SECTIONTHE HEADING SHINING LIGHT ON SUCCESS
Q&A with Amy Wan & Beth O’Brien
DEALS AT YOUR FINGERTIPS The Official Magazine of AAPL September/October 2017
Crowdfunding & Auto-Investing
AAPL ANNUAL CONFERENCE PREVIEW • Meet the Hosts • Meet AAPL Volunteers • Speaker Lineup • Keynote Speaker: Daren Blomquist
53 LENDER LIMELIGHT
YOU HAVE A CHOICE, CHOOSE A PARTNER
COMMITTED TO YOUR SUCCESS
FIX & FLIP LOANS RENTAL LOANS
NEW CONSTRUCTION LOANS BROKER & REFERRAL PROGRAMS
Why Finance of America Commercial? Our products, process, and people separate us from the industry. Let us prove it to you today. •
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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. Terms and Conditions apply. Lender-paid broker fees are not available in all states. License requirements vary by state.
©2017 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. §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.
CONTENTS SEPTEMBER | OCTOBER 2017
Building your Private Money Lender Dream Team -
Unsecured Financing Solutions
LENDER LIMELIGHT 38
Private Lender Capital Options
Real Estate Crowdfunders Turn to Auto-Invest -
Building a Strong Foundation Michael Tedesco
IRA Eligible Loan Structures
MANAGE & LEAD
Tax Reform or Tax Cuts?
Not Just a Dollar Amount -
Romney Navarro 72
4 Steps to Creating a Customer -
Shining a Light
Featuring Amy Wan & Beth O’Brien
AAPL 8th Annual Conference Preview • Meet your Hosts • Schedule of Events • Q&A with Daren Blomquist • Featured Conference Speakers • AAPL Advisory Committees Spotlight
The CFPB Gives an Inside Look at it’s New HMDA Portal -
Bryan Redington, Esq.
New Credit Reporting Rule Takes Eﬀect -
China’s Policies Impact U.S. Real Estate -
EVERYTHING ELSE YOU NEED TO KNOW 5
Last Call with Chris Ragland
CROSSING OLD BOUNDARIES FOR GROWTH & PROGRESS R. MICHAEL WRENN CEO, Aﬃnity Worldwide
President, Aﬃnity Worldwide
Executive Director, AAPL
HEATHER A. ELWING Editorial Manager
Editor in Chief, Private Lender Director of Marketing & Member Services, AAPL
Senior Account Manager, AAPL
BRANDON MCCURDY Designer | BrandDesign
Benard Guy, Brew Johnson, Brian Fritton, Christopher Packard, Tony Brown, Romney Navarro, Brian Redington, Esq., Clay Malcolm, Eddie Wilson, Jeﬀ Levin, Laura Chalk, James Hart
Rondell Lane | Media Lane Photo & Video 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.
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I always feel reflective when summer turns to fall. For me, it’s a time to step back and consider the winds of change both literally and figuratively while being reminded of what remains constant. My senses heighten as the crisp air washes over me and as sunlight reflects in the changing colors. But this change is also a constant because it happens every year. We can count on it. As we reviewed the content of this edition and look forward to our annual conference in November, I’m reminded of both change and consistency. Some constants of our human condition, no matter who we are – male, female, no matter our nationality, background or belief structure – are that humans are wired to connect, strive and innovate. Change comes in how we use those constant human traits to push past our boundaries, improve ourselves, our situations and to serve others. This edition, I find I’m especially inspired by the stories of resourceful, smart and innovative women. We’re covering the stories of several women who saw needs in the marketplace and diligently worked to fill the gaps, making business and life better for everyone they serve. While women have always been capable of innovation and high achievement, it wasn’t that long ago that women were mostly discouraged from making contributions in business and technology. Today, women contribute and succeed in a traditionally male dominated industry and continue to break stereotyped norms. I am inspired by the stories of people from half a world away who have crossed borders to find opportunity, investing in our country as well as in others. As you will read in our special feature, the Chinese government is changing some rules to make certain investments more difficult for its citizens, these investors show us that we can all adapt to external pressures, and find a way to succeed. Growth and progress require that old boundaries are crossed, new lands are explored, innovative tech is created and new associations are made. We must creatively apply our constant human strengths to break old barriers and bring about those winds of change that will propel us all to new heights. I’ll be carrying these sentiments with me this November as we gather in Las Vegas. As always, it will be a time of making new connections, meeting up with old ones and learning from one another. I believe we all rise when we tap into the genius of, and learn from, one another.
Executive Director, American Association of Private Lenders
The American Association of Private Lenders is an Aﬃnity Worldwide Company.
SECTION WHAT’S HEADING CURRENT
Trending industry topics and news from around the world of private lending
GERACI LLP is proud to announce its newest marketing team member, John Pelache. Pelache is the new account executive for the media department, and is working on growing and expanding the conference line, magazine and all marketing efforts. He has a background in sales, and has jumped right in with the upcoming conferences and Originate Report magazine.
SHARESTATES received the 2017 Great Neck Best Mortgage Lender Award. The annual Great Neck Award Progam is an annual awards program that honors and acknowledges the achievement of local businesses in the Great Neck, New York area. The impactful and prestigious awards are well known throughout the Great Neck community and bring a sense of appreciation to employees of honored organizations. “This is a local award that we are extremely proud of,” said Allen Shayanfekr, co-founder and CEO of Sharestates. “It is an honor to be recognized by our community and the Great Neck Award Program as not only one of the top mortgage lenders in the area, but also as a company that contributes to the community in a positive way, including local job creation and charitable initiatives.” GREYSTONE adds Kelley Klobetanz as managing director for Greystone’s Federal Housing Administration (FHA) team. Klobetanz’s role will focus on expanding client relationships in the multifamily, affordable and healthcare sectors with strategic initiatives to further streamline the FHA process for clients. Prior to Greystone, Klobetanz was the senior vice president and FHA deputy chief underwriter at Prudential Huntoon Paige Associates, Ltd. She holds MAP and LEAN certifications to underwrite HUD-insured transactions and has worked on over 70 deals totaling $1 billion in her 15-year career. “This role at Greystone represents an opportunity to utilize my underwriting and relationship management skills in an impactful way, creating a completely new experience for clients,” Klobetanz said in a press release. “Greystone’s technology and commitment to the FHA platform is unparalleled, and the company’s passion for iterative improvement is so energizing.” “We are building the absolute dream team in the FHA industry and Kelley brings to Greystone the rare combination of deep underwriting expertise and a dogged ‘can-do’ determination to find solutions rather than impediments to getting deals done,” Mordecai Rosenberg, head of Greystone’s FHA lending business, said in the release. EQUITY CAP FUND ADVISORS, INC. welcomes expert lender and real estate broker, Matt Rhodes, to the Equity 6
