Originate Report - September 2019

SEPTEMBER 2019

THE OFFICIAL MAGAZINE OF GERACI

INDUSTRY SPOTLIGHT:

2019 Captivate Award Winners

WILSHIRE FINANCE PARTNERS Don Pelgrim

INSIDE: INVESTING IN FUNDS

S E CR ET

WEAPON SECOND’S

PITCH DECK GENEROSITY REPORT!

www.originate.report 1

2 Originate Report | September 2019

CONTENTS SEPTEMBER 2019

FEATURES 18 What Not to Do When Building a Pitch Deck

Ruby Keys, Geraci Media

20 A Truly Diversified Portfolio Sharestates Invests

in the Next Generation

Originate Report Staff

6

22 CFPB Proposes Changes to HMDA

Reporting Requirements That Will Benefit Lenders

Amy E. Martinez, Esq., Geraci LLP

24 Secret Weapon Second’s

Bob Eakin, JCAP Private Lending

14

30 Comparing Investing in Individual Deeds of Trusts

with Investing in Funds

Edward Brown, Pacific Private Money

Who To Know 6

Don Pelgrim - Wilshire Finance Partners

Charles Peckman, Originate Report

18

14 Industry Spotlight

2019 Captivate Award Winners

In Every Issue

22

11 Industry Job Watch 26 Cities To Watch

Baltimore, Maryland

Originate Report Staff

36 Lender Directory

30 www.originate.report 3

Revenue diversification

Fix N’ Flip, Bridge, Refinance, Ground Up & Small Balance Commercial

Think of it as a new product offering which results in the diversification of your potential revenue. All of this is well within reach, and much easier than you may think.

TODAY’S MARKET OPPORTUNITY: •

•

•

100 billion dollar non owner-occupied investment space SFR ’s 1-4 Fix N’ Flip, Bridge, Refinance, Ground Up & Small Balance Commercial Diversify product offering and add new revenue opportunities you may be missing out on Legally compensate your most prized relationships (Realtors) for referrals

The NON-O/O investment space is a 100 billion dollar industry that has come full circle since the last market downturn. Over the last decade private lending has been growing, and the comeback of property investors is at an all-time high.

Here’s what it takes to do these types of loans and a good private lender will handle these things for your Brokerage…

WHAT TO LOOK FOR IN A BROKER + CAPITAL PARTNER RELATIONSHIP: • • •

Concierge across product offering with underwriting, training, service and support Dedicated call center for loan origination support and fund control Marketing materials provided including product tear sheets, pitch decks and web banners

• • • • • • •

Traditional Realtors and Mortgage Brokers have the misconception they need an NMLS license to be a lender in this product space. The main point in dealing with a private lender is while they primarily fund SFR’s, these loans are governed under commercial guidelines.

In today’s market, refinancings have limited availability and there’s not much new housing inventory to lend against. For mortgage Brokers, this means the obvious; there are a lack of transactions in the market to profit from.

For shops that are only doing refinance or traditional mortgages, opportunities only come around every 5-7 years. You’ve got to have a big client base to have volume. With financial products across SFR ’s 1-4 Fix N’ Flip, Bridge, Refinance, Ground Up & Small Balance Commercial, the sales cycle is faster, there is significantly higher recurring business, and a few lenders have teams dedicated to helping you succeed.

BROKERS, PARTNER TODAY

Review and process loan applications Document collection Facilitate Appraisal Coordinate Title & Escrow Complete underwriting Facilitate Funding Pay you

Thus we are not governed under RESPA, TRID or TIlLA. These loans are funded only into business entities allowing 7-10 business day closings and can pay anyone under a Brokerage license a referral fee or commission on the HUD at closing.

There are two avenues a Brokerage launching this type of product to Real Estate professionals can expect to see. You can be a Correspondent Partner (the lender would fund in your name)

http://triumph.capital/brokers

4 Originate Report | September 2019

or an Origination Partner (the client would see the lender’s name on the HUD). Most deals are funded under a single set of product guidelines allowing training, underwriting and servicing to be easily understood.

CORRESPONDENT PARTNER (CP): You look and feel like the lender, a complete white-label product.

ORIGINATION PARTNER (OP): Traditional Broker + lender relationship, lender shows on HUD. A full concierge service for Broker partners handling everything from A-Z is an entirely new model for private lending and Mortgage Brokers / Real Estate professionals. Working with a direct lender enables Mortgage Brokers to keep the lion’s share of the profit and have the potential to earn from the yield spread as well, all while monetizing on much more frequent lending transactions, instead of the normal 5-7 year customer lifecycle.

There many private lenders chasing this strategy and it’s safe to be wary of who to work with.

While choosing a partner, look for someone who understands the business and has a strong reputation for closing transactions. You’ll also need support with marketing materials. Having the right documents and product tear sheets (one-pagers) for conversations, trade shows, etc. is helpful in positioning the opportunity with your existing book of referral business from Realtors.

For more information call

877-450-9741

ROB JENNINGS robert@triumph.capital

GEORGE O. FLINT goflint@triumph.capital

CEO Geraci LLP ANTHONY GERACI Anthony@Originate.Report Vice President Geraci Media RUBY KEYS Ruby@Originate.Report Editorial Director MAX BERGER Max@Originate.Report Art Director LYNDA HIGHT L.Hight@Geracillp.com CONTRIBUTORS Max Berger • Edward Brown Amy Martinez • Charles Peckman Ruby Keys • Bob Eakin

Letter

from the

Editor Welcome to our September Edition of Originate Report!

“Opportunities don’t happen. You create them.”

-- Chris Grosser

Welcome to the September Edition of Originate Report!

We hope you had an enjoyable, productive summer. And thanks to those of you who attended our 3rd annual Captivate Conference! It was our biggest and best event to date, and it couldn’t have been done without you.

FOUNDING UNDERWRITERS

MARK HANF President, Pacific Private Money

ORIGINATE WEBSITE www.originate.report

This month’s quote was chosen because its message clearly resonates with our featured lenders. Our cover story, Don Pelgrim with Wilshire Finance Partners, has never been the type of person who passively waits for opportunities to fall into his lap – learn more about his remarkable career and unyielding perseverance in his article on the next page. The same qualities can be ascribed to this month’s industry spotlights, the winners of the 2019 Captivate Awards! Read on to learn why they were chosen by the private lending community and what sets them apart.

GERACI LAW FIRM www.geracilawfirm.com

To Opportunity,

MEDIA WEBSITE www.geracimediagroup.com

Max

CONFERENCE WEBSITE www.geracicon.com

Max Berger

Originate Report Editorial Director www.originate.report 5

PROFILE

“We have a talented team at Wilshire representing different disciplines; including, banking, finance, law, accounting, portfolio management, and the acquisition and disposition of real estate.”

