Size and Scope of the Fix & Flip Industry How will the Financial Choice Act Affect You? The “Growing” State(s) of Cannabis The Official Magazine of AAPL July/August 2017
How Socially Responsible is Your Business?
SPECIAL FOCUS: Get Crowdfunders to Fund Your Deals Raising Money Locally? There’s an Easier Way Dave Ramsey Said What?
ROB BARNEY LENDER LIMELIGHT:
HIS PROVEN PATH TO PERSONAL AND PROFESSIONAL SUCCESS
THE FUTURE OF LENDING IS HERE Compare our Rates and Points to the Competition!
Fix & Flip Lines of Credit with rates starting at
Single and Portfolio Rental Loans with
Financing for ground-up new
Private and Hard Money Lenders: Take Advantage of our Loan Products. Broker Them, or Sell Us Closed Loans.2
To learn more visit FOAcommercial.com/aapl05 or call (888) 677-0721 1. On land acquisition loans, land must be already improved/developed for use (i.e., ready for utilities and plumbing.) All applicable building permits must be submitted; if building permits not submitted, funding limited to 60% of lower of land value or purchase price. For new construction loans, land must be already improved/developed for use (ie., ready for utilities and plumbing). All applicable building permits must be submitted. 2. Terms and Conditions apply; Lender-paid broker fees are not available in all states. License requirements vary by state. Loans are subject to investor and business credit approval, appraisal and geographic location of the property and other underwriting criteria. Loan amounts and rates may vary depending upon loan type, LTV, verification of application information and other risk-based factors. Application fees, closing costs and other fees may apply. ÂŠ2017 Finance of America Commercial LLC | | NMLS ID # 1133465 | AZ Mortgage Banker License BK #0926974 | CA Finance Lenders License #60DBO 060757 | MN This is not an offer to enter into an agreement. Any such offer may only be made in accordance with the requirements of Minn. Stat. Â§47.206(3), (4) | 500 North Rainbow Blvd. | Suite 300 | Las Vegas, NV (702) 448-2030 NV Mortgage Broker License No. 4136 | OR Mortgage Lender #ML-5283 | Finance of America Commercial LLC only makes loans for business purposes | Finance of America Commercial is not currently licensed in Utah and is not licensed for certain loans in Idaho | Finance of America Commercial LLC is licensed or exempt from licensing requirements in all other states. Your specific facts and circumstances will determine whether Finance of America Commercial LLC has the authority to approve loans in your specific jurisdiction | Finance of America Commercial LLC operates out of several locations, but not all locations conduct business in all jurisdictions.
2 PRIVATE LENDER
CONTENTS JULY | AUGUST 2017
Trending industry topics and news from around the world of private lending Compiled from Industry Sources
Why brokers are moving from direct sales to mortgage pools by Nema Daghbandan, Esq.
by Judy Chen
by Heather A. Elwing
How marijuana is changing the real estate investing industry
by Bobby Montagne
Rob Barney offers his inside success story and how he’s taking DHLC to new heights.
Top strategies to measure value and success of your market share
The adolescence of online lending
State of Private Lending in Canada by Harry Singh
by Sohin Shah
Real Estate Crowdfunding: Where is it going? by Jason Fritton
SPECIAL FOCUS: CROWDFUNDING
Is it time for a Dodd-Frank haircut? by Jeffrey N. Levin
An easier and more cost-effective strategy to raising capital with Rule 147
by Jillian Sidoti
Dave Ramsey Responses Crowdfunding: By the Numbers Introducing Online Real Estate Investors - by AdaPia d’Errico
Understanding the difference between 506(c )3 and Reg A+ by Jason Powell & Abhi Golhar
Manage & Lead
Enhancing Corporate Culture by Jeff Chaltas
Ways to get crowdfunders to notice and fund your real estate deal by Abhi Golhar
Taking action on quick opportunities with AdaPia d’Errico
Sherman Ragland Profile
- by Kaitlin Brennan with Carmen Fields
Corporate Social Responsibility - by Allen Shayanfekr
Crowdfunding and SDIRA - by Clay Malcolm
JULY/AUGUST 2017 3
4 PRIVATE LENDER
Your Company Culture Speaks Volumes R. MICHAEL WRENN CEO, Affinity Worldwide
EDDIE WILSON President, Affinity Worldwide
LINDA HYDE Executive Director, AAPL
HEATHER A. ELWING Editorial Manager
CHRISSEY BREAULT Editor in Chief, Private Lender Director of Marketing & Member Services, AAPL
TIM DRAPE Senior Account Manager, AAPL
EMILY BOWERS Designer
CONTRIBUTORS Kaitlin Brennan, Jeff Chaltas, Judy Chen, Nema Daghbandan, Esq., AdaPia d’Errico, Carmen Fields, Jason Fritton, Abhi Golhar, Jeffrey N. Levin, Clay Malcolm, Bobby Montagne, Jason Powell, Sohin Shah, Allen Shayanfekr, Jillian Sidoti, Harry Singh
COVER PHOTOGRAPHY Jason Anderson Private Lender is published bi-monthly by the American Association of Private Lenders (AAPL). AAPL is not responsible for opinions or information presented as fact by authors or advertisers.
SUBSCRIPTIONS Visit www.facebook.com/aaplonline or email PrivateLender@aaplonline.com.
BACK ISSUES Visit www.issuu.com/aapl, email PrivateLender@aaplonline.com, or call 913-888-1250. For article reprints or permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail PrivateLender@aaplonline.com or call 913-8881250. Use of Private Lender content without the express permission of the American Association of Private Lenders is prohibited. www.aaplonline.com Copyright © 2017 American Association of Private Lenders. All rights reserved.
The American Association of Private Lenders is an Affinity Worldwide Company.
As we approach midyear, now is the time many organizations determine if they are on the right path to fulfilling their business goals. Goals not just based on profitability but through a healthy corporate culture, as you’ll learn in this edition’s “Six Areas of Focus for Corporate Culture Improvement.” It is no different here at the American Association of Private Lenders (AAPL). Our values are front and center, our small, but mighty team, embody the spirit of our values. As the association continues to grow, it has become more and more important to define and follow those values such as integrity, morality, humor (just talk to any of us, you’ll immediately understand this one!) and partnership. What beliefs do you bring to your workplace every day? How often does your team discuss the underlying beliefs that drive everyone’s attitudes, values and ultimately behaviors at work? It seems to me that every organization could benefit from a robust discussion of what associates underlying beliefs are as they pertain to workplace culture, the role of leadership, and the role business plays in society. As Alan Shayanfekr wrote, “There are few things that can truly influence and touch almost every facet of a business and its stakeholders.” We have focused on real estate crowdfunding in this edition but as you’ll discover in these pages, crowdfunding really helped change the real estate industry’s culture. By almost dissolving the term “P2P lending” and promoting the anonymous organization that is solely focused - or motivated by – a return on a monetary investment. What we’ve watched come to the forefront and engage ‘the crowd’ has busted through the country club doors and opened many new doors of opportunity. Crowdfunding has altered the real estate industry for the better. Many people believed that the shift meant the lowest quality loans would be offered to individuals after the institutions started their feeding frenzy. Yet, we’ve worked with many who propose speed, efficiency, and services that traditional banks haven’t been able to offer. Did you catch the magic word in that last sentence? Service. Just because you have an online platform doesn’t mean the individuals behind it should be anonymous. More people can invest like never before and property owners can gain investors they would have never had access to but that just proves for a healthy marketplace. People want the handshakes and relationships. The core values you build should be a guide to your company culture, proven in your value proposition, communicated, and ■ application) demonstrated thoughtfully to translate high-performance through organizational unity. (for printing) (for spotto color, silkscreen, or embroidery) (for any black and white
Executive Director, American Association of Private Lenders
JULY/AUGUST 2017 5
Financing for Private Lenders Spend less time raising capital and more time originating loans!
Build your brand with quick, reliable financing from table funding through payoff Industry leading fix-and-flip loan program 90% LTC/70% Loan-to-ARV Gain a competitive advantage with no limits on loan volume, rates, or fees GET STARTED TODAY LenderFinance@LimaOneCapital.com www.LimaOneCapital.com/LenderFinance
6 PRIVATE LENDER
Trending industry topics and news from around the world of private lending.
The American Association of Private Lenders (AAPL) is pleased to announce the addition of Bobby Montagne Jr. of Walnut Street Finance and Walnut Street Investment Fund and Melissa Martorella of Geraci Law firm to the Ethics Advisory Committee. Currently there are five AAPL members and one ex officio position. All are volunteers appointed to two-year terms. For more information about AAPL and its code of ethics please visit www.aaplonline.com.
LendingHome is awarded approval by Fannie Mae to expand home loans. This affords
Patch of Land recently expanded
LendingHome the ability to be a seller and servicer and allows them to expand their home
its senior warehouse debt facility with SF
financing division. Streamlining operations for better loan pricing, offering better customer
Capital. The expansion from $10 million
options. “Passing Fannie Mae’s stringent approval guidelines is no small feat, especially for a young company that started lending only three years ago,” said Matt Humphrey, cofounder and CEO of LendingHome. “This is a testament
to $30 million gives Patch of Land greater flexibility for funding loans and continue its upward motion as a robust crowdfunding platform. “SF Capital has been a great
to LendingHome’s financial strength, leading ground-up
partner, and this expanded facility will
technology platform, and the quality of our processes
help Patch of Land continue the growth
from end-to-end.” “LendingHome focuses on using
that has resulted in a very strong year for
technology innovation to create efficiencies and deliver a great customer experience,” said Jeff Walker, SVP and Customer Delivery Executive for Fannie Mae. “We’re pleased to welcome LendingHome as one of our lender partners and look forward to working with them toward our shared vision of a better mortgage process.”
the company,” said CEO Paul Deitch. “We continue to scale our business to meet our growing originations volume, and to fill a void in the real estate finance industry by expanding and improving our marketplace, developing new products for various classes of real estate entrepreneurs,
CIVIC Financial Services welcomes efficiency expert and creative leader, Merced Cohen, as the new director of operations. Cohen served as executive vice president of operations at skyline Financial Corporation for 10 years before joining CIVIC. She joins former colleague and the newly-appointed president of CIVIC William J. Tessar. “I’ve had the pleasure of working with Merced for more than a decade, and her creative approach to operations, inspirational leadership style, and relentless pursuit for simplicity makes her a vital part of the business,” Tessar says.
and enabling investors from Main Street and Wall Street the opportunity to participate in this attractive asset class.” “SF Capital works to identify and invest in high-quality companies with strong management, unique value propositions, and differentiated product offerings with an ability to scale to profitability within
Grand Coast Capital appoints David Adams as their new managing director of
significant target markets,” said Neil
fundraising and investor relations. Before joining the Grand Coast Capital team, Adams was the
Wolfson, President of SF Capital Group.
chief operating officer at Fullerton Investors LLC for more than five years. “David’s broad-based
“We have been pleased with our ongoing
experience with institutional funding and alternative investments perfectly complements his
relationship with Patch of Land and
role with Grand Coast Capital,” Grand Coast Capital Group CEO and Founder Jeff Carter stated.
are expanding our position because we
“His work in a variety of market spaces will translate seamlessly into Grand Coast Capital’s
believe that the company has the ability to
investment portfolio, and we look forward to his added contributions.”
significantly grow its top and bottom lines.” JULY/AUGUST 2017 7
National Conference & Expo
ATLANTA October 14-15, 2017 | The Westin Buckhead PATHWAYS TO SMART INVESTING There are many strategies for success in RE investing. Deciding which road to take really depends on your goals and unique situation. Fortunately, with Think Realty educational and investment resources, you donâ€™t have to go it alone. Join us for a day of education, networking, and deal making designed for real estate investors, landlords, property managers, wholesalers, note buyers, private lenders, rehabbers, and real estate entrepreneurs. Register and see the speaker lineup at ThinkRealty.com
USE PROMO CODE PL20 FOR 20% OFF!
MEET THE THINK REALTY COACHES! Learn from these pros and hands-on investors who share a passion for helping investors - like you - build wealth, better manage time, and live a life of greater purpose. SONIA BOOKER
$25 Early Bird Admission* | FREE for Think Realty Investor-Level Members Register today at ThinkRealty.com *Admission price increases to $45 on 9/15/17.
8 PRIVATE LENDER
Not a Think Realty Member yet? Sign up today at the Investor Level and receive FREE access to all Think Realty Events nationwide. Learn more at ThinkRealty.com.
Trending industry topics and news from around the world of private lending.
The American Association of Private Lenders (AAPL) is pleased to announce the formation of its new Education Advisory Committee. The committee is comprised of five current members: Corey Dutton, Private Money Utah; Chris Ragland, Noble Capital; Andy Williams, Recon Realty Inc.; Erica LaCentra, RCN Capital; Jeff Levin, Specialty Lending Group; and one ex officio position, Nema Daghbandan, Geraci Law Firm. The Education Advisory Committee will serve as a vital resource, assisting AAPL leadership in the planning, producing and maintaining of comparable and uniform information specific to the private lending industry. It will also develop and establish educational programs and materials useful for members, media and future legislative platforms. Committee members may serve two consecutive, twoyear terms, while keeping an active AAPL membership status. More information about AAPL and its Education Advisory Committee can be found at www.aaplonline.com. “It’s an honor to be joining the AAPL Education Advisory Committee, and I’m committed to bringing my 26 years of lending experience to advance the field,” said Levin. Linda Hyde, Executive Director of AAPL, “We are committed to educating and raising the bar for private lenders and service providers, and are always considering how to make the private lending industry better. The Education Advisory Committee is an important step in that direction.”
PeerStreet’s Vice President of Strategy, Jessica Murray was named one of Housingwire’s 2017 rising stars. Murray made the list of young leaders to watch in the housing industry. HousingWire’s 2017 Rising Stars list recognizes talent that demonstrates leadership and innovation. “Jessica is a rock star who continues to have an outsized impact on our business and the broader industry,” said Brett Crosby, chief operating officer and
New Direction IRA, Inc. (NDIRA) hires Ryan Griffiths as director of investor services. Griffiths is a Certified IRA Services Professional (CISP), contributing his industry expertise to NDIRA. Prior to joining the team, Griffiths co-founded Entrust Gulf Coast. He also held positions as director of business development for The Entrust Group (TEG), director of operations for International Bank and Trust, and became the director of the precious metals division for TEG. “Our client base continues to grow, so onboarding an experienced individual like Mr. Griffiths will help NDIRA continue to meet rising demand in our field,” stated Bill Humphrey, New Direction IRA co-founder and CEO. “I recently joined the team at New Direction IRA with a common goal of providing investors with the education, support, and technology to diversify their retirement plans into alternative assets,” said Griffiths. “After meeting with almost every self-directed IRA provider in our industry, I chose to join the team at New Direction IRA because of the philosophy and culture of their organization, as well as their leadership.”
co-founder of PeerStreet. “She has been instrumental in our company’s growth, especially as we continue to scale our business to empower investors to access this asset class.” “Our Rising Stars are always smart and talented, but one of the things that characterized our winners this year was the sheer scope of what they accomplished for their companies. They drove impressive results, whether they were measured by growth, profit or innovation,” said Sarah Wheeler, magazine
CCG Capital promotes Amin Noorani to the position of director
editor for HousingWire.
of lending. Noorani spent three and a half years as one of CCG’s lending associate. His communication skills, his strong client relationships, and his ability to successfully close loans within specified company parameters made him the ideal candidate for this position. “I have enjoyed being a part of the continued growth and success of this company and look forward to moving into a role that allows me to develop even more opportunities for us to evolve,” said Noorani. JULY/AUGUST 2017 9
10 PRIVATE LENDER
Do You Know Your Market Share? Top strategies to measure value and success by Bobby Montagne
o you know your organization’s local, regional and national market share?
to accurately measure market share. After much research, we thought we may have
Accurate volume data about the private
come up with a reliable method – a method
it’s critical to know the size of your market if
real estate lending market share.
lending market can be hard to come by. Yet
you want to raise capital, measure success or
you can use to benchmark your asset-based Our industry’s uniqueness makes it chal-
ers who freely share loan-level, portfolio-level and industrywide data.
In our industry, deals flow through innumer-
able pipelines created by companies that raise and lend funds in different ways.
grow your business.
lenging to analyze market share. We don’t
Two Ways to Measure the Market
in the Washington, D.C.- Maryland-Virginia
mortgage market, where most deals flow
(TAM), you have two choices: bottom-up and
A desire to better understand our position
metro area (DMV) led us to seek out ways
have the standardization of the traditional through a handful of secondary market play-
To identify the total accessible market
top-down. Whichever you choose, once you’re
JULY/AUGUST 2017 11
finished, it’s important to cross-
check your results with experts.
Boom Up: Fix & Flip
Fix-and-Flip Approach As a bottom-up approach, we
started with the number of flips
reported in ATTOM’s 2016 Year-
End U.S. Home Flipping Report. Culled from the public records
in more than 1,000 counties, the
ATTOM report covers the areas where roughly 81 percent of the
U.S. population resides.
56 billion naonal market
Average Flip Sale
ATTOM counts flips as any
property transaction, where the
property was sold twice within a 12-month period.
Top Down: Housing Units Sold
By expanding the ATTOM
data to represent the entire U.S. population, totaling 296,400
property flips in 2016. That’s 5 to 7
percent of all existing home sales.
For 2016, the median priced
flip sold for $189,900, meaning that the TAM for flipping purchases in 2016 was $56 billion.
5.4 million Existing Home Sales
Flippers Share of Home Sales
58 billion naonal market
Average Sales Price
Housing Units Sold Approach estimate that 5.7 percent of those homes were
calculate total loan volume.
ions do vary when it comes to exact numbers.
a TAM of $58 billion.
percent of 2016 deals nationally. ATTOM’s
How Much of the Fix-and-Flip Market is Financed?
31.5-percent figure comes from counting all cash
To use a top-down approach, we start with
total sales of existing U.S. homes in 2016. Opin-
Here are estimates of annual home sales from
• ATTOM 5.2 million
flipped and the $189,000 sales estimates, we get
Whether we take a top-down or bottom-up
ATTOM estimates flippers financed 31.5
senior vice president, Daren Blomquist says the sales in the mortgage data collected as part of the company’s “deed and recorder” dataset.
Applying that data point to our $56 billion to
• NAR 5.4 million
approach, the final estimates are relatively
• MBA 5.5 million
generally base their loans on after-repair
TAM of between $17 billion and $18 billion.
If we accept the average estimate as 5.4 mil-
into account), we can use that $56 billion to
ers write “cash sale” on a contract to get the
• NAHB 5.5 million
lion homes sold in 2016, then apply ATTOM’s 12 PRIVATE LENDER
close. Since most private money lenders
values (although we certainly take as-is value $58 billion sales figure as a starting point to
$58 billion TAM estimates gives us a financed
However, that number is low. Many borrow-
deal, then arrange some type of alternative -
private money - financing to close.
ment and short-term refinances.
mortgage originations, that equals $9.9 billion
annual and state-level variations in the propor-
Mortgage Debt Origination Approach
2016. A more aggressive estimate of 5 percent
TAM as well.
double-check our estimates - is to consider the
The ATTOM data also shows significant
tion of deals financed, which would influence
Private Lending’s Share How much of the money borrowed to flip
houses comes from private money lenders versus traditional mortgage loans?
Much of this funding could be coming
from our industry. Generally speaking,
private money lenders are more flexible and
move faster than traditional lenders because they are set up to quickly assess the asset backing the loans.
Some banks are relaxing their lending
standards to lend more money to real estate investors. However, private money lenders’ speed, flexibility and market knowledge
enable them to beat out the banks. Especially in markets where property inventory is
shrinking in turn raising competition for the remaining properties.
