

securing financing through an asset-

start

based lender instead of a bank means

lending partners.

interviewing

prospective

that your new investment property mortgage will not be reflected on

Key Lessons for Real Estate

your credit report, so your debt-to-

Investors

income ratio isn’t negatively impacted.

Some lenders can also issue these loans to business entities, including LLCs and corporations, while most (LTV), comparable rental property income, the borrower’s credit score, and reasonable cash reserves on hand to take care of unforeseen maintenance

needs.

No

income

verification is necessary. Since the

banks will only lend to individuals.

Perhaps one of the biggest advantages of working with a reputable private money lender is that they understand the unique needs of the real estate

loan is secured by the value of the

investor.

property, including the potential

this market, they understand the

rental income the property will

business model, the goals and the

generate, these products are ideal

conditions real investors need to be

for real estate investors. A bank is

successful. The best lenders act as

strictly focused on your personal

a resource to borrowers, with loan

financial resources as a guarantee

originators

for your loan, regardless of how

and guidance as they walk through

much rental income the property

the process with you, helping you

brings in.

make the best financing choice for

While banks offer slightly lower interest rates, that doesn’t help you if you can’t get the loan. Non-QM loans can offer competitive interest rates, with some currently available starting at 5.5%, with a maximum loan-to-value of 80% for rate-andterm refinances (75% Loan-To-Value for cash-out refinances). As of the date of this article, some of these loans are closing in as little as 3 to 4 weeks on average, much faster than the 3 to 4 months that a traditional mortgage takes.

Because

who

they

cater

provide

to

insight

your situation. This kind of lender is focused on creating a long-term relationship with investors who are building their real estate portfolios.

1. After using a short-term loan to purchase and renovate a property for use as a rental, refinancing into a Non-QM 30-Year Fixed Rate Loan is an excellent longterm wealth building strategy.

2. For many private money lenders, the most important criteria for their loans are: 1) loan- to-value ratio, 2) what comparable rental properties are renting for in the area, 3) the borrower’s credit score, and 4) having some cash reserves on hand to take care of unforeseen maintenance needs.

3. Closing a loan with a private money lender can take as little as 3-4 weeks instead of 3-4 months with most banks.

4. Currently some 30-Year loans offer interest rates as low as 5.5%, with 80% Loan-to-Value ratio (up to 75% LTV for cashout refinance).

5. Get a reputable hard money

Your success in building a rental

lender on your team well in

portfolio

advance

comes

down

to

financing you’re able to secure.

the

of

purchasing

an

investment property.

ABOUT THE AUTHOR: Grayson Wester, VP of Marketing and Sales, is a native Texan and earned his bachelor’s degree in business administration from Texas State University. He’s been investing in real estate since 2015 and understands firsthand the exciting possibilities that this business holds. In five years, he has rehabbed and wholesaled over 120 properties. CONTACT: contact@corridorfunding.com | https://corridorfunding.com/

February 2021 Originate Report 27

FEATURE

SHIFTING THE PARADIGM...AGAIN

Capital Strategies In Private Lending

By Kevin S. Kim, Esq., Geraci LLP

2

facilities; and (3) correspondence

and summer of 2020 but thriving

and loan sale.

throughout 2020 and into 2021.

From my perspective, the biggest

Going into 2021, it is important

lesson the volatility of 2020 taught

private lenders do not forget these

us was that private lenders needed

lessons. While correspondence and

to

captive

institutional capital markets are an

capital sources. This was proven

important facet to a larger capital

by many private lending funds and

strategy, it should not be the only

(1) balance sheet capital (funds,

other balance sheet lenders not

tool in your toolkit. The rationale is

investor notes, etc.); (2) credit

only surviving during the spring

simple, CONTROL. A well-balanced,

020

tested

lenders’

many

capital

private

strategies.