WILSHIRE FINANCE PARTNERS DON PELGRIM

E

on

a

career

real estate finance law at Brobeck, Phleger & Harrison, LLP and Rutan & Tucker, LLP. He received his Juris Doctorate from Loyola Law School of Los Angeles and his Bachelor

By Charles Peckman, Originate Report mbarking

practiced corporate, real estate, and

present from early on in his career.

in private lending is no

of Business Administration from Hofstra University.

easy feat. Cultivating an

In his current position as the head of

innovative industry leading business

Wilshire, Pelgrim oversees the WFP

is a different story all together. No

Income Fund, WFP Income Fund

one knows this better than Don

REIT, and WFP Opportunity Fund

Pelgrim, an owner, a director, and the

– which are the internal funding

CEO of Wilshire Finance Partners.

platform used to deliver fast, efficient

he outlined some of the important

Between a banking job during the

small-balance bridge loans from

factors that allowed the private

day, law school at night, and starting

$1,000,000 to $7,000,000 secured

money space to prosper – and what

a family, Pelgrim’s perseverance and

by multifamily and commercial real

sets Wilshire apart from the rest of

all-around can-do attitude was a

estate.

the pack.

6 Originate Report | September 2019

As an attorney, Pelgrim

When

Pelgrim

sat

down

with

Originate Report to discuss the company’s origins, as well as the triumphs and obstacles of his career,

also

opportunities

to

purchase

of multi-billion-dollar community

distressed properties through the

banks. In those roles, I managed

foreclosure process, short sales and

and was involved in a number of

other means. The problem was that

functions; including, mergers and

banks were not making loans and

acquisitions, secondary marketing,

the capital markets were seized up.

strategic

The original founders of

Wilshire

assets. In 2008, Kevin asked for my

recognized that financing gap and

legal assistance in the formation of

the significant need in the market

Wilshire and the creation various

for fast and efficient debt capital

legal

to capitalize on the opportunity to

initially

purchase those distressed properties

business. The original founders of

– so, Wilshire Finance Partners was

Wilshire were Kevin DeMeritt and

formed.

Thom O’Bryon.

alliances,

documents used

in

and

that their

special

Wilshire lending

A couple of years

after its formation, Kevin contacted OR: How did your background, and

me to let me know Thom was very

the circumstances of the company’s

ill and to ask for my assistance –

founding

he wanted me to run Wilshire as a

prepare

you

for

your

current position?

partner. After looking at the market

DP: My background is banking, law

Thom’s ownership interest in the

and the possibilities, I acquired

and finance. Right out of college, I Originate Report (OR): Can you describe the company’s background, and how you reached your current position of CEO?

worked with the President of a bank owned by the Dreyfus Corporation in New York to create mortgage programs marketed in eight states along the eastern seaboard. When I

Don Pelgrim (DP): Wilshire Finance Pastners was founded in 2008 and I am the second CEO of the company.

If you recall that timeframe, the

moved to California in the mid-1980’s I worked and became friends with Kevin DeMeritt, an individual who eventually became one of the original founders of Wilshire. While working

financial crisis was in full swing

as a Vice President for a bank during

and banks, federal regulators and

the day, I went to law school in the

servicers were dealing with problem

evenings, passed the bar and went

assets,

reduced

into private practice with a large

liquidity, bank failures and foreclosed

law firm. At that time, my practice

properties. At the same time, there

focused on corporate and real estate

were opportunities for buyers to

law, with an emphasis in real estate

acquire distressed properties (or

finance.

I was enticed back into

REOs) held on the balance sheets

banking

and

of banks and the FDIC. There were

Administrative Officer for a couple

eroding

capital,

became

the

Chief

company and became the CEO and a director of Wilshire. Unfortunately, Thom passed away a few years later.

Out of that tragedy an opportunity was created and that’s how I became involved with Wilshire. It gave me the opportunity to be involved with a growing business in an emerging market.

OR: Can you describe the onset of that market? What do you think caused borrowers and lenders to seek capital outside the traditional realm of banking?

DP: Private lending has been around for millennia. Before there were banks, people bartered for goods and services and bought items with cash.

Don Pelgrim: Continues on pg. 8

www.originate.report 7

Don Pelgrim: Continued from pg. 7

Lending occurred between people who knew each other. Although private lending is nothing new, the creation of banking systems and the capital markets in many ways eclipsed private lending, but never fully replaced it. But as I mentioned earlier, what really triggered the resurgence of private lending on the scale we see today was the financial

the last decade on fixed income

we consider, we lend on office, retail

instruments caused private lending

strip centers, warehouse, industrial,

to catch the attention of investors.

senior

living,

student

Additional capital looking for yield

housing and self-storage.

We do

has helped to fuel the growth and

not lend against land, development,

assist in maturing the industry.

major

assisted

rehabs

construction.

OR:

Can

Wilshire’s

you

talk

platform

more for

about funding

consider

or

ground

up

However, we will

value-add,

stabilization

and repositioning loans.

We lend

multifamily and commercial real

in primary and secondary markets

estate bridge loans?

and will consider tertiary markets if the market and the transaction

crisis – traditional lending sources

DP: Wilshire started to focus on

dried up, so real estate professionals

make sense.

multifamily and commercial real

needed

the

$1,000,000 to $7,000,000, but many

estate loans soon after I joined the

“traditional” realm to secure capital.

of our loans are below $3,000,000.

company and the formation of our

That

private

funds in 2013 solidified the funding

The vast majority of the loans we

lending to the forefront. It was one of

platform we needed to engage in

the most consistent forms of capital

that business.

during that time, and some would

focus is on multifamily (5+ units)

argue that it helped the recovery

and commercial real estate bridge

in certain sectors of the market.

loans nationwide.

Persistently low interest rates over

the commercial real estate collateral

to

reach

dynamic

outside

brought

Today, our primary

With respect to

We fund loans from

make are first liens that are placed in our WFP Income Fund. Through our WFP Opportunity Fund we are able to provide higher leverage and deliver more creative structures using lending tools like second liens, split notes, participating loans and joint ventures. Generally, our loans are just outside the banker’s “credit box” and the typical repayment strategy is the sale or refinance of the property once its stabilized or the issues requiring a bridge loan are seasoned.

OR: With that said, why are some of the reasons brokers and borrowers use Wilshire?

DP: As a balance sheet lender we have discretionary capital to lend and hold the loans on our balance sheet from the time they are originated until the time they are paid off. They are not sold or securitized. Because of that platform, we can provide greater

8 Originate Report | September 2019

speed,

efficiency,

flexibility

and

into

running

service – which leads to certainty

Wilshire with more

of execution.

efficiency?

Because we are the

capital source, communication is more robust, and brokers and their

DP: I would like

clients are dealing directly with the

to think that all

decision-makers.

of

All of that helps

the

different

with the ease of the transaction - it

experiences

I’ve

makes the experience more crisp and

had contribute to

easier to get to a final decision.

the position I’m in now. The collective

OR: What would you say is a primary

experience of being

differentiator for Wilshire in the

a banker at a Wall

market?

Street firm out of college,

working

DP: Ease. We have a talented team

on large, nationally

at Wilshire representing different

syndicated credits

disciplines;

banking,

as a lawyer, and

finance, law, accounting, portfolio

bidding on failed

management, and the acquisition and

banks through the

disposition of real estate. Our people

FDIC

are

process

including,

receivership crisis

attended law school at night, worked

decades of experience in multifamily

gives you a tremendous amount of

at a bank during the day, had a

and commercial real estate lending.

experience and prospective. I believe

young son, and a daughter along the

Combined with our capital platform,

that helps Wilshire in a number of

way. It’s one of those things where

our team has the ability to scope,

ways.