So far, all the data considered is centered
Another way we can view this challenge - and
flipping portion of the overall annual mortgage origination market. The Mortgage Bankers As-
sociation (MBA)’s Finance Forecast put 2016 total mortgage debt originations at $990 billion.
We asked several experts in the banking and
private lending fields about the percentage
This method gives us a large range, but it
shows $58 billion to $59 billion TAM estimates aren’t too far outside of the ballpark.
How to Calculate Your Regional Market Share Remember, we started this process seeking
of mortgage originations they thought were
received from venture capitalists, crowdfunders
can follow this strategy for funneling those
achieved with private money. Those estimates,
To do the same thing in your market, you
and traditional hard money lenders, ranged
national figures into the local market.
from 0.5 percent to 5 percent.
A selection of factors the sources considered:
1. We began with a few data points:
• Banks have loosened underwriting requirements to accommodate real estate investors.
• Census data: 1.9 percent of the U.S. population lives in the DMV (6 million/320 million)
• The nonprime lending market is re-emerging after dropping off post Dodd-Frank.
• Existing home sales: 1.7 percent of nation’s home sales occurred in the DMV (93,000/5.4 million)
• Bank offerings now include products that compete with private money loans.
also use private money for bridge loans, con-
If we use a conservative estimate that private
struction loans, land acquisition, develop-
puts the TAM at $49.5 billion.
an accurate measure of progress in the DMV.
around fix-and-flips. Although many private
money loans do fund fix-and-flips, borrowers
for the size of the private lending market in
money loans were equal to 1 percent of all
We’ve agreed the number of 2016 flips na-
tionally was 296,400 in 2016.
• 296,400 x 1.7 percent = 5,039 JULY/AUGUST 2017 13
• 296,400 x 1.9 percent = 5,632 We rounded up the number for the DMV to
sidering ATTOM research that shows the rate of flips and the rate of financed flips by ZIP code. Many of the DMV’s ZIPs have a high-
6,000 because we’d rather go high than go low
er-than-average rate of flips (compared to the
ing it look like we’re doing better than we are.
2. To calculate the lending volume gener-
the DMV’s potential TAM to more than $2
and underestimate the size of our market, mak-
U.S.) as well as a higher than average rate of
billion in 2016.
housing in the DMV.
you can determine the TAM for the ZIP codes
•W e used a 1.68 percent multiplier to reflect the ratio of the DMV’s median existing home price to the national median price.
Using U.S. Census, NAR and ATTOM data,
where you lend, or any ZIP code in the country,
helping you plan where to expand your business. The intent isn’t for this to be the last word
on the size and scope of the fix and flip and
private lending industries. Rather, we look at We’ve agreed the cost of each flip nation-
this as the beginning an ongoing conversa-
ally was $189,900. Applying a 1.68 percent
tion about our space.
billion in local TAM.
mined that the most effective methodologies,
multiplier to the 6,000 flips gives us $1.9
You can refine the data even further by con-
14 PRIVATE LENDER
added critical thinking gained from decades
of real world experience in the construction,
flipping and lending industries and drew reasonable, well-supported conclusions. ■
Taking those factors into account pushes
ated by those 6,000 flips, we had to adjust
the data to reflect the relatively high cost of
sources, analyzed and cross-checked that data,
In tackling this challenge, it was deter-
compiled reliable data from a variety of trusted
ABOUT THE AUTHOR Bobby Montagne is the founder of Walnut Street Finance, a leading private lender in the mid-Atlantic. Walnut Street Finance is the sponsor of the Walnut Street Finance Fund II LLC, a $30 million private lending fund offered under SEC Rule 506. It allows investments as low as $50,000 and provides a preferred dividend yield of 9 percent with no fees. The fund sponsor is Walnut Street Finance, a developer and private money lender with more than two decades of experience. The loans in the fund’s portfolio are generally short term – one year or less. All loans are collateralized by the underlying properties, and each borrower provides equity of 15 percent to 25 percent of the property’s value. This article does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security.
ON YOUR CORE BUSINESS and let us handle your accounting. Get virtual accounting solutions for private lenders, mortgage pools, and real estate ﬁrms tailored to your speciﬁc needs. You’ll have accurate and up-to-date ﬁnancial information on demand. Your sensitive data is always conﬁdential and secure.
C a ll R C G Today
www.RollinsConsultingGroupLLC.com or 386-562-3016
JULY/AUGUST 2017 15
16 PRIVATE LENDER
The State(s) of Cannabis How marijuana is changing the real estate investing industry by Judy Chen
he United States is entering into its
seventy-eighth year of cannabis prohibi-
tion. It is a violation of federal law to distribute cannabis throughout any place in the United States. It is estimated the national cannabis
black market generates more than $30 billion
in untaxed and unregulated sales annually. The industry, the federal and state government and the legal system are at a crossroads; one foot of the industry is still firmly planted in the shadows with the other striding toward legitimate
commerce, awaiting a pathway to legal compliance. Voters at the state level, through citizen
sponsored ballot initiatives, have approved the
legal sales of medicinal and/or recreational cannabis. Currently, more than 190 million people,
is currently available in 8 states; Colorado and
Washington were the first two states to legalize cannabis for adult use in 2012. Oregon, Alaska, and the District of Columbia came next, pass-
ing measures to legalize recreational cannabis use in 2014. Most recently, California, Nevada,
Massachusetts, and Maine all passed voter initiatives in the 2016 general elections to legalize
cannabis for adult recreational use. In addition five states; Tennessee, Texas, Utah, Virginia,
and Wisconsin are currently pursuing cannabis legalization legislation. In all, it is anticipated by the end of 2018, more than 80 percent of
States will have decimalized and/or will permit regulated cannabis sales.
State by state new legislation and correspond-
59 percent of the U.S. population have access to
ing systems are being put in place to provide
Americans, 21 percent of the U.S. population,
macy, and for the state, taxation and enforcement.
“legal” medical cannabis. More than 68 million have access to “legal” recreational cannabis.
Sales of legal cannabis has grown to $6.6
billion as of 2016 that includes $4.7 billion for medical and $1.9 billion for recreational. The
industry as a whole is projected to exceed $20 billion in taxed and regulated sales by 2021.
Medical cannabis is legal in 29 states; Alaska,
Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois,
Maine, Maryland, Massachusetts, Michigan,
Minnesota, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North
Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, Washington,
D.C., West Virginia, Puerto Rico and Guam. Recreational cannabis, which is cannabis
consumed without a doctor’s recommendation,
cannabis industry operators a pathway to legitiThe previous administration issued the Cole
Memorandum in 2013, in which it offers guidance to federal prosecutors and law enforcement
agencies on where to, and not to, focus its efforts.
The document allowed states to develop markets with minimal federal oversight or interference. Before the issuance of the Cole memorandum, recreational cannabis use was not permitted
anywhere within the United States. Furthermore, Congress has for the third consecutive
year passed the Rohrabacher-Farr amendment,
a fiscal amendment to prohibit the use of federal funds by the federal government to prevent any state from implementing their own laws that
authorize the use, distribution, possessions or
cultivation of medical cannabis. Although there
are numerous (approximately 60) proposed bills JULY/AUGUST 2017 17
and documents offering similar protections for
toward taxation and regulating the use and pro-
new tax revenues through heavy enforce-
recreational cannabis sales and use, currently
vide compliant cannabis business operators lim-
ment and major disruption of black market
industry from interference from the Department
prosecution. States have moved to generate tax
National black-market operators, which
there is no federal mechanism which protects the of Justice or other federal enforcement agencies.
The current administrations intentions in regard to cannabis use still remain unclear, but what
ited immunity from federal enforcement agency
revenues, versus enforcement expenditures, over the cannabis black market.
State regulations rely heavily on land use and
has been made clear is the citizens and the states
zoning ordinances to maintain control over pro-
recent Quinnipiac polls, more than 71 percent
As with other sensitive use industries, the states
desire to regulate cannabis use. According to
of Americans are in favor of legalized medical
cannabis sales, and more than 55 percent are in favor for legal recreational sales.
Taxation, regulation, and en-
forcement is the new mantra in regards to cannabis use and sales at the
state level. America has been in an of-
liferation and to address public safety concerns. are using real estate as the cornerstone of the
legitimization process. In order to be compliant with the states regulations and successfully
obtain and maintain licenses and permits, first and foremost the real estate must
be compliant with
state and local city
ficial â€œwar against
sales in Colorado
drugsâ€? since the
istration, and the federal govern-
ment has mostly put the financial
burden of that campaign
onto the states. Within the
of all cannabis
occurred in 2012,
has seen over 30
percent of all industrial real estate being
used to cultivate cannabis for
operators, primarily targeting cultivators.
garner a $30 billion market and represent billions in untapped tax revenues, will be
forced to move toward compliance and regulation or be forced out of business or prison. Cannabis regulation is a story of conversation from black market to regulation, and
not one of creating an entirely new industry. Best in class market operators with existing legitimate distribution channels, medical
sales, regulation represents an opportunity to participate in the mainstreaming of cannabis sales and consumption. The vast majority
of black market operators cannot afford to
purchase their own real estate, particularly in high value markets such as California,
as they do not have access to leverage. This conversion from black market to regulated market will be the single largest opportunity industrial real estate has seen since
the e-commerce expansion. The cannabis
industry represents tremendous opportunity
to real estate holding and leasing companies,
in the tune of hundreds of millions of dollars of leasing incomes spread out over tens of
marily transferred to an already overburdened
market rate rents. As of 2016, Colorado cannabis
millions of square feet of real estate throughout the United States. â–
Coming out of the major worldwide recession
resenting nearly 4.2 million square feet in can-
ABOUT THE AUTHOR
cost burden of enforcement and jailing for an
alone. When taking into account more than 34
Judy Chen is the CMO of IndoGro Properties, a cannabis real estate holding company. She has a real estate background in luxury hospitality with a focus on hotels, food and beverage, nightlife and private members clubs. In the past, she has held the position of Director of Design and Development for Thompson Hotels in NYC and Petit Ermitage in Los Angeles among others. She most recently had her own independent hospitality consulting firm. Judy holds a BS in architecture design from the University of Virginia and a MS in real estate development from New York University.
states, the burden has been pri-
local city law enforcement and prison systems.
of 2008, most cities could no longer handle the activity most constituents through voter initia-
tives were pushing to legalize. Rather than wait for politicians to make change, citizen groups
across the country took a grass roots approach to end spending on a widely viewed as failing
campaign originating from 1939. With little way
in terms of legal recourse from the newly minted laws, most states have pivoted and have moved 18 PRIVATE LENDER
legal sales at two to three times the
sales topped $1.2 billion in gross revenues, rep-
nabis cultivation space within Denver County
states representing more than 200 million peo-
ple and more than $20 billion in annual sales by 2021, the industry on a national level will absorb tens of millions of square feet of real estate at above market rents and sales prices.
Upon the states completion of the infra-
structure to its pathway to compliance via a licensing process, the states will protect its
JULY/AUGUST 2017 19
The State of Private Lending in Canada An inside look at how our Northern neighbors are lending funds by Harry Singh
he global financial crisis of 2008/2009 brought about tremendous change in
businesses to borrow at low rates in order to invest, creating more jobs and momentum
the world insofar as the banking and financial
for their respective economies. Canadian
omies around the world struggled, the global
and sought to achieve the same desired effect.
interest rates as low as possible. This allowed
recession, Canada fared generally better and
services sectors were concerned. As most econ-
monetary policy reflected the same sentiment
monetary policy response was to maintain
While the rest of the world dealt with a deep
20 PRIVATE LENDER
recovered a lot sooner. With the cost of bor-
rowing at historical lows, Canadian consumer debt levels have been hovering well over $150 for every $100 an average Canadian makes in income. This metric has been closely moni-
tored by policymakers over the last 10 years.
The easiest solution to putting the brakes on
high levels of consumer borrowing would be to
financial institution at favorable interest rate,
pooled money with like-minded investors.
al economy struggling to recover and the slow
ing an alternative lender who may have more
mortgage market has been very insignificant,
largest trade partner, raising the interest rates
For example, a business for self-borrower
raise the interest rates. However, with the globpace of recovery in the United States, Canadaâ€™s
found themselves in the position of approach-
flexibility in what it will view as income.
could put the Canadian economy at risk of
will have to provide two years tax returns to
The Minister of Finance, in conjunction
traditional lender to get the best rate, which
falling back into a recession.
with the Bank of Canada, chose to deal with
the rising levels of consumer debts by tightening the availability of credit. The Government of Canada, through its regulator, the Office
of Superintendent of Financial Institutions
(OSFI), mandated federally regulated financial institutions such as banks, trust and, default, insurance company to tighten their lending criteria with a view to slowing down the
availability of credit to residential borrowers.
The domino effect of such tightening has given the alternative mortgage market in Canada a tremendous boost over the last eight years. Canadaâ€™s alternative mortgage market is
comprised of two categories of lenders: institutional alternative lenders and private lenders. Institutional alternative lenders are generally trust companies or banks that raise capital
by selling guaranteed investment certificates
(GICs) that pay slightly more than the compe-
establish track record and net income to a
would average around 2.49 percent. For better or worse, most business for self-borrowers
is guided by their accountants to minimize
their taxable income by writing off business
expenses. This practice of minimizing income taxes has the unfortunate consequence of the prospective business for self-borrower not
being able to qualify at a traditional lender that would insist on taxable income and make very few concessions. An institutional alterna-
tive lender on the other hand would look at
cashflow to establish income which would be favorable to a profitable business. The cost of
lenders over to institutional alternative lenders. However, the institutional alternative lenders are also regulated by OSFI and have in turn
been advised to clamp down on their lending
a guaranteed rate of return over a fixed period
to the second category of alternative lenders in
of time at a relatively low risk level. Alternative
Canada, namely private lenders.
categories: business for self, new immigrants,
ries: Mortgage Investment Corporations and
ally an alternative mortgage portfolio would
ment Corporations or MICs raise capital from
introduced regulations, namely B-20 and B-21,
to tighten the availability of credit in the mortgage market, many borrowers who previously
would have qualified with a traditional bank or
experienced significant growth, but the market has been dominated by two major players:
Home Trust and Equitable Bank, with Home
Trust being the market leader. Unfortunately,
Home Trust recently has come under scrutiny with the regulators and investor confidence
has been shaken. Both institutional alternative players have noticed a run on their deposits
and have worked in restoring investor confidence. In the interim, MICs and private lenders have experienced tremendous increase in ac-
tivity at the expense of institutional alternative
players intentionally slowing down to build up their balance sheets.
Fundamentally, the two major institutional
to values, reserves, geographic distributions
that they previously would have funded over
followed by the other three categories. As OSFI
market. Institutional alternative lenders have
shifted significant business from traditional
higher. The result of tightening credit has
The Canadian GIC is an investment offering
carry primarily credit challenged borrowers
level of activity in the alternative mortgage
alternative lenders have managed their books
guidelines essentially kicking out business
investors and credit challenged. Tradition-
these changes have significantly increased the
borrowing of course, would be 1 to 2 percent
tition and in turn lend to alternative borrowers.
borrowers typically fall into one of the four
While traditionally the size of the private
Private lenders are organized in two catego-
individual private lenders. Mortgage Invest-
investors who desire consistent high returns on their investments and lend to borrowers who
fall outside the rigid/set guidelines of tradition-
al and institutional alternative lenders. Individual private lenders on the other hand lend to
the same segment but lend their own money or
judiciously. Their fundamentals, average loan and impaired loan reserves, have been very prudently managed. Thus, it is a matter of
time before both institutions regain investor
confidence. However, the broader regulations that went into effect to slow down the level of borrowing to cool down the housing and the
related mortgage markets are here to stay. As a
result, alternative (private) lending will continue to flourish in Canada. â–
ABOUT THE AUTHOR Harry Singh is the Founder and Editorin-Chief of Private Matters Today, the leading magazine for Canadian mortgage professionals in the private lending and investing arena. Harry is also the president and CEO of Indigoblue Mortgage Investment Corporation. For more information, contact firstname.lastname@example.org.
JULY/AUGUST 2017 21
In May 2017, Dave Ramsey responded to a question from a USA Today reader who asked, “What do you think of the idea of crowdfunding as a way to invest in real estate?” Dave responded by saying, “I’ve got a bunch of real estate, and I love it. But I wouldn’t go the crowdfunding route as a way to get started in real estate investing. I wouldn’t give someone money to buy real estate in a crowdfunding scenario, either.” Private Lender by AAPL asked crowdfunding professionals as well as other real estate investors, “What do you think of Dave’s advice?” Here is what they said…
Investing in real estate via crowdfunding is mainly appealing to those who are seeking passive access to pre-vetted investment opportunities and want to get their feet wet at low minimum investments of $5,000. Sites like InstaLend can serve as a great avenue for getting access to short-term cash-flowing investments that are secured by real estate. Sohin Shah, InstaLend
I think Dave is a smart guy. Based on that comment, I just don’t think he fully understands real estate crowdfunding. He’s also a bit biased as he doesn’t believe in debt, even if used as leverage for investment purposes. Douglas J. Cochrane, Arixa Capital Advisors
He’s out of touch. Dinosaurs become extinct. Susan Lassiter-Lyons
Not all tech-enabled real estate platforms are created equal, Dave. Would love to tell you about the unique opportunity that PeerStreet provides to access the private lending world. Brew Johnson, PeerStreet
THE HISTORY OF CROWDFUNDING
1700s: 22 PRIVATE LENDER
THE IRISH FUND LOAN This fund provided loans to low-income families in rural areas who had no experience with credit, held little collateral — but still considered creditworthy.
Strong returns of 8%-12% (or even better) in as little as 12 months, Certainly, experienced real estate investors, or even new investors who have a lot of time to identify opportunities, do the research, conduct on-site visits, and structure legal documents can have a lot of success managing and building their own real estate portfolios. However, real estate crowdfunding has attracted thousands of people who don’t have the time or knowledge, and who never invested in real estate before. The capital raised from these investors has helped hundreds of real estate professionals achieve success with their projects, creating a more diverse ecosystem (or marketplace) of real estate investing and development. In addition, sophisticated and institutional groups like family offices, hedge funds, and university endowments are investing in real estate through these platforms to access additional deals and increase their diversification and invest their capital. Of course, as with all investments, there are risks and that starts with the investment platforms themselves, so we’d urge all investors to do their homework before opening an account anywhere.
Ray Sturm, AlphaFlow
often with a minimum investment of only $5,000 makes crowdfunding a really attractive alternative for investors looking to get into real estate without the expense or challenges of managing a flip. Although real estate crowdfunding can be safer than other types of investments since there is an underlying physical asset, it is still an investment in real estate- which always involves a degree of risk. Robert Greenberg, Patch of Land
Well I think it depends on the deal. Honestly. If you have a $12,000,000 apartment complex and you’re looking to raise that money from a pool of investors and the average person can give $250,000 then you just slice the pie to give everyone their fair share of equity. It lowers risk and creates long lasting business relationships. Steven Lee O’Neill
For investors that are looking to get started in real estate, there is no easier way than crowdfunding - low minimums, diversified access to deals nationally and all from the convenience of a laptop or tablet. Skeptics are inevitable. The industry is still nascent and has a lot to prove. I’m excited RealtyShares gets to be at the forefront of defining a new category in online investing. Nav Athwal, RealtyShares
The real estate investment marketplace via crowdfunding has allowed for the democratization of the real estate industry. Individuals and corporations are able to invest in substantiated projects that on average yield a high return and have lower risk. This benefits both the investors and the broader industry as more investors are able to access deals that would otherwise be inaccessible to them.