Cap Family. Rhodes will spearhead Equity Cap's loan origination platform. He has served as president of a real estate company he owned and built from the ground up and joins former colleague, Mitch Valmer, president of Equity Cap Fund Advisors, Inc. and Equity Cap Venture Fund LLC. "It has been my great pleasure to have worked on real estate finance transactions for the last decade together, with his meticulous management skills, he has made it a seamless transition into the Equity Cap Family.” EQUITY CAP FUND ADVISORS, INC. launched a Regulation D 506(c) hybrid fund at summer’s end. Equity Cap Fund Advisors rolled out the Equity Cap Venture Fund. It was developed for accredited investors only. The structure of the fund is designed as an all-weather fund suited for the ebb and flow of economic changes by first switching from lending capital to fix and flippers, builders and developers then to the second strategy of acquiring distressed real estate in southern California, rehabilitating it and selling for a profit. FORTRESS INVESTMENT GROUP LLC announced July 18 that they purchased the equity and substantially all of the assets of Colony American Finance, LLC. With the purchase Colony American Finance’s operating platform, it will be re-branded under the name CoreVest American Finance Lender LLC. Beth O’Brien, CEO of CoreVest, said, “We are excit4ed to bring the same team and the same approach to the market under the CoreVest brand. Our customers will continue to work with our people and experience our high level of service, while also benefiting from the strategic capital brought by the Fortress Funds.” “We see terrific synergies between CoreVest and Fortress,” added Christopher Hoeffel, CFO of CoreVest. “The new relationship with the Fortress Funds, given their experience in the specialty fiancé area will allow us to expand our market leading position in the growing yet under-served, single-family rental finance market.” Ryan McBride, COO of CoreVest stated, “We believe our opportunity for growth is especially strong given the demographic tailwinds for housing in the U.S. This transaction will enable us
to provide scalable debt capital and innovative financing products to our investor clients.” LIMA ONE is in a perfect position to enter the non-owner occupied mortgage arena with a large loan over $470,000. WIPRO GALLAGHER SOLUTIONS announced, on July 31, the release of their latest version of their Loan Origination System (LOS), NetOxygen v5.0. Providing uses for like loan officers, processors and administrators with simplified innovations and configurations tools that meet the evolving needs of lenders and to support the next generation of lender transformations. It also enhances workflow logic to increase transparency around performance and increases efficiencies within the lending operation. PEERSTREET integrated with Personal Capital in August to provide more detailed investment overview. Powered by Envestnet | Yodlee Data Aggregation Platform, customers from both Personal Capital and PeerStreet can now view their PeerStreet positions within the context of their investment portfolio on Personal Capital. This integration with Personal Capital follows similar integrations announced earlier this year with Wealthfront and Betterment. “Many PeerStreet customers have asked for this integration with Personal Capital. We’re always working to improve the experience for our customers and provide greater control and transparency,” said Brett Crosby, co-founder and COO of PeerStreet. “The more people can see how their PeerStreet account is performing compared to other investments, the more they can make informed decisions about where to invest money in the future.”
Blackett and Dan Kinchla to their asset management and underwriting team. In their new roles, Blackett and Kinchla are responsible for reviewing and assessing residential renovation and commercial real estate loans being considered by Grand Coast Capital, as well as the managing and servicing of these loans. Formerly, Blackett was a credit underwriter at Capital Crossing Servicing Co. There he underwrote distressed commercial real estate loans and was instrumental in the acquisition of large debt portfolios held by the FDIC. In his new position, he will also focus on streamlining the residential fix and flip underwriting process. Previously, Kinchla was a senior asset manager for UC Funds. He managed an active portfolio of real estate investments totaling over $700 million with renovation budgets in excess of $300 million. “I’m looking forward to making an impact at Grand Coast Capital and becoming one of the many successful members of the team,” said Blackett. “The firm offers a great deal of potential for growth and learning, an aspect that is especially exciting.” “Grand Coast Capital is a thriving young firm that I am honored to join,” said Kinchla. “With an innovative and growing platform, the company is well suited to succeed in a variety of market conditions.” LIMA ONE CAPITAL, LLC announced on September 7 its acquisition of the residential debt origination business of RealtyShares. As a single source financing partner, the company is focused on delivering exceptional customer service, competitive pricing and superior execution. Lima One Capital will continue to work closely with RealtyShares, tapping into its deep pool of borrowers to source residential deals that meet both companies’ high standards.
GRAND COAST CAPITAL GROUP welcomed Joseph
AMERICAN ASSOCIATION OF PRIVATE LENDERS announced Daren Blomquist as the keynote speaker at AAPL’s 8th Annual Conference from Sunday, November 12 through Tuesday, November 14 at Caesars Palace in Las Vegas. Daren Blomquist is the senior vice president of communications at ATTOM Data Solutions, formerly RealtyTrac. He is also executive editor of the Housing News Report, a monthly newsletter published by ATTOM Data Solutions and named best newsletter by the National Association of Real Estate Editors in 2015 and 2016. “The practice of private lending has been around forever, but we’re seeing some trends pertaining to private lending within the real estate investment market that I’ll share at the conference,” said Blomquist. “If you’re aware of trends and know your market, you can be strategic and create win/win for you and your borrowers.” SEPTEMBER/OCTOBER 2017
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
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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.
