PL PRIVATE LENDER The Official Magazine of AAPL November/December 2016
Allen Shayanfekr LENDER LIMELIGHT: LENDER LIMELIGHT:
SHARING THE DREAM SHARESTATES CEO & CO-FOUNDER ARING 22SHSHARESTATES EAM CEO & CO-FOUNDER THE DR
■ Gray: The New ‘It’ Color ■ Is Seller Financing for You?
■ Gray: The New ‘It’ Color ■ Is Seller Financing for You? ■ The Disappearing ‘Gut Feeling’ ■ Alternative Funding Abounds
■ The Disappearing ‘Gut Feeling’
■ Alternative Funding Abounds
■ Professional Resolutions for 2017 ■ Communication is Perception
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NOVEMBER | DECEMBER 2016
What’s Current News about the people and organizations in our industry
AAPL Annual Conference Recap
Wide Open for Business
See all of our favorite photos from this year’s event!
Crowdfunders’ alternative lending solutions add value to the marketplace
by Robert Greenberg
Gray is the New ‘It’ Color
Is Seller Financing for You?
Sharing the Dream: Crowdfunding platform making real estate accessible
Baby Boomers having major impact on construction & private lending
Alternative form of financing can be quite beneficial
with Allen Shayanfekr
by Jeffrey N. Levin
by Abhi Golhar
To Be Clear
Out with the Old & In with the New
The Demise of ‘That Gut Feeling’
Importance of communications & perception in litigation
Professional resolutions to consider in the New Year
Data-drive decision-making is increasingly gaining favor.
by Eric D. Dean, Esq.
by Erica LaCentra
by Chrissey Breault
NOVEMBER/DECEMBER 2016 3
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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 All Information is indicative only and may be amended, superseded or replaced by subsequent summaries and should not be considered as any advice whatsoever, including without limitation, investment, legal, business, tax or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
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4 PRIVATE LENDER
PRIVATE LENDER R. MICHAEL WRENN CEO, Affinity Enterprise Group
EDDIE WILSON President, Affinity Enterprise Group
LINDA HYDE Executive Director, AAPL
LINDA WIENANDT Editor-in-Chief
HEATHER ELWING-DIXON Editorial Assistant
CHRISSEY BREAULT Director of Marketing and Member Services, AAPL
EMILY BOWERS Graphic Designer
CONTRIBUTORS: Eric D. Dean, Esq., Abhi Golhar, Robert Greenberg, Erica LaCentra and Jeffrey N. Levin.
PHOTOGRAPHY: Cover/Lender Limelight: Jeffrey Rosenberg Conference Recap: Lynn Brennan 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.
Take This Time to Relax but Also to Reflect and Plan For most people, the end of the year is the most unproductive time. But it’s a welcome change of pace because you get to slow down and enjoy the holidays with family and friends. While the importance of downtime for relaxation cannot be overlooked, it’s also the best time to reflect on the past year and plan for the next. As Jeffrey Levin points out in his article describing the impact that retiring Baby Boomers are having on the construction and private lending industries, “the key is to do your homework. Stay vigilant for new opportunities, while taking a systemic approach” to analyzing potential new projects. As we at the American Association of Private Lenders reflect on the past year’s challenges, changes and successes, we know the impact we have made on the private lending industry and maintain a commitment to excellence through education and ethics. Look for some big changes in 2017, including a new look for Private Lender magazine early in the year. But I don’t want to jump into the new year without savoring the rest of 2016. On behalf of the entire AAPL staff, I would like to take this opportunity to thank all of our subscribers, advertisers and contributing authors for your continued support, and wish you all a happy and healthy holiday season. Enjoy this time with your family and friends. And may 2017 be a happy and prosperous year for us all! •
Visit www.aaplonline.com/privatelender, 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 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is prohibited.
LINDA HYDE Executive Director, AAPL
Copyright © 2016 American Association of Private Lenders. All rights reserved.
NOVEMBER/DECEMBER 2016 5
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CONTRIBUTORS MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE
CHRISSEY BREAULT is a Pittsburgh native and hospitality major, Chrissey started a parttime photography and design business in 2009, while working full-time in local government communications. She is currently Director of Marketing and Education Services with the American Association of Private Lenders.
ERIC D. DEAN, ESQ., is the “Client Relations Partner” at Straggas Dean LLP, a law firm serving the commercial real estate, hospitality and financial services industries from five strategically located offices throughout the State of California. He attended UCLA as an undergraduate and is an honors graduate from UCLA School of Law. Dean has over 30 years’ experience representing clients in all facets of commercial real estate, hospitality and secured lending. He served as an in-house counsel for seven years with a national developer and operator of office buildings and branded hotels; he also acted as chair of real estate departments in both regional and national law firms. He regularly publishes articles and participates in panel discussions as a presenter on commercial real estate, hospitality and secured lending topics. Contact him at email@example.com or 949-660-9100.
ABHI GOLHAR is the host of “Real Estate Deal Talk” and Managing Partner of Summit & Crowne. Golhar 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 BS degree in electrical engineering from the University of Michigan. You can find him on Twitter, Snapchat and Instagram - @AbhiGolhar. #RealEstateDealTalk
ROBERT GREENBERG joined Patch of Land earlier this year as Chief Marketing Officer. His professional experience includes over 25 years in marketing working with familiar consumer brands such as Pepsi-Cola, Anheuser-Busch, and Sara Lee as well as B2B experience in retail, technology, finance, and real estate. Recently, he led the marketing efforts for the B2R Finance where he helped originate more than $1B of real estate investor loans that led to the industry’s first-ever multi-borrower single-family rental securitization. At B2R, he was responsible for branding, corporate communications, lead generation and integrated marketing efforts. He was responsible for leading the development and implementation of the marketing automation and CRM platform that helped to deliver sales management and operational efficiencies to enhance the customer experience for real estate investors nationwide. NOVEMBER/DECEMBER 2016 7
8 PRIVATE LENDER
CONTRIBUTORS MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE
ERICA LACENTRA, Marketing Manager, is responsible for planning, developing and implementing RCN Capital’s strategic marketing plan. Joining the company in 2013, Erica’s efforts have rapidly expanded RCN’s customer base and elevated the company to a national brand. Erica handles the creation of the company’s traditional and digital media, the management of paid search advertising, social media marketing and email marketing as well as the coordination of tradeshow sponsorships and event involvement. Erica holds a B.S. in Advertising with a minor is Advertising Design from Suffolk University.
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. 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.
CROWDFUNDING'S MACROECONOMIC FUTURE
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REAL DEAL TALK SECOND SOURCE
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A List Partners Management, LLC is a powerhouse team of real estate knowledge and experience providing high-yield alternatives through our managed funds for investors who want more for their money than the low interest rates offered by banks. Additionally, ALPM offers high yield opportunities for Non-US Citizens who are seeking investment options in the USA.
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WHAT’S CURRENT TRENDING INDUSTRY TOPICS
ABS UPDATES ITS MORTGAGE OFFICE SOFTWARE Applied Business Software Inc. recently announced
FINRA APPROVES SMALL CHANGE AS REGULATION CROWDFUNDING PORTAL Pittsburgh, Pennsylvania-based Small Change has been
a major update to its signature loan servicing software
approved by the Financial Industry Regulatory Authority
The Mortgage Office.
(FINRA) as a real estate Regulation Crowdfunding
The Long Beach, California-based software company, which
portal. This allows the portal to offer even non-accredited
also developed The Loan Office software, is an industry leader
investors the opportunity to invest in real estate projects.
in loan servicing software with a worldwide customer base.
Small Change launched in 2015, offering 506 (c) or
Some of the highlights in version 22.214.171.124 include:
Regulation D investment opportunities, which are reserved
• Text messaging between customers and their
for accredited investors. These will continue to be offered alongside Regulation Crowdfunding opportunities. ■
borrowers and lenders. Source: www.smallchange.com • Geomapping and interactive-map generation for all or selected loans via a partnership with MapQuest.
SHARESTATES PARTNERS WITH SEEDINVEST IN SERIES A FUNDING ROUND
• Multiple options for real-time credit Real estate crowdfunding platform
card and EFT payment processing,
Sharestates has partnered with
made possible by a partnership with
SeedInvest to raise capital in a Series A
Payment Data Systems.
funding round of $3 million in preferred equity. The offering is live, with a $10,000
• A new prepayment penalty feature that calculates guaranteed interest through the expiration date for payoffs.
minimum investment from Accredited Investors. SeedInvest has more than 5,000 Accredited Investors. The platform gives qualified investors access
• User-defined notes on line of credit, commercial and construction billing statements.
to startup investment opportunities that have already been vetted. For information on the Sharestates offering, visit:
• Addition of seven U.S. military and state abbreviations.
• Lender/purchaser disclosure statement updates.