Allen Shayanfekr, Sharestates
FUNDING EXPANSION IN IRELAND After the success of the Irish Fund Loan, more than 300 programs throughout Ireland were loaning and it was estimated that at it’s peak 20% of all households used the program. JULY/AUGUST 2017 23
Sell your loans to PeerStreet quickly and efficiently PeerStreet provides unprecedented liquidity to the private lending industry. We are a platform for purchasing first-lien residential and commercial real estate backed loans.
PeerStreet can be your capital and technology partner Here are just some of the benefits of working with PeerStreet: • Free up capital so you can originate more loans • Reduce your overall cost of capital • Take the hassle out of working with multiple counterparties • Benefit from access to PeerStreet’s diversified investor base • Maintain borrower relationships • Gain a partner, not a competitor
This notice is issued with and forms an integral part of information supplied in the form of a printed document (“Information”) and should be particularly noted in connection with that Information. This document has been prepared by Peer Street, Inc. (“PeerStreet”) for informational purposes only and without regard to the particular needs of any specific recipient. All Information is indicative only and may be amended, superseded or replaced by subsequent summaries and should not be considered as any advice whatsoever, including without limitation, investment, legal, business, tax or other advice by PeerStreet. Any such advice should be sought from an appropriately qualified and/or authorized professional. PeerStreet does not guarantee the accuracy or completeness of the Information which is stated to have been obtained from or is based upon trade and statistical services or other third party sources. All opinions and estimates are given as of the date hereof and are subject to change without notice. The Information is not intended to predict actual results and no assurances are given with respect thereto. The Information is not an invitation, offer or inducement to acquire or dispose of, or deal in, any interest in security, or to engage in any investment activity. Strategies or investments of the type described herein involve risk and the value of such strategies or investments may be volatile. Such risks include, without limitation, risk of adverse or unanticipated market developments, risk of counterparty or issuer default, risk of adverse events involving any
PeerStreet’s Lender Platform
Please contact us to learn more about PeerStreet: Lender Onboarding Team email@example.com
(844) 733-7787 x707
underlying reference obligation or entity and risk of illiquidity. This brief statement does not disclose all the risks and other significant aspects in connection with transactions of the type described herein.
24 PRIVATE LENDER
CROWDFUNDING: BY THE NUMBERS Real estate crowdfunding set to be
TOP CROWDFUNDING PLATFORMS AND THEIR FOCUS:
industry in 2017.
Source: https:// crowdfundbeat. com/2014/11/03/realtycrowdfunding-exponentialgrowth-numbers-dont-lie/
1) Clearly define you r ideas, goa ls and mis sion 2) Choose the right d igital platform 3) Develo p your cam paign 4) Offer m ultiple fun ding amounts 5) Offer d ifferent re wards for differe nt funding levels 6) Manage your frequent u page with pdates
MODES OF CROWDFUNDING:
RealtyMogul Commercial & Residential RealtyShares
P2P Lending $
Reward & Donation $
Cash-flowing Commercial & Residential
Is crowdfunding right for your small business? 1) Do you have a marketable project or produce others arenâ€™t offering? 2) Do you have a large number of backers -- friends, family, local community, existing online followers -- who are willing to drum up support for you. These people are your funders, but they are also your promoters.
digital RE lending platforms in the world, with 70% operating out of the United States. Source: http://timesrealtynews.com/resources/global-list-of-real-estate-crowdfunding-sites/
THE HISTORY OF CROWDFUNDING
THE BIRTH OF CREDIT UNIONS The first modern credit unions are attributed to Franz Hermann Shulze-Delitzsch, who established the first one in 1852 in Eilenburg, Germany. JULY/AUGUST 2017 25
An Introduction to Online Real Estate Investors: Who are they and what do they want? by Adapia d’Errico
he private lending industry has benefit-
ed from several years of growth in bridge
Having launched a real estate crowdfunding
financing with fix-and-flip, purchase, refi, and,
platform in 2014, I realize that what I consider
While this growth has brought significant
acquiring clients is not the way it is done in
more recently, single-family rental financing.
institutional capital off the sidelines, another
standard regarding targeting an audience and
private lending. For example, online communi-
group of early-adopter investors had already
ty development, social media, brand activation
money lending and investing through online
that form the backbone of reaching people
been making an alternative play in private real estate crowdfunding platforms.
A traditionally private industry, as the name
implies, private lenders and capital invest-
ment companies could not historically rely on
general solicitation and advertising due to pri-
and digital marketing—these are the elements who interact online, whether they are digital natives or baby boomers. We are all part of
the “connected generation,” and we all use the
internet to inform hundreds of daily decisions. Beyond the user/client acquisition phase,
vate placement rules dictated by the Securi-
there are far deeper criteria for engaging with
Regulation D, Rule 506(b). Then, real estate
real estate online. One must understand online
ties and Exchange Commission (SEC) through crowdfunding came along and flipped the
industry on its head. Crowdfunders leveraged Rule 506(c) and took a decidedly different
approach to acquiring investors than industry players had in the past. They created a user
experience akin to e-commerce purchases and
applied visual merchandising to present deals. Then, they simplified the process of obtaining investment information - and documenta-
tion - making it entirely digital, mobile, and
people who may be interested in investing in versus offline behaviors, expectations, and
requirements of a potential client. Decoding
the potential investor’s mindset, which may be
fraught with well-founded and well-researched concerns, solving for UX (user experience) and CX (customer experience) pain points, and
earning trust with a website and strategic content are elements used by the most successful online real estate investment companies.
The number of people investing online and in-
cluding real estate as part of their investment mix is growing. In the recently published 2017 The
Americas Alternative Finance Industry Report, research shows that Real Estate Crowdfunding
(RECF) increased by 70 percent to $821.0 million in 2016 from the $483.8 million in 2015. Over the three-year period, RECF saw an average annual
THE HISTORY OF CROWDFUNDING
1976: 26 PRIVATE LENDER
THE YUNUS PROJECT Dr. Mohammad Yunus loaned $27 to 42 women as part of a research project to give banking opportunities to low-income people evolved.
growth rate of 160 percent, and it accounted for 2.3 percent of the total market in 2016.
The naysayers have been proven wrong.
Why are investors interested in online real estate opportunities?
For most private investors, real estate
crowdfunding platforms offered the first op-
portunities for many people to invest directly
co-founded by AlphaFlowâ€™s CEO, Ray Sturm,
a six-figure check. Prior to crowdfunding,
as $5,000 in great projects from all over the
in real estate as an asset class without writing relatively few people truly had access to real
estate investments, particularly if they did not want to make it a full-time job. Platforms like Patch of Land and RealtyShares, which was
changed all that by letting people invest as little country. AlphaFlow itself purchases loans from private money lenders and online origination platforms to build personalized portfolios for
private investors. Below are some insights from
THE GRAMEEN BANK In just 5 years, Yunusâ€™ simple project turned into a program boosting more than 30,000 members. The success of this project led to the creation of Grameen Bank, which has now lent to more than eight million borrowers. JULY/AUGUST 2017 27
our experience and our growing clientele:
Q: What are the online investors’ preferred investment duration and rate?
Q: What are the some of the most common investor concerns?
New investors—and that may mean investors
Many private investors are venturing into
real estate investing for the first time. Their biggest concerns typically revolve around
understanding investment risk and possibly feeling overwhelmed by the complexity of investing in certain real estate structures.
When deals get too complicated, with mul-
tiple types of equity and complex rules and
tax situations to map out how they get paid,
new investors tend to pull back and wait for a simpler deal. It is one of the reasons first-lien debt on residential real estate has worked so
well. The deals with clear value propositions, transparent risks and easily understandable timelines and return calculations tend to fund most quickly.
Q: What makes investors uncomfortable? Investors will also have a healthy dose of
skepticism about investing in real estate if
they have never done it before. There is also negative nostalgia around real estate due to the housing crisis and both the real effects felt by so many people and the effects that
media has added to the national psyche, most recently with the films, ”The Big Short” and
new to real estate investing or new to an invest-
ment platform—typically look for investments with a 12 to 18-month duration. Once they
make a few of those investments and see their
payments arriving on time, they have a positive
experience and begin to think longer term. They may be happy with their returns but not neces-
sarily interested in repeatedly finding new deals
in which to invest because of the burden of time required to do thorough due diligence on each project, and on multiple sites.
and incur defaults or losses if you have a
diversified portfolio to minimize the impact of
any single problem investment. Diversification
includes a mix of different types of investments within each asset class of your portfolio and a solid mix of asset classes. In online real estate investing this includes diversification across platforms, borrowers and geographies.
Q: What are the demographics and experience levels of online real estate investors? In the early days when crowdfunding
platforms first emerged, a high percentage
of customers were experienced real estate
This nascent space commands a
investors. They viewed the platforms
considerable risk premium from
as another avenue to access
private investors, and in the first
few years of crowdfunding,
in attractive MSAs far from
many deals (debt or equity) paying less than 9 percent
where they lived or typically
the last few years has taught
knew how to evaluate op-
did business. Because they
would languish. However,
portunities and projects, they
many investors that projected
could make investment decisions
returns are not necessarily going
to match actual returns every time,
particularly with risky equity deals. The result
is a shift by investors to include first-lien debt in
their portfolios in addition to better understanding the risk-return profile, especially as it relates to LTVs, judicial versus non-judicial states, and
using the information provided by
the platforms, and to further diversify their
investments geographically, without the need to make a trip to the property location.
In addition to this group, we have iden-
tified two other groups who are regular in-
local market factors.
vestors. The first group is made up of highly
Building trust with a potential client is the
Q: Are investors’ risk/reward expectations reasonable?
and engineers who meet the significant
or any company raising capital.
tors is that you can be a successful investor
”99 Homes.” Also, there is discomfort around investing with a new, unknown company.
primary prerogative of an investment manager
A philosophy shared by experienced inves-
educated professionals like doctors, lawyers, income required by SEC regulations but lack
time to make these investments on their own. This group is attracted to a passive income
THE HISTORY OF CROWDFUNDING
1997: 28 PRIVATE LENDER
MARILLION Unable to afford to travel overseas to perform, the British rock band Marillion raised $60,000 in online donations from fans to finance their U.S. tour.
and an easy way to access investments,
without a significant commitment of time or expert knowledge.
The second group is made up of successful
nication and what does an investor expect from it? Clear and honest communication is critical
to building long-term relationships with inves-
small-business owners who, like many real
tors. It is especially important when commu-
out with their own small, local business and
of loan interest and principal, including delays
net worth has increased substantially. This
proceedings. One of the reasons more investors
tangible nature of real estate.
platforms have made it easy and accessible for
Q: Do investors need to speak to someone at the platform? Are they happy to invest online with no interaction?
needing to go on-site to see it in person, or
estate business owners, may have started
nicating the progress of a project, repayment
grown that over the years, and with it, their
in payments, extensions and foreclosure
group understands and is attracted to the
are adopting online investing is that these
Many investors are happy to work with plat-
forms electronically, but they often want to kick off the relationship with a conversation. Investors, both those who are unfamiliar with real
estate investing and those who have been doing it for years, have many questions and want
to speak to ‘real’ people. They are prudent,
sometimes skeptical, and very smart. They are vetting the professionalism, experience and
expertise of the company, whether they speak
to a founder, a VP or a client services employee. While a seamless experience, engaging online presentation, and thorough project information are vital elements to success, investors
generally seek to vet the people behind the
platform to build a level of comfort and trust before investing their money no matter how
investors to ‘see’ and evaluate a deal without meet the borrower or sponsor. The investor
trusts the platform and the deal that is being presented for investment. However, the plat-
form is also responsible for maintaining con-
sistent and transparent communication about the returns ‘promised’ to the investor by way
of regular updates, especially when returns do not match stated or expected payments.
If an investor does not receive those up-
dates, or cannot easily obtain progress reports, accurate payment calculations, or is unable
to reach someone at the company, their worst fears kick in. Any miscommunication, misinformation or lack of communication creates
a situation in which investors cannot wait to
get their money back and invest it elsewhere. Given the cost of acquiring customers in the space, that is an expensive mistake.
attractive an investment may be on the surface.
Q: What percentage of investors are completely new to real estate investing – online or traditional?
Q: How important is investor commu-
Today, we estimate that about 70 percent of
customers have never invested in real estate
before working with AlphaFlow or another real estate platforms. Also, as we have seen from
the research mentioned above, the figures for
dollars invested and participants in crowdfund-
ing is growing, but the industry still has not
penetrated beyond a relatively small number of
early adopters. There is still a large opportunity for reaching the individual investor at scale. Growth in online platforms has opened
private lending and investing to a broader
audience. Today, most investors doing real estate investing online would not have found their way to a private lender or private capital company. Understanding the nature of online
behavior, and investor requirements and
expectations is a key factor in converting
interest into investment. However, we cannot discount the importance of active rela-
tionship management both in earning an
investor’s trust, as well as building long-term
relationships based on fundamental business practices and communication. ■ ABOUT THE AUTHOR AdaPia d’Errico is a passionate and visionary executive with extensive experience across countries, cultures and both established and entrepreneurial business environments. She is experienced in growing companies, launching brands and building online communities that generate demand and awareness. AdaPia is COO at AlphaFlow, the first automated portfolio service for real estate investments. Prior to AlphaFlow she was Chief Marketing Officer at real estate crowdfunding platform Patch of La and co-founded two woman-owned businesses in the new media industry. AdaPia is a coach and mentor, author and speaker on topics such as entrepreneurship, crowdfunding, and brand and marketing.
JUSTGIVING was founded to provide online tools and processing services to enable the collection of charitable donations. Many copycats and niche crowdfunding platforms would soon follow! JULY/AUGUST 2017 29
The King of D.C. Real Estate: Sherman Ragland The future of crowdfunding in real estate investing by Kaitlin Brennan with Carmen Fields
f you’re even the slightest bit active in any
day, Ragland got the call from Rouse’s
heard the name Sherman Ragland. After all,
“Mr. Rouse pulled out all the stops,
national REIA groups, then you’ve probably
assistant, asking to schedule a meeting.
this multiple award-winning real estate inves-
having me meet with all of his senior
years, and Ragland is showing no signs of re-
of a half day of meetings, he brings me
soon. In fact, Ragland is only expanding his
his real estate development company.
(on my own) was a two-bedroom bungalow in
days before I had submitted my application for
and sold it later for $112,000,” said Ragland.
how he got his start in the industry, tips for
University of Pennsylvania (Wharton). I walked
other people money,” Ragland is quick to
estate investment and private lending is going
real estate game, and nothing else.”
what he calls “High Profile Projects.” Instead of
A life-changing phone call
Initial real estate investments and tips for first-time lenders and investors
flashy sales with impressive partnerships,
tor-lender has been in the industry for over 32
executives, said Ragland. “At the end
linquishing his D.C. Real Estate crown anytime
into his office and offers me a job in
empire with plans to execute his new crowd-
Ultimately, I turned him down, only because
Capitol Heights, Maryland. I paid $24,000 cash
Private Lender spoke with Ragland about
the MBA (Master of Business) program at the
Because of years of experience in “making
lenders and where he thinks the future of real
into Wharton knowing I wanted to get into the
(hint: it’s crowdfunding!).
Ragland’s career in the REI business began
with a simple phone call that “changed his
life.” While working a summer internship in
Baltimore, Maryland with IBM, Ragland sold an entry level typewriter to the most famous
real estate developers of his day, James Rouse,
the creator of Harbor Place. The sale must have made a strong impression on the commercial
property developer mogul because the following
Post-graduation, Ragland secured finance and
then management roles with local real estate
development firms in the D.C.-region., it wasn’t until his assisting the D.C. government make
$100 million off one transaction that Ragland
decided it was time for a shift in his career focus. “Interesting enough, after several years of
watching others get rich from my effort, I decid-
ed to start investing on my own. My first deal
suggest that lenders shouldn’t get caught up in focusing one’s entire energy and attention on
The real estate industry in general, and real
estate lending specifically, is prone to wide
fluctuations in market value. All investors and
lenders need something to fall back on when a
deal goes differently than expected or planned. You will make mistakes,” Ragland said, “and plenty of them, if you’re doing your job!”
“The number one thing Mr. Rouse taught
me was that you learn this business by doing
it!” says Ragland. “By definition, this means you
THE HISTORY OF CROWDFUNDING
KIVA.ORG became the first
microlending website to connect lenders with low-income/ underserved entrepreneurs and students. 30 PRIVATE LENDER
PROSPER was the first peer-to-
peer lending site in the U.S. This was the first time this particular type of loan existed outside of developing economies.
will make mistakes. You can minimize them
investors are finding and the way lenders
having a mentor you actually listen to, but in
serious trouble. The need to understand how
by being a part of a Mastermind Group or by the end, you can not completely avoid mistakes
are funding clients can get some people into to put together a good deal is more import-
use to be only available to the most sophisticated real estate investors,” says Ragland.
With Ragland’s emphasis on the growing
importance of crowdfunding, it shouldn’t
if you plan on being this business.”
ant now, than ever, which is why Ragland is
come as a surprise that this D.C. real estate
The current climate of real estate investing and lending and where the business is headed
estate investor education. While social media
Ragland believes it’s the explosion of digital
ketplace. Many Hard Money Lenders (HML) will
others that have really made an impact on the
most traditional lenders will not fund the kinds
In the post-recession era, the real estate
investing and lending industry has grown at
astonishing rates. Ragland credits this not only to the economy improving dramatically, but
also to the vast digital resources that were once
unavailable to lenders and individual investors. “Real estate has become more sophisticated
in terms of the technology that is now avail-
able. I remember when the MLS (Multiple Listing Service) consisted of printed out computer pages that were placed into books, like phone books,” said Ragland. “Today, I have as much
power as a room full of computers had, when
I was first getting started, on my iPhone, and I can pull up data for free that use to cost thousands of dollars and take weeks to compile.” “For years, it was standard that real estate
agents charged a 6 percent real estate commission to buy/sell a house. Today, we are seeing
listing commissions crumble to 1 percent, or less. This is made possible through technology and
more importantly, a new generation of lenders and investors who are creating new business
models at a rapid pace that fully embraces the use of these technologies,” said Ragland.
This dramatic, digital change in the way
so passionate about the need for local real
has changed the game in terms of marketing, platforms like Zillow, Redfin, Hoozip and current industry climate.
A new crowdfunding platform and the future of real estate investing His emphasis on education, whether it’s
through local REIA groups or other avenues, is how Ragland would argue how someone creates sustainable wealth in the industry.
“Wealth is created in real estate through
long-term ownership. Yes, you can make ‘quick cash’ to pay bills and put food on the table, but eventually, you need to turn your real estate
investing skills into skills that allow you to buy
right and hold for the long term,” says Ragland. While digital technology has permanent-
ly changed the real estate investor-lender
game, Ragland says the final missing piece on how investors will get deals done in the future is crowdfunding.
“Crowdfunding is a strategy that every investor
new or seasoned to raising money must know.
Folks come to me if they are interested in learning how they can raise as much as $5 million in a
single day, using this little-known technique that
THE TERM “CROWDFUNDING” IS DEFINED Michael Sullivan
is credited with the first recorded use of the term ‘Crowdfunding’ in fundavlog in August 2006.
king is working on his very own digital
“Fundamentally, we saw a need in the mar-
not let investors fix and rent their properties, and of beat up properties that can be turned into
outstanding rentals. We are using crowdfunding
in the D.C. Region to close this gap. by being able to have our own source of local capital, we can
help our members get into really great properties and keep them for the long run. Keeping prop-
erties for the long run is how real wealth in this business is created,” said Ragland.