That includes assisting on

it takes a lot of mental fortitude

structure and close multifamily and

one-off transactions that may be

and determination as well as the

commercial real estate loans quickly

more complicated to the creation of

support from the people around you.

and efficiently. Even challenging

strategic relationships with brokers

My family and friends were very

transactions become easier because

and other partners. I get a kick out of

supportive of what I did, and that

of the knowledge, experience and

creating strategic relationships with

gave me a lot of latitude because there

service levels of our team. With

brokers and other parties where we

were missed holidays and missed

the broker’s access to deals and our

can leverage our collective strengths.

vacations due to the tremendous

OR: I can imagine the difficulty of

matter how challenging it was for

seasoned

professionals

with

in

the

financial

funding platform we can get a lot accomplished.

going to law school at night while OR: Getting back to your career, how

also trying to jump-start your career.

has your background helped in your

Can you speak about the challenges

current position? With experience

associated with doing this?

in both lending and the law, does that breadth of expertise translate

DP: It was pretty interesting – I

time commitment.

However, no

me, didn’t have to look very far to see a single mother or someone else in my class with greater challenges buckling down and getting it done.

That’s a pretty good motivator.

Don Pelgrim: Continues on pg. 10

www.originate.report 9

Don Pelgrim: Continued from pg. 9

For people who are starting out in the real estate business, I would offer up that the people who are successful in this space are the ones who treat it as a profession. What I mean is that real estate is not always a “9 to 5” job, and you need to put the time in.

I have some pretty good experience and that experience helped get me to where I am today, but I am also learning something new every day.

One of the first things to do when thinking about a career in real estate is picking out a path – and, there are a number of paths you can take. I believe it’s also crucial to find a mentor or someone who can take you under their wing. There are formal and informal mentorships, and I think it is important to take advantage of both. At Wilshire, in addition to our training programs, we

are also looking to expand our

been partnering with each other

reach through additional strategic

for years. For example, while the

OR: As the marketplace changes

partnerships with other companies.

banks are highly competitive when

and the role of technology expands

Some of those partnerships include

originating

exponentially, what is Wilshire doing

companies who are private lenders.

once the loan is on their balance

to “stay on its toes” not only in terms

We don’t view those companies

sheet, they have collegial, strategic

of changing technology, but the

as “the competition,” rather we

partnerships with other banks for

services offered by the competition

view them as potential allies. In

trading, selling, participating and

as well?

fact, I did presentation for the

servicing loans. Some of that is by

American

Private

necessity to meet capital, liquidity

DP: We are investing in technology

Lenders (AAPL) in August of this

or concentration requirements, and

and we are building out some

year on this exact point – the

some of that is part of an overall

platforms to benefit our strategic

market share once dominated by

strategy. By looking at our business

partners.

things

banks has been partially eroded

the same way, we can view other

we’ve been working on include a

by different technology platforms

lenders, brokers, and bankers in

technology-based

that

and other parties; including, credit

the marketplace as potential allies

provides real time updates to our

card companies, Wal-Mart offering

and create relationships with them

brokers as well as other information

deposit products to their customers,

leverage our collective strengths.

to help facilitate transactions. We

and alternative lenders. Banks have

For example, leveraging our capital,

have mentor-mentee relationships.

Some

of

the

backbone

10 Originate Report | September 2019

Association

of

loans

in

the

street,

marketing and technology with their

discussing the partnerships that

evolved in our business.

distribution

make

you have made at Wilshire, and the

industry has continued to mature the

sense to facilitate the growth of each

partnerships that you plan on in the

timing is now better and if Wilshire

of the respective businesses.

future. Do you think that mindset is

can be one of the catalysts to help

an important differentiator?

that occur, it would be fantastic.

associated with the ever-changing

DP: I think so. Sharing a page from

OR: Continuing that thought, where

nature of technology?

the banker’s playbook, it is great

do you see Wilshire moving in the

to

in

future? Is it more-so focusing on

DP: Every day! As an entrepreneurial

the marketplace and that is never

emerging technology or facilitating

company, growing pains come with

going to go away. When you get

growth in other ways?

the territory. It’s not just technology;

into the c-suite, however, and you

it’s everything associated with being

are also looking other avenues and

DP: I see us growing in many

a business owner and manager. The

approaches to grow and manage the

different ways – both vertically

“game” if you will is facing those

business. If you shut down potential

and horizontally – assets under

challenges head-on and adapting

partnerships as an option you are

management and additional products

to them – as opposed to being

also shutting down that opportunity

and services. The key driver remains

reactionary, being proactive.

to grow. When I started in this sector

the relationships we will develop. We

of the lending business 2011, it was

are actively seeking new strategic

OR: It seems as though many c-class

non-existent or done in discrete

relationships with Brokers and other

executives are apprehensive about

transactions on a small scale. While

Lenders, developing new products

mentioning strategic partnerships

there are a few platforms that have

and technology.

with other companies, so I was

tried to take a run at it, I still believe

opportunities with our capital is

surprised to hear you so open when

that type of approach hasn’t fully

exciting.

channels

may

As this

OR: Are there any growing pains

have

healthy

competition

Combining those

CONTACT: dpelgrim@wilshirefp.com | https://wilshirefp.com/

INDUSTRY JOB WATCH Commercial Mortgage Credit Analyst - Newport Beach, CA

LOOK WH

O ’S

HIRING!

Looking to fill a posit Originate ion? Adve Report’s rtise it Industry of thousa Jobs to g here in nds of qu et it in fro alified ca nt ndidates Contact . us at (94 9) 629-3 961.

Wilshire Finance Partners is a growing balance sheet lender and manager of several real estate debt funds. Our internal funding platform provides debt financing and equity capital secured by apartments/multifamily and commercial real estate throughout the United States.

We seek a motivated and detail oriented individual with 3 or more years of experience as a Commercial Mortgage Credit Analyst or Commercial Mortgage Junior Underwriter to join our Newport Beach team.

The Commercial Mortgage Credit Analyst will work closely with the underwriting and origination team and is responsible for processing, analyzing and facilitating loan requests secured by apartments/multifamily and commercial real estate. The Credit Analyst will obtain and review reports, documents and information; assist with processing and underwriting; assist loan closings; drive the management of post-funding loan covenants, draw requests and disbursements; assist with loan portfolio management; and assist with regulatory reporting For more information, please visit the Careers page at www.WilshireFP.com

www.originate.report 11

Inc. Magazine Unveils Its Annual List of America’s Fastest-Growing Private Companies—the Inc. 5000 For the 3rd Time, Geraci LLP Appears on the Inc. 5000, Ranking No. 1861 with Three-Year Revenue Growth of 271% NEW YORK, August 14, 2019 – Inc. magazine today revealed that Geraci LLP is No. 1861 on its annual Inc. 5000 list, the most prestigious ranking of the nation’s fastest-growing private companies.