GROUNDFLOOR EXPANDS REACH TO 23 STATES
• Auto-pay email notification to borrowers. A year after qualifying with the SEC to sell securities • Updated IRS forms 1098, 1099INT and 1099MISC to comply with IRS changes for tax year 2016. ■
to non-accredited investors under Regulation A+, Groundfloor is continuing to grow at a steady rate. The company recently announced it has doubled its borrower
territory, bringing the reach of it lending business to a NOVEMBER/DECEMBER 2016 11
total of 23 states.
development and implementation of the marketing
Groundfloor was founded in 2013 by
automation and CRM platform that helped deliver sales management and operational efficiencies. ■
Brian Dally and Nick Bhargava and is based
Bill Lanting is the new vice
in Atlanta, Georgia.
president of commercial debt
“We’re still the only
originations at RealtyShares, a leading
peer-to-peer real estate
online marketplace for real estate
lender open to non-
crowdfunding. A former executive with
accredited investors,” said Bhargava, who serves as EVP.
Radisson Hotels and Wyndham Hotels, Lanting has recently been responsible for
According to the company: Since achieving qualification under Regulation A+ and
bridge loan originations, underwriting and raising large, multimillion-dollar investment funds from
commencing its multi-state offering program in late August
institutional investors for Thorofare Capital and Partners
2015 and through Sept.7, 2016,Groundfloor has funded 111
Capital. At RealtyShares, he will head the expansion of the
loans. During this period, retail securities sales were $13.6
platform’s commercial debt product. While the company had
million. Borrowers have fully repaid 39 loans under this
previously offered commercial debt options on a smaller scale,
program. This compares with retail securities sales of $1.9
Lanting’s hiring signals a major commitment to providing real
million in the preceding 12-month period (with 36 loans
estate developers and operators a one-stop shop for raising
funded via Groundfloor’s intrastate offerings in Georgia). ■
capital for their projects. To date, the RealtyShares network of investors has funded upward of $200 million across more
PEOPLE IN THE NEWS
than 400 investment opportunities on the platform, funding residential and commercial projects in 31 states. ■ Source: www.realtyshares.com
Robert Greenberg is the new Chief Marketing Officer for Patch of Land. His professional experience includes over 25 years in marketing, working with
Edward Kim has joined the national sales department at Applied Business Software Inc., developer of The
familiar consumer brands such as
Mortgage Office and The Loan Office software for the
Pepsi-Cola, Anheuser-Busch and
lending industry. Kim’s sale experience spans the past
Sara Lee, as well as B2B experience
15 years at various Fortune 500 companies. At ABS, he
in retail, technology, finance and real
will focus on expanding the footprint for The Loan Office
estate. Recently, he led the marketing
during “a time where our business is booming and our
efforts for B2R Finance, where he
company is reaching unprecedented high sales volume,”
helped originate more than $1 billion
according to Jerry Delgado, ABS president and co-
of real estate investor loans that led
founder. The company, based in Long Beach, California,
to the industry’s first-ever multi-borrower single-family
is a global provider of software systems and solutions for
rental securitization. At B2R, he was responsible for branding, corporate communications, lead generation
the lending industry, with a suite of products designed specifically for those who originate and service loans. ■
and integrated marketing efforts. In addition, he led
12 PRIVATE LENDER
CONGRATULATIONS TO AAPL’S NEWEST CERTIFIED PRIVATE LENDER ASSOCIATES:
Kelvin Chiu, Gaia Funding
Jay Hinrichs, JLH Companies
Brian Vinson, Kingdom Firm, LLC
Jeremy Miller, Appeal Taxes Now Nicholas Spognardi, Premier Commercial Capital Andy Moon, Education Management Services, LLC Roberto Varela, A List Partners Management Howard Tenn, Asian Knight Capital Kyle Sennott, New Funding Resources Guy Cook, Maryland Private Mortgage Jerome Bell, RAJJ Investments Properties, Inc Lakila Richardson, The Leee Rose Group Jim Wiley, Absolute Capital Lending Taryn Kendrick, Worcester Investments Natalie Bueno, Royal Development Miranda Trujillo, Royal Development
Joel Worcester, Worcester Investments Chris Mark, Oregon Trail Corp Frederic Abitbol, Hypotec Loans Emily Rigby, Thrive Lending Troy Fullwood, Pinnacle Investments Jay Offen, Asset Management Services Group Fred Rea, Rain City Capital Marshall Welton, Appeal Taxes Now Mark Hanf, Pacific Private Money
submit your news
Send us your news, updates, or job opportunities for possible inclusion in our next issue! Submit details to PrivateLender@aaplonline.com
Jeff Abernathy, Genesis Capital Mortgage Fund, LLC Nathaniel Baker, Ned Steven, Inc. Douglas Rutherford, RentalSoftware.com Allen Moma, Blueberry Funding Michael Monge, Trilion Capital Michael Masi, Blacknote Capital, LLC
Want access to qualified private and hard money lenders in one centralized directory? Start today at PMLGloan.com
Todd Frank, LMC Funding, LLC
CONGRATULATIONS TO ALL OF AAPL’S NEWEST CERTIFIED FUND MANAGERS: Scott Haberbosch, A List Partners Management Jordan Regalado, A List Partners Management Matt Vavala, A List Partners Management John Citrigno, Cirius Capital Randy King, The Legacy Group Andrea Trout, The Legacy Group Christopher Schubert, Contract Exchange Corporation Alan Dooley, Grathia Corp Charlotte Hofer, Grathia Corp Bryce Mason, Oakmont Realty, Inc. Garth Morrison, MBA Mallory Brook, Provost Capital NOVEMBER/DECEMBER 2016 13
2017 ANNUAL CONFERENCE SAVE THE DATE 12-14 NOVEMBER 2017 // CAESARS PALACE
14 PRIVATE LENDER
AAPL ANNUAL CONFERENCE RECAP THANKS TO EVERYONE WHO ATTENDED. WE HAD A BLAST!
SAM KADDAH (LIQUID LOGICS) & AJ POULIN (THE MORTGAGE OFFICE)
ROB RUDOLPH (LAND GORILLA)
BREW JOHNSON (PEERSTREET)
ROCKY BUTANI (PRIVATELENDERLINK.COM)
KEYNOTE SPEAKER: MARK FLEMING, Ph.D (FIRST AMERICAN FINANCIAL CORPORATION)
THOMAS STANDIN & JASMIN PALACIOS (NOTE SERVICING CENTER)
NOVEMBER/DECEMBER 2016 15
AAPL ANNUAL CONFERENCE RECAP
CARRIE COOK (PREFERRED TRUST), CHRISTINA GERACI (GERACI LAW FIRM) & SUSAN NAFTULIN (REHAB FINANCIAL)
AJ POULIN (THE MORTGAGE OFFICE)
ADAPIA D’ERRICO; DAVID OWEN (A-LIST PROPERTIES) & KEVIN KIM (GERACI LAW FIRM)
16 PRIVATE LENDER
JASON HARRIS, SUZANNE KRETSCHMER, ALEXANDRA YELLIN, & MARC HEENAN (PEERSTREET)
KEYNOTE SPEAKER: MARK FLEMING, Ph.D
GERACI LAW FIRM & EDDIE WILSON (AFFINITY ENTERPRISE GROUP)
TRISHA DRAPE & BRIAN McHENRY (COMMUNITY BUYING GROUP)
SEE YOU NEXT YEAR! VIP EVENT
NOVEMBER/DECEMBER 2016 17
Wide Open for Business Crowdfunders’ alternative lending solutions add value to the marketplace. by Robert Greenberg
orrowers investing in singlefamily residential real estate now have access to more alternative funding sources than perhaps any time in U.S. history. Part of that opportunity comes through crowdfunding, which appeared around 2003 when Brian Camelio, a Boston-based musician, started ArtistShare, a website where artists
18 PRIVATE LENDER
could seek donations from their fans to produce recordings, according to authors David M. Freedman and Matthew R. Nutting in “A Brief History of Crowdfunding.” The authors called it the first instance in which crowdfunding — seeking multiple small donations via an online platform — gained significant traction in the United States. Since then, many types of
crowdfunding companies have emerged, including platforms for investing in commercial real estate, single-family residential property mortgages and all types of business startups. Since those early days, real estate crowdfunders — or peer-to-peer alternative lenders — have positioned technology and transparent platforms to investors as part of their strategy
to generate awareness when few understood or had even heard of crowdfunding. It worked. The combination of online technology coupled with the opportunity for groups of like-minded people coming together to fund a business, product or service combined American capitalism, entrepreneurship and ingenuity into a very marketable package. Crowdfunding quickly won a following and became a viable form of alternative investment capital. Real estate crowdfunding is still fairly new to the game with many platforms just a few years old. These platforms continue to offer innovative methods for financing real estate for borrowers and provide investors opportunities to diversify their portfolios.