With the growing number of digital plat-
forms, it’s clear crowdfunding and Ragland’s
reign over the D.C. real estate scene is not only here to stay, but here to grow. ■ ABOUT THE AUTHOR Kaitlin Brennan is a social media and digital content manager for Rivet: a small marketing, design and development studio based in the River Market area of Kansas City. Brennan has been freelancing in the Kansas City area for over five years, focusing on digital content creation, SEO strategy and data-driven marketing campaigns. She’s been active in the local startup community and has worked for companies at the Sprint Accelerator, Think Big and the Kansas City Startup Village. She earned a BA degree in English from the University of Kansas and lives with three cats: Tom Riddle, Bellatrix and Ramses.
KICKSTARTER is launched in Brooklyn with the mission of helping bring creative projects to life.
JULY/AUGUST 2017 31
What Crowdfunding Can Teach Us About Corporate Social Responsibility The beneficial effects on company culture and business models by Allen Shayanfekr
here are few things that can truly influence and touch almost every facet of a business
and its stakeholders. There are even fewer aspects that have the power to change the mission and reputation of an established enterprise or new
startup company. Corporate social responsibility (CSR) is one of those factors, a phenomenon
impacting every industry from technology to business and entertainment to advertising.
CSR encompasses initiatives made by a company to evaluate and contribute to development
by delivering economic, social and environmental benefits. As a CEO, corporate social responsibility means taking accountability and providing beneficial programs for every stakeholder whether that be an employee or an investor.
Like CSR, crowdfunding works to bring vari-
ous stakeholders together for a mutually admired
cause. In its most basic form, crowdfunding
allows for donations from a large group of people to a project or cause via various platforms.
Crowdfunding has emerged as an alternative
form of financing that collects funds from the
â€˜crowdâ€™ and channels them into various social causes or business projects.
Businesses looking to excel in CSR may
be doing so for a variety of reasons and can
THE HISTORY OF CROWDFUNDING
STARTUP AMERICA PARTNERSHIP Former President Obama called on both the federal government and the private sector to dramatically increase the prevalence and success of entrepreneurs across the country. 32 PRIVATE LENDER
work to implement a similar strategy. As such,
serve. Now the brands you love are being chal-
millennial consumer, has played a large role in
life and community, whether that be raising
and create better CSR programs. Companies
crowdfunding can help a company increase
lenged to be more involved in the consumer’s
ment, and build communication channels.
money for a local hospital or offering their
available funding, raise awareness and engageCompanies can also take a lesson from the
values behind why crowdfunding is such a
employees college tuition while they work.
Crowdfunding, the act of financing a project
success:it unites an incredibly diverse spectrum
through small contributions from many
the opportunity to make an impact.
deavor that only takes place through computer
of individuals over a common cause creating
The Rise of Corporate Social Responsibility CSR originally came to be when a compa-
ny was facing reputational damage or amid a crisis. Giving back to the community or
a charity somehow made up for the faults
or stumbles the company was facing. CSR
was an optimal damage control tactic, and
was used to mend bridges with a company’s audience and their consumers.
CSR in business has evolved with the
marketplace. With an increasing number of
companies implementing CSR programs as a
permanent component to their business model, consumers have come to expect formal CSR from the brands they are loyal to. This is made
opened an infinite number of doors for both the
should be seen as a tool to bring together
platforms we use every day are making it easier
this is not the case. Instead, crowdfunding
different people and communities with similar interests and passions. Whether is it financing a local business or the sequel to your favorite
movie that never got picked up; crowdfunding extends to and encompasses every industry.
The New Consumer The millennial consumer is the most complex
yet, demanding qualities in companies that have never been asked of before, such as connecting with brands and an increased focus on CSR.
Holding the highest percentage of purchasing power, Millennials have corporations at their
beck-and-call, adapting to each desire to earn fa-
popular topic due to the new consumer want-
With ever-evolving technology and a society
products and services. Consumers now want
our relationships can seem small, distant and
isolated. The combination of CSR and crowdfunding are doing their part to bridge the gap
between companies and the communities they
the local activity center or hospital.
transactions within the digital space. However,
other research and analytical firms.
separated by computer screens, the world and
maternity for their employees to giving back to
The Gains of Giving Back
vor with the generation that changed everything.
Living in the digital age can be difficult.
are implementing any and everything from pet
people, may seem like a distant and lonely en-
evident from yearly consumer trust surveys
conducted first by Edelman and recreated by
pushing companies to challenge themselves
Over the last decade, CSR has become a
The internet and new technologies have
crowdfunding industry and CSR programs. The
to bridge communities and causes through social media and the democratization of information.
Perhaps one of the most incredible and en-
gaging cases of philanthropy that showed the
power of bringing community together was the amyotrophic lateral sclerosis (ALS) ice bucket
challenge. This began to raise both money and awareness for the disease, ALS, by challenging friends to donate and if they didn’t do so in 24 hours, they had to dump a bucket of ice and
water on themselves. This movement sparked
recognition from individuals suffering from the disease, their friends and families to eventu-
ally celebrities and raised both awareness and money for the cause.
ing more from companies than just quality
The Crowdfunding Effect on Corporate Social Responsibility
companies they buy from to prove that their
industry, from how companies in the space do
what the consumer cares about, such as social
in financing projects. As previously mentioned,
ethics and what they care about are in line with and environmental issues.
The new consumer, otherwise known as the
CSR can learn a lot from the crowdfunding
business to the methods and strategies deployed companies are looking to increase their CSR in an effort to not only make the company more
PATCH OF LAND The “hard money” lender co-founders begin the architected the core of the platform that still runs Patch of Land today.
JULY/AUGUST 2017 33
Sharestates Gives Back
harestates began and participated in
Sunrise Gala: Michael Ramin & Raymond Y. Davoodi Shaving Sunrise Board Member David Miller’s famous hair and handle bar mustache.
a similar challenge to raise money for
a charity near to the executive team - The Sunrise Association, an organization that supports children with cancer around the world through day camps and in-hospital programs.
All players and spectators, made donations to charity. Pictured are Nicki Chadi and Eileen Davoodi (left to right)
To raise money and bring Long Island community members together, Sharestates has taken part in charity galas and hosted
Left to right: Bijan Nassi, Radni Davoodi, Sam Simani
poker tournaments. In addition to the galas and poker nights, this year the company challenged one of the Sunrise Association board members to shave off their iconic and beloved mustache for a sizable donation. Through the challenge, Sharestates encouraged community members to join in and increase the donation. It resulted in over 500 donations totaling in $1 million.
Left to right: David Zar, Michael Ramin, and David Miller
ethically righteous, but to ensure that they do not
works to generally raise public awareness and
ABOUT THE AUTHOR
is the demand of the highest player in the indus-
can reveal an opportunity from the crowd.
Allen Shayanfekr is the CEO of Sharestates.com. He is currently admitted to practice law in NY and CT. His legal expertise in securities and real estate law are paramount to Sharestates’ ability to promote and produce public and private offerings in a highly regulated space. Allen interacts regularly with the Securities and Exchange Commission, in addition to spearheading daily operations at Sharestates. His superior knowledge in real estate marketplace lending has landed him multiple speaking and thought leadership positions at the country’s top events and in major publications. Prior to launching Sharestates, Allen joined the Atlantis organization as their National Title Producer, holding approximately 28 Producer’s Licenses across the Country. Allen received his J.D. Magna Cum Laude from Touro Law Center where he graduated in the top 6% of his class and his B.A. in Political Science from New York University.
fall behind in this millennial driven world. If CSR try, then CSR is what is needed for companies to
engagement and increase a market reach that Following that, rather than just large com-
continue to prosper.
mercial banks having their hands in the funding
crowdfunding attributes into their CSR business
much more democratically diverse access to cap-
Companies that have been implementing
strategy have come to realize that this tactic
helps leverage technology to expand funding
opportunities and to collect different fields of expertise while increasing transparency. For example, the money raised for the Sunrise
Association was a direct result of the power of crowdfunding and how it can bring communities together for a common cause. Beyond
the scope of just funding, crowdfunding also
of a certain business, crowdfunding produces a ital. Crowdfunding platforms provide a unique space, where CSR can interact with donors,
employees, customers and local communities. Crowdsourcing has the ability to go beyond
just funding; it also helps to be beneficial for a company’s over CSR strategy. A true analysis
of this phenomenon for a CSR perspective can
have extremely beneficial results for changing a company’s culture and business model. ■
THE HISTORY OF CROWDFUNDING
2013: 34 PRIVATE LENDER
SYNDICATEROOM becomes the first equity crowdfunding platform in the U.K. to allow the crowd to co-invest in professionally led opportunities.
Crowdfunding and Self-Directed Retirement: A Union of Investor Empowerment Vehicles How the JOBS Act changed America’s financial systems for lending by Clay Malcolm
rowdfunding has a key role in democratizing the investment arena by exposing
regular people to new asset markets and by giving small companies new ways to raise necessary capital. Previously, prospective investors may
have sought ways to get in on the ground floor of
from anyone besides their friends and families.
Business Startups Act (JOBS Act) provided
makes them business partners by combining
would eventually emerge. At its inception, the act
Crowdfunding unifies these eager entities and
recent legislation with efficient technology. New businesses accumulate the capital they need by
accepting small contributions from many individ-
the “next Apple,” but the sizable task of sifting
ual investors, while investors can hold stake in an
may have seemed unfeasible. In turn, entre-
offerings for the privilege.
through available data to find such a possibility preneurs may have struggled to raise capital
entity without having to pony up five or six-figure The 2012 ratification of the Jumpstart Our
preliminary legislation from which crowdfunding removed limitations on raising capital but still
presented considerable barriers to all parties. In
accordance with Rule 506(b) of Regulation D, an
issuer (the entity attempting to raise money) was unable to engage in general solicitation tactics as a means of attracting potential investors.
Rule 506(c) of the same regulation—commonly
REALTYSHARES The company raises $1.9 million led by General Catalyst to make its offering available both to more developers and more investors. JULY/AUGUST 2017 35
referred to as Title II of the JOBS Act—softened
websites that offer non-financial returns or no
or exchanges may not be possible for a specified
marketing targeted at accredited investors. Such
donation-based and only provide opportunities
age of return in accordance with their original
receive small gifts or rewards for their donations,
or bought out. For instance, you could contribute
the parameters of the previous rule, but only for investors are defined as having an annual income of $200,000 or more, a net worth of $1 million or more, or an annual household income (among spouses) of $300,000 or more. This provided a
new avenue for young companies to reach inves-
returns at all. Many of these undertakings are
for charitable contributions. Contributors may
but they’ll never yield equity or other legitimate
financial returns. Proper crowdfunding ventures
create genuine economic partnerships by offering
tors, but only if they had deep pockets.
private equity positions.
as Reg. CF) changed everything by opening the
investors to make similar transactions. While the
In 2015, Title III of the JOBS Act (also known
Other online platforms, of course, may allow
process to non-accredited investors. With the
offering company may rely on the JOBS Act for
funding as we know it was born by removing re-
funding according to the Reg. CF definition. The
the abilities of issuers to advertise their offerings.
ably for quite some time, so it’s important for
implementation of this new regulation, crowd-
strictions on potential investors and by expanding Like their accredited counterparts, non-accredited investors may participate in crowdfunding in
accordance with their income or net worth. Issu-
ers may only solicit their efforts to non-accredited investors through third-party intermediaries that target any potential investor and provide direct
access to a funding portal. These intermediaries usually take the form of investment websites
where investors can create cash accounts and initiate transactions with a simple key stroke.
Another subsection of the JOBS Act, Title IV,
specifies similar provisions regarding solicitation to accredited or non-accredited investors. Quali-
its legal validity, it may not be engaging in crowd-
for a 1 percent stake in the total funding. Should the issuer excel and raise $25 million from an
initial public offering (IPO), your original $10,000 could become $250,000 (1 percent of the IPO
yield). Such returns may not be typical and would largely depend on the policy of the issuer, but the fundamental idea behind equity crowdfunding
holds true: Small investments can generate large
potential investors to know what they’re getting
form for financial success that may otherwise be
investments in fractional debt, partial debt,
with self-directed retirement. As confidence
involved with. Online intermediaries that allow ownership in real estate, or remote ownership of commodities, like hard liquor, are among
available options that mimic the crowdfunding
process without falling under the same umbrella. Issuers and third-party intermediaries can take
the lead in reducing investor confusion by clearly specifying the nature of their offerings. Simple
notations of “506(c)” (accredited investors only) or “Reg. CF” (crowdfunding under Title III) might help identify a genuine crowdfunding portal,
tain requirements. Tier One companies may raise
investors dial in on their options.
Two companies may raise up to $50 million.
partial ownership in a company or entity in
be confused with peer-to-peer fundraising
Investors may receive private shares, though sales
Crowdfunding intermediaries are not to
$10,000 toward a $1 million crowdfunding effort
returns if you find the right opportunity.
and clearly specifying the type of asset offered --
up to $20 million per 12-month period, while Tier
investments should the company be taken public
term “crowdfunding” has been used interchange-
fied businesses under this regulation may pursue higher levels of capital provided they meet cer-
period. Shareholders could also yield a percent-
debt, equity, hard asset, etc., will help prospective Conventional crowdfunding systems provide
a similar manner as publicly-traded stocks.
In that regard, crowdfunding creates a plat-
unavailable. Crowdfunding shares this quality in stocks and other publicly-traded securities
continues to waffle, people are exploring new
methods for bolstering their IRAs, 401(k)s, health savings accounts (HSAs), and education savings accounts (ESAs). Alternative assets like crowd-
funding allow investors to pursue opportunities in markets they choose rather than wait by the
stock ticker and hope for the best. Anomalies notwithstanding, the stock market has been around long enough to demonstrate a relationship
between risk and return. Alternative assets offer opportunities to personally direct investments
and dictate financial progress, even when they’re held in an IRA or 401(k).
Crowdfunding and self-directed retirement
plans are giving 21st century investors opportunities to take control in ways that our parents
THE HISTORY OF CROWDFUNDING
PEERSTREET launches a new crowdfunding platform that focuses on raising funds for non-
bank lenders that provide short-term commercial property loans to small individuals and businesses looking at real estate investing. 36 PRIVATE LENDER
or grandparents never could. Furthermore,
percentage of the total funding amount de-
the security of sensitive information when
goal and leave earnings yielded by investors
systems lead to better accounting practices,
crowdfunding is no different from other alterna-
pending on whether the company met their
conducting business online. More effective
Revenue Code. Self-directed retirement account
alone. Others may collect transaction fees
so accurate reporting to the IRS is easier than
both investors and issuers. Naturally, such
tors and large fees may also be a thing of the
traffic on their sites.
manpower requirements allow self-directed
tive assets from the perspective of the Internal
holders can allocate their tax-advantaged dollars toward crowdfunding efforts, at which point the account itself becomes the investor. The
IRA will bear the accreditation of the holder,
so non-accredited investors would need to seek crowdfunding investments allowable per Title III and Title IV of the JOBS Act.
These two relatively new financial systems
complement each other by addressing the needs
of modern investors. People want to take the reins and avoid the uncertainty of publicly-traded
securities, but the logistics of self-direction may seem daunting. Investors may be concerned
about additional paperwork required to incorporate alternative holdings into an IRA or 401(k). Documentation must be specifically titled in the name of the account and self-dealing activities must be avoided to remain in IRS compliance.
Self-directed investors may worry that alternative investments in tax-advantaged accounts will garner special IRS scrutiny because of these
added factors, but a knowledgeable and educa-
tion-based retirement administrator can provide
the guidance necessary to avoid the manifestation of these concerns.
Fees are another major consideration
regardless of whether investors are using per-
from investors or possibly assess charges to platforms may have a hard time generating Incorporating crowdfunding into a re-
tirement account will involve fees assessed
past as more efficient processes with reduced retirement providers to lower their fees.
The marketplace for new financial oppor-
by the IRA provider in exchange for their
tunities continues to grow and technology
from participating in crowdfunding with
between investors and the up-and-coming
services. Such fees may deter investors
their IRAs or 401(k)s. Unlike providers that
charge percentage-based fees, self-directed
retirement providers tend to employ a flat or asset-based fee structure. These schedules
may assess fees on a per-asset, per-value, or
asset-specific basis and may prove financially impractical to the smaller investors that
crowdfunding attracts. A $25 investor and a
$25-million investor will require comparable administrative services from transaction, tax reporting and data security standpoints, so they will likely pay similar fees despite the
broad difference in their earning potentials. The development of technological
platforms has played a significant role in
bringing the convenience and egalitarianism of crowdfunding to self-directed investing. Portals that allow 24/7 client access and
sonal money or retirement money. Crowd-
online transaction initiation help optimize
this department if intermediaries provide
Web-based transactions can eliminate the
platforms may retain, from the issuer, a
technological safeguards continue to ensure
funding can offer a substantial advantage in
the process for executing investments.
a beneficial framework to investors. Online
stress of completing tedious paperwork, and
ever. The relationship between small inves-
continues to provide streamlined access
companies that crowdfunding supports. Individuals can test the waters of crowdfunding with relative ease, all while utilizing the tax
advantages of self-directed retirement plans. There may always be a place for Wall Street strategies, but hands-on wealth creation
through alternative assets is certainly the wave of the future. â–
ABOUT THE AUTHOR Clay Malcolm is Chief Development Officer at New Direction IRA, Inc. He oversees most avenues of marketing, teaches continuing professional education and informal classes and webinars, and facilitates the training of business development and client representative teams at New Direction IRA Inc., a self-directed IRA provider that assists more than 12,000 clients nationally. Malcolm, who has more than 20 yearsâ€™ management experience in various roles, draws upon his teaching background to develop the educational aspects of New Direction IRA and impart knowledge about self-directed IRAs to its clients and prospective clients. Malcolm received his Bachelor of Science degree in Communications from Northwestern University. www.newdirectionira.com/education
ALPHAFLOW becomes the first to offer funds that allowed investors to participate in loans across multiple real estate crowdfunding platforms with a single investment. JULY/AUGUST 2017 37
It’s Time for the Online Lending Industry to Mature Online lending is still in its infancy and why it’s problematic by Sohin Shah
by writing bigger checks and allowing loan
platforms to substantially scale deal flow at the
expense of individual investor participation and returns. In fact, some lending platforms have become so dominated by institutional inves-
tors that only a limited number of investment
opportunities are visible for review and funding
s our economy was hurled into the
Great Recession, the online lending
industry exploded as individuals and inves-
tors recognized the opportunity of non-bank
lending, particularly in terms of access, speed
and efficiency. Strong interest from institutional investors, venture capitalists, financial institu-
process. The overall real estate lending market is estimated at over $11 trillion, a much larger overall asset type than other online lending categories (consumer debt, small business
loans, etc.) so real estate has the potential to
grow to be the largest type of all online lending. The unique characteristic of real estate-backed
tions and hedge funds fueled the rapid growth
loans that will undoubtedly encourage the
2016, there were 72 U.S.-based online, non-bank
underwriting depends more on the nature and
of the lending industry. So much so that by May finance platforms. While still a relatively small piece of the total lending market, the Treasury Department confirmed through industry as-
sessments last year that online loan originations could reach $90 billion by 2020.
Online lending has been dominated by
consumer lending portals, but since 2012, the
growth of real estate crowdfunding is that loan
value of the underlying property than the credit worthiness of the borrower as an individual or
business. This collateralization should mean less risk compared to an unsecured personal loan.
Online lending is still in its infancy. As the U.S.
Treasury Department assessed in May 2016, “New business models and underwriting tools have
industry has evolved to include asset-backed
been developed in a period of very low interest
ing. While industrywide data is a bit thin, the
conditions … this industry remains untested
by individual accredited investors. Institutional capital should help create long-term value, as opposed to spiking uncertain demand.