Building Your Private Money Lender Dream Team Putting together your team of professionals for winning results by Bobby Montagne your interests and capital are protected throughout the closing and lending process. APPRAISERS Appraisals are an insurance policy for lenders, verifying the “as-is” and “after-renovation” values, confirming your comps and due diligence. Having a good local appraiser on your team who knows your neighborhoods well, ensures accurate appraisals with local knowledge and insight. INSURANCE AGENT
amously known as the Dream Team, the 1992 United States men’s Olympic basketball team not only won gold but went down in history as one of the best sports teams ever assembled. “Made up of the greatest collection of basketball talent on the planet.” Every winning team is dependent on the skills and talents of each of its members. To win single-handedly in a team sport is impossible; it requires collaboration, trust and synergy. The world of private lending is no different. In order to provide your borrowers a positive experience and successful outcome it’s important to develop and maintain a trusted network that works together to get results. So, who should you have on your Dream Team? SETTLEMENT COMPANY
Private lenders know distressed properties often have complicated title issues. The rapid nature of private lending is that borrowers almost always need to close quickly. A good settlement company and attorney can help you navigate complex title issues and move fast. Finding a settlement company that understands private lending is important, and using the same company routinely builds a positive relationship benefiting all parties. LENDER’S COUNSEL This is your defensive line. They don’t let anything get past them, and they verify all paperwork is in order before closing, protecting you from costly surprises down the road. From drawing up promissory notes and guaranty agreements, to reviewing LLC docs and draw schedules. They make sure
All renovation projects require builder’s risk insurance, and having a go-to insurance agent who knows exactly what your lender requirements are saves time and simplifies the process for your borrowers. Policies differ regarding coverage limits and terms, so it’s important to make sure you as a lender are covered in case of an accident on the job site. Making sure you are correctly listed as a mortgagee is important as is making sure the policy is assignable if the loan is sold THIRD PARTY INSPECTORS A third party inspector’s job is to inspect the property before each project draw or milestone. Having a seasoned and trusted inspector who understands your criteria for paying draws is critical. They understand, for example, whether you pay for partial work or for materials on-site versus installed. The benefits of having a third-party inspector versus doing inspections in-house include: SEPTEMBER/OCTOBER 2017
BUSINESS STRATEGY freeing up time for your core employees and having a neutral third party who decides how much borrowers get from each draw. The inspector can be the “bad guy” to borrowers. A good lender will not only have an all-star lineup for themselves, but will help their borrowers understand the importance of having their own Dream Team. These are a few of the potential players on your borrowers team: WHOLESALERS They are always on the search for great deals on distressed properties, and can help a borrower find the perfect investment property, often priced well below market. The process of finding these below market deals is time consuming and often involves a lot of networking and word-of-mouth. Borrowers are smart to use wholesalers to find deals rather than try to do it all themselves. REALTOR A good realtor will be able to help a borrower navigate the myriad of properties available, and offer advice on the best one for them given the neighborhood, buy price and potential exit price. He or she will know, based on comps and market knowledge, a good entry price for a property, and will also be able to use his or her negotiating and creative skills to outmaneuver other buyers in multiple bid situations. ARCHITECTS Projects that require extensive renovations, condo conversions, or zoning changes will require an architect. An experienced architect creates aesthetically pleasing plans that include detailed specs for building materials and any necessary engineering. These detailed plans and specs are critical when applying for permits, and are used when getting “apples to apples” bids 10
from contractors and subcontractors. Some lower budget projects do not need an architect but still may be worth considering, as many architects also help manage a job through its completion. PERMIT EXPEDITERS Depending on the jurisdiction of the renovation, getting permits can be one of the largest hurdles. Providing borrowers access to someone who is familiar with the permitting process can save your borrowers time, money and stress. In Washington D.C., for example, many retired employees from the permitting department work as permit expediters. They understand the permit process, know the legal shortcuts, and can cut the time to get permits from months to weeks. ATTORNEYS There can be a lot of paperwork, jargon and potential legal hurdles involved in real estate transactions, specifically those that deal with distressed or short sale properties. Giving a borrower access to a trusted attorney can make the process easier to understand and navigate. Most settlement companies have excellent real estate attorneys who can handle everything from complicated short sales to Tenant Protection Act issues, and can answer specific borrower questions throughout the process. CONTRACTORS Unless your borrower is a seasoned pro at home renovations, contractors are a must. A good contractor understands the local market and is trustworthy. Experience is the most important consideration when looking for a contractor. This experience should include a knowledge of the permitting processes and how to obtain a permit quickly. They should also have a trusted
list of subcontractors who are ready to work, know what to do when something goes wrong and know how to build a contingency buffer into the budget. When you narrow it down, choose the contractor who not only covers all the above but who has the patience to handle budget and schedule changes throughout the renovation process. We all know there will be changes and issues that “pop-up” over the course of any renovation. STAGERS Your borrower has come to the end of his or her renovation project and is now ready to put the home on the market, hoping to rent or sell the property as quickly as possible. Having a stager who understands design trends, and what prospective buyers are looking for can make all the difference. A staged home helps paint a picture to potential buyers of what life would be like living in this home. In the National Association of Realtors’ 2017 Profile of Home Staging, 39 percent of seller’s agents said staging a home greatly decreases the amount of time a home stays on the market, and 77 percent of buyer’s agents said a staged listing makes it easier for buyers to visualize the property as their future home. A good team always has a good coach. As the coach, putting together all the right players in the right positions for yourself and for your borrower, leads to success for everyone.
BOBBY MONTAGNE is the founder of Walnut Street Finance, a leading private lender in the mid-Atlantic and member of the American Association of Private Lender’s Education Advisory Committee. This article does not constitute an offer to sell, a solicitation to buy, or recommendation for any security.
Unsecured Financing Solutions
Don’t get discourage when conventional lenders decline you by Christopher Packard
here are dozens upon dozens of small businesses that open every day. Each is unique and carries its own specific set of strengths and weaknesses. However, they all have one major thing in common: they will all have the need for capital. Going to a traditional bank or a credit union used to be the only option small businesses had to access working capital. This is no longer the case. With the rise of alternative lending, there are now numerous options to consider before moving forward to obtain capital. One such option is an unsecured business loan
WHAT IS AN UNSECURED BUSINESS LOAN? An Unsecured Business loan is a loan that is not usually backed with collateral. Lenders who offer unsecured business loans won’t require your business to put up any assets as collateral to obtain the loan. That means there are no risks to existing assets like homes, vehicles or commercial property. Traditionally, to be approved for an unsecured loan, you as the borrower must have great credit history. Alternative lenders will still often overlook poor credit history and charge higher interest rates in lieu of a
credit based decision. IMPORTANT: Just to make it clear from the start, unsecured business solutions are not free for you to use arbitrarily. You, the borrower, have to pay your lender interest or some sort of fee for access to capital. Let’s go over the multitude of solutions that unsecured financing has to offer: WORKING CAPITAL LOANS Working Capital Loans are the most commonly sought out type of financing product. They are, in essence, designed to help meet short term financing needs.
This can include inventory purchases, business expansion or really any crucial business expenses. Most lenders will consider your credit score, time in business and cash-flow metrics to determine whether you, as the business owner, will be able to obtain financing. Repayment is made simple with a fixed term and fixed automatic daily or weekly remittance. Keep in mind that working capital loans are paid back over a much shorter time frame than traditional loans (anywhere from three to 18 months). This means it may have a higher impact on your cash-flow, while paying back the loan.
have access to cash when you need it. That’s why this type of financing is a great option to offset the ups and downs in your business. The advantage of a business line of credit is that you are not required to use the funds until they are needed. Also, you are only charged interest when it is used. One of the biggest advantages of this type of financing is that it will report directly to your business credit, allowing you to build your credit score while getting the funds you need. Most lenders will require the possession of a business checking account, proven financial history of two or more years, and a credit score over 650. The downside is that it’s much more difficult to qualify for this type of credit. If you aren’t the most qualified borrower, or you need fast access to financing, short-term working capital loans may still be the way to go when the immediate need for capital arises. Speaking of credit, 37 percent of American adults admit they do not know their credit score. Don’t be a part of this statistic, know your credit. INVOICE FACTORING
BUSINESS LINE OF CREDIT
Probably the oldest method of financing, invoice factoring (also known as A/R financing), is the selling of purchase orders or accounts receivables for immediate funds. In its truest form, factoring isn’t really a loan as much as it is the sale of an asset. This tool allows you, as the business owner, to receive capital in the event you are owed money for services completed. This is valuable when a contract for products or services is received, but the business lacks the cash to fulfill on the contract. In some industries, like textiles, it remains the financing vehicle of choice.
A business line of credit is an unsecured loan that businesses may use without having to go through the process of applying for a loan, each time they need capital. As the owner of a small business, it is necessary to
An invoice financing agreement is ideal for businesses needing funding to cover expenses when working capital is tied up until customers pay invoices. The key benefit is that it is treated as a transaction, rather than a loan.