The list represents a unique look at the most successful companies within the American economy’s most dynamic segment—its independent small businesses. Microsoft, Dell, Domino’s Pizza, Pandora, Timberland, LinkedIn, Yelp, Zillow, and many other well-known names gained their first national exposure as honorees on the Inc. 5000.

“On behalf of everyone at Geraci LLP, I am truly honored that we have been selected as an Inc 5000 award winner for the 3rd year in a row. Building our foundation on client service and market responsiveness have allowed us to emerge once again as one of the fastest-growing law firms in the United States,” said Anthony Geraci, CEO, Geraci LLP. “We would like to thank our clients, because without them, we could not have achieved this great honor. We continue our commitment to serve their needs in whatever capacity necessary and are looking forward to our future growth.”

Not only have the companies on the 2019 Inc. 5000 (which are listed online at Inc.com, with the top 500 companies featured in the September issue of Inc., available on newsstands August 20) been very competitive within their markets, but the list as a whole shows staggering growth compared with prior lists. The 2019 Inc. 5000 achieved an astounding three-year average growth of 454 percent, and a median rate of 157 percent. The Inc. 5000’s aggregate revenue was $237.7 billion in 2018, accounting for 1,216,308 jobs over the past three years.

Complete results of the Inc. 5000, including company profiles and an interactive database that can be sorted by industry, region, and other criteria, can be found at www.inc.com/inc5000.

“The companies on this year’s Inc. 5000 have followed so many different paths to success,” says Inc. editor in chief James Ledbetter. “There’s no single course you can follow or investment you can take that will guarantee this kind of spectacular growth. But what they have in common is persistence

Lesley Boyd | Marketing Director | Geraci LLP | 949-379-2600 12 Originate Report | September 2019

PRESS RELEASE

and seizing opportunities.”

The annual Inc. 5000 event honoring the companies on the list will be held October 10 to 12, 2019, at the JW Marriott Desert Ridge Resort and Spa in Phoenix, Arizona. As always, speakers include some of the greatest innovators and business leaders of our generation.

More about Geraci LLP A full-service law, media, and consulting firm, the Geraci team is at the forefront of the ever-changing non-conventional lending space and caters to non-conventional lenders worldwide. Our legal departments include Banking & Finance, Corporate & Securities, and Litigation/Bankruptcy, while our recently-formed Geraci Media Group not only organizes conferences, but also provides a full array of media services to help raise your brand awareness.

More about Inc. and the Inc. 5000 Methodology The 2019 Inc. 5000 is ranked according to percentage revenue growth when comparing 2015 and 2018.

To qualify, companies must have been founded and generating revenue by March 31, 2015. They had to be U.S.-based, privately held, for profit, and independent—not subsidiaries or divisions of other companies—as of December 31, 2018. (Since then, a number of companies on the list have gone public or been acquired.) The minimum revenue required for 2015 is $100,000; the minimum for 2018 is $2 million. As always, Inc. reserves the right to decline applicants for subjective reasons.

Companies on the Inc. 500 are featured in Inc.’s September issue. They represent the top tier of the Inc. 5000, which can be found at http://www.inc.com/inc5000.

About Inc. Media Founded in 1979 and acquired in 2005 by Mansueto Ventures, Inc. is the only major brand dedicated exclusively to owners and managers of growing private companies, with the aim to deliver real solutions for today’s innovative company builders. Inc. took home the National Magazine Award for General Excellence in both 2014 and 2012. The total monthly audience reach for the brand has been growing significantly, from 2,000,000 in 2010 to more than 20,000,000 today. For more information, visit www.inc.com.

The Inc. 5000 is a list of the fastest-growing private companies in the nation. Started in 1982, this prestigious list has become the hallmark of entrepreneurial success. The Inc. 5000 Conference & Awards Ceremony is an annual event that celebrates the remarkable achievements of these companies.

The event also offers informative workshops, celebrated keynote speakers, and evening functions.

For more information on Inc. and the Inc. 5000 Conference, visit http://conference.inc.com/.

www.originate.report 13

SPOTLIGHT SPOTLIGHT

INDUSTRY SPOTLIGHT 2019 Captivate Award Winners FUTURE IS BRIGHT

Recognizes an outstanding young professional who is already making a mark on the industry (under 35 years old)

WINNER! Rachel Croessmann, PeerStreet

INNOVATIVE IMPACT Recognizes a product or service that has led to

success through innovation and technology

WINNER! ProDeal 360

INDUSTRY INFLUENCER Recognizes an industry leader and overall role model

WINNER! Gary Bechtel, Money 360

14 Originate Report | September 2019

INNOVATIVE IMPACT AWARD WINNER

PRODEAL 360 Winner: ProDeal 360 Reason: ProDeal is the only lightweight platform that streamlines due diligence tracking and deal closing by combining communications, data storage, and workflow into a single source of truth while also adding a layer of security and automation to your deals.

Key Features & Benefits: • Real-time notes • Robust document storage capabilities • Mark docs as final and deliverable’s as complete • Assign team responsibilities with due dates • Automated daily recaps of deal activity • Export final documents to Smart Closing Binder • Export Smart Checklist PDFs Fun Fact: The CEO (Mike Bebon), who was the brains behind the ProDeal platform, literally came up with the concept by writing it on a napkin while out with some friends. www.originate.report 15

FUTURE IS BRIGHT AWARD WINNER

RACHEL CROESSMANN, PEERSTREET

Winner: Rachel Croessmann, Director of Business Development Reason: Rachel is an invaluable member of the Business Development team who continues to grow the ecosystem of lenders at PeerStreet at an unusually fast pace. She consistently receives glowingly positive feedback from her lender clients. Rachel is an excellent ambassador for PeerStreet at industry events and she works diligently to improve the lender experience for all PeerStreet lenders.

Fun Fact: She attended University of Miami Law School and worked as a commercial real estate in-house counsel and acquisition specialist for a firm in Miami.

16 Originate Report | September 2019

INDUSTRY INFLUENCER AWARD WINNER

GARY BECHTEL, MONEY 360 Winner: Gary Bechtel (Money 360) Reason: Throughout his 33 years in the industry, Gary has closed over $10 billion in commercial debt transactions and touched on every aspect of the commercial real estate process from origination to underwriting and restructuring. At Money 360 his leadership has led to incredible growth for a young company closing more than $1.5 billion in commercial real estate transactions as the company continues to gain momentum and expand throughout the US. Gary is known by all as a respectful and charismatic leader, who is always ready to work alongside his team to troubleshoot problems and find solutions.