CROWDNETIC INDEX Top 10 Industries by Recorded Capital Commitments
According to alternative finance and data analysis firm Crowdnetic, which publishes an annual report on crowdbased offerings and transactions, “Real estate is a tangible and well-known commodity with a proven track record in the long term, and it continues to generate strong investor demand.” The report continues, “Real estate development and real estate investments have combined through Year 3 to account for more than $386 million in capital commitments, representing more than one-fourth of aggregate capital commitments across all industries. It is also interesting to note that only three industries (real estate development, real estate investments and entertainment/ other) appear on both lists, indicating that the companies that are attractive to
Green Building Materials
Organic Food & Beverage
Oil & Gas Production & Pipelines
Pharmaceuticals & Related Products Investments, Other
entrepreneurs are not necessarily the same ones that are attractive to investors.” As indicated below, the real estate debt-based crowdfunding sector has two distinct groups of constituents that it must satisfy: investors and borrowers (or real estate entrepreneurs). The key to success is finding a balance in the marketplace that informs, educates and attracts both constituencies while clearly articulating the value proposition of crowdfunding. To be sure, reaching and appealing to investors is what initially made this new form of alternative financing exciting. Young platforms needed investor buy-in to make the concept viable for borrowers. As real estate crowdfunding matures, it seems that now is a good time for crowdfunding platforms to focus even greater attention on borrowers.
Real Estate Investments, Other
Real Estate Development $0.00
NOVEMBER/DECEMBER 2016 19
PROVIDING VALUE TO THE BORROWER Over the past few years, alternative lenders such as hard-money shops, assetbased lenders and crowdfunders have rushed to fill a lending void caused in part by the tightening of the credit box at traditional lenders. Bank regulation increased significantly after the 2008 financial crisis, which has affected the willingness and ability for big banks to lend. These institutions were blamed, in part, for the mortgage meltdown and have paid millions in settlements. They are only now coming up for air — eight years after the crisis. The nation’s big banks are still working to reduce the stigma from the foreclosure crisis, which continues to linger. All of this has had the effect of reducing financing options for borrowers. In addition to the issues at big banks, many small community banks have exited the residential mortgage business altogether as economies of scale enjoyed by larger institutions make it hard for them to compete and as added regulations increase cost. As a result of these post-crisis issues, alternative lenders began to see opportunities to come into the market and add value — reaching borrowers who either couldn’t qualify under new, tighter lending restrictions or who needed an alternative to traditional lenders. Unlike most hard money lenders, who generally lend in a metro area close to their home base, real estate crowdfunders are typically national in scope and operate using highly sophisticated technology platforms. This national footprint, combined with state-of-the-art technology, is a 20 PRIVATE LENDER
huge differentiator that opens up new opportunities for both borrowers and investors around the country. Traditional mortgage lenders want to know a borrower’s individual credit history and require W-2 income from the past two years, and typically won’t allow borrowers to have loans outstanding on half a dozen properties at one time, which is a common practice among professional flippers. Therefore most real estate investors have been forced to depend on a hodgepodge of small private lenders, wealthy investors or friends and family to provide much needed capital. Real estate crowdfunding platforms enable flippers to tap into a much larger network of investors eager to participate in funding all types of real estate deals. The platforms are typically open to accredited investors, who make more than $200,000 annually or have a net worth of at least $1 million. Crowdfunders, particularly, bring positives from both the traditional big bank model and the hard money model. They have a similar national footprint to the big, national banks without the brickand-mortar retail shops. At the same time, crowdfunders offer the nimbleness and flexibility of smaller, local hard money shops that typically allow them to fund loans quickly. Their technology platforms, meanwhile, provide efficiencies that are not often found at many small to midsized banks or with hard money lenders. WHAT CROWDFUNDING MEANS FOR BORROWERS Because the real estate crowdfunding space is still so new, borrowers may be confused about the concept of crowdfunding. They may wrongly assume they have to wait for a “crowd”
of investors to materialize before their loan will be funded. Today, real estate crowdfunding sites like Patch of Land take a first-lien position and fund borrowers’ loans, often in a week or even less. Once the loan has funded and the borrower has received funding, crowdfunders offer their “crowd” (accredited investors) the opportunity to buy into the loan in bits and pieces, typically with a minimum investment as little as $5,000. Borrowers only need to apply and the lending process is assisted by sophisticated online technology, making it quick and relatively easy to fund loans. To be clear: borrowers do not need to be concerned with attracting investors. The platform does that. The value proposition here cannot be ignored. Getting a loan through a traditional lender can often take 30 days or more, especially if the customer isn’t a typical W-2 borrower with a high credit score. While we have often gravitated toward the term “crowdfund” we may have inadvertently confused borrowers or driven them to other sources of loan funding due to confusion about how crowdfunding actually works and how a loan gets financed on a crowdfunding platform. At Patch of Land, we’re strongly committed to our crowd and expect to see the number of investors participating in real estate crowdfunding continue to grow at a healthy pace. However, it is important to clearly articulate the opportunity that crowdfunding provides without confusing potential borrowers. For example, Kickstarter and GoFundMe — among the most well-known crowdfunders on the Web today —have “rewards” models that are far different from how real
estate debt crowdfunders work. This can cause confusion for a first-time potential borrower visiting a real estate crowdfunded website. Under the Kickstarter and GoFundMe models, a “borrower” advertises the investment opportunity to investors to raise the money needed for their business, project or event. The project or event may never get off the ground if enough investors don’t buy into it. Not so with real estate crowdfunding. Loans to borrowers get approved and funded before the loan is ever offered to investors. Envisioning ways to take advantage of crowdfunding’s popularity while differentiating ourselves from consumer-
based “rewards” sites will be critical to alternative lenders’ long-term success in attracting both borrowers and investors. Each of the real estate crowdfunding platforms has its own characteristics and niche services with investments and loans that include commercial real estate, residential purchase and refinance, fix-andflip and rental portfolio loans. While some attributes are shared among the different platforms, they aren’t cookie-cutter operations. Each is looking at unique ways to attract its respective constituents. CONCLUSIONS As we prepare to enter a new year, there has never been a better time
for borrowers to consider alternative lenders in the crowdfunding space. As crowdfunders work to attract new borrowers, it’s important to clearly articulate the value that real estate crowdfunding platforms offer — a national footprint, and efficient technology that allows for quick lending decisions. Exposing potential customers to the value proposition of real estate crowdfunding has the potential to attract customers who previously have not considered alternative financing or alternative investments. The real estate crowdfunding industry is now wide open for business. ■
Contact Tom Schmidt at 785-889-1300 or firstname.lastname@example.org to discuss your IRA custody needs.
NOVEMBER/DECEMBER 2016 21
SHARING the DREAM Through crowdfunding platform Sharestates, Allen Shayanfekr is making real estate accessible to larger numbers of investors.
22 PRIVATE LENDER
NOVEMBER/DECEMBER 2016 23
llen Shayanfekr, Esq., is CEO and a founder of Sharestates, a crowdfunding platform that was launched in July 2014.
His legal background—he graduated magna cum laude with a J.D. degree from Touro Law Center and is admitted to practice law in New York and Connecticut—is paramount in Sharestates’ ability to promote and produce public and private offerings in a highly regulated space. He interacts regularly with the Securities and Exchange Commission in addition to spearheading Sharestates’ daily operations. We asked Shayanfekr about his background and how Sharestates came to be, as well as to offer his insights about crowdfunding to the readers of Private Lender. PL
What do you think is in store for the future of real estate crowdfunding? The investment landscape is changing dramatically. The industry is still in its
infancy, but it has matured significantly since 2014. More and more institutions/retail investors are legitimizing this industry. We believe that real estate crowdfunding will eventually be a part of every retirement/investment strategy long-term. Firms that handle investment strategies, retirement portfolios, insurance and pension funds will soon see that the type of investments that companies like ours handle are actually relatively safe compared to their residential consumer loan counterparts. Moreover, the short-term nature of our products offers a form of rolling liquidity that traditionally has not been the case for real estate investment. PL
Is real estate crowdfunding a good way to diversify your investment portfolio? Of course — every portfolio should have exposure to the real estate sector. The problem
has largely been around accessibility. Unless an investor was part of an elite group or had hundreds of thousands or millions of dollars, real estate was 24 PRIVATE LENDER
inaccessible. What weâ€™re providing is a passive opportunity
United States from Iran in 1988. My family left everything
to indirectly and directly gain some exposure to real estate.
behind to start from scratch here â€” in order to give me
How much of the lending process is automated in real estate crowdfunding? Initial applications and algorithmic pricing modules
and my siblings a better and safer chance at life. Being part of the Jewish religion, our family did not find Iran to be a safe place for us. PL What did you study in school?
handle incoming loans. If a loan makes it past the
initial screen, then it moves to a physical underwriting team to complete review. PL Tell us about your background. AS I come from an immigrant family that moved to the
I was lucky enough to secure a full scholarship to NYU for my undergraduate degree where I majored in
political science and sociology. I later went on to attend law school, where I graduated in the top 6 percent of my class. PL What was your first real estate job?