This means no debt is incurred and the processing time is much shorter. Depending upon your customer base and the state of your account receivable, factoring is usually much easier and faster than a conventional loan. EQUIPMENT FINANCING Equipment financing is a solution that helps you pay for the new or used equipment your business needs over time, instead of fronting the entire cost of your equipment in one purchase. A business equipment loan is very similar to an auto loan, where the purchased item itself acts as collateral. Because of this, lenders are sometimes more willing to offer these types of loans and qualifying for them can be relatively easy. Equipment financing helps business owners acquire equipment that would normally be too expensive to buy with cash, in a much shorter period of time. This is a great option for companies that want to grow their revenues with a certain tool or piece of machinery. Approvals are typically based on credit score, years in business, financial history and value of the equipment itself. If you have a business that works within a specific industry like construction or agriculture, keep this in mind when searching for a financing company. Often times, these lenders will specialize in particular industries so going with a company that specializes in what you do is key! MERCHANT CASH ADVANCE A merchant cash advance (MCA) is not a loan, but rather an advance based upon the future revenues or credit card sales of a business. Basically, you as a small-business owner are selling a portion of future revenues or credit card sales to acquire capital immediately. Most providers form partnerships with payment processors and then take a fixed or variable percentage of a SEPTEMBER/OCTOBER 2017
merchant's future credit card sales. Each day, an agreed upon percentage of the daily revenues or credit card receipts are withheld to pay back the MCA. The hold-back is typically based on the amount of funds your business receives, your monthly receivables and the time it will take to repay the advance. Because repayment is based upon a percentage of the daily balance in the merchant account, the more transactions a business does, the faster they’re able to repay the advance. This structure has some advantages over the structure of a conventional loan. Most importantly, payments to the merchant cash advance company fluctuate directly with the merchant's
sales volumes, giving the merchant greater flexibility with which to manage their cash flow, particularly during a slow season. Also, because MCA providers like typically give more weight to the underlying performance of a business than the owner’s personal credit scores, merchant cash advances offer an alternative to businesses who may not qualify for a conventional loan WHAT’S NEXT? Only about 34 percent of small businesses receive funding through a bank. So, a conventional bank loan is not the end- all, be all for small business financing. Getting declined by your bank can be discouraging, but it doesn’t
mean your business is destined to fail. When it comes down to it, securing a bank loan for a business is tough! Even though credit unions have twice the approval rate of big banks, they still only work with more established businesses. Sometimes you just need extra capital to grow your business. If you’re not willing to give up equity in your company or don’t qualify for conventional bank loans, then taking on an unsecured business funding solution could be the way to go. CHRISTOPER PACKARD is the Director of Strategic Initiatives at Strategic Capital; a company that empowers business owners to grow to their highest potential through the use of creative financing solutions. Visit www. CapitalWithStrategy.com if you have questions or want to see if you qualify for any of the financing products above.
Private Lender Capital Options Discover the keys to alternative investment strategies by Bernard Guy
aving a robust, diversified and scalable capital structure is paramount for all financial firms. This includes large commercial and investment banks as well as private lenders. This means private lenders would have multiple sources of funding. The type of capital varies but generally it could include an equity component (common and preferred) and several forms of debt (short term working
capital, short term and long-term debt). The reasoning behind building a more robust capital structure are many but include: • Reduce risk inherent in having just a sole source should there be an interruption to that source. • Ability to better match your assets and liabilities. You ensure that the life of your assets and liabilities match
so you are not left with debt that is maturing but financing longer term assets and vice versa. • Lenders may have many good opportunities to book business but their sole source is not adequate to fund this business (cash outflows exceed inflows.) • Match cost of capital against return on assets. Sometimes it may be necessary to book a deal at a lower SEPTEMBER/OCTOBER 2017
invest in assets generating current income and are accustomed to evaluating unique credit circumstances which mirrors what private lenders see every day. These funds manage patient capital (five to seven years) from pension funds, insurance companies and private wealth management offices. Partnering with one of these firms enables a private lender to expeditiously and inexpensively establish a committed capital fund. BENEFITS TO INSTITUTIONAL CAPITAL AS OPPOSED TO PRIVATE PLACEMENTS
interest rate than you are paying for capital, creating negative spread. This is especially true when competitive pressures increase, which is occurring more frequently now. In practice, private lenders have historically funded their business through just one form of capital: a fund for registered, private placements used to solicit investments from individual private accredited investors. For the most part, these investors are sourced and managed via registered retail broker dealers. Some firms can bear the costs and risks associated with this strategy and have been able to establish a robust mechanism to invest in and execute in this arena. Many other firms have been limited in their ability to scale and execute on this strategy. One of the key limitations of this strategy for all firms, regardless of success, is that it still exposes the lender 16
to all the risks inherent in a single source capital strategy. Due to recent market shifts, however, private lenders are attracting a lot more attention from institutional investors than has historically been the case. This creates an opportunity for lenders to access an additional funding source. A structure can be created that provides committed capital to the lenderâ€” somewhat like a private placement but without the costs, time and risk required. It solves most, if not all, of the single source strategy risks. There are numerous institutional credit funds that are desirous to expand into the commercial real estate small balance lending space. These funds have historically invested in larger deals (approx. $15 million and above) and are now looking to partner and create longterm relationships with established private lenders. These funds have excess capital to
Costs: There are minimal costs associated with setting up these relationships. Costs that occur are legal review of contracts and time resources. All costs associated with creating and filing a private placement are eliminated. Ongoing costs of compliance, including annual audits and reporting are likewise eliminated. Time: There is no set time table but these relationships can be created quickly. Initial contact to funding can be accomplished in as little as 45 days. This contrasts favorably with the time required to solicit and close individual investors. Regulatory risks: This is a private contractual relationship. The SEC nor any other regulatory body governs these relationships. All legal risks associated with accepting and managing private investor funds are eliminated. Number of investors: It is not uncommon for private lenders to have dozens if not hundreds of individual investors. The time associated with maintaining proper communication with these many individuals can be overwhelming.
CAPITAL FORMAT There are multiple ways to structure a relationship. This will depend greatly on the lenders needs and resources. Commitment: It is important at the outset of the relationship that the lender communicates to their investor their capital needs and capabilities to manage a new relationship. This will drive the structure and help in selecting the right investor. Investors are generally not interested in putting the resources in place to develop a relationship for just a one-off deal. They will focus on partners that can provide a steady flow of deals. This allows the lender to secure a certain size of commitment. The size will vary but a good starting point for investors focused on this asset class will be close to $20 million. Legal structure: The legal form of capital investment will be driven by lenders needs and capacity. The investor will commit capital to the lender under an agreed upon structure. These generally fall into categories: • Servicing retained sales: Lender will sell a loan to the investor, but retain the servicing and management of the loan. The loan sold can already be funded and on the lender’s books or it can be a new loan that the investor will fund on behalf of the lender. The lender is compensated for the servicing and loan management and can retain a participation in the loan or can sell the entire loan. The lender can redeploy the capital in funding new loans. • Servicing released sale. Investor will underwrite, fund and service the loan themselves. This works well when the lender doesn’t have the capital on hand to fund the loan themselves, and/or they do not want to take on the credit or capital risk of a certain deal.