Although the private lending

industry has very few standardized conventions,

capital

formation

and strategies have been relatively consistent. The three most common capital strategies have always been:

28

have

independent,

balance sheet of loans. Typically, in the form of a fund.

Other strategies are emerging as well. We have seen a marked increase in securitizations offering liquidity to private lenders across the US. Lately, unrated securitizations have seen an increase in popularity allowing many more private lenders an opportunity to access increased liquidity and yield enhancement via the revolvers made through the securitization. One key consideration when pursuing this is to ensure you have uniformity and standardization to

the

loans

being

securitized.

Loan type, LTV, terms of the loans, and

even

loan

documentation

should be standardized. Another important aspect when pursuing a securitization is to ensure you have the right partners in place to ensure thoughtful capital strategy ensures

while retaining control over key

that the private lender has reliable,

business decisions.

captive capital sources along with

all aspects of the securitization are a success.

We

hope

that

private

lenders

institutional capital markets plugged

These same concerns have private

in as an added benefit or resource. This

lenders searching for new ways

2020 and thrive with the lessons

balanced approach not only provides

and solutions for liquidity and yield

learned. There is still significant

liquidity and additional capital, but

enhancement.

it grants the operator a significant

yield enhancement is using leverage.

level of control over their business’

Banks

direction.

facilities

Our

recommendation

One

continue

to

available

hallmark make for

for

credit

qualified

remember the “stress tests” of

opportunity, and it will be the companies that are prepared for a correction that will not only weather the storm but thrive during it. For the private lenders who

is a balanced structure utilizing

lenders at very attractive rates.

would like to work on building this

a mortgage fund with additional

One key requirement for the most

blueprint, please do not hesitate to

attractive credit facilities is a sizable

contact us at k.kim@geracillp.com.

liquidity

solutions

sourced

from

secondary capital markets. In a bull market, liquidity

this

provides

increasing

additional origination

velocity and fee income. In a bear market, it enhances the ability to preserve capital (assuming sufficient reserves are in place) and pivot into different investment strategies all

ABOUT THE AUTHOR: Kevin S. Kim, Esq., is a partner in the Corporate and Securities practice at Geraci LLP. Kevin focuses his practice on private placements and other alternative investments for private lenders, real estate developers, and other real estate entrepreneurs. He has advised and prepared hundreds of securities offerings including mortgage funds, structured debt offerings, real estate syndications, crowdfunding offerings, EB-5, and Qualified Opportunity Funds. Kevin is also the lead instructor for the American Association of Private Lender’s Certified Fund Manager Courses, teaching hundreds of mortgage fund managers throughout the United States about securities regulations, fund design, and compliance. CONTACT: k.kim@geracillp.com | https://geracilawfirm.com/

February 2021 Originate Report 29

FEATURE

Moving Forward, Looking Back

C

By Tony Ingoglia, Socotra Capital

rises are often described

loan volume was reduced overnight

behave amid moments of crisis as it

as accelerants for change.

and lenders who primarily sourced

relates to the loans being originated.

Actions

capital via these channels were

What

forced to pivot and forge new

repeatedly with each subsequent

become everyday commonplace. The

capital

fulfill

financial crisis is that traditional loan

COVID-19 pandemic brought about

their

pipelines.

buyers in the secondary markets can

disruptive changes to the private

Unfortunately,

these

change their risk profiles and as a

lending industry that have forced

new relationships can take time

result, their capital allocations, just

many of us to reconsider not only

and the world of private lending

as easily as an individual investor.

the types of loans to originate, but

can move quickly, causing undue

also the types of capital needed to

duress on borrower relationships

When sourcing capital for private

adequately service our clients.