Shayanfekr, left, with Ashley Bal and Michael Ramin NOVEMBER/DECEMBER 2016 25
My first real estate job was working with Atlantis National Services in the company’s sales department for title
We bring banking automation to what was traditionally the antiquated “hard money” lending
insurance. I later went on to become the company’s national
industry. Traditionally, these small mom-and-pop-shop
title producer, holding titles licenses in 28 states.
lenders had limited money and poor process, which meant
PL How did you end up in real estate lending?
that closings could take three to five weeks and your lender was constantly running out of money, leaving the borrower to constantly search for new lenders. Traditional lenders
We started the legwork for the Sharestates platform
like banks had the automation down, but their bureaucratic
in 2013. After building our software and meeting with
system meant it could take three to six months to actually
various institutions, we realized that the debt product we’re
receive your loan — this could ultimately kill a deal. We’ve
offering today was a very scalable business practice. It neatly
combined the speed and power of hard money lending with
fits into a box that investors can easily digest and know with
the automation of larger institutional banking — closing
some level of certainty what they can expect.
loans in just one to two weeks while maintaining the quality
PL Tell us more about Sharestates.com.
of our underwriting. PL How difficult is it to source quality real estate deals?
Sharestates is a real estate lending and investing marketplace where we match accredited and
institutional investors with real estate borrowers looking for
Very — starting out, the difficult part was sourcing capital, but as we have grown and legitimized the
financing. Our full operation launch was in February of 2015.
business, we’ve found ourselves with a surplus of capital.
Since then, we have gone on to issue approximately $200
We’re now actively working on increasing originations.
million in loans across 275 projects. PL How did the concept for Sharestates come about?
What is the benefit of having committed capital from institutional investors as well as individual
investors for the purchase of loans? AS
Over a Shabbat dinner with my family — I was finishing law school and discussing future plans with my brother-
in-laws and now partners, Radni and Raymond Davoodi. PL Why is now the right time for Sharestates.com?
Our long-term goal is diversification of capital sources. Just like a diversified investment
portfolio, we want to make sure we’re not subject to the whims of any one type of investor. Individuals help us diversify our capital sources, while institutions bring
Technology has grown tremendously over the last
larger numbers and scale to the table.
decade. We can now automate much of what was
an antiquated process. Moreover, the real estate market is strong and investors have been looking for a way to diversify
What are some of the future challenges for online real estate lending?
their portfolios for smaller investment stakes. Sharestates enables all of the above.
Growing our access to quality real estate offerings and diversifying our product offerings to include
What does a real estate developer have to gain
midterm products. We also believe it’s everyone’s
from choosing real estate crowdfunding instead of
responsibility to act morally and ethically in this industry
traditional lending options? 26 PRIVATE LENDER
to protect their investors. Otherwise, regulation could very
••• – dwarfing all other sectors. But it’s also one of the most difficult to scale and automate because of the need for physical underwriting. Many counties are not yet automated, meaning we cannot automate certain processes either. PL
How does Sharestates underwrite real estate
We use a 34-point underwriting system
for pricing our loans and also collect additional underwriting materials on the back end that are not disclosed via our platform, such as: personal financial statements, bank statements, track record verification via
Allen Shayanfekr and Michael Ramin confer.
prior HUD and settlement statements, background checks
quickly make it impossible to run platforms such as these. PL
Tell us more about compliance in the young online lending asset class of real estate. We primarily have two bodies of regulation we need to be concerned with. On the one hand, we need to
be very cognizant of state and federal securities laws. We’re currently operating under a Regulation D Rule 506(c) regime, which means we’re limited to accredited and
via LexisNexis, OFAC (U.S. Treasury’s Office of Foreign Assets Control) and Patriot Act searches, etc. PL What has been the key to Sharestates’ success?
they would each fight tooth and nail for this company. The 9-to-5 workday mentality doesn’t exist here. PL
to be aware of the various state lending and banking laws that may or may not require licensing in particular states. PL
It has been said that online real estate lending has the potential to be bigger than consumer, small
business and student lending combined. Do you agree? AS Yes –the real estate lending industry is $10 trillion in size
built personal connections and relationships with.
I can confidently say our team loves coming to work and
institutional investors who have verified their accreditation through us or a third party. On the other hand, we also need
An amazing and bright team of employees that we’ve
What advice do you have for other real estate lending entrepreneurs? Be patient. Spend your time wisely. And make sure you never sacrifice your integrity or ethics for any deal. The
industry has a lot to offer and very large numbers – sometimes people can lose track and cut corners. Either do it the right way or not at all. Otherwise, it’s like building a home on shaky foundation – it will inevitably come tumbling down. ■ NOVEMBER/DECEMBER 2016 27
Gray is the New ‘It’ Color Retiring Baby Boomers are having a major impact on the construction and private lending industries. by Jeffrey N. Levin
top by a Sherwin-Williams store and you’ll see that gray is replacing beige as the go-to neutral color for interior decorating. This anecdote provides a platform for a plethora of bad puns, because the graying of the Baby Boomer population is having a major impact on the housing market. The aging of Baby Boomers presents both an important opportunity and a series of challenges for real estate developers and the companies that finance them. The pattern of retiring workers selling the big family house and relocating to condos in Arizona or Florida is shifting. Over the past several decades, the number of retirees purchasing condos 28 PRIVATE LENDER
in multi-unit housing has been declining, according to Trulia. Some retirees are opting to rent, some want to “age in place,” and still others are looking to buy even larger houses. This, coupled with debt-laden Millennials holding off on purchasing, is upending a time-honored pattern of generational purchase activity. The good news is that this new dynamic is keeping the market humming. Most Millennials and GenXers, like their parents before them, aspire to live in larger homes (excluding those folks attracted to tiny houses or hipster lofts). Their parents’ generation, however, is exhibiting an aspirational divide. While some in the over-54 category are upholding
the honored tradition of downsizing and moving to warmer climates, other Baby Boomers are just as likely to buy a bigger home, even taking out a mortgage during retirement to buy it. This behavior is now as likely as downsizing to a condo in Florida. There are still other Boomers bucking tradition and deciding to rent, even though they could afford to buy. Now other factors including the shortage of available housing stocks in certain markets are coming into play. Questions about when and where Boomers will retire—and what kind of houses they will buy—represent a complicated subject for economists making predictions on what’s in store for the housing market. Baby Boomers represent 31 percent of all homebuyers, second only to Millennials, who represent 35 percent. 53 percent of Boomers live in houses that are between 1,400 and 2,600 square feet, while a much smaller slice (12.5 percent) live in larger houses of 2,600 square feet or more, according to Trulia. Will they trade up or down in size?