Fun Fact: Gary is an avid fisherman and takes trips all over the world on fishing boats. Whenever he returns from fishing trips, he brings back fresh cuts of fish for his colleagues, processed and packaged for everyone to enjoy with their family for dinner. www.originate.report 17

FEATURE

What Not to Do When Building a Pitch Deck

By Ruby Keys, Geraci Media

A

your ideas are. Take advantage of the templates that PowerPoint and other presentation-building tools offer, and be sure to add custom touches, like your company’s logo and simple graphics. If you want to go above and beyond, hire an agency

pitch deck is a slideshow

business’s industry. Avoid using

or presentation – created

technical jargon that will confuse

on PowerPoint, Keynote,

your audience. Stick to simple

Prezi, or a similar software – that

words, animations, and transitions

presents your company, goods, and

to convey complicated ideas. Create

services to an audience. Creating

your presentation so that even

an effective pitch deck that keeps

someone with little knowledge of

investors engaged and helps you

your industry and company could

achieve your business goals takes

understand it.

time and effort.

It is important to note, however,

Anyone can throw together some

that there is a chance your audience

slides in a matter of hours, but

may be knowledgeable about your

consider this: for every 100 pitches

industry.

an investor hears, he or she will

is paramount to this point, as

fund only 10 of them, which means

oversimplifying your presentation

most pitches get lost in the crowd.

may appear as though you are

Here are 10 things to avoid to

talking down to your audience.

hook them at the beginning to

2. Use old-fashioned design

the end of your presentation.

Preliminary

research

more advanced software, such as Adobe Photoshop or InDesign.

3. Get off to a slow start Even if your business idea is incredible, if you can’t capture your audience and keep them engaged, your deck will get lost in the crowd.

A strong, memorable introduction will keep investors wanting to know more about your company and how they can benefit from their investment in you. After all, they’re trusting you with their money; ensure they stay with you through

ensure that your pitch deck is at the top of investors’ minds.

who can make your pitch deck in a

You don’t need to be a professional designer, but you also don’t want

4. Give a lengthy pitch

presentation

to

Show respect for investors’ time

Chances are, your investor does

Your

not know the ins and outs of your

forward-thinking

1.

Overcomplicate

the

18 Originate Report | September 2019

present deck

plain should

white

slides.

convey and

how

modern

by

finishing

your

presentation

well before your meeting time is

up. You don’t want to make your

when their investment pays off!

return on investment. One of the

audience antsy about missing their

Make your business story relatable

best ways to get their attention is

next appointment, and you’ll leave

and weave it throughout your deck

to show them how high their ROI

time for any follow-up questions.

for

presentation.

will be in a few years. When you

You can shorten your presentation

However, be careful not to overdo

present a good exit strategy, you’re

time by shortening or altogether

it – make sure your story relates to

showing investors that you’ve done

omitting your startup’s history or

your overall business model.

your homework, you’re credible,

a

compelling

and their money is in good hands.

founders. Keep them wanting more 8. Involve disclosures and NDAs

– share details later.

You know your ideas are worth a

10.

5. Fudge the numbers

lot, which is why you’re protective

proposition

It can be tempting to bluff data in

of them. Many people think that the

At the end of your deck, your

your pitch deck, but it’s important

best way to avoid having their ideas

audience should be able to answer

to resist this temptation. This is a

stolen is by asking investors to sign

the following questions: Why are

very poor business practice that

an NDA before pitch presentations.

you better than your competitors?

misleads

wastes

The hard truth is that investors have

What makes you special? Why

everyone’s time. Getting caught

probably heard a variation your

should they invest in your company?

exaggerating in your pitch can

idea before. Legitimate investors

Your value proposition should be

ruin your reputation and lead to

who receive pitches all the time

relevant to your business’s market,

lawsuits down the road. Before you

will rarely sign an NDA. For best

present

even pursue funding from angel

practice, have an attorney who

problem, have tangible and specific

investors and venture capitalists,

specializes in your space review

benefits, and differentiate from

gather concrete data that supports

your pitch deck to make sure it’s

your competition. Focus on your

your business case. They’ll come

legally compliant.

product’s benefits, not its features,

knocking at your door!

Remember that investors aren’t

and use your value proposition to

your competition. They’re not going

craft your story.

to invest in multiple competing

As you’ve read, there’s a lot that

because

businesses. So while you may be

goes into building a successful pitch

investors can see that their ideas

intimidated by the fact that they

deck. If you want to earn investors’

are great, but their founders lack a

have the money and resources to

funding and respect, focus on your

compelling vision. When pitching to

build a better product than you,

story, stick to the facts, and explain

investors, your goal is to convince

resist the urge to ask for an NDA.

your value. If you are looking for a

investors

and

6. Leave out your mission Many

startups

fail

Leave

a

off

clear

your

solution

value

to

a

marketing team to help build your

them that they’re going to make it big by investing in you, and there’s

9. Forget about your exit strategy

pitch deck, Geraci Media is your

no better way to do that than

This one might be counterintuitive.

expert in the private lending space.

selling them on your mission. If

Venture capitalists don’t want their

Email Ruby today to discuss how

you don’t get much traction at first,

money sitting in the bank. They

Geraci Media can make you an

don’t be discouraged. Rethink your

want it to be used to create a high

outstanding pitch deck!

vision and make sure it’s grounded in reality.

7. Forget to mention your story Everyone

loves

a

good

story,

especially one with a happy ending.

For investors, that happy ending is

ABOUT THE AUTHOR: Ruby Keys is the Vice President of Geraci Media, a full service marketing agency, which caters to the Non-Conventional Lending Space. Geraci Media was founded in 2016 and began as an event line. Ruby has helped grow and manage Geraci Media to where they now host 5 conferences a year, produce a monthly magazine for Loan Originators, and offer marketing services for lenders nationwide.

CONTACT: r.keys@geracillp.com

www.originate.report 19

GENEROSITY REPORT

A TRULY DIVERSIFIED PORTFOLIO

SHARESTATES INVESTS IN THE NEXT GENERATION

By Originate Report Staff

I

nvesting

inherently

causes that all share one common

This organization is the world’s sole

risky business—just take a

goal: improving the lives of children

provider of day camps for childhood

cursory glance at the latest

in need. Whether it’s assisting

cancer patients and their siblings,

stock report and you’ll see that

families with funding medical bills

and they’ve provided this amazing

the

frequently.

for childhood cancer patients or

resource for free since 2006. Sunrise

But what if I told you that leading

providing food for homeless youths,

Association’s ability to maintain

real estate crowdfunding platform,

Sharestates realizes that the most

this zero-cost accessibility is made

Sharestates,

an

precious commodity is the welfare

possible through their partnerships

investment with zero risk and the

of the next generation—regardless

with

potential for unlimited growth?

of their socioeconomic status.

Share4Kids. The nonprofit arm of

prices

is

an

fluctuate

has

discovered

like-minded

entities

like

Sharestates hosts an annual poker Sounds too good to be true, right?

The

few

tournament, with 100 % of the

Think

because

examples of the many community-

proceeds donated to support the

invests

oriented entities that Share4Kids

efforts of Sunrise Association Day

in the future via their nonprofit

has assisted over the last several

Camps.

entity dubbed Share4Kids. This

years:

again.

Sharestates

That’s

consistently

following

are

just

a

affiliate raises capital for numerous outstanding

organizations

and

• St. Mary’s Hospital for Children: • Sunrise Association Day Camps:

20 Originate Report | September 2019

This

renowned

healthcare

center provides an unparalleled,

proceeds going towards funding

for implementing positive change

innovative continuum of care to

their education.

in the lives of children through their

children and young adults who require

are

• Bethel AME Church: Over 50 years

associated with the Share4Kids

suffering from serious illnesses.

ago, thousands of people gathered

organization.