To keep up with institutional investment
demand, real estate loan platforms may tend to be more lenient in their underwriting guide-
lines as they chase volume. Given the ease and scale with which institutions invest money,
there tends to be a bias toward institutional
capital. However as we have seen across earlier economic cycles, withdrawal of institutional
capital potentially exposes those who have been “swimming naked.” For a true marketplace to
prove itself as it reaches maturity, it must hold
true to having diversity in its sources of capital,
and appeal to retail investors to fund every offering. This is challenging give how involved retail investors tend to be, with their investments.
Opportunistically, Wall Street institutions
lending, most notably real estate crowdfund-
rates, declining unemployment and strong credit
three largest online crowdfunding real estate
through a complete credit cycle.”
idential and commercial properties. Although
online real estate lending is a newer phenome-
Challenges and Opportunities of Institutional Capital
cumbersome post-housing-crash bank under-
real estate lending space face several specific
online real estate platforms generally focus on
these is how institutions have entered the market
performance monitoring, leaving too many
platforms have invested over $2 billion in res-
non, its strong appeal was clearly enhanced by writing protocols versus the typical time-con-
suming and burdensome bank loan application
Individual accredited investors in the online
challenges as the industry matures. Chief among
have also begun bundling short-term real
estate loans to home flippers into mortgage
bonds. Offering a more appropriate way for hedge funds, private equity firms and other
institutions to invest in this sector while promoting greater liquidity in the industry.
With regards to the fix-and-flip industry,
loan origination volume at the sacrifice of loan
THE HISTORY OF CROWDFUNDING
SHARESTATES As of December 30, 2016, the real estate crowdfunding platform reported
having returned more than $151 million to its investors with no loss of principal and yielded a net average annual return of 11% to investors. 38 PRIVATE LENDER
investors in the dark.
in loans on the front-end when the loans are
individual accredited investors with access to
measured against the protection and timely
sheets can help with exits to avoid defaults.
this important new sector is necessary. ■
Obviously, a platform’s credibility should be
repayment of principal investment. In some
originated. Institutions with their heavy balance Gross profit-per-house-flip reached its high-
secured investments, further maturation of
cases, any semblance of loan servicing has dis-
est level since 2000 in 2016 - and this is not
ABOUT THE AUTHOR
updates from borrowers and sporadic updates
markets. According to the National Associa-
Sohin Shah is the founder of InstaLend, an online lending platform that allows accredited individuals to make direct investments in residential real estate. Sohin is a pioneer of real estate crowdfunding wherein he has managed the listing and reporting processes for millions of dollars raised and overseen the development team. He’s also the creator of ValuationApp which allows finance professionals to analyze businesses and startups, making use of valuation techniques that are on par with the ones used in the real world. Sohin successfully used crowdfunding to raise capital to develop this app in 2012. Sohin previously worked at investment banks in New York City and is a graduate of New York University with a master’s degree in finance and risk engineering.
solved to infrequent collection of investment to investors, thus hurting transparency. Plat-
forms opting to wait to follow up with a bor-
rower until the loan term ends are employing a risky strategy. Online platforms should be
more proactive in helping create liquidity op-
portunities for their borrowers, thus allowing investors to experience a successful exit.
Lending platforms need to reposition institu-
tional involvement on this ‘back-end’ to ensure retail investors get a fair opportunity to invest
only a result of generally improving housing tion of Homebuilders, the median age of U.S. home was 37 years in 2015, up from 31 years
in 2005. The condition of U.S. housing stock justifies the increasing capital investment in
renovation, particularly in light of the annual shortfall of new housing production relative to new household formation.
To keep up with this demand and to en-
sure that the online home lending industry
remains true to its original vision of providing
Contact Tom Schmidt at 785-889-1300 or firstname.lastname@example.org to discuss your IRA custody needs.
JULY/AUGUST 2017 39
The Status of Real Estate Crowdfunding Where we’ve come from and where we are headed by Jason Fritton
eal estate crowdfunders have disrupted the status quo of
residential real estate investing with online platforms that
put new opportunities — once the domain of the wealthy — into the hands of Main Street America.
The growth of real estate crowdfunding into a billion-dollar
industry has been nothing short of phenomenal, and the sector
has a bright future. Already, it has brought real estate investing to the masses while changing the way people and businesses invest
and borrow. To be sure, real estate crowdfunding’s fast growth has resulted in both opportunities and challenges.
Historically, U.S. real estate lending and investing has worked
within a fragmented industry where lenders have been slow to
adopt technology. These lenders often had a myopic focus on the owner-occupant. In the real estate investment area, only those
with deep pockets — mainly wealthy individuals and institutional investors — had the wherewithal to invest in a significant way. 40 PRIVATE LENDER
There were limited options for non-owner
occupants from Main Street America who
wanted the financing to establish a real estate portfolio, or who wanted to invest in the
deals of bigger players. This dynamic began to change in the wake of the housing crisis.
Alternative lenders emerged to meet the needs of real estate investors who saw opportunities to rebuild the nation’s residential real estate
market after the 2008/2009 financial crisis, but
who were stymied by limited financing options. Entrepreneurs who recognized the oppor-
tunity developed innovative technological
solutions to address some of the problems facing the housing finance market. They
developed online lending and crowdfunding platforms to provide efficiencies, speed, 24/7 access, transparency, national reach, and
the sector “hit its stride” last year. “The 2017
Addressing the Sector’s Challenges
port” has some interesting statistics:
es. The challenges facing the industry are
Americas Alternative Finance Industry Re-
Total market volume for alternative finance was $35.2 billion in 2016, up 23 percent over the prior year. The data
covers the United States, Canada, Latin
America and the Caribbean with most of the volume, $34.5 billion, in the U.S.
Marketplace, or peer-to-peer, lending makes up the bulk of the alternative
finance volume, about 60 percent. While
real estate crowdfunding accounts for 2 to 3 percent of the volume.
lower costs to the investor/borrower.
Real estate crowdfunding is on a fast-
ing platforms have formed in recent years.
by 70 percent to $821 million in 2016
Literally hundreds of real estate crowdfund-
However, most haven’t overcome the very basic challenge that faces crowdfunding startups: If you don’t have investors, how do you get
projects on your platform? If you don’t have
from $483.8 million in 2015.
The report notes that the number of new
entrants into alternative financing is slow-
ing and some entrants have already exited.
wider arena of crowdfunding platforms, has
Regulation Crowdfunding (Reg CF) platforms
years after these organizations began forming,
States, Reg CF, part of the JOBS Act, turned
began to strategically invest in a few of these
successful in providing startups with capital
crowdfunding platforms have reached signif-
for smaller, non-accredited investors.
However, the report also shows new emerging
only been around a few years. A couple of
that began to emerge last year. In the United
venture capitalists and private equity firms
1-year-old in May. The regulation has been
platforms. Today, about a dozen real estate
while opening new investment opportunities
icant size in terms of revenue, deal flow, and
Since Reg CF took effect, 119 companies have
participation by borrowers and investors. In-
raised $36.6 million under the regulation, ac-
profile and its ability to fund larger deals.
funds, investors are funding a wide variety of
stitutional involvement is raising the sector’s
Growing Volume and Influence A joint study by the University of Cam-
bridge and the University of Chicago suggests
varied and sometimes complex. They include the following:
STRENGTH DURING ECONOMIC DISTRESS Most real
estate crowfunders are less than seven years old, and some have just barely
spread their wings. They have yet to be tested in recessionary times.
CYBER-ATTACKS The frequency of cyber-attacks on financial institutions is a growing problem
and recent global attacks on traditional
growth trajectory. Increasing its volume
projects, how do you get investors?
Real estate crowdfunding, a subsector of a
With its fast-paced growth come challeng-
cording to statistics from WeFunder. With these businesses from breweries to tech startups.
In a few short years, it’s become evident
that real estate crowdfunding has entered the mainstream.
In a few short years, it’s become evident that real estate crowdfunding has entered the mainstream. banks as well as large retailers have
heightened the concern. Cyber threats
are among the most critical challenges facing the financial services industry, including alternative lenders. U.S.
banks have been among those who
have been victims of cyber-attacks from
ransomware to denial-of-service attacks. JULY/AUGUST 2017 41
Now Wall Street, which was initially skeptical, has embraced the crowd and, as a result, more opportunities are opening for smaller investors. The playing field is being leveled.
42 PRIVATE LENDER
Crowdfunders aren’t immune. A popular
defenses. Still, some in the cybersecurity in-
in 2014 of a hack that involved the theft
a company deals with an attack, not whether
crowdfunding site, Kickstarter, was a victim of customer data. Patreon, a crowdfunder
for creatives, was attacked in 2015 and had
dustry believe it may become a matter of how they will be attacked.
customer data stolen as well. Although there hasn’t been a headline concerning crowd-
B UILDING SCALE UNDER CURRENT REGULATIONS
funding customers who have lost funds due to a hack, it’s imperative for crowdfunding
Much crowdfunding to date has been
platforms to keep constant vigilance and
equity crowdfunding on individual deals, which makes it challenging
continue to develop sophisticated front-end
for a platform to build a scalable
solution. For this reason, growth in real estate crowdfunding is
opportunity on the horizon. Real estate crowdfunding remains a small
lending don’t meet current Reg CF limitations for arms-length
fast. As it gains acceptance, it will be able to tap into an enormous
largely occurring on the debt side. However, platforms that do transactions. Thus, are prohibited from unaccredited investor crowdfunding. There is some growth in e-REITs, a natural progression of investing for unaccredited investors under
Title IV Regulation A+ although the limitation on e-REITs — about $50 million over a 12-month period — is too small for
larger platforms with significant scale. Crowdfunders applaud Congress’s passage of the JOBS Act, and Reg CF, which has
opened investment opportunities to the public at large, but
believe there are still more regulatory improvements that can be made.
Looking Toward to the Future There’s plenty of good news in this sector and more good news to
share of the overall alternative lending marketplace, but it is growing
amount of available capital, from 401(k)s to IRAs, and put that capital to work in new and exciting ways. The future looks bright. ■ ABOUT THE AUTHOR Jason Fritton is Co-Founder & Executive Chairman of Patch of Land, responsible for setting its vision and leading the team’s efforts to accomplish the company’s mission of building wealth and growing communities. Fritton launched Patch of Land when the SEC implemented Title II of the JOBS Act in 2013 based on his vision to evolve real estate financing to be tech-enabled, data-decisioned, and easily accessible to a marketplace of borrowers and investors. Jason has decades of experience managing and growing startup companies. Prior to Patch of Land, Fritton founded and developed a telecommunications design and procurement firm active in the public sector. Previously he served as Director of Digital Marketing for a national retailer. Additionally he founded and developed several technology-based startups including Startingline Networks, Tech@Cost, and Virtual Realties. Fritton studied biology at Cornell College.
come. The retail investor can now participate, fractionally, alongside sophisticated high-volume investors on their same terms, which
hasn’t been possible before. Real estate investing has long been a
lucrative asset class with a high barrier to entry. Those barriers are
EQUITY PARTICIPATIONS | TRUST DEEDINVESTMENTS AVAILABLE OPPORTUNITIES
coming down. In the past, people who wanted to get into real estate
investing had to have a lot of capital. Before the advent of real estate crowdfunding, no one really cared about an investor’s $5,000 or
even $50,000 infusion. They often wanted to see $500,000 or more. This left small, unaccredited investors mostly out of the game.
Now Wall Street, which was initially skeptical, has embraced the
crowd and, as a result, more opportunities are opening for smaller
investors. The playing field is being leveled. For example, an institutional fund may opt to invest $250,000 in a million-dollar real estate project, leaving $750,000 for smaller real estate investors to come in
and invest the remainder at much smaller amounts. Currently, these
retail investors may not know they are investing alongside an institu-
tional investor. But the sector is moving toward providing that type of visibility — which will lead to added credibility — going forward. As real estate crowdfunding grows, it’s likely the sector will see
more opportunities for these smaller investors to participate alongside sophisticated institutional investors. In other words, someone
could potentially invest $1,000 in a deal alongside an institution that is investing $1 million in the same project. As institutional investor
acceptance of real estate crowdfunding grows, it will naturally lead to growth in the size and scale of projects brought to the crowd.
While there are challenges for the industry, there remains plenty of
CALL US AT 866-897-6966 EXT. 110/112 We have Whole & Fractional Equity Participations and Trust Deed Investments that can be invested with Capital Accounts and Retirement Accounts such as Self Directed IRA's, Pension Plans, 401k's, Roth's and many other qualified accounts. We are third party custodian friendly.
JULY/AUGUST 2017 43
LENDER LIMELIGHT WITH ROBERT BARNEY
Solid Foundation Rob Barney offers his inside success story and how he’s taking DHLC to new heights. BY HEATHER A. ELWING
ob Barney is no stranger to success, unless you count his several foster pet failures. Raised in Missoula, Montana and after a brief stint in college, Barney began his
professional career with MCI Telecommunications with their Partner Market Division. He spent five years with MCI before being offered a unique opportunity in Western Maryland where he became a minority partner in charge of the corporate specialty
division of Kim’s Khocolate. “It was a small, local chocolate company that received some great national exposure with its ‘logo-in-chocolate’ program,” states Barney.
After two years working with the chocolate company, Barney moved to Texas. While
working with a few startups, Barney founded a company called “.tmc” an online mar-
keting and advertising representation firm. It was within this time frame he started
another online small business portal. Through this venture he learned about private, asset based lending or hard money. He was fortunate to have a partner in the small
business portal who had been in the realm of private money lending for 30 years. After a very successful five year run with “.tmc” he decided to close shop.
It was after discussing real estate investing with his private money lending friend that Barney
took his real estate agent licensing exam and founded DHLC Investments and DHLC Mortgage. Sixteen years later he still enjoys helping his customers and clients as a private lender. Private Lender sat down with Barney to discuss his success, philanthropy and his
awareness of the private lending industry.
A believer in giving back Barney and his company started their own not-for-profit to
provide building materials and construction services to less fortunate families in time
of need. He also spends spare time fostering dogs and has a couple foster failures – he adopted the dogs himself – in his home along with one cat. 44 PRIVATE LENDER
ROB BARNEY, CEO/OWNER OF DHLC, CONFIRMS CONSTRUCTION PLANS FOR HIS NONPROFIT SIDE PROJECT.
JULY/AUGUST 2017 45
LENDER LIMELIGHT WITH ROBERT BARNEY
BARNEY WALKS THROUGH ONE OF HIS NONPROFIT SITES, WHICH PROVIDES MATERIALS AND CONSTRUCTION FOR LOW-INCOME FAMILIES.
46 PRIVATE LENDER
BARNEY CREDITS HIS DEDICATED STAFF FOR MUCH OF HIS COMPANY’S. HERE, BARNEY IS PICTURED WITH SHANNON BROWN, OFFICE MANAGER/UNDERWRITER.
PL: You’re involved in a few local charities. Can you tell us who you are involved with and why?
houses, but we also work with buy-n-hold investors. PL: Tell us a little more about what DHLC companies offer
RB: DHLC contributes to the North Texas Food Bank as well as to
reasons we decided to start our 501c3 - To give back locally to our
RB: We offer our borrowers, not only access to capital to purchase and
needy individuals in the DFW metroplex. That is one of the main
surrounding communities. I also foster dogs in my own home. Sometimes I end up adopting the dogs myself.
PL: There are a lot of people in this space that see private lending as a niche. Do you think your company works in a niche? RB: Based upon volume and location I guess we do work in a niche. We primarily focus on sub-million-dollar rehab projects in Texas.
Most of our borrowers are real estate investors who want to fix-n-flip
rehab their fix-n-flip properties or their buy-n-hold homes, but also access to quarterly training with our FlipU Investor University and
on-demand rehab advice whenever they need it. We always try to be
just a phone call away. Our capital partners on the other hand have ac-
cess to our turn-key passive income vehicle that once was dubbed “The Machine.” by one of our capital partners. We offer our investors the
opportunity to fully review our due-diligence on every project that we
lend on, earning them strong rates of return on their capital with local real estate securing that capital at low loan-to-values (LTVs).
JULY/AUGUST 2017 47
LENDER LIMELIGHT WITH ROBERT BARNEY
PL: How do you think your companies stand out from other private lenders? RB: I believe we offer a level of service and transparency to both our
borrowers and our investors that is unrivaled in this industry. Over the last 16 years we have earned a reputation of doing what we say we are going to do. Our staff is second to none in the way they help and care for our clients. There are lenders that offer “better” rates but usually have hidden fees or large down payments. DHLC doesn’t play that
game. If the borrower buys the property at the right price they can
realize their dreams through real estate investing is a great way to
make a living. Further, being a safe-haven for our investor clients is
very important to us. The fact that many of them have been with us
since we moved away from lines of credit (LOC) almost 10 years ago is a source of continued pride. The simple fact that they have not only
entrusted us with their capital but have continued to do so year after
year and have referred their friends to DHLC...drives us to be the best we can for them.
PL: What do you do to stay ahead of your competition?
qualify for 100 percent financing.
PL: What do you believe the driving force is behind DHLC’s success? What keeps it moving forward? RB: It comes right down to our clients and our staff. I love what I
do and I have, hands-down, the best staff! Helping our borrowers
BARNEY CONFIRMS THE INITIAL CONSTRUCTION PHASE FOR A NEW NONPROFIT HOUSING PROJECT
48 PRIVATE LENDER
RB: By hiring the best people and keeping a close eye on the competition. I believe that we can out-perform any competitor and take better care of our clients than anyone in the business.
PL: What are your company’s plans for the future? Or how do you see the company growing?
RB: DHLC, I hope, will continue to gain market share across the state
the ability to speak directly to someone at your preferred lending firm
exceed their expectations while deploying our investor’s capital wise-
able to speak to the president or owner, is going to become more and
of Texas. If we can maintain our ability to serve our borrowers well, ly; we should be able to accomplish that goal.
PL: It sounds like you are a believer of core beliefs. Do you have core
or company who can immediately solve your problem because you are more important. In my opinion, big can be good as it relates to reach
and scale, but large private lending firms cannot, by their very nature, compete with smaller client focused private lenders.
beliefs or some guiding principles in place at DHLC? PL: Speaking of ‘big can be good’ and the theory of “too big to fail,” RB: Our core beliefs are simple. We put our client’s first! While we
how do you think the latest Dodd-Frank ruling will affect the indus-
don’t have a mission statement, that is our governing principal.
try? Do you think it will affect DHLC? If so, why or why not.
new presidential administration, Dodd-Frank, where the industry is
RB: The Safe and Fair Enforcement Act (SAFE) that was created by
Barney shares his perspective about the private lending industry, the going and growing.
PL: It’s been great getting to know about you and what drives DHLC but let’s switch paths just a little bit. Let’s talk about your views of what is happening in the private lending industry: How do you think
the original Dodd-Frank bill was implemented in Texas through
T-SAFE. We operate under that governing rule. It remains to be seen
how Texas will implement the latest Dodd-Frank ruling and what impact if any it will have on us. What I know so far leads me to believe that there will if any impact on private lenders like DHLC.
the new presidential administration will affect private lending? PL: Besides your membership with the American Association of PriRB : Talk about a loaded question! *Chuckles* I think it is very diffi-
vate Lenders, of course, how do you keep up to date with new rules
cult to predict what this presidential administration will do and how
the value this industry has in respect to the U.S. economy and refrain
RB: The current regulations governing hard money lenders in Texas
it may impact our industry. My sincere hope is that they will realize from doing anything to adversely affect private lending.
allow us a unique level of autonomy. We are constantly monitoring changes in the state laws governing hard money lending.
PL: If you could change one thing about the industry, what would it be and why?
PL: If you could share one important nugget of information to those starting out in the private lending industry, what would it be?
RB: The recent trend by new lenders to put considerable downward pressure on rates is very concerning. Those of us who have been in
RB: This business isn’t just sexy looking interest rates and origination fees.
for the capital we lend, understand how important having a com-
of yourself or you will take it on the chin. I see it time and time again with
this business over the last 10 years, and who are directly responsible fortable cushion is. With rates becoming lower that cushion is put
in jeopardy. If the market contracts again we will all want as much cushion as possible to ride out the storm.