Buy or rent? Those questions are complicated by the low inventory of housing stock that appears to be stalling home purchases across the country. Many analysts contend that the U.S. now faces an acute housing shortage: since 2012 the number of both starter homes and “trade-up” homes on the market have dropped by over 40 percent, according to Trulia. Over the same period of time, price increases for higher-end premium homes have outpaced middle-tier homes, according to Trulia’s data. Today the median price of a premium home is $542,805, compared to a median for middle-tier homes of $267,845. That’s a significant impact for Boomers who were considering a move to a larger and more expensive home for retirement. As the price gap widens, it becomes more difficult for a buyer looking to trade up to justify and afford the price of a premium home. At the same time, the widening price gap may make it more difficult for retiring Boomers to find a buyer for their own existing homes. FREDDIE MAC WEIGHS IN The Federal Home Loan Mortgage Corporation, known as Freddie Mac, recently conducted a large survey of those over age 55 to investigate their housing perceptions and preferences. Among the homeowners who responded that they would consider moving, 12 percent believe their next home will be more expensive than their current one, while 37 percent believe it will be in the same price range. About half of the respondents believe it will be less expensive. At the same time, 23 percent of homeowners say they would have to make major renovations in order to
age in place in their current home. In an interview with the trade magazine Mortgage News Daily, Freddie Mac’s Executive Vice President of SingleFamily Business, Dave Lowman, pointed to the impact of Boomers on both the construction and finance industries. “The decisions the nation’s Baby Boomers and other older homeowners make will have an enormous impact on the demand for housing and new mortgage credit for the foreseeable future,” Lowman said. “Whether they buy new homes or decide to refinance and renovate their current ones, the size of this generation and the fact that they hold close to two-thirds, approximately $8 trillion, of the nation’s home equity makes it very important that we watch what they do.” The survey indicates that an estimated 6 million homeowners and nearly as many current renters may move again. Of those homeowners and renters who expect to move, more than 5 million say they are likely to rent by 2020. CONDO DEVELOPERS DEVELOP NEW TRICKS In the face of such currents, some premium condo developers are finding new ways to adapt. In Florida, they are focusing on retirees who can afford big houses but are interested in accepting much smaller spaces once the kids have left home – with the big caveat that the location must be cool and the amenities compelling. It’s a new approach to Baby Boomer downsizing that is becoming a lucrative niche. When they can find buyers for their homes, some retirees seem willing to give up traditional retirement homes for a hip urban lifestyle. Builders that traditionally focused on
retiree housing are using such high-ticket condos to lure retirees to warmer climates. Florida’s Kolter Group is known for diversified real estate developments and investments, with projects amounting to over $12 billion in value. At three Kolter condo developments—in Sarasota, St. Petersburg and north Palm Beach— condo units ranging from 1,800 to 2,400 square feet are priced from about $900,000 to $1.5 million, with penthouses priced at over $3 million. For many Boomers who are potential buyers, there is some hesitation about the units because they are so much smaller than the houses they currently live in. “Our sales manager frequently gets the comment from the husband or the wife that they haven’t lived in something that small since their first house,” Bob Vail, president of Kolter’s Urban project, said in a recent article on Curbed.com. “But they still buy.” What attracts them are the urban locations of the developments, in midsized cities with many nearby walk-able destinations like cafes, parks and shops, or “center ice,” as Vail puts it. At 41 stories and 450 feet, ONE St. Petersburg is the tallest building in downtown St. Petersburg, with gorgeous views of the bay and the downtown area. It boasts a 5,000-square-foot fitness complex and many other amenities. Vue Sarasota Bay will feature a dog park on top of its parking garage. In North Palm Beach, The Water Club offers three towers of 22 floors each, with a fullservice marina alongside. All three buildings, which are in varying stages of construction, have water views. Kolter has bought into a new trend NOVEMBER/DECEMBER 2016 29
in interior design that’s attracting downsizing Baby Boomers. Its units feature open floor plans rather than walls marking out a living room, family room or dining room. Instead, the units have a central “great room” with very few or no hallways, high ceilings and floor-to-ceiling windows. So far, this design strategy appears to be effective. In Sarasota, the Vue project has eight units left to sell out of its 141, from a three-bedroom for $1.5 million to a four-bedroom penthouse listed for $3.4 million. The Water Club has closed deals for three-quarters of its 164 units in the first building. And ONE St. Petersburg, which broke ground in midJanuary, has contracts for just under half of its units, according to Vail. RENTING INSTEAD OF BUYING – A NEW TREND FOR BOOMERS? When Boomers consider downsizing, purchasing a condo or another home is not the only option. Renting pricey apartments, particularly in attractive urban locations, is also a new trend for them. The number of renters who are age 65 or older will reach 12.2 million by 2030, more than double the level in 2010, according to research 30 PRIVATE LENDER
by the Urban Institute in Washington. While Millennials have driven demand for apartments in recent years, Baby Boomers represent the next wave, pushing up rents and spurring construction of increased multifamily housing units. An article in the July 21, 2015 issue of Bloomberg interviewed some of the participants in the front lines of this trend: “It’s a combination of their sheer size and that they’re entering the age range where they increasingly downsize,” said Jordan Rappaport, a senior economist at the Federal Reserve Bank of Kansas City. As a result, “it will put upward pressure on rents for all types,” he said. Rappaport’s research reported that people ages 50 to 70 accounted for nearly all the net increase in multi-unit occupancy from 2000 to 2013. As members of the Boomer generation are now entering their 70s and downsizing, “multifamily home construction is likely to continue to grow at a healthy rate through the end of the decade,” he wrote in a report published last year. With combined demand from Boomers and Millennials, vacancy rates for rental properties are already near 21-year lows. That pushed the national median rental
price up 27 percent to $1,381 in 2015 as compared to $1,090 in 2012, based on data from the United States Census Bureau. According to the U.S. Commerce Department, last year saw the largest increase in construction starts for multidwelling properties featuring five or more units since 1987. These multi-unit buildings represented over 40 percent of total housing starts, compared to about 16 percent of starts in June 2009 when the recent economic expansion commenced. Real estate developers such as Lennar Corp., Bozzuto Group and Alliance Residential Company are undertaking multi-unit projects for multiple generations. Should the supply of rental properties fail to keep up with demand, however, it’s likely there will be conditions where younger workers are competing for housing with the burgeoning population of retirees, and other lower income retirees are going to struggle to find suitable rentals. Lennar Corp., a Miami-based builder that traditionally focused on single-family home construction, formed a $1.1 billion joint venture that will develop multifamily communities in 25 major U.S. metropolitan markets, according to the Bloomberg report. Alliance Residential is designing buildings with smaller, more affordable units on ground floors to attract Millennials, and with larger and more expensive apartments on upper levels to attract Boomers, as reported in Bloomberg. The larger units feature amenities like wine refrigerators and touch-button window screens to lure away Boomers who might ordinarily be attracted to new single-family housing. At Bozzuto, which manages over 50,000 units in cities including Washington, Chicago and Atlanta, about 10 percent of
renters in 2014 were at least 60 years old, up from 8 percent in 2012. The Marylandbased company expects the share of Boomers to continue growing. “Something’s happening,” Tony Bozzuto, CEO of his family company, said in an interview with Bloomberg, adding that the company is looking to add rental properties catering to residents 55 and older. OPPORTUNITIES FOR PRIVATE LENDERS With all this new demand for the multi-unit housing market, both for sale and rentals, you might think lending conditions would be terrific for developers. After all, pressure on supply should axiomatically lead to higher valuations and improved margins, which should make banks comfortable with lending. However, the opposite is becoming the case. Commercial banks are getting more cautious with development projects because regulators are looking at the industry’s robust growth and worrying about a potential bubble. Federal officials are concerned about construction lending, according to a letter sent last December by three federal agencies that regulate banks, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. New regulations also limit how much construction risk commercial banks can put on their balance sheets. The Dodd-Frank Financial Reform and Consumer Financial Protection Act in the U.S. and “Basel III” banking standards were created years ago, and many of their provisions recently came into full effect. While
the longevity of these new rules has come into question under a Trump presidency, currently these rules require banks to hold large capital reserves to cover potential losses on investments like commercial real estate loans. In many cases, smaller lenders simply move on to other types of lending with less stringent reserve requirements, like auto and student loans. In addition, construction lenders are worrying about rising costs of labor and land as the construction market stays frothy. For private lenders, the upshot is that, in the short term, many new opportunities are going to emerge as some developers with solid plans for multi-unit projects struggle to obtain traditional financing. Banks offer construction loans with low interest rates that float 250 to 300 basis points over LIBOR, which is quite attractive. But if a commercial lender cannot get comfortable with a developer’s loan to value ratio, balance sheet, or other factor, a private lender can step in to save the day, while also earning a terrific premium by enabling the project to move forward. Like all business practices, the key is to
do your homework. Stay vigilant for new opportunities, while taking a systemic approach to analyzing the developer’s balance sheet and project plans. In addition, as the new administration settles in, it is anticipated that these stringent banking regulations will be relaxed so private lenders have to be ready to capitalize on the current framework and adapt to a changing one. More and more good lending opportunities will be out there as the cohort of graying Baby Boomers transform the market and help drive new multi-unit construction starts for years to come. Private lenders have to be flexible and agile in order to capitalize on it. ■
NOVEMBER/DECEMBER 2016 31
Is Seller Financing for You? This alternative form of lending can be hard to find and obtain, but it can offer benefits to those who embrace it. by Abhi Golhar
urchasing a property for all-cash is rare. Not many people have hundreds of thousands of dollars lying around. The common folks have to rely on an economic function known as “financing,” which is essentially just a fancy term for “borrowing.”