Share4Kids sponsored a sizeable

at the Bethel A.M.E. Church in

they exhibit a similarly successful

team

Healthcare

Paterson, New Jersey to witness

ability

System for Children’s 14th annual

one of Dr. Martin Luther King Jr.’s

investors

Big Hearts Walk, which raised over

final sermons to raise awareness

estate investments via their easily-

$110,000 dollars for the global

for the Poor People’s Campaign—

accessible

leader in pediatric post-acute care.

one of King’s initiatives in his

average

historic non-violent campaign for

between a remarkable 8-12%. The

• Alpha School: An integral and

civil rights. Today, Bethel A.M.E.

secret behind Sharestates proven

proactive

the

Church continues King’s efforts

results is their innovative 34-point

East New York and Brownsville

as the local anti-poverty agency,

scoring matrix, which they use to

communities for more than 40

offering services such as day care,

mitigate risk to their investors and

years, the Alpha school assists

free health clinics and food drives

cost of capital to borrowers.

students between the ages of 17-

in addition to their regular Sunday

21 in preparing for and passing

worship congregations. Share4Kids

Just like Sharestates believes that

the New York City’s high school

sponsors an annual food and gift

no child should be without the

equivalency (GED) exam as well

drive for the Paterson community

opportunity to thrive, they have

as applying to colleges, military

with the assistance of the Bethel

made it their mission to make

services or trade apprenticeship

A.M.E. Church.

real

in

special

St.

needs

Mary’s

component

or

amazingly effective partnerships

of

programs. Share4Kids helps these

to

Unsurprisingly,

in

offering

direct

access

online

net

estate everyday

everyday to

real

portal—with

annualized

investing

returns

accessible

investors—lowering

students reach their full potential

Changing the Future of Kids AND

the barrier to entry and enabling

by sponsoring an annual food drive

Real Estate Investing

everyone

within the East New York and Brownsville communities, with all

to

take

part

in

the

rewarding market of real estate Put simply, Sharestates has a knack

development.

C O N TAC T: m a r ke t i n g @ s h a re s t a t e s .c o m www.originate.report 21

FEATURE

CFPB Proposes Changes to HMDA REPORTING REQUIREMENTS THAT WILL BENEFIT LENDERS

By Amy E. Martinez, Esq., Geraci LLP

L

ast

year,

the

Consumer

of credit per year, in each of the two

in a two-year period are required

Financial Protection Bureau

preceding years.

to report their HMDA data to the

(“CFPB”) made changes to

Now, the CFPB is proposing to

CFPB. However, the CFPB proposal

the data collection and reporting

loosen HMDA reporting rules even

establishes two new thresholds that

rules under the Home Mortgage

more by offering some relief for

would raise the HMDA reporting

Disclosure Act (“HMDA”).

smaller lenders and credit unions,

requirement

The new policy exempts insured

and possibly exempting them from

originate either 50 or 100 mortgages

depository

and

reporting requirements altogether.

over a two-year period. This new

credit unions from certain HMDA

The new rules would go into effect

threshold would eliminate reporting

requirements

on January 1, 2020.

requirements

less than 500 closed-end home

Under the current law, lenders that

lenders, community banks, and local

mortgages or 500 open-ended lines

originate 25 or more mortgages

credit unions.

institutions if

they

originated

22 Originate Report | September 2019

to

for

lenders

many

that

small

at the current 25.

proposed increase to the threshold

The CFPB added, “[T]he loss in data

would result in aggregate savings on

from these depository institutions

the operational costs of roughly 40%

and for this relatively small number of

of institutional lenders obligated

census tracts may be justified by the

under HMDA of approximately $8.1

significant reduction in compliance

million per year.

costs for the approximately 745

If you make consumer loans and want

lower-volume depository institutions

up to date information regarding

that would no longer be required to

HMDA

that the proposed increase in the

report HMDA data.”

please contact Geraci Law Firm for

closed-end

The

CFPB

Director

explained, changes

Kath

Kraninger

“[T]oday’s

proposed

would

provide

much-

needed relief to smaller community banks and credit unions while still providing federal regulators and other stakeholders with the information we need under the Home Mortgage Disclosure Act.” In the proposal, the CFPB states

from

25

coverage to

50

threshold

would

relieve

institutions that originate between 25 and 49 closed-end mortgages of the ongoing costs associated with reporting those loans that they might otherwise incur if the closedend coverage threshold remained

CFPB

estimated

that

the

reporting

requirements,

more information.

ABOUT THE AUTHOR: Amy’s practice focuses on representing lenders, brokers, real estate investment trusts, limited partnerships, individual investors, banks, hedge funds, mortgage pools, and private investment funds. As an experienced litigator, Ms. Martinez is able to navigate through the Court system, at both the State and Federal levels, and will help guide you through the process every step of the way.

CONTACT: A.martinez@geracillp.com

www.originate.report 23

FEATURE

Secret Weapon Second’s

By Bob Eakin, JCAP Private Lending

S

collateralize or do a “blanket loan” the LTV is still the same.

One of the benefits of a second mortgage is that it allows your client

econd mortgages have long

and home renovation.

been used to get borrowers

“what do you do when your client

cash quickly when they have

needs more cash-out”?

So we ask A straight

to

borrow

significant

amounts.

Because the loan is secured by real estate, they have access to more than they could get without using

real estate to use as collateral. In

refi perhaps would come to mind

this article we’ll go through exactly

but they may not need the cash long-

what a second is, good examples of

term. A good option could be a 2nd

when it should be used, the benefits

on an existing investment property.

to a broker, and some things to look

You get paid for booking another

out for.

loan and your client gets the cash to

65% on a stated income loan. That

A second mortgage is a loan that

invest in other properties or cash for

maximum would count all of your

uses real estate as collateral while

their business. Your client may be

home loans, including first and

there is another loan secured by that

able to get up to 65% LTV on a stated

second mortgages.

real estate. People use these loans

income 2nd’s program or up to 80%

Good 2nd’s scenarios:

for all types of business ventures

with traditional blanket. If you cross

• If your borrower wants to sell their

24 Originate Report | September 2019

real estate as collateral. How much can be borrowed? It depends on your lender, but you might expect to borrow up to 80% of the home’s value on a full doc loan and up to

of all up-front costs from the get-go.

with your CPA).

In some cases, there will be a

Second mortgage rates are typically

tax

lower than credit card interest

deduction

for

interest

paid

on a second mortgage. There are numerous technicalities to be aware of, so advise your borrower to talk to a tax preparer before they start taking deductions. For tax years after 2017, the Tax Cuts and Jobs Act eliminates the deduction unless

keeping an eye out for them: balloon

loan (consult your CPA).

payments that could cause problems

Benefits always come with tradeoffs.

down the road and prepayment

One

investment property on the line.

If they stop making payments, the

• If your borrower is growing their business and needs cash quickly to invest in their business.