• Warehouse line of credit. This is a revolving credit line that allows the lender to accumulate a loan on their balance sheet for a given time, generally three to six months. This allows the lender to book a loan and hold on to it until they wish to place it into a longer-term funding source. This is applicable to larger lenders who have the balance sheet to support this strategy. The investor will not fund the entire loan and will require the lender to fund anywhere from 10 percent to 25 percent of the loan themselves. LOAN PARAMETERS Generally, credit funds are participating in the loan characteristic such as:
COLLATERAL: Real property commercial, mixed use, apartment/ multifamily, light industrial, selfstorage, retail, hospitality LOAN PURPOSE: Purchase, refinance, bridge, investment, property rehabilitation, rent stabilization, distress situations. Any instance where property is being re-positioned. Some investors will finance vertical construction although this is not a common practice. TERM: Six months to two years LOAN SIZES: $750,000$20,000,000 LTV: < 70 percent
LEGAL CONSIDERATIONS Legal requirements will include execution of the following contracts:
• Purchase and sale contract that outlines the duties and responsibilities of parties. • If capital is in the form of warehouse credit line, then a warehouse lending agreement will be required. • If agreement includes the lender retaining loan servicing, a loan servicing agreement will be required. OTHER LEGAL ISSUES OF IMPORTANCE These transactions will generally be non-resource to the lender for purposes of credit risk. That risk will transfer to the buyer at closing. Private lenders can retain a participation interest in the loan which will be considered a first loss position, meaning that the interest will be subordinate to investors. Lenders will be compensated for retaining this position. There currently exists a very strong desire amongst real estate focused credit funds to allocate capital to private lenders who generate small balance commercial loans. This is a very credible and effortless way to explore alternative funding sources beyond private placements. If you believe your business could benefit from additional channels of funding this could be the solution you are seeking.
BERNARD GUY is the founder of CapBrev LLC and is responsible for strategic direction and all operations of the firm. Mr. Guy has over 30 years of experience in the commercial and residential real estate credit markets. He has co-founded 2 firms from startup to profitability and sale in the U.S. and UK. During this period, he has managed, securitized, financed and sold approximately $30 billion in mortgage-related assets.
IRA Eligible Loan Structures Make your IRA work for what is best for you by Clay Malcolm
hen it comes to private lending, or any other investment opportunity, investors are beginning to understand a fundamental truth - if they can do it personally, then their IRA, 401(k), or health savings account (HSA) can likely do it as well. With a few exceptions regarding disqualified persons and titling considerations, most loans originated or purchased with personal funds are perfectly allowable within tax-advantaged retirement funds as well. For a borrower looking for a loan, this provides a new avenue for skipping the banks. Interest rates can be competitive (since the IRA holder and
the borrower determine the rate, term, etc.) and funding times can be slashed from weeks to days with the right IRA provider. This structure allows lenders to double their investment power by putting their tax advantaged funds to work in addition to their personal capital. Self-directed retirement accounts provide a degree of control that Wall Street retirement accounts, with only publicly-traded securities, typically cannot offer; yet there are a few key distinctions between personal investing and retirement account investing. It is important to understand your retirement account is a separate legal
entity than you personally. Therefore, the separation of those moneys is absolutely critical. IRA income yielded through interest payments must return to the account until a distribution takes place. Conversely, any costs associated with establishing and servicing the loan would need to be covered by the account and could not be paid out of pocket. Fees associated with security documentation or legal services are potential expenses in this context. Even though you, as the lender and IRA holder, will interact with any applicable entities in completing such tasks, compensation for services would still have to come from your account.
retirement plan. LOAN ORIGINATION The tried and true method of granting a sum of money and charging interest is certainly available to IRA investors. Common structures like personal or automobile loans can be offered by a retirement plan as a secured or unsecured note. An IRA can help a borrower pay off student loans at a lower interest rate, can be a second mortgage on a property, or can act as a hard money lender for a fix and flip project. IRA lenders apply the same investment principles they likely already use personally: conducting comprehensive due diligence, qualifying potential borrowers, and establishing agreeable terms to encourage successful loan fulfillment and a profit for the retirement account. In accordance with IRS regulations, parameters surrounding prohibited transactions must also be considered. Prohibited transactions most often occur when IRA-related business is carried out with disqualified persons. These disqualified individuals include certain immediate family members (parents, children, grandparents, grandchildren, their spouses, etc.) any entities owned and/or controlled by disqualified persons, or fiduciaries to one’s retirement plan. Non-lineal family members including siblings, aunts, uncles or cousins are non-disqualified, so one’s IRA could benefit from working with these people without IRS restrictions. With these guidelines in mind, let’s examine common loan structures and address additional considerations involved with implementing these strategies within a self-directed
Potential lending activities in this regard include, but certainly are not limited to: ǫǫ Commercial or residential construction projects. ǫǫ Bridge loans. ǫǫ Fix & flip projects. ǫǫ A new business in need of startup capital. ǫǫ An ongoing business in need of operating capital. ǫǫ And virtually any other loan variation. LINES OF CREDIT Your IRA, 401(k), or HSA can issue a line of credit, offering a loan sum on behalf of your plan and only collect interest on the actual cash your borrower requests. Although self-directed IRA investing requires the account holder to remain at arm’s length from IRA-owned assets, the IRS allows the account holder to determine
the pertinent terms of the loan. It also alleviates any possible headaches from having to amend a note to request additional funds from the IRA custodian or third-party administrator. Depending on the policy of the IRA company, requesting a withdrawal of funds to execute a loan could be a lengthy process. So be sure to do your due diligence. Compare IRA companies and their processes for funding notes and lines of credit. Extending a line of credit provides flexibility to all applicable parties by requiring the borrower to only pay interest on money received and by authorizing additional IRA withdrawals when warranted. NON-PERFORMING LOANS When borrowers stop making payments on their loans, banks have historically responded by triggering security clauses to acquire collateral. In recent years, however, banks have begun selling non-performing loans to recoup a portion of their capital without the hassle of trying to collect. Although these loans can be difficult to acquire, IRA investors can pursue these opportunities in the same manner as personal investors. Like other methods of private lending, IRA holders can participate in acquisition and refinancing endeavors without violating the rules surrounding prohibited transactions. For instance, if your IRA purchases a non-performing home loan and you don’t want to foreclose on the family living there, you can personally determine and implement new, mutually-beneficial terms to create a solid economic opportunity for your plan while allowing the family to keep their home. EQUITY IN AN ENTITY OR FUND THAT ISSUES LOANS Can’t find a borrower or not sure you want the headache of a hands-on SEPTEMBER/OCTOBER 2017
BUSINESS STRATEGY approach to the strategies discussed? This model may better suit individuals who don’t want to issue and service loans but still want to participate in the business of lending. Private lending companies are becoming commonplace as business owners pursue funding but don’t want the hassle of applying to a bank. These companies are always looking for capital they can use to lend to borrowers. This mitigates the risk of losing your investment to a non-performing loan and may therefore suit investors with different risk tolerances. Of course, your investment still relies on the success of the investment company, but a series of failed loans may not be as likely as a single defaulted transaction into which you allocated a significant portion of your retirement plan. FRACTIONAL DEBT Purchasing portions of larger loans has emerged as an increasingly popular means for investors to learn about the world of lending or participate, invest limited available capital, or diversify capital amongst multiple loans. This lending model is often accomplished through Online platforms, known as “fintech” or financial technology. Websites provide a single location for potential investors to review
opportunities in real estate loans, small business loans, or other such transactions and contribute small sums toward the total capital requirement, all from the comfort of one’s living room or home office. Technology can promote a strong relationship between partial debt transactions and self-directed retirement plans as IRA providers develop analogous and compatible technology. This allows retirement investors to engage in business activities with a level of convenience that other investment models often don’t provide. LOAN TO ANOTHER RETIREMENT PLAN We have detailed several ways to use retirement funds as a lender. Another approach that includes all strategies discussed, is the borrower can be another IRA. As long as the borrowing retirement account does not belong to someone on your disqualified persons list, your IRA can serve as a lender, using any of the forms of lending we have covered, to another retirement plan. The loan can be secured but must be constructed as a non-recourse loan meaning that the account holder (or any other disqualified person/entity) cannot pledge any personal assets to secure the loan. The only recourse the lender has, should the loan default, is the property the loan is secured against. All retirement accounts can use nonrecourse financing to purchase property, and many banks offer nonrecourse loans, but the terms and process can often discourage investors. Using IRA funds creates new opportunities for both investors.