PL: Do you think that you will need to be prepared to ride out the storm sooner rather than later? Where do you see the industry going? RB: No. Not really. I think you will begin to see a lot of new players enter the market with new “lending models.” This isn’t necessarily a bad thing either. However, for both borrowers and investor clients, having
Start slowly and learn everything you need to know before you get ahead new lenders. Borrowers need to know that there is more to choosing the
right lender than rates. Investor clients need to understand what it is that
they are investing in as well. That is why we are SO big on transparency. ■ ABOUT THE AUTHOR Heather A. Elwing is the editorial manager for Private Lender. She has bachelor degrees in public relations and journalism. She is a licensed Realtor in Missouri working on her GREEN designation. She has passion for education within the real estate investing space, sustainable building and living. You can reach her at email@example.com.
JULY/AUGUST 2017 49
LENDER LIMELIGHT WITH ROBERT BARNEY
UP CLOSE AND PERSONAL: PETS? Too many! I rescue animals so I always have a few in addition to my 3 dogs and 1 cat. FAVORITE VACATION SPOT? The lake home that my grandfather built in Michigan. If not there, any place that requires a passport. I love to see new places and explore. WHAT DO YOU DO TO RELAX? That is much harder for me to do. However, get me up at my family lake house or on my Harley and I am as close to being relaxed as possible. HOBBIES OTHER THAN WORK OR FAMILY? Travel and wine. Love both equally! DARK SIDE OR ALLIANCE? (STAR WARS) Alliance! FAVORITE MOVIES? 3 IF POSSIBLE 1.) The Shawshank Redemption 2.) The Princess Bride 3.) The original Star Wars movie. Not necessarily in that order. FAVORITE FOODS? Mom’s enchiladas, dad’s grilled steak and sautéed mushrooms THE ONE THING YOU CANNOT LIVE WITHOUT, EXCLUDING FAMILY, FRIENDS OR PETS. My faith BATMAN, SUPERMAN OR WOLVERINE? Wolverine WHAT DID YOU WANT TO BE WHEN YOU GREW UP? ASSUMING PRIVATE LENDING WAS NOT YOUR CHILDHOOD CHOICE. I honestly don’t remember. I just wanted to make my parents proud. 50 PRIVATE LENDER
American Association of Private Lenders
2017 ANNUAL CONFERENCE Inspiration through Association November 12-14, 2017 | Las Vegas Register by September 1, 2017 for $659!
JULY/AUGUST 2017 51
The Financial Choice Act Is it time for a Dodd-Frank haircut? by Jeffrey N. Levin
The primary argument for de-regulating
the DFA revolves around the U.S. economy’s
2 percent annual growth rate being too tepid, and around small lenders being hamstrung
by the legislation’s regulatory burden. There is no question that large banks have only
ecently, the House Financial Services Committee voted to approve the Fi-
nancial Choice Act, a 500+ page bill intro-
duced by U.S. Representative Jeb Hensarling of Texas, the Committee chairman. The bill
proposes to fix many issues that cropped up from implementation of the 2010 Dodd-
Frank Act, making it crucially important for executives in commercial finance, construction and development sectors to pay close
cial institutions being “too big to fail,” but to
gotten larger, with the “Big Four,” JPMorgan
that was sweeping both in its complexity and
Fargo, now controlling approximately 45 per-
many, it was hastily-introduced legislation
Chase, Citigroup, Bank of America and Wells
its reach. Small banks and credit unions end-
cent of total bank assets. Meanwhile smaller
claimed that DFA hampered growth. Within
have skyrocketed, lowering their growth rates
will be points of contention over the weeks
account for nearly half of all small busi-
ed up caught up in its regulations, and critics
lenders struggle as their compliance costs
the Choice Act there are six major topics that
in comparison. While community lenders
and months ahead:
ness loans, DFA arguably constrained their
appetite and ability to make mortgage loans
due to the broad risk retention requirements
islation from here. The Financial Choice Act
Providing an “off ramp” for certain lenders to be exempt from DFA regulations;
committee along party lines and is on its way
to seize troubled banks;
show that borrowers met an “ability to repay”
the entire life of the loan, raising the risk of
Eliminating the “Fiduciary Rule” for investment advisers regarding retire-
to the massive reduction in consumer mort-
Repealing the Durbin Amendment that regulates fees for bank debit cards.
to Fail” regulations that needs to be fixed.
attention to how Congress manages the leg-
that it imposes on everything sold into the
Stripping the government’s authority
secondary market. DFA requires lenders to
to the floor of the House. The bill faces two
Reforming the Consumer Finance
test—which can be challenged in court for
seen how similar the Treasury Department’s
Repealing the Volcker rule;
litigation. Proponents of the Choice Act point
was approved on May 4, 2017, by Hensarling’s
obstacles: on the one hand, it remains to be recommendations on financial regulatory
reform will be. Based on an Executive Order from President Trump, these recommendations are expected soon. On the other hand, the bill or some version of it must
get through the Senate where a narrower
ment planning; and,
Republican majority, combined with minori-
A Drumbeat for De-Regulation
a greater ability to obstruct or delay action.
just from Wall Street but protect them from
ty-friendly procedural rules, give Democrats
President Trump recently stated his intent to
“give Dodd-Frank a real haircut,” and is likely to sign any deregulation package that makes its way to his desk.
The Choice Act is designed to correct
perceived deficiencies in the landmark
Dodd-Frank Act (DFA) that was the Obama administration and Congressional Demo-
crats’ answer to the 2008 financial crisis. DFA was intended to solve the problem of finan52 PRIVATE LENDER
“Somebody has to protect consumers, not
gages underwritten by community banks as
one unintended consequence of the “Too Big However, to its critics, the Choice Act mostly benefits the largest financial institutions by
reversing those DFA regulations designed to prevent another banking crisis.
during an interview with National Public Ra-
Major Issues in the Financial Choice Act
cut in half. Banking fees have gone up. Work-
tory requirements across a number of fronts,
mortgages. Our plan replaces Dodd-Frank’s
tial to be the main points of contention as the
banks and credit unions with reforms that
then to the Senate. Here are more details:
on Main Street can grow and create jobs.”
A DODD-FRANK “OFF RAMP.” The
Washington as well,” said Rep. Hensarling
dio in May. “Free checking at banks has been
While the Choice Act aims to relax regula-
ing people are finding it more difficult to get
the six issues identified above have the poten-
growth-strangling regulations on small
bill works its way through the House floor and
expand access to capital so small businesses
Choice Act would provide regulatory relief to several classes of financial institutions based on their capitalization, size, risk
level or charter type. For large lenders, the off ramp reduces regulations for strongly
capitalized institutions and banks that have an average “quarterly leverage ratio” of at least 10 percent. Additionally, bank holding companies with assets of at least $50
billion would be required to conduct the
company-run stress test required by DFA
only once a year, rather than twice a year as currently stipulated. For community banks
and federal savings associations, the Choice
Act would raise the threshold at which point
the most cumbersome regulations come into play from $1 billion to $5 billion of assets,
reducing compliance costs for thousands of
firms. Additionally, there is indirect relief on
this orderly liquidation authority — the gov-
other lender malfeasances. However, the CFPB was established as a stand-alone agency with
the burdens that business customers of the
ernment’s blank check for seizing a financial
must have a material reason (not based solely
substitute for what to do in the event a major
terminate a customer’s account. The reform
of “too big to fail” large institutions do in-
collect fair-lending-related information from
of the global economy to have an appropriate
a blank check to tap funds straight from the
Getting rid of the “living will” requirements
hired a number of ambitious young attorneys
hands-off approach consistent with the loos-
compensation plans that incentivized them to
a single director appointed by the president,
banks face: under the Choice Act regulators
institution — without providing a coherent
on reputation risk) for ordering a bank to
financial institution fails. Despite the notion
bill also relieves banks of the requirement to
deed get into trouble, and it is in the interests
appropriations process, the new agency had
businesses regarding their ownership.
plan to contain the damage when they fail.
Federal Reserve. Soon after its start, the CFPB
REPEAL OF ORDERLY LIQUIDATION AUTHORITY. The Choice Act would strip
without any replacement authority is a
as regulators, and provided them variable
er regulatory environment before 2008.
negotiate huge settlements from the lenders
REFORM OF THE CONSUMER FINANCE PROTECTION BUREAU AND OTHER AGENCIES. Another area
unchecked powers and incentive structure
president, the power to seize any financial
the Consumer Finance Protection Bureau
renamed the Consumer Law Enforcement
of default. The measures the government
oversee federal consumer lending laws. The
institution are referred to as the “living will”
problems that harmed consumers like the use
the federal government of the broad powers
it was granted to both seize troubled lenders
and provide emergency lending. Dodd-Frank established a unique level of authority in the executive branch by providing the Secretary of the Treasury, in consultation with the
of focus for the Choice Act concerns reforming
institution that it determines to be in danger
(CFPB), established under Dodd-Frank to
can then take to manage a failing large
CFPB was designed to address systemic
provisions. The Choice Act would eliminate
of “robo-signed” mortgage documents and
vested with broad powers unchecked by direct legislative or executive oversight. Rather
than be funded through the Congressional
they went after. The combination of these
caused many banking executives and their representatives to cry foul.
Under the Choice Act the CFPB would be
Agency and see its authority curtailed so that it could no longer crack down on “unfair or
deceptive acts or practices,” but rather would be charged with more narrowly enforcing
existing laws. It would be placed - along with JULY/AUGUST 2017 53
other regulatory agencies that the Bill seeks
REPEAL OF THE FIDUCIARY RULE. A
to reform - into the regular appropriations
fourth area of deregulation under the Choice
tunity to defund or deeply cut its budget for
(DOL) Fiduciary Rule that requires financial
process so Congress would have the opporenforcement activities. Its employees only would be paid under the normal federal
employee compensation plan. The presi-
dent would have the ability to fire at will its director. Although its power would be sig-
nificantly reduced under the Choice Act, the renamed CFPB would remain a stand-alone division rather than being rolled into the
Securities and Exchange Commission (SEC).
ELIMINATION OF THE VOLCKER RULE. A very significant portion of the DFA
that was delayed until 2015, the Volcker rule forbids large banking institutions from proprietary trading, owning hedge and invest-
ment funds, and sets limits to the maximum
amount of liabilities a bank can carry. It was established with the support of five former
Secretaries of the Treasury in order to reduce
the risk of bank failure from speculative trading; its goal is to prevent another crisis like the 2008 meltdown. However, the Volcker
Rule is criticized because its implementation requires joint rulemaking from five different agencies. Wall Street lobbied for numerous
Act regards the Department of Labor’s
because it’s easy to understand and easy to see the benefit of such capped fees.
advisers dealing with retirement accounts to
The Winding Path Through Washington
interests to earn commission and fees. This
quires its supporters in Congress to navigate
regulatory environment is simply too cum-
as well as mostly uniform opposition from
over workers’ retirement accounts. However,
ment is one aspect of concern for many
financial advisers, while the CFPB and the
from voters when debit card fees go unfet-
banks. No federal agency regulates insur-
more debate is the average leverage ratio
Meanwhile the DOL has little expertise in
restrictions on capital and dividend payouts.
Rather than fix the regulatory jumble the
biggest Wall Street firms would have to raise
rule and essentially propose that the SEC
ty” if they want to be exempt from regula-
put their client’s interests ahead of their own
Getting the Choice Act signed into law re-
rule is emblematic of criticism that the U.S.
through some tension among Republicans
bersome. The DOL has some jurisdiction
Democrats. Repealing the Durbin Amend-
the SEC has authority over stockbrokers and
Republicans because of a fear of backlash
Federal Reserve have some authority over
tered. Another issue that will be subject to
ance salespeople; states have that authority.
banks must meet in order to get relief from
financial regulation and its enforcement.
Hensarling has predicted that some of the
Choice Act would simply repeal the DOL
“several hundred billion dollars in new equi-
exercise its authority to implement a similar
tions on capital and dividend payouts.
insurance or bank products, so passage of the
from many fronts. The Council of Institutional
current federal regulation regarding products
letter urging Representatives to oppose the bill.
ities, some IRAs and certificates of deposit
Choice act threatens fundamental investor pro-
rule. But the SEC has no authority over
Opposition to the Choice Act is coming
Choice Act would effectively strip away the
Investors, an advocacy group, recently sent a
like life insurance retirement plans, annu-
The deputy director of the council wrote, “The
and other products.
tections that keep U.S. markets safe, fair and
and trading desks, yet the result of the leg-
REPEAL OF THE DURBIN AMENDMENT. The Choice Act repeals this
just too risky.” Fifty-three pensions, unions and
departed the banks to join or start their own
larly rankled the banking industry. The Durbin
extensions to the deadline by which the large banks must divest their illiquid investments islation caused a brain drain as top traders
hedge funds. By eliminating the Volcker rule, the Choice Act would allow the big banks
to return to the days of proprietary trading,
which can generate bigger profits as well as the bigger risks that go along with speculative trading. Critics point to these risks and
argue that this de-regulation is an unconscionable giveaway to Wall Street. 54 PRIVATE LENDER
11th hour addition to Dodd-Frank that particu-
Amendment sets limits on the fees that banks
can charge for consumers using ATM or debit
cards, while conspicuously not addressing the
fees that can be charged for credit cards. Small-
er lenders and community banks complain that the regulations impose an unnecessary compliance burden on them. However, the details of the Durbin Amendment poll well with voters
vibrant. It’s like taking seatbelts out of cars, it’s other institutions that collectively hold more than $4 trillion in assets signed it, including
the California Public Employees’ Retirement System, Colorado Public Employees’ Retire-
ment Association and New York State Teachers’ Retirement System. The letter went on to argue that the bill would reduce curbs on “abusive” executive pay practices, restrict shareholder
rights in board elections and raise the cost of proxy advisers. It would also impede the Se-
curities and Exchange Commission’s oversight
of financial markets by requiring “excessive” cost-benefit analysis and including “unwise limits on enforcement.”
House and Senate Democrats are uniformly
opposed to the Bill, some of whom said it would be dead on arrival in the Senate. “This is one of
the worst bills I have seen in my time in Congress. The Wrong Choice Act is a vehicle for Donald
Trump’s agenda – to get rid of financial regulation and help out Wall Street,” Rep. Maxine Waters,
D-California, the committee’s ranking Democratic member, said during deliberations this week.
As with most legislative efforts, the potential
for a bill to get passed really lies with the Senate, where a narrower Republican majority com-
bined with the Senate’s procedural and filibuster rules provide Democrats more leverage. As seen
in the House, most, if not all Democrat Senators,
will fight attempts that they believe will weaken
private finance area, watching the developments
Senate floor. Senate Banking Committee Chair-
potential to alter the current lending landscape
DFA at both the committee level and on the
man Mike Crapo (R-ID) stated that he intends
is even more critical as the Choice Act has the
and thus the way that those in the private lend-
to approach the legislation more slowly and
ing business do their business. ■
version that has some bipartisan consensus. It
ABOUT THE AUTHOR
deliberately, with the intention of producing a therefore remains to be seen how much of the current Choice Act might survive into a final
bill, or whether de-regulation of Dodd-Frank might simply get jammed up in the gears of
lawmaking. For executives in the construction
and development sectors, keeping a close eye on how the Choice Act proceeds is critical because the argument cuts both ways: de-regulation of
Dodd-Frank has the potential to boost economic growth, but also to increase the risks of another
banking crisis like in 2008. For executives in the
Jeffrey N. Levin is the founder and president of Specialty Lending Group and Pinewood Financial, which together provide a full suite of boutique private real estate lending services in the Greater Washington, D.C., area. Prior to launching SLG, between 1993 and 2007, Levin was a co-founder and CEO of iWantaLowRate.com and a co-founder and president of Monument Mortgage. Levin is a recognized authority on real estate investing and, as such, is a frequent author, lecturer and panelist, and is a member of the AAPL’s Advisory Education Committee. He earned a BA degree from The American University in Washington, D.C., and lives on Capitol Hill with his wife, Dunniela, a Canadian trade lawyer, and his two sons, Jack and Charlie.
Lender Solutions • Customized set of insurance lender requirements • Coverage will not cancel without your acknowledgement • Force-placed alternative option is available • Affiliate Marketing Program revenue opportunities
YOU INVEST. WE PROTECT. Request your FREE custom proposal today at NREIG.com or call 888-741-8455
Borrower Benefits • Include occupied, vacant, and renovation properties on one schedule • Pay-as-you-go monthly with no minimum earned premiums • Seamlessly add and delete properties as you go • Coverage available in all 50 states
National Real Estate Insurance Group is the nation’s leading agency offering coverage options for real estate investors across the country. Our lineup of products includes: REIGuard, LandlordGuard, PMGuard, TurnkeyGuard, LenderGuard, and CommercialGuard.
JULY/AUGUST 2017 55
Don’t Let Title Issues Delay Your Funding Any problems that could slow funding should be mentioned sooner rather than later by Nema Daghbandan, Esq.
ince the housing crash of 2008, the mortgage market has made a slow but steady
rebound. With the bombardment of new
regulations, a myriad of rules and document
changes, and aggressive competition, worrying about title issues seems to fit at the bottom of the totem pole. However, title problems can
and do arise, and when they happen, the delay can slow your funding or even kill your deal.
Serious title issues can result from typical
“clouds” on a title such as old service liens, encumbrances, easements, or missing con-
veyances that grind your file to a halt. These 56 PRIVATE LENDER
potential problems should be identified early
not have helped, some of those title clouds still
but it is good policy to familiarize yourself
before the title insurance policy can be issued.
by the title agent or by your escrow officer,
with the issues that can affect your closing.
Some items can get missed in the hustle and bustle of juggling multiple originations.
During the peak of the foreclosure crisis,
homeowners were scrambling to save houses
in default by any means possible. Some of the techniques employed included filing UCC
liens, deeding over the property to a relative
or third party, or filing bankruptcy against the property. While the techniques may or may
exist in the marketplace and must be dealt with Other issues may be more innocuous but
can be just as disruptive to the process. Missing signatures on previous title transfers, deceased title holders, mechanic’s liens, HOA dues, tax liens, or judgments all can be resolved but
must be identified early and worked through
before the file gets too far along in the process. Many title problems will be caught and re-
solved by the title agent. Some will require the originator to work with the seller or borrower
to fix them before they cause a delay. If there
Clearing a title is a process that is some-
are problems that could slow funding, bring
times taken for granted. There may be
will allow you to quickly resolve them and
obtain title insurance based on a cloud on the
expected delay. If there are more serious issues
action could be initiated so a court can clear
then the owner may need to retain legal help to
to submit a disputed title claim to the court,
Certain liens or encumbrances may expose the
any encumbrances or blots on a title. The
consult a competent real estate attorney to help
an owner should be aware that until serious
them out into the open with the client. This
instances when an owner will be unable to
ensure they do not get blindsided with an un-
title. When that situation arises, a quiet title
that cannot be solved by the title company,
up the title issue. A quiet title allows an owner
ensure the title coverage is intact and complete.
present evidence, and allow the court to clear
owner to future litigation. The owner should
action can be costly and time-consuming, but
resolve those issues immediately.
title issues are corrected, they will not be able
to close a sale or refinance the property. ■ ABOUT THE AUTHOR Nema Daghbandan’s practice encompasses all facets of real estate transactions representing lenders and brokers, including loan documents for commercial, residential, construction, multi-family, servicing agreements, spread agreements, assignments (of all types), leases, lien releases, procurement agreements, intercreditor agreements and subordination agreements throughout the country. He also leads the firm’s non-judicial foreclosure practice and advises clients on all default related matters, and is a member of the AAPL’s Advisory Education Committee. He has closed hundreds of millions of dollars in loans throughout the country.