• If your borrower needs cash fast to invest in another property.

Second mortgages often have lower interest rates than other types of debt. Again, securing the loan with real estate helps because it reduces the risk for the lender. Unlike unsecured

personal

loans

such

as credit cards, second mortgage interest rates are commonly lower and may be tax deductible (check

Also, make sure to be aware of risky

be different for a business purpose

borrower will need to put their

loan.

first loan.

have these problems, but it’s worth

a second mortgage is that your

selling so they need a short-term

risk than the lender who made the

improvements” to a home. This may

of the biggest things to note with

to make it more profitable before

second mortgage lenders take more

loan features. Most loans do not

loans should be used wisely.

make improvements on the business

the first loan’s rate. This is because

you use the money for “substantial

The costs and risks mean that these

property but has been advised to

rates, but they’re often higher than

penalties that wipe out the benefits of paying off your debt early.

Most lending companies don’t do second mortgages because there’s a greater risk in losing the mortgage to a lender because the 1st’s ability

lender will be able to take the home

to foreclose.

through foreclosure. For that reason,

typically consider 2nd’s as an option

it rarely makes sense to use a second

for their clients just because of the

mortgage for “current consumption”

low volume of companies offering

costs.

and

this type of loan, however, 2nd’s are

regular living expenses, it’s just not

a perfect solution for clients who

For

entertainment

sustainable or worth the risk to use a home equity loan. 2nd’s for business purposes are the best fit.

Second mortgages, like the purchase loan, can be expensive. The borrower will need to pay various costs for things like credit checks, appraisals,

Many brokers don’t

need short-term loans but who do not want to disrupt their low interest rate 1st.

Brokers who have advised their borrowers to use 2nd’s for business purposes have had happy customers

origination fees, and more. Closing

that turn into repeat customers and

costs can add up and it’s a good rule

that’s why we call them “Secret

of thumb to let the borrower know

Weapon Seconds”.

ABOUT THE AUTHOR: Bob Eakin is the CEO of JCAP Private Lending based in Newport Beach. Jcap offers short-term, low loan-to-value real estate loans (including Construction Loans and Stated Income 2nd’s) offering safe, high-yield investments for their investors, while quickly solving a short-term problem for loan clients. They are committed to bringing unparalleled professionalism and service to their community.

CONTACT: bob@jcap.net

www.originate.report 25

CITIES TO WATCH

CITIES TO WATCH:

BALTIMORE, MARYLAND

By Originate Report Staff

S

to

history – which extends further

away from the shore, however, the

influential writers such as

than the U.S. itself – Baltimore

city’s largest employers are Johns

Edgar Allen Poe, Frederick

continues to evolve to this day,

Hopkins Hospital and Johns Hopkins

Douglass, W.E.B. Du Bois, and F.

creating a unique atmosphere for

University,

Scott Fitzgerald – and with one

its 600,000-or-so inhabitants.

worldwide

erving

as

the

home

which for

are

their

known

healthcare

and education prestige. Because of

third of its buildings on the National Register of historic buildings –

Established by the Constitution of

the city’s numerous districts, this

Baltimore, Maryland is certainly

Maryland as an independent city in

Maryland metropolis is home to an

teeming with history and culture.

1729, Baltimore has grown to the

eclectic mix of character, culture,

With hundreds of districts, the city

most populous city in Maryland

and cuisine.

holds the catchy moniker of the

(and the 30th in the U.S.) The

“city of neighborhoods,” and boasts

second-largest

more public statues and monuments

Mid-Atlantic, Baltimore has long

The scent of pretzels, hot dogs,

per capita than any other city in the

established itself as a main-stay

and (admittedly overpriced) beer

U.S. But aside from the city’s

in transporting goods – further

– where do these scents belong,

26 Originate Report | September 2019

seaport

in

the

Must-see Locations

BALTIMORE, MD Economy: • Major industries: Biotechnology, IT

percent one-year forecast) • Homeownership: 47.4 percent • Median rent price: $1,264/month

& Cybersecurity, Military & Federal,

Job Market:

and Energy & Sustainability

• Forbes List: Best places for business

• Minimum wage: $10.10/hour

and careers #57

• Cost of living: 3.2 percent lower than

• Unemployment: 5.60 percent

the national average

• Job growth: 0.6 percent (future

Housing:

job growth has been predicted at 25

• Median household income: $77,394

percent, however)

• Median home price: $115,300

• Loan originator average salary:

• Home price change: 1.8 percent (-2.6

$62,542

you may ask? At a baseball park,

this location is a must-visit; if not

only seem logical to flop into your

of course. Baltimore’s well-known

for fresh seafood, then for local

hotel bed. Although this may be the

park, Camden Yards, is the home

offerings from countless purveyors

case, your day doesn’t have to end

of the Orioles – whether it is a hot

of delicious cuisine. But what is that

once the sun goes down – after all,

summer day or a crisp fall evening,

sound in the distance? It sounds like

Baltimore’s nightlife will have you

thousands of fans pack the stands

someone…or

to cheer on their team. If, for some

“nevermore.” This sound, possibly,

hitting the town long after the “rest

other-worldly

pretzels

is emanating from the Edgar Allen

and beer are not your favorite,

Poe House, a monument to one

Baltimore’s

market,

of the preeminent disseminators

Lexington Market, is the oldest in

of the grotesque and arabesque.

reason, premier

something…saying

the country. Established in the late 18th century – before the advent of

Nightlife

refrigeration and other “modern”

After a full day of exploring the

amenities we take for granted –

largest city in Maryland, it may

of the city” is fast asleep. A visit to the Tin Roof, for example, leaves tourists and regulars alike with full stomachs (and a necessary Uber ride home, depending on your hankering for some of the Tin Roof’s mouth-watering libations.) On-par Cities to Watch: Continues on pg. 28

www.originate.report 27

Cities to Watch: Continued from pg. 27

with Baltimore native Edgar Allen Poe’s thrilling stories, prepare for a spine-tingling night on one of the city’s Ghost Tours, which you can brave alone or drag a group along with you…but beware, you may also be dragging unwanted spirits from the grave!

visit. Additionally, the National

dishes, Alexander’s Tavern has

Aquarium

plenty to offer – regardless of your

animals; whether you are a fan

proclivity for IPAs or Lager. If your

of giant sea turtles or fearsome

stomach is rumbling for American

sharks, the whole family will gaze

cuisine – with a twist – the intimate

at the splendor of aquatic life. For

setting and unique dishes of Alizee American Bistro will surely leave you with a full stomach.