FINANCING FOR REAL ESTATE Your IRA can be someone’s mortgage lender. As leveraged real estate investing grows in popularity, IRA lenders can diversify their retirement portfolio by providing the financing for real estate purchases. Your IRA can be in a first lien position or come in as a second mortgage. The account holder does the due diligence on the borrower, and determines the terms for the note. The account holder also chooses how the loan is serviced, making sure payments are made in time to the IRA, HSA or solo 401(k) accounts. As traditional lenders have tightened guidelines for borrowers, private money lending creates a viable option for investors looking to diversify their retirement funds. As you can see, the lending-based opportunities for some IRA investors are broad. Many people are not aware of their ability to include their retirement accounts into their investment strategies; so, it can be important for all the parties involved in IRA investing to keep educating investors. Whether you are an individual investor or a business in the lending space, it is important to have easy access to IRA educational assets, and to choose an administrator that has the technological means to support your investment strategies.
CLAY MALCOLM is the 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 12000 clients nationally. Malcom, who has more than 20 years management experiences in various roles, draws upon his teaching background to develop the educational aspects of New Direction IRA and impart knowledge about selfdirected IRAs to its clients and prospective clients. Malcolm received his Bachelor of Science degree in Communications from Northwestern University. Newdirectionira.com/education.
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New Credit Reporting Rule Takes Effect
Most civil judgments and many tax liens won’t show up on borrowers’ credit reports. by James Hart
significant change has taken effect in how Americans’ credit reports are compiled, but it’s not yet clearly exactly what impact the new policy will have on private lenders and their clients. On July 1, the three national credit reporting agencies – Equifax, Experian and TransUnion – stopped including any tax liens or civil judgments on a person’s credit history unless those documents contain that person’s name, address and either their Social Security number or date of birth. Most civil judgments don’t list that information. Approximately half of tax liens do. Because those liens and judgments won’t show up on their credit reports, about 8 percent of scoreable. Americans
will see an improvement in their credit score. Going forward, the credit-reporting agencies say they’ll be checking the public record on a regular basis – at least once every 90 days – to ensure individuals’ histories are kept up to date. “The changes that the CRAs (creditreporting agencies) are making will improve the quality and currency of data reported, ensuring that the credit reporting system stays strong,” said Francis Creighton, president and CEO of the Consumer Data Industry Association (CDIA), a trade group. While millions might see their scores rise, the CDIA predicted only “modest impacts” to credit scoring and predictive performance. VantageScore Solutions found that, for those who do receive
a bump in their score, it will be only about 10 points on average. Several private lenders echoed that assessment. “The new credit report policy will likely affect a few clients who will see their scores rise,” said Susan Naftulin, co-founder and president of Rehab Financial Group, a multi-state lender serving real estate investors. “As certain negative credit items are no longer going to be reported, the elimination of those items will result in a rise in score. For most clients, however, I do not believe there will be an effect.” POTENTIAL FOR SLOWER APPROVAL After all, many private lenders do not consider credit scores an end-all, be-all
part of their review process. Asset-based lenders are much more interested in the property securing the loan than an applicant’s credit history. And lenders can usually spot other signs that someone is a bad risk. “Certain tax liens and civil judgments are being eliminated, but the truth of the matter is that when a person has tax liens and/or civil judgments against them, they generally have other credit blemishes that speak to their creditworthiness,” Naftulin said. Even with the new policy, lenders have other ways to learn if a borrower has a civil judgment or tax lien. “Upon receipt of a credit report that shows any blemishes, our company will also order other searches to fill in the blanks that are no longer being addressed by the major credit reporting agencies,” Naftulin said. “Other sources will still be able to report tax liens and civil judgments, so the elimination of these on the credit reports will only serve to slow down the approval process and raise expenses.” “We will not change any of our internal operations as a result of this credit reporting change,” said William J. Tessar, president of Civic Financial Services, an asset-based private money lender specializing in non-owneroccupied properties. “The tax lien and civil debt information that will no longer be reporting on the bureaus can be pulled up through other resources, which is part of our normal validation of a loan request.” Corey Dutton, a private lender with Private Money Utah, said that some private lenders will still have pressure from their investors to include tax lien and judgment information in their lending decisions. “This information may be publicly available, but lenders will now be responsible for collecting and reporting
this information from public record, which consumes both time and resources,” Dutton said. “For lenders that want convenient access to this information, LexisNexis Risk Solutions is marketing a liens and judgments report to lenders. But at what cost? As if the new lending requirements and disclosures weren’t adding enough costs for mortgage lenders?” Going forward, credit histories may have less and less meaning for lenders as they begin to adopt an ever-growing set of tools and data sources. “I think that removing the items that generate largest problems of false negative information is a good thing,” said John Helmick, CEO of Gorilla Capital. “Overall, I think that credit reports and credit scores will be a part of our history but not a part of our future as more reliable measurements of individuals’ creditworthiness are being developed in this age of social media and meta-data.” WE DO NOT THINK THE CHANGES ARE NECESSARY. That’s not to say there’s no risk to the changes. Some experts have voiced concerns that erasing tax liens and civil judgments from credit histories could lead lenders to approve financing for people who are not good risks. “As a private money lender, I’m not happy about this decision,” Dutton said. “Lenders that exclude this information from their lending decisions may
perceive that borrowers are more creditworthy than they actually are. This invites an opportunity for error that private lenders cannot take on.” But this may be more of a problem for banks and other traditional lenders, who are bigger believers in credit scores and histories. “Conventional lenders could experience an extra layer of risk as those material items (tax liens / civil debts) will no longer impact the credit score which is normally heavily relied upon in making a decision to extend credit or not, as well as the terms of the loan,” Tessar said. Naftulin understands why some see the new credit-reporting policies as a benefit to consumers. “The truth is that only a small number of consumers will be benefited, while all will be affected by the slowdown and expenses discussed above,” she said. “From the lender’s perspective, we do not think the changes are necessary. There are very few times when we have seen a tax lien or judgment that was shown on the report of an otherwise credit-worthy borrower. These items are usually accompanied by a host of other credit blemishes.”