JULY/AUGUST 2017 57
Raising Money Locally With Rule 147
crowdfunding portal, you somewhat eliminate all
An easier and more cost-effective strategy
tal (i.e., the money that the portal receives for their
by Jillian Sidoti
he problem with raising money usual-
three issues. It’s not that expensive to file a Form C, you can advertise on the portal, and you can take
any investors. The problem is that the cost of capiservices after the fact) and the limitation on the
amount of money raised (only up to $1,000,000) Under Regulation D, Rule 506(b), you can
make Regulation CF not so palatable.
ly comes in three forms:
eliminate #2 and #3, but then how do you get
Are there any other options?
Advertising issues A ccredited investor issues
be done, but it is not as direct as saying, “Who
all three issues above: depending upon the state,
C ost issues
Under Regulation A, you can solve #1 and
#2 by qualifying an offering with the Securi-
people to know you are raising money? It can wants to invest in my deal?” or “I am offering
a preferred return of 8 percent,” as announcements such as these are prohibited under the general solicitation ban under Rule 506(b). Under Regulation D, Rule 506(c), you
ties Exchange Commission (SEC). However,
can eliminate #1 and #3, but what happens
leave problem #3. Regulation A also doesn’t
accredited, wants to invest? You can’t take his
it can be costly, time consuming, and still
make sense if only a small amount of capital is contemplated for the raise. 58 PRIVATE LENDER
when your cousin, who is a good guy, but not money under Rule 506(c).
Under Regulation CF, utilizing the services of a
Yes. In many ways Rule 147 offers solutions to
general solicitation for investors is allowed;
suitability standards for investors are much
laxer; and it is a far less expensive alternative to Regulation A. Rule 147 of Section 3(a) (11) of the Securities Act of 1933 has always existed as an exemption that allows issuers to raise capital
from investors within one state and use capital
for that state’s purposes. Recently, the SEC made changes to this rule that made it even easier to raise money under Rule 147.
Rule 147 allows general solicitation and has
no suitability requirements. The suitability
requirements and general solicitation rules would be vested in the individual state in
which the issuer elects to conduct its business. The old Rule 147 (still a good rule) was ap-
plicable and allowed issuers to raise capital under the following circumstances:
All of the investors must reside in the state of the offering. 80 percent of the business conducted must be within the state1. T he officers, partners, or managers
primarily direct or control activities within the state.
Offers are limited to in-state residents or persons the issuer reasonably be-
lieves are in state.
The issuer entity must be registered in the state in which they are conducting the offering.
federal exemption in Rule 147, it does not mean
that the state will be as receptive to your offering. Using a Rule 147 exemption is great if you
are in the state of California and most of your
business or properties reside there. If they do,
fornia. BaySierra’s deeds of trust secured
primarily by non-owner occupied residential properties and improved commercial, industrial, multifamily and mixed-use properties.
you might want to consider a registration spe-
Single Family Flip Businesses
istration by Permit. It is under Section 25113 of
has been great throughout California. Finding
by permit, you need to take your offering to
the Great Recession was not a problem,
cific to California. This process is called Reg-
the California Corporations Code. To register the state of California to get approval. Once
you get approval, you are issued a permit and can sell securities throughout California.
Example of Issuers that have raised capital using Rule 147: Lenders Many lenders focus on the California market
have utilized Rule 147 and the California permit rules to raise money for lending to California based entities. For example, the Brownstone Diversified Mortgage Fund set out to raise
$25,000,000 for the purposes of making and ac-
quiring mortgage loans on residential and com-
Since 2010, the single-family flip business
deals at the beginning of the comeback from but financing all the deals was a problem.
Dodd-Frank also changed rules regarding the status of accredited investors: no longer were investors allowed to calculate their primary
residence as part of their net worth to be qual-
ified as an accredited investor. Since so many
California investors’ wealth was tied up in their homes, this change removed a large contingent of investors from the accredited investor pool.
The California permit allowed developers to
raise funds from investors throughout California with little investor requirements.
mercial property as well as specialty lending.
Large Commercial Developers
to conduct a Rule 147 offering without violating
ty company that was organized for the purpose of
and their real estate investment trusts (REITS)
sion adopted a new Rule 147, named Rule 147(a),
trust which were secured by California commer-
offerings. But when Rich Uncles first started
above eliminating the need for cautious advertis-
their permit for $50 million in February 2017 and
instead relied on Rule 147, using the California
With the recent advent of crowdfunding and
the increased use of the internet, it was difficult
RCTC Fund, LLC is a Delaware limited liabili-
Many of us know the company Rich Uncles
point #4 above. On October 26, 2016, the Commis-
making or investing in loans secured by deeds of
from their ads on radio and their public
that allowed flexibility with both points #4 and #5
cial and residential real estate. RCTC received
out, they didn’t use a big public offering and
ing over the internet for those relying on the rule
allows a minimum investment of $5,000.
permit offering rules to raise $25,000,000.
gage Funding” is a California corporation
facility developer, used the California permit
and those entities formed in other states.
One entity that was simply named “Mort-
ActivCare, a San Diego based memory care
that sought to sell its corporate obligations
and Rule 147 for a $30 million offering for
you follow the state’s laws. Some states have
improvement and/or modification of man-
and Colorado. Other states, such as Pennsylva-
developments of up to four (4) units at a time.
to conduct a $50 million commercial property
not. It is important to consider your own state’s
their most recent permit in late 2016 to raise
trial and office spaces throughout California.
deeds of trust, primarily located in Cali-
estate investment trust that not only focused
It’s great in big states like California Rule 147 may be used in any state as long as
some friendly rules, including California, Texas, nia, Arkansas, and the New England states, do
rules before attempting an offering like the ones
contemplated below. Just because there is a great
(Bonds) to fund loans for the purchase and/or ufactured or modular homes or residential BaySierra Capital Fund, LLC received
$50,000,000 to make loans secured by first
four southern California property developThe Shopoff Group in Irvine, use the rules
development offering for various retail, indusBravoZero REIT started a $50 million real
JULY/AUGUST 2017 59
on property purchases but also lending to
MyRacehorse - MyRacehorse, LLC used the
real estate development borrowers.
new Rule 147(a) and formed a Delaware series
Other business outside of real estate
the interests of each series in the state of Califor-
Although real estate is seemingly the most
perfect industry for these types of offerings, others outside of real estate have attempted to use the California permit and Rule 147 to build their business:
Cuvee Club - The proprietors of the Cuvee
Club intend to establish a cabaret venue
limited liability company. They then registered nia under one permit. This would allow them
to sell interests in separate race horse purchases made in separate series allowing investors to
“choose their horse.” This type of offering may
have never been approved by the SEC under Reg-
ulation A or allowed on a crowdfunding platform. For the lender that wants to raise money in
combining fine dining, boutique beverages,
their own hometown to lend in their own home-
bands and throwback comedy in Temecula,
147 and their own state’s securities registration
music and performances by jazz musicians, California. Since this type of business is
usually best financed by locals, a California permit made sense.
60 PRIVATE LENDER
town, using the exemption provided by Rule
rules might be the way to go. Always be sure to
consult an experienced securities attorney to see if Rule 147 is right for your business. ■
ABOUT THE AUTHOR Jillian Sidoti, Esq., CCIM is one of the country’s leading experts on Regulation A+. Since 2008, Jillian has submitted multiple Regulation A Offering Circulars to the Securities Exchange Commission for approval making her one of the few attorneys familiar with the law before the changes under the JOBS Act. Since the JOBS Act, Jillian has assisted multiple companies and entrepreneurs realize their fundraising goals through Crowdfunding, 506©, and Regulation A. She is a practiced speaker whose engagements are well attended and often come to produce sound bites and additional discourse. In Crowdfunding Myth, Jillian enumerates on the falsehoods that people tend to believe about crowdfunding and points prospective business owners in the right direction. For several years, Jillian taught Finance and Accounting for the BS and MBA programs at the University of Redlands, drawing on her experience as financial analyst, controller, and chief financial officer for many companies from manufacturing to real estate development. Jillian may be contacted at jillian@ crowdfundinglawyers.net or 323-799-1342.
Regulation D, Rule 506(c) versus Regulation A+ Why it’s necessary for real estate investors to understand the difference by Jason Powell & Abhi Golhar
rowdfunding is the biggest buzzword in raising capital since the Jumpstart
Our Business Startups (JOBS) Act of 2012 was
enacted. The word crowdfunding has become
synonymous to advertising for investors, which under certain provisions of the JOBS Act is
allowed. Crowdfunding was permitted before the enactment of the JOBS Act, but only for not-for-
Title IV of the JOBS Act, also referred to as
Regulation A+, allows companies to use equity
crowdfunding platforms to raise as much as $50
million from both accredited and non-accredited investors. Regulation A+ is broken up into two tiers, Tier 1 and Tier 2.
This article will explore the differences
between Regulation D Rule 506(c) and Regu-
profit ventures. For-profit companies could not
approved intrastate offering.
Regulation D Rule 506(c):
advertise for investors without first obtaining an Title II of the JOBS Act directed the Securi-
With the adoption of the regulations for Rule
ties and Exchange Commission (SEC) to draft
506(c), companies are now allowed to advertise
limited to accredited investors, which resulted in
public. Under Rule 506(c) there is no limit to the
regulations allowing advertising of offerings
the SEC’s adoption of Regulation D, Rule 506(c) in September 2013.
their investment opportunities to the general
amount a company can raise in this manner. The
company raising capital is able to create a website
soliciting the funds, or they can hold seminars
or meetings with potential investors and solicit
investment funds from those in attendance. This is a significant change to the prior offering rules that clearly prohibit such activities.
There is one catch under Rule 506(c): the com-
pany raising funds can only accept funds from “accredited investors.” An accredited investor
is someone who has $200K in annual income ($300K if married) or $1 million in net worth
(excluding equity in their home). This verification requirement that all purchasers be accredited in-
vestors contrasts with the “old” Rule 506 offering, which is still allowed by Rule 506(b), in which up to 35 purchasers can be non-accredited investors if they can evaluate the merits and risks of the
potential investment. Going forward, companies JULY/AUGUST 2017 61
selling securities must make a trade-off between being able to use general solicitation but being
limited to only selling to accredited investors and
being able to sell to up to 35 sophisticated non-accredited investors but being limited to private
offerings that do not involve general solicitation. The company raising capital by issuing the
securities must take reasonable steps to verify
that each purchaser is an accredited investor. This verification rule is a new requirement for Rule 506(c) and is always required when a company makes general solicitation and marketing
efforts for investors. The SEC has set forth four non-exclusive safe harbors that are sufficient, but not necessary, for a company to show
compliance with the verification requirement.
The SEC also allows a general principles-based
framework in order to determine whether, under the particular facts and circumstances of each
case, a company has taken reasonable steps to
verify investor status. Any company that fails to meet one of the non-exclusive safe harbors will
still be able to rely on a facts and circumstances analysis of the reasonableness of the steps it
took to verify accredited status under the general principles-framework.
Non-Exclusive Safe Harbors The SEC has provided the following four
non-exclusive safe harbors that companies can
rely on to satisfy the verification requirement in the new Rule 506(c):
Analyzing a natural person’s U.S. tax doc umentation to verify income in the past
two years combined with obtaining a written statement of the investor’s expectation for income in the current year;
Reviewing an investor’s consumer credit report, bank and brokerage statements,
U.S. credit reports, or real estate appraisals to confirm net worth;
Using a third-party registered or licensed 62 PRIVATE LENDER
professional, such as a securities attorney
deemed to satisfy the verification require-
or certified public accountant to provide
ment in Rule 506(c) with respect to the
indeed verified as accredited; or
purchaser at the time of sale that he or
written confirmation that the investor is
For any natural person who invested in a company’s Rule 506(b) offering as an ac-
credited investor before the effective date
purchaser by obtaining a certificate by the she qualified as an accredited investor. In general, the safest method is to use a
of Rule 506(c) and remains an investor of
third-party licensed professional to conduct
by the same company the company is
the company, for any offering conducted
this review and provide the company with a
Principle Based Verification Under the general principles-based
framework, whether the steps taken to verify
investor status are â€œreasonableâ€? is an objective determination by the company in light of the particular facts and circumstances of each purchaser and transaction.
The factors that the company is to consider are: The nature of the purchaser and the type of accredited investor that the purchaser
claims to be;
whether the company took reasonable steps to
the company has about the purchaser; and
Whether the steps a company took are adequate
The amount and type of information that The nature of the offering such as the
manner in which the purchaser was solic-
verify that a purchaser was an accredited investor. to meet this test can vary, based on the factors
above. The SEC has indicated that the compa-
ited to participate in the offering, and the
ny may rely upon, in addition to other reliable
available filings with government regulatory
terms of the offering, such as a minimum Under this principles-based verification frame-
work, there is no set formula for what constitutes
sources, information obtained from publicly
bodies, third-party information that is reasonably reliable (such as pay stubs indicating a natural
JULY/AUGUST 2017 63
personâ€™s income for the last two years), or third
consequences could be dire.
status (such as accountants, securities brokers
can offer up to $50 million in any 12-month peri-
offering and the way the purchaser was solicited,
and Tier 2.
ny, the greater the measures the company must
panies soliciting on a website generally available
million in any 12-month period. Under Regula-
parties that are able to verify a personâ€™s accredited and attorneys). With respect to the nature of the
the greater the general solicitation by the compatake to verify accredited status. For example, com-
Regulation A+ is divided into two tiers, Tier 1
Under Tier 1, a company can raise up to $20
to the public must take greater measures to verify
tion A, all investors must be provided with, or
offering with a substantial minimum investment
This is referred to as an offering circular. For
accredited status than companies soliciting for an on a website available only to a pre-selected group of high net worth individuals.
Utilizing the principle-based approach to
verify accredited investor status means the company is relying on the judgment of its
team. The risk is that if at any point the SEC
fering circular. For Tier 2 offerings, the offering
circular is subject to review and qualification by the staff at the SEC, but is not subject to review by state securities regulators.
Companies offering securities under Tier 2 be-
Tier 1 offerings, this offering circular must
their financial results, companies raising money
also be filed with, and is subject to review and
qualification by, the staff at the SEC as well as by the securities regulator in the states where the offering is being conducted.
One notable distinction about investing in a
been properly verified, the company could
ongoing reporting requirements other than a
64 PRIVATE LENDER
with, or given information to access to an of-
come subject to ongoing reporting requirements.
Tier 1 offering is that companies relying on Tier 1
lose its entire Rule 506(c) exemption and the
od. As with Tier 1, all investors must be provided
given information to access about the offering.
determines the companyâ€™s judgment was
flawed, and that even a single investor has not
Companies offering securities under Tier 2
Like public companies that regularly disclose
under Tier 2 will also file regular reports with the SEC. Tier 2 companies are only required to file a
semiannual (Form 1-SA) and annual report (Form
1-K) as well as interim current reports upon (Form 1-U) the occurrence of certain enumerated events. Securities offered under Tier 2, however, may
will not need to obtain an audit and do not have
be listed on a national exchange to the extent that
final report on the status of the offering.
listing requirements for that particular exchange.
the company applies for listing and meets the
In such circumstances, the company would be
to an SEC order denying, suspending or
a. For individuals, 10 percent of the great-
ing reporting requirements of public companies
rities within five years before the filing of
b. For entities, 10 percent of the greater
required to comply with the more extensive ongoincluding, for example, the requirement to file quarterly reports.
Eligible Securities Equity, debt and convertible securities (in-
cluding guarantees of such securities) are eligible for sale under both Tier 1 and 2. The SEC has
clarified that all securities, rather than just equity securities, that are convertible or exchangeable into equity interests are eligible, which would expand the scope to include warrants.
Eligible Companies Only companies that are organized in, and
revoking the registration of a class of secuthe offering statement.
Limitations on Secondary Sales The SEC believed that allowing secondary
sales under Regulation A+ was important in
the first year. The amount of securities that can be
Testing the Waters
the following 12 months is limited to 30 percent of
from potential investors, a practice known as
period, the final rules differentiate between sec-
A can test the waters both before and after filing
company’s first Regulation A offering and during the aggregate offering price. After the 12-month
1. Affiliates of the company are limited to no
more than $15 million in the case of Tier 2, over a 2. Non-affiliates are limited only by the
officers, partners or managers primarily direct,
maximum offering amount permitted by either
from inside the United States or Canada.
any 12-month period; sales by the company and
to use Regulation A+:
Companies subject to reporting under the Securities Exchange Act of 1934 (Exchange
Tier 1 ($20 million) or Tier 2 ($50 million) during secondary sales by affiliates are aggregated with
Companies subject to bad actor disqual ification;
Under Tier 2, unless the offered securities will
Companies that are or have been subject
materials used after the offering statement has
been publicly filed with the SEC must be accom-
panied by a current preliminary offering circular or contain information on how the most current preliminary offering circular can be obtained.
This requirement can be satisfied by providing a
website where the preliminary offering statement is available, including the SEC’s site, EDGAR.
Companies must include testing the waters
review or first filed and must update the exhibit
can invest, or how much you can invest, if you
Companies who failed to file ongoing reports required by Regulation A+; and
the offering statement with the SEC. Marketing
offering amount under Tier 1 or 2.
when calculating compliance with the maximum
Companies of fractional undivided inter ests in mineral rights;
“testing the waters.” A company using Regulation
materials as an exhibit to the offering statement
Blank check companies;
Companies can obtain indications of interest
nonaffiliated secondary sales for these purposes
Act), other than voluntary filers;
Investment companies and business
the company knows, at the time of sale that the
sold by existing security holders at the time of the
in the United States or Canada for purposes of
The following types of companies are unable
Companies may rely on an investor’s represen-
representation is untrue.
more than $6 million in the case of Tier 1, or no
control and coordinate the company’s activities
required to inform investors of these
requirements for affiliates and non-affiliates after
added first-year limits and created different
a Regulation A+ offering. A company will be con-
determining eligibility to use Regulation A+ if its
fiscal year-end Tier 2 companies are
tation of compliance with the limitations unless
ondary sales by affiliates and by non-affiliates:
sidered to have its “principal place of business”
of annual revenue or net assets at
providing liquidity to security holders, but it
have their principal place of business in, the
United States or Canada are eligible to engage in
er of annual income or net worth
There are no limitations on whether you
are investing in an offering relying on Tier 1. be listed on a national securities exchange when the offering is qualified, purchasers must be one of the following: 1. Accredited investors
2. Limited to purchasing securities in an amount not to exceed:
when it is either first submitted for nonpublic
for substantive changes in the testing the waters materials after the initial nonpublic submission or filing. Companies and intermediaries using testing the water materials after the offering
statement has been publicly filed with the SEC must update and redistribute the marketing
materials in a substantially similar manner to
how the materials were originally distributed, to the extent that the materials themselves or the
preliminary offering circular becomes inaccurate or inadequate in any material respect.
Regardless of whether a company tests the
waters in the prequalification period, the company is required to deliver a copy of the pre-
liminary offering circular to prospective pur-
subject to the Tier 1 ($20 million) and Tier 2 ceilings ($50 million).
chasers at least 48 hours before a sale. Testing
• Rule 506 always preempts state securities
to antifraud and other civil liability provisions
filings and anti-fraud provisions. Tier 1
the waters marketing materials remain subject of the federal securities laws.
The advantages of Regulation A+ in relation to
Rule 506 are as follows:
• Regulation A+ securities are not “restricted securities.” Securities purchased in a Rule
506 offering are restricted securities, and not freely tradable.