Attractions

Dining Due

microbrews and classic American

to

this

city’s

watery

Although Baltimore’s Inner Harbor

holds

over

15,000

history buffs – and for a journey into the heart of the American spirit – few sites carry the clout of Fort McHenry, which survived bombardment

during

numerous

battles and was the setting of

surroundings, it is only natural

is an attraction in and of itself –

that Baltimore is home to some,

after all, it is the second-largest in

excuse

kick-ass

the Mid-Atlantic – a short journey

seafood. Acqua Restaurant, for

inland leaves room for adventure,

famous Yankee, Babe Ruth, called

example, has a rustic atmosphere

excitement, and relaxation. A visit

this Maryland city home; a journey

and

of

to the Ripley’s Believe Or Not!

through the Babe Ruth Birthplace

Chesapeake Bay dishes (but not

for example, boasts oddities and

Museum

to worry, there are non-seafood

exhibits you will surely be talking

visions

options as well.) With over 60

about for weeks after your initial

stepping up to the plate.

my

classic

French,

interpretations

Francis Scott Key’s penning of the Star

Spangled

Banner.

leaves of

the

Another

visitors Great

Bambino

CAPITAL DIRECTORY THE MARKETPLACE FOR PRIVATE LENDING & INVESTING PrivateLenderLink.com is a robust website which connects all players in the private/hard money mortgage industry: • Brokers & Borrowers

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28 Originate Report | September 2019

with

www.originate.report 29

FEATURE

Comparing Investing in Individual Deeds of Trusts with Investing in Funds

I

By Edward Brown, Pacific Private Money nvestors clamoring for yields

More often than not, individual

on these types of DOTs are usually

are often faced with choosing

deeds

provide

much lower than one can earn in a

to

a higher coupon than mortgage

Fund; thus, one has to start looking

assets, be they dividend paying

pool

at less conservative assets in order

stocks, bonds, alternative assets

are some specific downsides to

such as mortgages, and the like,

choosing individual DOTs instead

versus investing in pooled funds

of Funds. First, choosing the right

Another advantage to investing in

such as income mutual funds, or

DOT takes due diligence and a

individual DOTs is that the investor

alternative funds such as REITs, or

certain amount of expertise in

can pick and choose which DOT to

mortgage pool funds. This article

many cases. Investing in extremely

invest in compared to having the

focuses on the alternative market,

conservative DOTs that have LTVs

manager of a Fund choose which

and, specifically, individual deeds

at lower than 25% may not need

mortgage fits the desired yield.

of trust with mortgage pool funds.

a PhD in economics, but the yields

This is really not much different

invest

in

individual

30 Originate Report | September 2019

of

trust

funds

[DOTs]

[Funds],

but

there

to produce the desired yield.

than

an

investor

choosing

to

in most circumstances by some

a substantial discount associated

invest in specific stocks instead

division

Federal

with it should the investor need to

of investing in a mutual fund; for

Government authority or the state

liquidate, making liquidation much

some reason, however, the public

in which they do business. It is rare

less desirable and quite a hardship

seems to be more at ease in trusting

that a Fund has no oversight. With

for many investors.

a mutual fund manager than a Fund

regard to liquidity, most Funds

manager. Could this be because

have a lock up period in which

There are some advantages for

mutual funds are regulated under

liquidity

non-existent

investing in a Fund [as compared

the Investment Act of 1940? Could it

or comes with a penalty, similar

to an individual DOT] that may

be the relative liquidity of a mutual

to an early withdrawal penalty

outweigh the negatives. For one,

fund? Could it be the perception

imposed

that mutual funds are considered

the lock up period, withdrawals

regular investments as compared

may be somewhat limited by the

to

categorized

manager. Some individual DOTs

as alternative investments? The

may be able to be liquidated in a

answer is probably a combination

secondary market, but most offers,

of these. Although most, if not

even for high quality DOTs, are at

all Funds are not regulated under

a discount. Those DOTs that are

the 1940 Act, they are regulated

50% LTV or more will usually have

Funds

that

are

of

is

by

either

either

a

a

bank

CD.

After

there is diversification in a Fund, so the risk is spread amongst many DOTs. Unless the Fund experiences a major disaster, distributions to the investor should be uninterrupted.

With an individual DOT, a default usually means months or possibly a year or longer [as in the case Investing in Funds: Continues on pg. 32

www.originate.report 31

Investing in Funds: Continued from pg. 31

of a bankruptcy by a borrower].

If

foreclosure

proceedings

are

necessary, the Fund will usually handle them without the need for the investor to get involved or have to come up with money to pay the trustee or other costs, such

individual DOT is paying 8.5%,

capital that has been returned

the after tax return [presuming

due to payoffs from borrowers.

a 40% tax bracket] of the Fund

When one looks at the time value

is 4.76% whereas the DOT’s after

of money, this delay in redeploying

tax return is 4.80%. This 4 basis

capital can significantly lower the

point difference is not significant,

net, after tax, rate of return desired

especially if one were to reinvest

by investors. Money that is not

the distributions in a Fund.

deployed in new DOTs sitting idle in low earning bank accounts bring

as an attorney. In the case of an individual DOT, the investor/lender

“Another advantage to investing in

has to front these costs. If regular

individual DOTs is that the investor

distributions are a must, a Fund is a more conservative route.

invest in compared to having the

months at 1% produces a pre-

earn a higher interest rate than a

mortgage fits the desired yield. ”

Fund [about 1-1.5% on average],

whereby the interest can compound, usually

adding

about

35

basis

points, whereas an individual DOT has to take the monthly distribution with no ability to reinvest. The gap between interest rates of Funds and DOTs gets even narrower [for most investors] when considering the income tax issue because of the new QBID [Qualified Business Income Tax Deduction] introduced in 2018. Congress decided to allow Funds the benefit of reducing the income that has to be reported on an investor’s tax return [subject to certain income limits]. Investing in individual DOTs does not allow for this tax benefit. This 20% reduction in reporting can have a significant impact on the after tax rate of return of a Fund compared to an individual DOT. For example, if a Fund is paying 7%, and an

an 8% return on an individual DOT, having money sit idle for three

manager of a Fund choose which

offering a reinvestment program

For example, if an investor desires

can pick and choose which DOT to

Although individual DOTs usually

Funds may offer the advantage of

the net yield down for the investor.

tax return for the year of 6.25%.

Money sitting idle for four months lowers the net yield to 5.67%. In addition, in many cases, Funds snap

The

most

important

factor

up the better quality DOTs, leaving

nowadays [at least in California] is

the less quality loans available

the continuity of investing in a Fund

for individual investors. The main

compared to investing in individual

reason for this is that Funds want

DOTs

due

to

the

downtime

to produce steady, uninterrupted

experienced

in

many

investor’s

returns for their investors. They

portfolios when a loan gets paid off.

usually desire to avoid loans that

In these circumstances, the investor

have a more likely default rate,

usually calls his broker for another

even if the yield could be higher

DOT to invest in and may be told

by taking on a bit more risk. Some

that there are no good loans to look

investors

at for the moment. The investor is

investing standards in order to

asked to be patient or may be forced

keep their money working; thus,

to look at less quality DOTs. There is

investors have to carefully consider

tremendous pressure in the market

whether the benefits of investing

right now for loans to fund, as

in individual DOTs outweighs the

there is significant capital looking

benefits of investing in a Fund.

lower

their

quality

for a home. This competition for loans has driven down interest

rates

that

an investor can earn on a DOT as well as adding to the length of time to reinvest

32 Originate Report | September 2019

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

CONTACT: edward@pacificprivatemoney.com

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

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