JAMES HART is a Kansas City-based journalist who writes about real estate and entrepreneurs. A former newspaper reporter and editor who worked for The Kansas City Star and the Cape Cod Times, he’s the son of a Realtor and title agent who owned income properties in north Missouri.
Tax Reform or Tax Cuts? What will come to pass in congress this fall? by Jeff Levin
he Trump Administration and the Republican Congressional leadership spent the last several months preparing to tackle legislation for corporate and personal income tax reform. As the 115th Congress sets out to take up this issue during the fall term, the operative questions are whether reform will actually materialize and, if it does, how extensive it will be. Unfortunately, the potential for reform legislation is not looking all that promising. Instead of reform, it’s more likely that Congress will try to push through new, but temporary, tax cuts — a far cry from actual reform. Businesses in the specialty lending and construction industries should keep a close eye on how the tax reform process ends up rolling out, as any significant restructuring of the tax code has the potential to unleash robust
economic growth. On the other hand, in the current environment, not even modest tax cuts are a sure thing as even implementing temporary tax cuts takes lots of political muscle and some cooperation, both of which are currently in short supply in Washington. And, failure to pass even temporary tax cuts could have a detrimental effect on the economy. The kick off for reform took place in July of this year, right before Congress left Washington for the summer recess, when the group called the “Big Six” –the White House and Republican Party Congressional leaders charged with developing tax policies -- released a statement outlining their joint vision for reform. The Big Six is composed of House Speaker Paul Ryan (RWI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary
Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch (R-UT), and House Ways and Means Committee Chairman Kevin Brady (R-TX). The joint statement was not a policy document, but rather a five-paragraph expression of their guiding principles, which had the effect of raising more questions than it settled. Previous plans released by both House Republicans and the administration were more detailed and specific policy documents, conversely, this statement was designed to provide a template for what Republicans will take up during the fall term. The joint statement began with a mission statement that on its own is uncontroversial: “Above all, the mission of the committees is to protect American jobs and make taxes
simpler, fairer and lower for hard-working American families. We have always been in agreement that tax relief for American families should be at the heart of our plan.” Next, the statement described three key matters that the tax reform effort will address, plus one earlier proposal that they have now taken off the table. CORPORATE TAX REDUCTIONS The statement repeatedly refers to reducing tax rates for corporations and in particular for small businesses. It states, “We also believe there should be a lower tax rate for small businesses so they can compete with larger ones, and lower rates for all American businesses so they can compete with foreign ones.” It’s valuable to take a look at what U.S. corporations are paying in taxes as a backdrop to what reform may offer. For regular corporate income tax, a system of graduated marginal tax rates is applied to all taxable income, including capital gains. Through 2015, the marginal tax rates on a corporation’s taxable income ranged from 15 percent for corporations earning up to $50,000 of net income to 35 percent for corporations earning above $18.3 million. Of course, it’s well reported that large corporations take advantage of a myriad of strategies and tax deductions that drastically reduce their marginal rates. These include attributing income to (and leaving the money in) foreign countries where the company operates, R&D tax credits, and stockbased compensation booked to capital. Even the largest and most profitable companies pay far less than the marginal rates. The average effective tax rate among S&P companies is 24.11 percent — well below the current corporate top rate of 35 percent — according to data compiled by The Earnings Scout, a
corporate earnings analysis firm. To underline how this works we note that in their most recent SEC filings, Amazon reserved 17.4 percent for annual federal income taxes, J&J reserved 14.9 percent, and the remarkably profitable Facebook reserved just 4.4 percent. In contrast, small businesses corporations are generally the ones for whom the marginal tax rate makes a big difference in the amount they pay to the government. According to the SBA, small businesses in the United States pay an estimated average effective tax rate of approximately 19.8 percent on an average of $83,000 of net income. That’s a little over $16,000 per business sent annually to the IRS. According to the U.S. census bureau, there are 28 million small businesses in America and they tend to be job creation engines, so it’s not difficult to make a case to reduce their marginal rates based on both political and economic rationale. The main inference of the joint statement is that revisions to the tax code should be made to encourage large corporations to repatriate capital they have been hoarding in international markets, and to lower tax rates for the small businesses that tend to be the big drivers of employment rolls. Taken together the document suggests that reductions to corporate tax rates would create new jobs and stimulate economic growth. There’s not much bipartisan support from the Democrats to reduce corporate tax rates and any legislation would have to pass muster with the Republican deficit hawks in both the House and Senate, the very ones who tripped up health care legislation due to disagreements over the long term impact on the federal debt. FIXING A “BROKEN” TAX CODE AND PROVIDING TAX BREAKS FOR FAMILIES
The joint statement describes an oftrepeated sentiment that the existing tax code is so complex that it is effectively broken, and in so doing, touches on the subject of tax relief for families. It calls for “a plan that reduces tax rates as much as possible,” but doesn’t go into any detail about potential tax breaks for families. The Democrats could have a field day by suggesting that the families the Republican Party has in mind are the super-rich Waltons, Trumps and Koch brothers. However, previously released statements provide clues about Republican Party thinking around individual income taxes. The House Republican tax reform plan championed by Speaker Ryan and released last year proposed to:
• Replace the existing seven tax brackets with three brackets.
• Nearly double the standard
deduction, to reduce the incentive to file itemized returns.
• Eliminate most itemized
deductions including for state and local tax payments, with exceptions only for charitable contributions and mortgage interest.
• Eliminate the alternative minimum tax.
• Replace personal exemptions with tax credits.
The White House tax reform statement from April was quite similar to the House plan on most of these points except for personal exemptions, although it didn’t close the door on replacing personal exemptions with tax credits. Otherwise, there are only minor differences in the specific details of the two plans. The House Republican plan proposed tax brackets of 12 percent, 25 percent and 33 percent, while the White House plan proposed tax brackets of 10 SEPTEMBER/OCTOBER 2017
percent, 25 percent and 35 percent. Since these two proposals were largely in agreement, it’s likely the upcoming tax reform legislation will look a lot like a marriage of the House Republican plan with the Trump proposal.