or potentially losing high quality

lending, there are various types

loans. It takes a significant amount

of capital and they all come with

to

of time to establish a streamlined

varying

disrupt all our daily lives, the first

process that satisfies both borrower

profiles, liquidity needs, compliance,

reverberations in our industry were

and investor needs. What every

duration, and hurdle rates. When a

felt in the secondary market, where

lender needs to ultimately decide is

lender evaluates their loan pipeline,

large institutional or traditional loan

what kind of capital partners they

they need to also make sure that

buyers paused their purchases, or

want to have for the long term and

the capital they are sourcing is

drastically altered their respective

get a better understanding of how

appropriately matched across all

credit boxes for loans. Consequently,

their respective capital partners will

these variables within their loan

unlikely

When

30

or

the

once

considered

improbable

pandemic

quickly

began

relationships respective

loan

to

establishing

our

industry

degrees

of

has

cost,

seen

risk

pipeline. When these two parties

either through a mortgage fund

those requests in a transparent,

are not appropriately matched, the

or to turn back towards individual

fair, and equitable fashion (for both

lender is consciously tolerating a

accredited

relationships

departing and legacy investors alike)

degree of counterparty risk, or a risk

with individual capital partners,

was challenging, to say the least.

that one (or both) of the parties in the

shifting away from the institutional

What we found was that all capital

transaction will not perform, which

capital partners. While this pivot

partners had varying degrees of

ultimately leaves the lender bearing

undoubtedly can have a dramatic

concerns regarding the pandemic

the brunt of those costs. These costs

effect on the scale and capacity of

and its impact on the industry. Our

can be painful and some in the

loans that can be originated, it can

investors acknowledged that it was

industry took material haircuts (or

often insulate a lender from daily

unreasonable to expect every loan

left the industry) because of these

shifts in the market and allow the

to be 100% current, no matter the

mismatched relationships.

lender to maintain control of their

circumstances.

loan pipeline. As mentioned, this

investors can (& should) rightfully

Sourcing capital for private lending

pivot can be challenging to overcome

hold the manager accountable to an

can often be just as challenging

and requires significant amounts

action plan on how they intend to

as originating a high-quality loan.

of time invested in prospecting,

work out of problematic loans. While

Cautious

educating,

your

the investor may not agree with the

underwrite loans to evaluate risk,

capital base about what to expect

approach, they are owed a degree of

so too should private lenders when

from

money

communication that informs them

evaluating

sources

loans. Maintaining a clear and open

about the status of the mortgage

satisfy their loan pipeline. Common

line of communication is essential

fund and what any future investor

risks relating to capital include

to managing any reservations or

should expect if they were to begin

concentration,

and

concerns with your capital partners.

investing today.

reputation risk. Concentration risk

Furthermore, transparency is a key

can best be described as sourcing

element to not only assuaging these

too much capital from only one

concerns but also in helping to build

investors

their

will

capital

often

behavioral,

source. Behavioral risk relates to the likelihood of an investor changing their risk profile. Reputation risk in this context would be if a capital partner were to leave a lender “at the

altar,�

potentially

damaging

the lender’s standing in the market and

jeopardizing

opportunities,

future

which

loan

ultimately

puts all capital partners at risk.

Managing all these types of risks can be a challenging endeavor. However, if they are adequately addressed, they can make for a rewarding and virtuous cycle.

The COVID-19 pandemic created an

impetus

for

private

lenders

to reconsider aggregating capital

investor

and

investing

informing in

hard

long-lasting relationships.

However, it should also be noted that aggregating capital within a mortgage fund does not completely insulate a lender from these pressures. At Socotra Capital, we faced redemption pressures much like other managers within our industry, and we were

However,

those

Throughout the past twelve months, we have come to accept that every investor will not always share our philosophy and approach to this asset class. This constant journey to find the right capital partner is just another obstacle we face and forces us to constantly test our investment thesis. As a result, our guiding principle as it relates

forced to temporarily pause investor

to raising capital has been to seek

withdrawals, something we never

like-minded partners that desire an

would have considered prior to the

attractive risk-adjusted return for

pandemic. Our ability to process

their allocation needs.