32 PRIVATE LENDER
In the world of real estate, the money borrowed to purchase a property is known as a mortgage. Those who can meet certain qualification requirements may receive a mortgage from a traditional financial institution, such as a bank. Others who do not have a good credit
score or a significant yearly income may find it harder to obtain such a loan, and in the rare case that they do, it will be at the expense of less favorable terms, such as a higher-than-average interest rate. An alternative form of financing a property that can be quite beneficial
to the latter category of individuals is seller financing. Seller financing takes place when the owner of the property decides to take on the role of the lender, essentially replacing the financial institution. The owner agrees to receive monthly payments for a specified amount of time instead of a one-time, lump-sum payment. For example, let’s assume the seller and the buyer agree on the final price of $100,000. Instead of paying the seller $100,000 all at once, the buyer will make monthly payments of $1,000 toward the loan value, plus an interest payment. The latter amount will be determined by the interest rate agreed upon by the two parties when the deal was officially closed. As far as buyers are concerned, the benefits associated with seller financing are numerous. For starters, no income threshold or credit check are required. All of the loan’s terms are negotiable, which leads to another potential benefit—the possibility of obtaining a property’s ownership with a zero down payment, a very powerful tool for those who are just getting started in real estate investing, those investors who have experienced financial troubles, or for homebuyers who simply do not have the savings to make a down payment but can afford the monthly payments. Now, you may be wondering, “What’s in it for sellers? Why would anyone rather receive monthly installments for decades then a one-time payment of hundreds of thousands of dollars?” Well, the fact of the matter is that not everyone thinks along the same lines or has the same financial goals. A retiree who has quite a significant amount in his savings account will probably not be in a rush to cash out. Instead, this individual might prefer monthly payments, which can support his personal living expenses. But that’s not all. Sellers who are interested in providing seller financing can also benefit from the overall price of the agreement. In order to entice sellers to accept financing terms that are favorable to them, or in order to entice sellers to provide financing at all, buyers will usually crank up the offering price by a significant amount, and that’s not to mention the additional revenue that the seller will generate
through interest payments. Whether you are an aspiring investor, a seasoned investor or a homebuyer searching for the perfect place to live—whatever your reasons for purchasing a property—seller financing is one of the most powerful tools for those who prefer low interest rates, low or no down payments and virtually no qualification requirements. This does not mean that seller financing is easy to obtain; not all sellers are willing to take on the role of a lender. However, there are benefits to be had for both parties, so chances are that every buyer will eventually encounter a seller who will embrace the idea. ■
NOVEMBER/DECEMBER 2016 33
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To Be Clear The importance of communications and perception in litigation by Eric D. Dean, Esq.
or lenders and servicers, communication is perception. If the last few years have established anything, it is that the perception of borrowers, regulators and, in litigation, judges and juries, have and will dramatically influence not only the outcome of a dispute but, risk assessments, profitability and business practices. This article is meant as a brief look
into how everyday communicationsâ€” whether by content or toneâ€”can have a dramatic and wide-ranging influence, especially in the context of prelitigation negotiations or litigation. In the last several years, lenders and servicers have increasingly been in the public eye. And in many instances they have been perceived as prone to ruthless actions, sharp practices and overreaching.
One need only look at the regulatory restrictions currently being placed on Wells Fargo Bank, the Dodd-Frank legislation and the recent limitations placed on residential foreclosures in many states to see the impact of the change in perception of lenders and servicers on what were once routine and streamlined business practices. This change in perception has had an increasing effect on how lenders are treated in litigation by juries, and, in many cases, by judges. Indeed, in California, in 2013, the California Supreme Court ruled that where fraud or mistake is alleged, courts are required to go beyond a review of the express terms of the loan documents and make a determination as to whether the loan documents actually NOVEMBER/DECEMBER 2016 35
reflect the intent of the lender, borrower and guarantors. With these shifts, lenders and services have experienced higher litigation risk, greater litigation costs and as a result may be more prone to reach a compromise of a dispute in order to maintain negative events or communications in confidence or avoid the risks of an adverse ruling resulting from what may be viewed as harsh actions or regulatory violations on the part of the lender or servicer. The purpose of this article is to suggest that these realities be considered and responded to by promoting awareness among personnel and the adoption of policies and procedures on a proactive basis to avoid unnecessary and otherwise avoidable communications risks. Let’s look at some of the pertinent factors leading to this more hostile environment and their impact. THE INFORMATION AGE Our lives are governed by an increasing demand for higher speed and greater volume. In the business world, the solution for these demands has largely been to replace letters and phone calls with emails and similar types of quick communications. While letters were generally drafted, edited and many times redrafted and phone calls were typically undocumented, emails are generally quick, first drafts, and in many instances part of a flurry of back-and-forth communications prepared on an extemporaneous basis—often quickly and without even proofing the email, let alone giving it careful consideration before its transmission. The use of emails is a primary source of litigation risk. 36 PRIVATE LENDER
EVIDENCE IN A LAWSUIT Often, there are hundreds, if not thousands, of emails exchanged between various individuals both inside and outside the institution long before a potential dispute is recognized. As the matter moves toward trial, out of this mass of emails, there will customarily be only five to 10 upon which a party will focus and present at trial to hammer home a theme. Worse yet, these emails may be taken entirely out of context and twisted to support a litigant’s position or present the drafter of the email in a bad light and inflame the judge or jury. Generally, as harsh as it sounds, an attorney in litigation is not conducting a search for the truth, but is instead endeavoring to present the strongest case for his or her client. The attorney will, in reviewing emails, look for every statement by the other side that may provoke a judge or jury to look negatively on the opposition and every ambiguity that can be skewed to strengthen his or her client’s position and weaken the position of the opposing party. Since the judge or jury hearing the matter may already have a predisposition against the lender or servicer, this negative view can in many instances be exacerbated by the lender or servicer’s own emails. Trial results are often driven more by perceptions and likes and dislikes than by legal theories or who is “right.” The impreciseness of communications may, as a result, become a critical factor in the outcome of a trial or whether a party can even risk going to trial as opposed to being forced into an otherwise unacceptable settlement position. THE ECONOMIC ENVIRONMENT With the unexpected downturn in
the economic environment and the more restrictive lending environment that exists especially as to certain types of business loans, during the great recession the number of uncured loan defaults rose throughout the industry. Lenders and servicers were required to handle these defaults with a staff not adept at handling the volume of communications that resulted and through systems and remedies that were not designed or equipped to manage the conditions presented. This was further exacerbated by new regulations placing more requirements on lenders and servicers especially in the area of residential foreclosures. The result was, to a certain degree, a chaotic environment where lenders and servicers were viewed as they had not been viewed since the Great Depression. While the number of foreclosures has now significantly declined, not only is the regulatory environment and government oversight more draconian than ever but the negative perception of lenders and servicers and the heightened suspicions as to their business practices remain. THE SHIFT IN PRECEDENT As the view of lenders and servicers became more polarized, previously reliedupon and well-recognized protections and defenses against litigation became weakened or destroyed by new legislation and court decisions that favored borrowers and guarantors. Specifically, in California a long-established series of cases to the effect that the court would not look beyond the four corners of the loan documents was cast to the wayside if: • The borrower or guarantor made
the contention that the loan documents did not accurately reflect what was represented by the lender and relied on by the guarantor or borrower; or •T hrough a stream of communications between the borrower and the lender or servicer, an agreement was formed under which the lender must forbear, modify or waive rights. This may be argued based on nothing but a series of emails exchanged between the borrower and lender; or •E ven if no contract was formally entered into, the lender is liable based on a verbal commitment or loan modification that was never documented but is nevertheless binding based on representations that were justifiably relied on. With the downturn in the economic environment and a growing number of attorneys who wished to maintain a viable practice, a broader group of lawyers emerged who specialized solely in the representation of borrowers. This resulted in borrowers having significantly greater access to representation by lawyers who had superior expertise in this particular area of law and who regularly challenged lenders and servicers, often on an extremely aggressive basis with no goal other than to stall out the lender’s exercise of its remedies after a default. Each of these factors has resulted in the need for lenders and servicers to be significantly more cognizant of the implications of their communications, to standardize communications where
possible and to consider a change in who is communicating on behalf of the lender or servicer if it appears that a material dispute may be on the horizon. MAXIMS OF COMMUNICATIONS In view of the concerns expressed above, the following precepts are helpful considerations in limiting risk of a communication going awry:
• The less editorial the better. • Ambiguity creates risk. • Maintain a theme and focus based on the purpose of the communication and the desired outcome. • Recognize risk of a potential lawsuit; stay vigilant.
• Fast paced communications have created enhanced risk of an ambiguity or poorly based phrase becoming the center point of the borrower or guarantor’s entire case.
• Emails should be read at least twice and the persons to whom the email is being transmitted (especially in the case of a reply) reviewed carefully before transmission.
• Desperate borrowers with creative attorneys will look to distort the meaning of communications to gain an advantage.
• Communications intended to be confidential or which are privileged in nature should be so designated on the face of the document.
•P oor communications can lead to a wide range of claims based on theories of written contract or promissory estoppel that are harder and more costly to defend. • Use of an attorney to make communications confidential and privileged should be considered in internal communications. • Claims of fraudulent inducement in the making of a loan and other business transactions are now both a greater risk and a more frequent occurrence. • Every written communication is a potential exhibit at trial. • Focused and short is better than long and complex.