•R egulation A+ securities can be offered to the general public. General solicita-
tion is permitted under Rule 506(c), but sales pursuant to Rule 506(c) can only be made to accredited investors and
the company needs to take reasonable
steps to verify the status of purchasers as accredited investors.
• Companies are not required to use reasonable methods to verify accredited investor
status for purposes of the investment limita-
tion in Tier 2 Regulation A+ offerings. Unlike Rule 506(c), companies in a Regulation A+ offering can rely on purchaser self-certifi-
cation unless the company knows that the purchaser’s self-certification is wrong.
• There is no limit to the number of non-accredited investors in a Regulation A+
offering. Non-accredited investors are not permitted in Rule 506(c) offerings.
The advantages of Rule 506 in relation to
Regulation A+ are the following:
• There are no limitations on the amounts that can be raised. Regulation A+ offerings are
66 PRIVATE LENDER
capital more efficient as the real estate companies and operators are no longer restricted to just approaching investors they know.
Regulation A+ is not for the casual real
registration requirements - other than notice
estate company or operator, rather it is for
Regulation A+ offerings are subject to state
that are serious about raising money, want to
securities registration requirements.
• There are no mandatory disclosure provi-
those real estate companies and operators
reach a wider audience and plan to be in this business for the long-haul. Regulation A+
could also be ideal for seasoned issuers who
sions if sales are made only to accredited
have already conducted private placement
operators who are ready to take their real
investors. Regulation A+ contains various
• Rule 506 offerings do not involve any review
offerings in the past or those companies and estate investment companies public. Due to
the lengthy approval process for a Regulation
of the offering documents by the SEC. Reg-
A+ offering, the format won’t necessarily
to be filed with and are subject to review by
who has a property under contract with a
Tier 1 offerings.
Regulation A+ could be an excellent option
ulation A+ offerings documents are required
work for the real estate company or operator
the SEC and state securities regulators in
set closing date of 60 or 90 days. However,
• Rule 506 does not require ongoing reporting by the company, unlike the Regulation A+ Tier 2 provisions.
Why is this important to real estate investors? The dawn of crowdfunding has definitively
reshaped real estate investing in many significant
ways, and those effects have been largely positive. For example, crowdfunding regulations have brought an increased degree of transparency
to real estate investing. In addition to increased transparency, the most significant change has
been the fact that crowdfunding has injected a
new level of accessibility into the real estate in-
vesting marketplace. Crowdfunding has opened up an entirely new asset class to a significantly
wider pool of investors - in the case of Regulation A+ - without requiring a high minimum amount in order to invest. As to real estate companies
and operators, crowdfunding has made access to
for private money lenders, serial borrowers, fix-and-flippers or commercial investors
with track records who want to raise money
to buy multiple properties under a specified offering, semi-specified offering or “blind pool” scenario. ■
ABOUT THE AUTHORS Jason Powell is a corporate, securities and real estate attorney. Jason focuses much of his practice on representing real estate operators, developers, and lenders looking to raise capital to grow and expand. He can be reached at firstname.lastname@example.org. Abhi Golhar is the host of “Real Estate Deal Talk” and Managing Partner of Summit & Crowne. Abhi uses a “value-added” approach to invest in real estate renovation, new construction and development opportunities in the Southeast United States. He actively educates and works with investors to deploy market-driven strategies that yield success. He holds a B.S. in Electrical Engineering from the University of Michigan. You can find him on Twitter, Snapchat, and Instagram - @AbhiGolhar.
JULY/AUGUST 2017 67
5 Ways to Get Crowdfunders to Notice and Fund Your Real Estate Deal Strategies to get investors interested in your projects by Abhi Golhar
ike every other type of investment,
real estate investment has changed
significantly over the past several years.
To remain successful, real estate investors
must keep up with new ways of funding and conducting deals. One of the most promis-
ing developments for investors is the advent 68 PRIVATE LENDER
of crowdfunding. In crowdfunding, groups
real estate investors looking to put together
online platforms, to fund a project. This
as simple as putting together a deal and hop-
of people come together, usually through
system distributes the risk and reward of an investment between many lenders, rather than just to one individual lender.
Crowdfunding has significant potential for
money for a deal. However, crowdfunding isnâ€™t ing people are interested. If you want to fund your deal with real estate crowdfunding, you need to stand out from the crowd. Here are
five great ways to get crowdfunding investors
interested in your real estate project.
#1: Tell Your Story in an Engaging Way Though investors are primarily interested in
#3: Show Your Numbers and Get Them Right Before you even think of putting together a
crowdfunding campaign, you need to have all the
making money, you must “hook” them in order
numbers lined up for your project. Know exactly
One of the best ways to do this is to tell the
repairs or renovations will be and what you can
them want to learn more. Maybe your invest-
to have reliable estimates created of how much
to save and modernize by converting it into
will want to see your plan for turning a profit.
think would be perfect for a growing startup.
pro investors who are making buying mis-
to explain how your deal can be facilitated.
what the property will cost you, how much any
story of your project in a way that will make
expect to pay in taxes and fees. You will also want
ment property is a vintage warehouse you want
you can reasonably make on the deal, as investors
luxury lofts, or a commercial property deal you
In today’s market, there are many new and
Whatever it is, tell the story of the deal and
takes. More specifically: their “Total Project
that will resonate with people who view your
tion price and renovation costs, exceeds 70
them interested right off the bat - they’ll stick
The key to avoiding that error is to stay true
your real estate deal a great investment.
In the event an inflated market corrects,
#2: Use Interesting Visuals
problems to your bottom line. As the fed
of your own experience in an engaging way
Cost,” which is a simple addition of acquisi-
crowdfunding page. If you “hook them” - get
percent of their After Repair Value (ARV).
around long enough to find out what makes
to your formulas and true to your numbers.
Like anyone else, investors like visual aids
even a small drop in sales price can cause increases interest rates, overall affordability
as opposed to walls of text and numbers. In-
will decrease, transitioning homeowners
plan to invest in, videos of yourself talking
to the $450,000s. If you didn’t buy right, this
clude plenty of pictures of the property you
who expected to purchase in the $500,000s
about your plans for it and an architect or
can become a problem, quickly.
look like when completed. Even a simple
bers and be unforgiving about your buy box.
surrounding area can be useful as long as it
#4: Be Honest About Challenges
the monotony of plain text.
is always peachy and contractors are in love
more visuals. It’s that simple. If you’re look-
the reality in which you live. Nothing turns
artist’s rendering of what your plans might graph showing property value data in the
conveys relevant information and breaks up The more complicated the project, the
What’s the lesson here? Know your num-
will take a long time to complete. Be honest about any issues you think may affect the
investment. Investors will find this refreshing
and be more likely to trust you based on your admissions that the deal isn’t perfect.
#5: Get Results All of us know investors love proven track
records. If you succeed on one crowdfunding venture and your investors earned a solid
return, you’ll find it much easier to secure
funding for your next venture. For this reason, it might be worth starting your crowdfunding efforts with small deals you can easily secure funding for elsewhere. These small ventures will give you a history of delivering on your
promises, and a group of investors who will be eager to work with you again. Treat your
investors properly, and they will do the same for you. It can be a beautiful circle.
As more investors look to online platforms to
find opportunities, crowdfunding can be one of
the best ways to grow your real estate investment business. Investors who succeed on crowdfunding platforms can fund deals easier and more quickly than those who are still stuck dealing with banks and hard money lenders. Make
yourself stand out and give lenders good reasons
to fund your project. You can reap the benefits of crowdfunding in your own real estate business. ■
Being the borrower who says everything
with you, leaves investors wondering about
ing for crowdfunders to provide funding for
an investor off more than seeing a project
without renderings, surveys, appraisals,
Investors know that nothing is ever perfect,
reality. Investors are very sharp. Provide them
any issues the property may have. Perhaps
so they can win, and so can you.
a bit of a slump lately, or perhaps the project
your single-family new construction project
being billed as a guaranteed moneymaker.
engineering, etc., you’re living in a different
so it’s a good idea to be forthcoming about
with every insight you can offer on your deal
the real estate market in the area has been in
ABOUT THE AUTHOR Abhi Golhar is the host of “Real Estate Deal Talk” and Managing Partner of Summit & Crowne. Abhi uses a “value-added” approach to invest in real estate renovation, new construction and development opportunities in the Southeast United States. He actively educates and works with investors to deploy market-driven strategies that yield success. He holds a B.S. in Electrical Engineering from the University of Michigan. You can find him on Twitter, Snapchat, and Instagram - @AbhiGolhar.
JULY/AUGUST 2017 69
70 PRIVATE LENDER
MANAGE & LEAD
6 Areas of Focus for Corporate Culture Improvement Creating a top-notch office environment will increase your company’s likelihood for success by Jeff Chaltas
healthy corporate culture can have
amazing results on a company’s bottom
line. Improved productivity, employee retention,
customer service and effective recruiting are just a few of the benefits of a positive culture.
environments to motivate their employees.
Employees who believe they’re in a good
working environment are more likely to remain
with the company – decreasing the costs of hiring and training new employees. These employees often become positive public advocates for the
company through their social networks – both online and offline.
Here are six areas to consider when seeking to
a company. Sure, some of the reviews might
improve corporate culture:
were let go, but website visitors often read sev-
company’s leadership views employees as more
Without that, the cold fact is there would be no
be “sour grapes” from former employees who
eral reviews to get an overall sense of whether a
In any organization, the work must get done.
than faceless sources of labor output.
business. However, the development of a healthy
studies show that at least half of all job candi-
satisfaction. Satisfied employees are likely to be
considerable empathy at appropriate times to
Indeed.com or similar websites before making
at companies that have ignored any efforts to
tions through the eyes of others. Several research
Effective recruitment is enhanced by the
power of positive word-of-mouth. Several
dates read company reviews at Glassdoor.com, a decision to apply for or accept a position with
Corporate culture is closely tied to employee
more productive and healthy than counterparts enhance culture or have adopted high-stress
corporate culture requires managers to show
employees. Empathy is the ability to view situa-
studies have shown that empathy is one of the
JULY/AUGUST 2017 71
MANAGE AND LEAD
top attributes employees want in a manager.
has become increasingly popular and seems
business to help set rules and guidelines about
ingful connections with their staff members. A
on as broadly as many labor experts expected
be clearly aware of them.
Leaders without it are unable to build mean-
study by Development Dimensions International showed that only 40 percent of supervisors were
proficient in empathy. More than simply a feeling, empathy needs to be reflected in managerial
behavior to maximize the performance of a team. It’s a key aspect of emotional intelligence (EI/EQ), defined as the ability to understand, recognize and manage a person’s own emotions and to
perceive the emotions of those around him or
her. An employee might work for a manager who doesn’t exhibit empathy. However, if that same
employee knows a manager has his or her best
interest at heart through words and actions, then productivity and appreciation for the work environment is likely to be substantially better.
Flexibility Flexibility covers everything from telecom-
muting to flexible work schedules to adequate bereavement policies. While telecommuting
72 PRIVATE LENDER
to vary by industry, it has never quite caught
years ago. Unfortunately, many business leaders
topics related to flexibility and to help employees
continue to envision employees doing a minimal
fear the lack of visual oversight. Conversely, many
complete assignments without their supervisors
favor of telecommuting should be an employee’s
a healthy level of respect and trust when empow-
amount of work – perhaps in their pajamas – and
employees continue to argue that the key factor in productivity, and there should be a level of trust from management to allow it.
Flexible work schedules are highly popu-
lar with many companies and another way to
improve culture. This allows employees to attain
Most employees want to be empowered to
watching every little step of the process. It shows
erment is given to employees. Yet some managers have a tendency to smother their employees
through micromanagement, which creates a negative corporate culture.
Employees do need feedback – positive and
a better work-life balance and meet family obli-
negative – and they should be open to that
There is often a “core time” when employees
when it steps over a certain pre-determined
gations, such as picking up a child at pre-school. need to be on the job, but the start and stop times can be adjusted to a degree. A study by Bentley
University showed that 77 percent of millennials
believe flexible work schedules increase productivity for employees in their same age group.
An employee handbook should be part of any
feedback, but they will resent micromanagement threshold they’ve set in their minds. For instance, if a supervisor wants all subordinates to have
cleaned-off desks before they go home for the
evening, more than a few of them might feel this
is an overreach (and perhaps anonymously leave the famous photo of Albert Einstein’s cluttered
desk on the supervisor’s chair).
send a message that leadership doesn’t value
How many managers have broken the common
“mini me’s” out of all their team members. These
in style and substance, but they all have one
private by humiliating a team member in a group
Managers also can sometimes try to create
managers might expect their underlings to learn a computer program as well and as quickly as they did, or they might demand they use the same computer keyboard shortcuts they use
to increase their productivity. While it’s proper to share skills with others when the position requires it, managers need to ensure they’re not smothering employees with their influ-
exemplary performance. Programs vary widely common ingredient – they widely acknowledge
that employee contributions to a corporate effort are commendable and worthy of distinction
among peers. Recognition programs typically
add positive energy to what might otherwise be a mundane working environment.
Employees value opportunities to provide
feedback and participate to some degree in ideas
ence. Employees can come to resent the forced
that will improve the company’s operations and
on the fringe of core duties almost as much as
feedback is being requested and considered,
Managers must recognize that everyone has their
Encourage two-way channels of feedback in as
employees will never be manager clones.
company and its culture.
use stern pressure and fear on employees
seldom works for long. If they’re not meeting
ers can greatly affect morale and culture. Their
transfer of knowledge or work habits considered
working environment. When they know their
they resent the micromanagement of projects.
they feel a stronger bond with the company.
own unique strengths and weaknesses, and that
many situations as possible to help improve the
Although it might work for a while to
to get the most productivity out of them, it
reasonable expectations and aren’t open to
improving through coaching, it’s in their and management’s best interest to let them go.
Some companies with unreasonable expectations take a “churn and burn” mentality,
where employees are constantly searching
for “greener pastures” at the first opportunity. There are statistics backing up the fact that employees leave companies because of bad
supervisors more than any other factor. There are some cases where the supervisor is only following corporate “marching orders” and
needs to place unfair demands on a team to meet goals, but that will seldom have any relevance in the minds of employees.
A company without an employee recognition
program is not doomed, but the lack of one can
setting? This and other important management principles can be taught in a half-day session.
The result would not only be better leaders inside the company, but a better corporate culture with higher morale and productivity.
Training also encompasses employee
enrichment. In a good corporate culture,
employees are encouraged and allowed to
grow professionally by learning new skills.
Companies need to offer and promote training to enhance their workforce and help their employees increase their expertise.
Six areas have been listed here as a good
starting point to improve corporate culture,
but there are many more. It requires several
diverse elements or methods to build a strong The leadership style of managers and own-
style should create a positive environment for
employees so they can be their most productive and satisfied, while also enabling the company
to meet its objectives. If employees seldom hear from top leadership, a level of mistrust can set
in. “Water cooler” talk and untrue rumors will often fill the void left by a lack of leadership
exposure and communication. High employee morale is enhanced by plentiful communications. Transparency should include frequent
performance feedback and information about
the company’s goals and actions from supervisors and top leadership.
Training Companies often cut corners in training man-
Employee Recognition/ Feedback Mechanisms
management tenet of only offering criticism in
agers on how to lead a team. Many organizations don’t train new managers at all, expecting them to be good leaders because they were accom-
plished employees before promotion or hiring.
corporate culture – not just a few. This diversity is needed because each employee will value various cultural characteristics differently.
For instance, Bob in Human Resources might believe that being able to telecommute from his home on Fridays is a lot more attractive than Janet in Payroll, who is more enthusi-
astic about the company’s policy of allowing
employees a day off every year to volunteer for their favorite nonprofit organization.
Building a top-notch corporate culture is
a way to increase the odds of organizational success. Ask employees for ideas on how to enhance culture, survey them about ideas
already formulated, implement the best ones, and then watch your organization take flight to a higher level. ■
ABOUT THE AUTHOR Jeff Chaltas is a freelance writer and published author in the Kansas City area. He has served in various roles in corporate and marketing communications in diverse industries for more than 25 years.
JULY/AUGUST 2017 73
LAST CALL WITH ADAPIA D’ERRICO
While I cannot predict the future, every day is an opportunity to work towards goals, growth, and a better future. What I can count on is that I always put my passion and vision into anything I jump into.
Opportunities Come Quick, Be Ready to Take Action
ecently, my business partner said, “Some people build a busi-
ness. Not you. You build a business and you build your house!”
What can I say? The smart answer is that I ‘totally got this’ and I’m
pulling it off flawlessly, according to plan. The realistic answer is that I jump into things when they feel right and figure things out on the fly. I look for well-timed opportunities with the potential for strong
upside and major personal growth. But I don’t know what twists and
challenges await, what may go off track, or the shape of the outcome. I didn’t plan on completely rebuilding the property. It was sup-
posed to be a quick DIY remodel that we’d flip in two to three years. Two years later, the property is not quite finished, and is basically new, save for the footprint and the framing.
As things stand, we’re not leaving anytime soon. It’s no longer
ness. I’ve been an entrepreneur for a decade, launching brands and
businesses; failing at some, succeeding at others. I don’t always need all the details upfront – where would be the fun in that? I’ve learned
that adaptability, perseverance, curiosity and optimism are requisites, especially during tough times. Most importantly, I’ve learned that
innovation rooted in a desire to do good work and to make a meaningful impact leads to success, no matter how you measure it.
I feel this way about crowdfunding, crowd financing and the impact
that regulations, startups and the omnipresent internet are having in real estate and finance. With artificial intelligence, advanced algorithms and with machine learning coming into play, we’re on the crest of the next wave of change, progress, and uncertainty as to where it will all lead.
While I cannot predict the future, every day is an opportunity to
a flip, it’s a hold. And it’s home. What happened? We made the
work toward goals, growth and a better future. What I can count on
market value pricing (MVP) needed for a true flip. However, we did
never knowing where it will lead but trusting that the process is the
first-timer “mistake” of designing to our tastes rather than doing the
assess market trends and data, as well as our ability, resourcefulness, and willingness to put in the work for a long-term growth play.
What an experience! Frustrating, even infuriating at times but also
fun, challenging and rewarding. The process was so different from
what I thought it would be. Did we overspend? Probably. Could we have done less? Possibly. Have I developed new skills, abilities and know-how? Absolutely. Will I do it again? Ask me later!
This experience, I realized, isn’t dissimilar to building a busi-
74 PRIVATE LENDER
is that I always put my passion and vison into anything I jump into, teacher and that I’ll forever be a student. ■
AdaPia d’Errico is a passionate and visionary executive with extensive experience across countries, cultures and both established and entrepreneurial business environments. She is experienced in growing companies, launching brands and building online communities that generate demand and awareness. AdaPia is COO at AlphaFlow, the first automated portfolio service for real estate investments. Prior to AlphaFlow she was Chief Marketing Officer at real estate crowdfunding platform Patch of La and co-founded two woman-owned businesses in the new media industry. AdaPia is a coach and mentor, author and speaker on topics such as entrepreneurship, crowdfunding, and brand and marketing.
JULY/AUGUST 2017 75
Symbol of Excellence FOR PRIVATE LENDING
Members of the American Association of Private Lenders are the new trend-setters in the private lending industry. From their voluntary adherence to a Code of Ethics to their knowledge of the private lending process, they are the gold standard for the profession. Activate your membership with the American Association of Private Lenders to give your business the professional advantage and career boost it needs.
You will: • Join a viable network of industry experts •G et immediate recognition as an industry professional • Have a voice in creating the standards for the industry • Have access to exceptional professional development opportunities •G et added marketing support and opportunities to enhance your business
It’s time to take your business to the next level. JOIN AAPL TODAY!
AAPLONLINE.COM • (913) 888-1250
July/August 2017 www.aaplonline.com