ABOUT THE AUTHOR: Tony Ingoglia is the Chief Strategy Officer and Chief Investment Officer at Socotra Capital. He is responsible for establishing investment fund strategies, investor communications, and all fund management at Socotra Capital. Since its inception, Socotra Capital has originated over 1,500 loans in excess of $800M and has raised over $250M in capital.

CONTACT: tony@socotracapital.com | https://socotracapital.com/

February 2021 Originate Report 31

FEATURE

How Arixa Capital Turned a Pandemic Year Into One of its Best Yet MORTGAGE FUNDS RECORD A RESILIENT YEAR AMID UNCERTAINTY FOR TRADITIONAL LENDERS

L

By Emily Rappleye, Contributing Writer for Originate Report ooking back almost a year

of Arixa Capital. “It was pretty

were stopped, and when Wall Street

later,

frightening because all of us were so

firms reopened, the rates were

unsure about what happened next.”

relatively inaccessible. This sent

March

2020

feels

surreal. A cruise ship off the

coast of California was held at sea when passengers tested positive for

Arixa

Capital

had

hundreds

of

COVID-19; the NBA suspended its

millions of dollars in loans on their

season; the coronavirus pandemic

balance sheet. Would those loans be

was declared a worldwide emergency

impaired? Would they lose value?

— all in the span of a few days. Then,

Would collateral lose value? Would

for many industries, the bottom

people make interest payments? Could

fell out.

construction projects continue?

Arixa Capital, a West Coast private

“The stock market was plummeting

lender and investment management

…and people were getting margin

firm, spent the remaining days of

calls. There were those two or

March 2020 trying to right the ship

three weeks where nobody really

in a sea of uncertainty and anxiety

understood how far and how fast

about what the pandemic meant for

this thing could go,” Hebner said.

many companies scrambling to find new capital, often straight into the arms of mortgage fund managers.

Mortgage funds, like those managed

by Arixa Capital, proved better able to protect lenders from the pandemic-induced market volatility.

Because of this, and a few other strategic choices, this is where Arixa Capital’s 2020 story diverges from many others.

Since COVID-19 hit last year, Arixa Capital has not had a single loan go

real estate investing.

The uncertainty put strains on repo

into default. The firm never missed

“On March 12th, the world was

market liquidity, and traditional loan

a draw and never missed a draw

normal; on March 13th, it wasn’t,”

buyers put purchases on hold. Loans

inspection. They expanded their

said Greg Hebner, managing director

that had already been originated

team, and they added more new

32

the pandemic. “Because a lot of companies couldn’t control their capital … they couldn’t control the conversation and the experience, and their reputations took the hit for that,” Hebner said.

Overall, Arixa Capital closed the books on a pretty solid year financially.

Their investment returns didn’t move around much in April and May, the funds performed well, and Hebner is optimistic that performance will only improve in 2021. Because so many firms pulled back and stopped customers in 2020 than any previous

Hebner

year in the firm’s history.

project sites to check in on borrowers

also

personally

visited

and see if they needed anything.

“It wasn’t because of our incredible

“You’d be shocked at how happy they

marketing efforts, or because of a

were just to see somebody who came

new Instagram post,” Hebner said.

onsite when our state was shut down,

“There were a lot of clients seeking

and who walked the project and

us out because we hadn’t destroyed

said, ‘Hey, how are you guys doing?

our reputation or left people in

Are you guys OK?’ and just being an

the lurch.”

empathetic listener,” he said.

making loans in April, May, and June, Arixa Capital was able to be more selective about risk. “We were able to put on our books some fantastic new investments, which will benefit us and our investors in 2021,” he said.