TYPES OF COMMUNICATION TO AVOID Based on these postulates certain communications need to be avoided: • Unintended promises or assurances (may result in a binding obligation that was not intended). • Ambiguous statements (allows for distorted interpretation). • Conveying internal discord (this will often broaden the scope of a lawsuit). • Poor follow-up (inflammatory at all levels). • Breaching the attorney/client or other privilege (opens up enormous problems and risk of disclosure). NOVEMBER/DECEMBER 2016 37
as to what communications can be maintained as confidential, and these exceptions must be considered and understood before relying on a confidentiality agreement.
• Heavy-handed statements (can be deadly even if fully accurate). • Untrue statements (very difficult to overcome at trial). • Oversell (avoid promising more than you are certain you can deliver). USE OF A PRE-NEGOTIATION OR CONFIDENTIALITY LETTER One available method to avoid risk of an errant email or other communication being used by an adversary is a “prenegotiation” or “confidentiality” agreement negotiated and documented at the early stages of the communication exchange, especially where the possibility of a dispute exists, pursuant to which all communications with the borrower and its affiliates are acknowledged to be confidential in scope and perhaps for settlement purposes. Such a document can be in letter form and should be 38 PRIVATE LENDER
considered whenever the potential for a dispute exists, even before the actual dispute arises. Reference should also be made that these communications are initiated at the borrower’s request and that the communications are to be used solely for purposes of facilitating discussions between the parties and not otherwise, and are to remain strictly confidential in all respects. Most state and federal courts will honor and enforce such agreements and not allow the communications designated as being for purposes of discussing a possible resolution of an actual or potential dispute to be introduced in the proceeding should a litigation or arbitration later be instituted. This type of agreement can also be used to document a variety of facts and to convey and respond to settlement positions without fear of use or disclosure of positions taken during the course of the confidential communications. There are exceptions
USE OF ATTORNEY COMMUNICATIONS AND INTERNAL COMMUNICATIONS Communications in confidence between an attorney and his or her client are privileged and not subject to discovery by a third party or forced disclosure. This applies whether the attorney is in-house, retained or just consulted. Involvement of an attorney in communications within an organization or within departments if properly employed can be an effective tool to maintain sensitive internal communications in confidence as long as only personnel and consultants of the organization are made privy to the communications with the attorney. Such communications are rarely challenged as discoverable and discovery of such communications is even less often ordered by a court as long as the conditional nature of the communications is strictly maintained. DISCLAIMER: This article is intended solely to raise awareness and not to render advice nor for purposes of reliance. Competent counsel should be contacted as to any specific areas of concern. Awareness of risk combined with prudent policies and training are the best weapons available to minimize these risks and prevent costly mistakes arising from poor or careless communications or the disclosure of internal communications of a sensitive nature and intended to be maintained in confidence. ■
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Out With the Old & In With the New Professional resoutions to consider in the New Year by Erica LaCentra
ith 2016 swiftly coming to an end and 2017 planning well underway, it is inevitable to spend time reflecting on both the positives and negatives of the past year. As with the close of any year, this reflection is typically what drives people to create New Year’s resolutions. While many focus on personal resolutions such as going to the gym more, eating healthier, etc., professional resolutions are often overlooked, or worse yet, never even considered. People may think companyestablished goals for the New Year
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will suffice, but how many people would ever settle for leaving their personal objectives in someone else’s hands? Use 2017 as an opportunity to better yourself both personally and professionally. If you’re not sure where to start, here are some professional resolutions you might want to consider. RESOLVE TO PAY MORE ATTENTION TO YOUR CUSTOMERS One of the biggest pitfalls that companies fall into while developing new programs and products is creating
something based on what they think customers want. Meanwhile, no one ever took the time to find out if that matches up with what their customers actually want. The easiest way to figure out what will draw new customers and retain existing customers is to simply ask them. Start the New Year off with a customer satisfaction survey and ask basics like: “ What did our company do well/ poorly this past year?” “Why did you originally choose to
work with our company?” “What could we do to improve in 2017?” “ What new products/services could we offer that would be beneficial to you?” Surveys can provide valuable insight into new products or programs that should be considered in the coming year. They can also help shine a light on issues that you may not have known existed. This will allow you to develop a plan to tackle parts of your job or company that need immediate attention. Most importantly, surveys show your customers that they matter to your business and their opinions are valued. RESOLVE TO SCOPE OUT YOUR COMPETITION When was the last time you compared
work with a peer or, at the very least, asked for objective input on a project? Most likely it was not anytime recently. Why? Because it can often be difficult to see any faults in your work when you are so heavily invested in a project. Over time, it can be easy to get into a professional rut. You develop a case of work blinders where it seems like your products are the best they can possibly be, but in reality you are getting walloped by your competition. Much like the first resolution, scoping out your competition comes down to the importance of getting an outside perspective to determine how you can improve your products or programs. Be your own harshest critic and compare what you are doing with other big players in your space. The best-case (read “highly improbable”) scenario is that there is
absolutely nothing you could possibly improve upon and everything stays status quo in 2017. More likely, though, you will find several areas that need improvement and you can figure out how to make those advancements happen in the New Year. Your competition isn’t going anywhere anytime soon. So why not start using it to your advantage? RESOLVE TO GIVE NEW TECHNOLOGY A TRY Plain and simple, you can probably simplify the way you are currently handling at least one part of your job and improve efficiency with software or a piece of technology. With the amount of technology currently available, the thought of trying to find the perfect tech tool may seem like a daunting task, but it shouldn’t be. NOVEMBER/DECEMBER 2016 41
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The best place to start is to think about your current job responsibilities and figure out which tasks take up the majority of your time. From there, it should be easy to identify the major pain points that exist in your most time-consuming tasks. Then, it’s all a matter of researching what technology exists to eliminate those pain points. If you are still afraid of picking the wrong technology, fear not. Depending on what you are looking for, free versions of a great deal of software tools are now available that give the user unlimited access to basic functionality. This allows you to use certain features of the tool and develop a basic understanding of it without spending a dime. Typically you will only have to pay to access more advanced features and at that point you should know if the software is a good fit or not. If you find a tool where this is not an option, more often than not, you may be able to access a limited free trial, or at the very least, an in-depth demo that will let you see if it has the functionality you are looking for. Finally, if all else fails, talk to peers in your field. Chances are, you are not the first person to experience whatever pain point you’re trying to resolve. When a person finds a tool that improves his or her way of doing something, the person is usually 42 PRIVATE LENDER
more than happy to talk about it. So ask around. Someone may be able to suggest the magic piece of technology you have been looking for all along. RESOLVE TO GO BACK TO BASICS Going back to basics may seem counter-intuitive to the last resolution, but the truth is technology can’t do it all, and it’s not always the right solution to every problem. Unfortunately, every innovative new idea isn’t always going to play out as you had hoped, and sometimes less is more. It is important to remember some basic fundamentals while you’re launching new initiatives in the New Year. If you were meeting with a client who only spoke Spanish, you wouldn’t speak to him in English and hope he understood what you were saying. Good communication is key, and the way you communicate matters. Be straightforward and transparent with your customers. You never want to surprise people at the last minute because you tiptoed around an important detail or neglected to tell them in the first place. It is also important to be available to your customers through numerous channels of communication (email, phone, face-to-face meetings, etc.). Allow people to connect with you in
the method they are most comfortable with. If you were to use email as your sole method of communication because you felt it is more convenient, most customers wouldn’t mind. However, it isn’t worth losing out on customers who prefer to have their questions answered over the phone or face-toface just to save some time. And that leads to another basic, but often neglected, concept: Customer service is key. The bottom line is, people are willing to pay more for great customer service. A 2013 survey, conducted by Dimensional Research, found that 62 percent of B2B and 42 percent of B2C customers purchased more after a good experience, while 66 percent and 52 percent, respectively, stopped making purchases after a bad experience. Also keep in mind that if there is one thing that people remember more than great customer service, it is awful customer service. In the same survey, 95 percent of respondents told a friend, co-worker or family member after having a bad customer service experience, compared to 87 percent who said they shared a story of their good customer service experience. One of the easiest ways to lure customers away from your competition is to provide better customer service. RESOLVE TO PUSH YOURSELF OUT OF YOUR COMFORT ZONE Although this sounds more like a personal New Year’s resolution, it’s equally relevant in a professional setting. It is important to be willing to go outside your professional comfort zone in order to grow in your field. Many people find attending
networking events and conferences intimidating. Think of it this way though:, even attending just one event gives you the ability to make face-toface connections with people you may not normally have a chance to speak with. Building a robust professional network is a great way to gain new insight into your industry and access new opportunities. Creating and publishing content is another nerve-wracking task. It can be stressful to think about the sheer number of people who will read what you have written and critique it in some way. The benefit of getting your name out in the industry is worth
the stress, though. Plus, it can be satisfying knowing that people are learning more about your business because of something you wrote. Maybe you are afraid of public speaking. There are numerous organizations, like Toastmasters International, that specialize in helping their members with public speaking. Never turn down the opportunity to speak as an authority on a topic. Doing so creates a level of credibility that may otherwise be difficult to achieve. If you aren’t comfortable diving in head-first, try volunteering for a project that may not be the norm for
you. It could be the first step to bigger and better things. NOW, STICK TO YOUR RESOLUTIONS! Be careful not to fall into the trap of pushing your resolutions to the back of your mind and letting them fall by the wayside. Setting monthly or even quarterly goals for each resolution is a simple and effective way to keep yourself on track. This also allows you to keep tabs on your progress to see just how far you’ve come since the start of the year. Just like with personal New Year’s resolutions, professional resolutions only work when you stick to them. ■
NOVEMBER/DECEMBER 2016 43
Jon Hornik, Partner
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‘Trust Your Gut’ Marketing Busts for 2017 Data-driven decision-making is increasingly valued above a ‘gut feeling.’ by Chrissey Breault
n the very beginning, there just were no tools and information needed to conceive and measure the effectiveness of our efforts. We all were forced to rely on our gut feelings when it came to assessing the success of our marketing initiatives. According to Harvard Business Review, 45 percent of executives “rely more on instinct rather than facts and figures to run their businesses.” That’s an alarming statistic! Even now, as more effective tools to collect analytics are available, many in marketing prefer to trust intuition over data. Intuition is highly valued in
C-suites across the country, and acting on gut feelings has been valued over the hard work of crunching data and formulating rational strategies. The trust in intuition is understandable. But it’s also dangerous. Intuition does have its place in decision-making, and you should not ignore your instincts any more than you should ignore your conscience – but anyone who thinks that their gut is a substitute for reason is indulging in a risky delusion. Detached from proper analysis, intuition is irresponsible and undependable. It is as likely to lead to disaster as to success.