Despite the unknowns of a new administration in Washington, D.C., and the long-term effects on the industry, Hebner believes 2020 was

How did they do it? First, they acted

Arixa Capital’s vertically integrated

quickly and proactively. Although the

model helped reinforce this hands-

Arixa Capital team had never worked

on customer experience. Everything

remotely before, their systems were

from origination to valuation to

entirely cloud-based, which made it

construction draws and servicing is

“It is a once-in-a-generation moment

easy to rally the team during shelter-

handled in-house, which meant the

in time that is going to set the

in-place orders. They didn’t waste

firm could help clients assess their

[stage] for how your firm is going to

time before hopping on the phone

unique situations and figure out what

be perceived and your reputation,”

with clients, which was the top

they could and couldn’t do. This was

Hebner said. “So much of our

priority as soon as everyone was safe

in stark contrast to firms that relied

business goes on trust.”

at home. “The biggest advantage we

on third-party servicing companies,

had is we talked to all of our clients.

which were overwhelmed in late

Arixa Capital is one of the West Coast’s

We got them on the phone and we

March with thousands of clients

premier private real estate lenders

engaged with them,” Hebner said.

calling in to check up on loans.

providing small balance loan solutions

With past experience as a developer,

truly a pivotal year for Arixa Capital and will secure its reputation for years to come.

to lower middle market residential

Hebner knew the best thing he could

Finally,

the

firm’s

capital

mix,

offer clients was as much support

which includes permanent capital,

developers. For more information, visit

as possible.

was a major differentiator during

https://www.arixacapital.com/.

and

commercial

investors

and

February 2021 Originate Report 33

FEATURE

Be in the Know

Incoming Changes to Federal Securities Exemptions Go Live March 15: 6 Updates to Know

By Kevin S. Kim, Esq. and Julia Chang, Esq. of Geraci LLP

T

he framework for securities

Here are the key changes

2. Regulation Crowdfunding limits

offering

to know:

also increased.

1. Regulation A offering and

Regulation

investment limits are increasing.

exemption for startups to access

exemptions

is

undergoing major changes

beginning March 15 that will ideally make

capital

accessible

for

formation small

more

businesses

and entrepreneurs, while retaining protections for investors.

The

Securities

and

To

protect

investors,

Regulation

A sets limits on how much can be offered and sold under the exemptions. Offerings are stratified into two tiers based on the offering

Exchange

Commission (SEC) approved the final amendments last November after receiving input from the public on

amount in a 12-month period. The first tier was traditionally capped at $15 million, and the second tier was capped at $50 million.

Crowdfunding

is

an

crowdfunding. It creates guidelines for the transaction process itself, as well as limits on the amount of capital that can be raised, and how much an individual can invest. The most notable change to Regulation Crowdfunding on March 15 is the limit on the amount of capital that can be raised is being increased. The amendment raises the offering limit from $1.07 million to $5 million.

how to streamline what had become

Starting March 15, the maximum Tier

an overly complex process. Geraci

2 Regulation A offering will increase

Law Firm is cited throughout the

to $75 million from $50 million. The

final document regarding the firm’s

amendments also up the maximum

stance on the amendments below.

offering for Tier 2 secondary sales

The amendments include updates

to $22.5 million from $15 million.

to the Integration Rules, Regulation

This was done to encourage greater

A, Regulation CF, and rules on

capital formation and provide more

registration

general solicitation.

investment opportunities.

the integration rules have become

34

3. The Integration Rules were cleaned up and clarified.

Integration Rules exist to prevent companies from dividing a single offering into multiple to qualify for exemption from the traditional SEC process.

Over

time,

increasingly complex, so the SEC

Previously, demo days were only

lookback at the time of filing the

sought to adopt a new, simpler

exempt if the issuers had a pre-

offering and the time of sale.

integration framework. This new

existing relationship to the potential

framework is based on a general

investors or found them through their

principle of integration that requires each offering not covered by a safe harbor under Rule 152(b) to be evaluated based on its own facts and circumstances.

safe harbor time period under Rule 152(b). Previously, issuers had to wait six months between offerings to be granted this safe harbor. The changes that go into effect March 15 will shorten this time period to 30 days, and the new rules allow for concurrent 506(b) and 506(c) offerings. Of note, 506(b) offerings will still be limited to 35 nonaccredited investors within a 90-day period. This change means issuers need to wait 90 days between 506(b)

offerings

as

opposed to the previous 6-month safe harbor.

been clarified. restrictions

solicitation

around

were

not

general expressly

defined in the previous framework, so the amendments seek to provide more

clarification

notable

updates.

through First,

two

issuers

can now use generic solicitation of

interest

materials

without

identifying the exemption they plan to rely on. Second, “demo days,” or events organized for businesses to pitch to potential investors, are now considered exempt from general solicitation if they are organized by an institution of higher education, state

or

and small business owners.

The

exemption

framework

has

historically prohibited “bad actors” from

using

the

raise

capital

exemptions

under

local

governments,

nonprofits, incubators, accelerators, or angel investment groups.

6. Financial reporting rules were standardized.

Regulation

A

and

Regulation

D

previously had different financial

to

Regulation

A, Regulation Crowdfunding and Regulation D to protect investors.

disclosure requirements for issuers.

Under

the

March

15

updates,

Regulation D offerings over $20 million will require issuers to provide investors the same information as they would have under a Regulation A offering. This includes consolidated

Bad actors are people who have

balance sheets for the two previous

engaged in fraudulent activities or

fiscal years, as well as consolidated

violated securities laws, for example.

financial statements with income and cash flow, among other information.

However,

there

were

some

inconsistencies between the various regulations as to how and when an issuer was deemed a “bad actor.” The amendments attempt to harmonize the disqualification lookback period for all three regulations to align with Regulation D, which requires

4. General Solicitation rules have The

restrictive for a lot of entrepreneurs

5. Bad actor rules were standardized.

The amendments also shortened the

subsequent

personal network. This was overly

the evaluation to occur at the time

The impetus behind this change was to increase investment opportunities for non-accredited investors.

If you are offering securities under any of these frameworks, please contact

us

at

949-379-2600

to

ensure your best practices, offering

of sale. Under the new amendments,

documents, and operations are up

Regulation A will now require a

to date.

ABOUT THE AUTHOR: Kevin S. Kim, Esq., is a partner in the Corporate and Securities practice at Geraci LLP. Kevin focuses his practice on private placements and other alternative investments for private lenders, real estate developers, and other real estate entrepreneurs. He has advised and prepared hundreds of securities offerings including mortgage funds, structured debt offerings, real estate syndications, crowdfunding offerings, EB-5, and Qualified Opportunity Funds. Kevin is also the lead instructor for the American Association of Private Lender’s Certified Fund Manager Courses, teaching hundreds of mortgage fund managers throughout the United States about securities regulations, fund design, and compliance. CONTACT: k.kim@geracillp.com | https://geracilawfirm.com/ ABOUT THE AUTHOR: Julia Chang is an attorney in the Corporate and Securities Group at Geraci LLP. She received her J.D. from the University of California, Irvine School of Law, where she advocated on behalf of a pro bono client at the Ninth Circuit as a certified law student. Julia’s practice currently involves drafting and preparing exempt securities offering documents for private lenders, real estate developers, and other professionals in the real estate industry.

CONTACT: j.chang@geracillp.com | https://geracilawfirm.com/

February 2021 Originate Report 35

UPCOMING EDITIONS

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INNOVATION

Innovate 2021 Special Edition

June:

WOMEN OF OUR INDUSTRY If you have an article you would like to submit in one of our upcoming editions, reach out to us at: submissions@originate.report 36

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February 2021 Originate Report 37

Direct Lender

Zinc Financial Inc. www.zincdinancial.com office@zinc.net Tom Valentino

7M500K

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55/33

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5M

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150K

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Fidelity Mortgage Lenders, Inc. www.fidelityca.com psteigleder@fidelityca.com Peter Steigleder (818) 422-8879

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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

LENDER DIRECTORY

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.

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February 2021 Originate Report 39

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