Unfortunately for marketers driven by creative instinct, today’s businesses are increasing demand for marketing teams to have the ability to show a tangible ROI to justify their budgets. Simply stated, marketers must do better. Gut feelings just aren’t good enough anymore. IS IT ART OR SCIENCE? Marketers didn’t always have data analytics tools available to quantitatively and qualitatively measure the effectiveness of their strategies or campaigns. In the past, determining marketing success really was an intuitive exercise. NOVEMBER/DECEMBER 2016 45
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John Wanamaker, an early marketing pioneer, once famously said, “I know half my advertising is wasted; the trouble is I don’t know which half.” Despite a growing and acute recognition of the need for more transparency, the technology just wasn’t there. Neil Borden, who wrote “The Concept of the Marketing Mix” in 1953, described the state of the art at the time: “Marketing is still an art, and the marketing manager, as head chef, must creatively marshall all his marketing activities to advance the short- and longterm interests of his firm.” He was chiefly interested in determining how the elements of a marketing program could “be manipulated and fitted together in a way that will give a profitable operation.” Borden highlighted the need to ask “what overall marketing strategy has been or might be employed to bring about a profitable operation in light of circumstances faced by management?” Despite the progress marketers have made toward a “use of the scientific method” to test which configurations of a marketing mix are most effective, Borden was critical about marketing still not achieving the goal of establishing pragmatic marketing science by the 1960s. Marketing remained largely in the “realm of art,” as he put it. With the development of productivity analysis in the ’80s, the trek toward marketing analytics surged ahead. That was followed by enterprise analysis systems in the early 2000s that gave large companies the capability to better track their marketing efforts. Business intelligence followed, coming together as a coherent discipline in the mid- to late 2000s. It all paved the way for 46 PRIVATE LENDER
modern data analytics, powered by the bleeding-edge cloud technology, predictive modeling and information for APIs. Today, we are witnessing a shift in data analytics tools, which continue to become increasingly available to marketers from every type and size of business. Prices are dropping, cloud solutions are enabling mobility, dragand-drop interfaces are replacing code-based ones, automation and AI are handling the heavy lifting, and integrations are bringing silos down. It’s easy to forget that until now, effective data analysis was primarily the realm of larger corporations that could afford the (necessary) infrastructure to work with huge sets of unstructured data from various sources. That infrastructure usually included data warehouses, an accompaniment of data analysts and expensive software to make sense of the data and deliver the results of the data analysis to decision-makers. That brings us back to the challenge facing today’s executives: How do you analyze more in less time? The answer lies in the technology. Powerful new decision-support tools can help sort through vast numbers of alternatives and pick the best. When combined with experience, insight and analytical skills of a good management team, the tools offer a way to make consistent sound
and rational choices even in the face of baffling complexity – a capability that our guts can never match. IT’S A REVOLUTION Since the shift toward content-based marketing built momentum, marketers find themselves under increasing pressure to measure the effectiveness of their publishing efforts. At the same time, they now have more data available then was ever available in the past. The number of data sources actively analyzed by businesses is expected to grow by 83 percent between 2015 and 2020, according to the 2015 Salesforce State of Analytics Report. By comparison, the number of data sources only increased by 20 percent between 2010 and 2015. The big question in not whether marketers can apply the scientific method to available data. The question is now how best to do it? The Salesforce report pointed out, “business leaders face a continued influx of data and still struggle to make sense of it all.” TREND WATCH 2017 These trends are being driven mainly by a wealth of available data and emerging tools to make practical use of that data. The urgency will only intensify as we shift into 2017.
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WHAT ARE THE KEY BENEFITS OF MARKETING ANALYTICS IN YOUR OPINION? Source: Regalix State of B2B Marketing Metrics & Analytics 2016
Helps in identifying marketing channels that provide the most ROI
Helps in allocating marketing spends more effectively
Helps in optimizing the marketing mix
Provides a better view of the sales funnel
Helps in better marketing message
Helps engage with the customer better
51% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
According to Marketing Land, the data analytics landscape is primed to undergo some significant evolution in the months ahead. Here are the top trends to track: Data-driven engagement via automation The trend that we have seen throughout 2016 will only strengthen in 2017, as the industry continues to demand higher levels of efficiency and effectiveness in an increasingly scrutinized, misunderstood and competitive environment. According to Acend2, 71 percent of companies currently use marketing automation and another 23 percent plan to get started with it in the months ahead. Marketers will have no choice but to increase their investments in marketing tools that are capable of more sophisticated segmenting for targeted engagement with 48 PRIVATE LENDER
existing and prospective customers. The tyranny of the bottom line Marketing has always required a combination of creativity and science— usually more of the former. This has made the impact of marketing trickier to measure accurately and the value even harder to measure. The tides have turned, as marketing has become increasingly data-focused. The effectiveness of the data revolution in marketing is twofold. On one hand, marketers have far deeper insights into what works and what doesn’t. On the other hand, it means marketers are expected to make more effective use of available data analytics tools to show higher returns. Tighter collaborations across teams With greater transparency into
all aspects of the customer life cycle, marketing is finally being recognized as a critical contributor to business success, and tighter integration with the sales team is crucial. Marketing is no longer a fringe group practicing the dark arts that somehow benefit the business. The pressure is on for better alignment in terms of evaluation performance. End-to-end business process metrics are merging with one another, and lead qualification criteria are evolving as a result. You can finally ignore those vanity metrics that don’t make substantive contributions to the bottom line. Insights derived from marketing analytics must be actionable by your sales team who must, in turn, give feedback to your marketing team about leads that do or don’t convert and which lead are more likely to convert, as an example.
This process transforms marketing into a discipline that draws on relevant metrics to deliver practical, useful insights and prospects to sales teams to use to realize higher sales and revenue. Analytics latency is history. Today’s advanced business intelligence tools (think cloud storage solutions and caching algorithms) make it easier to collect data from multiple sources in different formats, analyze the data and extract actionable insights. The benefits include dramatic cost savings and near-real-time analysis of information accurately merged from distributed sources. Simply breaking down traditional data silos was a big step toward better
efficiencies. Analysis with minimal latency means more immediate decisions that often have profound results for rapidly growing businesses based on key goal-based metrics such as: ■ Cost of content production and paid customer acquisition.
■ Content being distributed effectively. ■ True engagement with relevant audience members.
TAKING IT TO THE NEXT LEVEL Those who pay attention to the trends heading into 2017 are better positioned to take advantage of new
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tools to collate, analyze and act on their data. Ultimately, those are the people who will be able to most effectively determine whether their marketing strategies are working and how best to optimize them. We’re likely to see increasing demand for data that is more detailed and precise than ever before. Those who are capable of drawing insights from data using analytics will leap ahead of lazy marketers who insist on relying on that “gut feeling.” We can already see the signs of this imminent, fundamental change. They all point to one certain conclusion: Using your gut over data analysis-driven strategy for 2017 is a recipe for failure. ■
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