PERMANENT TAX REFORM
special interest groups from overturning reconciliation rules do not allow Congress to pass any kind of legislation the apple cart. if it adds to the deficit after a tenThe last major tax reform was in year period, so permanent tax breaks 1986, and only made it through with must be bundled together with either the forceful leadership of luminaries expense cuts or other sources of revenue including President Reagan, the chairs to balance the tax reform’s long-term of the Congressional tax-writing impact on the federal debt. committees Dan Rostenkowski and
The joint statement stressed the need to develop permanent changes to the existing tax code, and not just temporary revisions. The purpose of developing permanent changes is to keep tax reform intact in future years, so Congress won’t have to decide annually whether or not to continue with the changes. Permanence, however, seems quite unlikely. It’s been a long time since Congress did the heavy lifting to pass and implement any kind of permanent tax changes. Getting tax reform done requires strong political leadership, significant technical expertise from government staffers, and a steady information campaign to galvanize the public around the need for the change to happen. These requirements are necessary to prevent the plethora of
However, in the current political climate there is not a solid track record for enacting permanent legislation around taxes or spending. The American Recovery and Reinvestment Tax Act (ARRA) of 2009 created many temporary tax cuts, but several of them later expired when Congress decided not to renew them. The budget
Bob Packwood, and public champions of tax reform like Senator Bill Bradley and Representative Jack Kemp. Behind the scenes, comprehensive work by the tax policy wonks at the Treasury Department and Congressional staffers was undertaken. From the bully pulpit to the media to the public at large, at the time the consensus was that tax rates were just too high and there were too many tax shelters.
That’s a political hot potato, and as recently seen with “replace and repeal,” the House Freedom Caucus is likely to block anything that adds to the national debt. Most recently, major legislative initiatives have not been able to achieve a plurality in one or the other branch of the legislature, despite Republican majorities, and President Trump has not demonstrated the kind of consistency in using the “bully pulpit” of the presidency to champion the cause among the public in the way that many presidents have before him. BORDER ADJUSTABILITY One noticeable reversal in the Big Six joint statement from earlier Republican Party tax strategy documents is the jettisoning of what is called “border adjustability,” which would have offered
up increased taxes on imports. The border adjustment tax was a favorite of Speaker Ryan’s. As proposed by the House of Representatives it would have prevented businesses from deducting the cost of imports they purchased, while removing taxes on revenue from exports. The thinking behind it was to boost the U.S. domestic manufacturing sector, but it ran into early opposition from large global business interests including the energy industry, large retailers and the powerful Koch brothers. The joint statement articulated the retreat from Ryan’s pet project rather delicately, stating that the White House and Congressional leadership “… appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform.” It’s very likely that border adjustability would have caused deep rifts in Congress and have been challenged as an illegal protectionist action by the World Trade Organization, so it was eliminated in order to give tax reform a better chance of making it through the House and Senate. The early fate of the border adjustment tax serves as a cautionary tale and a good preview of how difficult it will be to make other big changes to the tax code. When the border tax was proposed, masses of lobbyists moved rapidly to dispatch it, and they are ready to ply their trade and battle either for or against whichever proposals benefit or harm their clients. Lobbying muscle will be particularly intense around the issues of taxation of small businesses, deductions for corporate interest expenses, and deductions for state and local taxes. LOOKING AHEAD Any tax bill which reduces revenue
will naturally raise worries about increasing the federal budget deficit and faces hurdles from congressional budget rules. Like the health care debate that preceded it, any tax legislation will need to stay as part of a budget reconciliation process to avoid being subject to a Senate filibuster that effectively would require 60 votes for passage. There are ways to get around the budgetary rules, including requiring the tax cuts to expire after 10 years, as was done in 2001, or using “dynamic scoring” with excessively optimistic assumptions about how economic growth will soar after tax cuts; the rising tide lifts all boats argument. These options have substantial drawbacks and are limited in how far they can propel the legislation, and scoring from the non-partisan Congressional Board Office will be taken more seriously. Unfortunately for the public, the combination of political polarization and the narrow, one-party control of Congress will make it very hard to get any real tax reform done. The Republican majority is likely to work to enact reform without trying to get any bipartisan buy-in. Just as likely, the Democrats will remain unified in their opposition, with an eye to the midterm Congressional elections in 2018. The anticipated absence of any real measure of bi-partisanship naturally empowers the deficit hawks and conservatives on the far right, including the House Freedom Caucus, which has sufficient votes in that chamber to torpedo any legislation assuming the Democrats vote “No” as a bloc. In the Senate, just three opposing Republican votes can topple their majority firewall as seen in the last round of health care legislation. The narrowness of this plurality, the strength of the conservative bloc, and the highly partisan approach of the lawmakers’
legislative work will make it tough for tax reform legislation to withstand opposition from all the special interest groups that will want to defeat it. Instead, based on the joint statement and other information made public so far, legislation will likely center around short-term tax cuts with only partial revenue offsets. Certain tax breaks may be reduced if they are the ones that Republicans oppose on ideological or political grounds. For example, the legislation is likely to try to repeal the state and local income tax deduction, which promotes state and local public expenditures and largely benefits residents of states that have voted for Democrats in recent presidential elections. But even this repeal may be too challenging to ram through over the objections of Republican members from high-tax states like California, New York, and New Jersey. Will we see real, permanent tax reform legislation being signed on President Trump’s desk this year? That is a highly unlikely outcome. Will we see some short-term cuts or the elimination of some deductions? That is a possibility. And will we see a bruising legislative battle, tweet storms, partisan wrangling and bare-knuckle politics? That is a certainty. It should be a very interesting autumn. JEFF 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. Before 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, lecturer, panelist and is also a member of the American Association of Private Lender’s Education Advisory 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.
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China’s Policies Impact U.S. Real Estate Chinese could be changing their investing strategies by James Hart
ver the last several years, Chinese investment has assumed an increasingly influential role in U.S. commercial real estate. In 2016 alone, Chinese investors spent $15.1 billion on commercial property here, representing 46 percent of Chinese investment in other countries, Real Capital Analytics reports. The United States was the number one destination for China’s outbound investment. Some of those deals were gigantic – five of them were each worth more than $1 billion. Portfolios of hotel and office properties accounted for many of those transactions. But it’s grown to the point that Chinese officials are taking action to throttle Chinese firms’ overseas investment. As of mid-August, that country’s State Council released a new set of guidelines that will restrict (though not completely eliminate) Chinese investors’ ability to put money into real estate, hotels,
sports, theaters and entertainment. And anything related to the gambling or sex industries will now be completely off limits.
countries in Asia, Eastern Europe and Australia. Investments in tech, oil, mining, fishing and farming will be allowed, too.
ENCOURAGING INVESTMENT IN INFRASTRUCTURE
Chinese leaders are reining in investors because they’re concerned these companies may be taking on an unsustainable, “irrational” amount of debt through these acquisitions. Officials also want to reduce capital flight from China and shore up its currency.
David Dollar, a senior fellow at the Brookings Institution, noted in a blog post that China’s effort to control precisely what investors are buying is a new development. “The number one destination of Chinese capital has been the U.S. That is not likely to change,” Dollar wrote. “But some of the purchases have been hotels, real estate and movie theaters. The announcement indicates that these will now be disfavored.” Instead, Chinese companies are being encouraged to put their money in roads, rail, ports and other related infrastructure – part of the country’s “Belt and Road” initiative to increase trade between China and other
A CHANGE IN APPROACH CBRE Research believes the new rules may lead Chinese investors to adjust their strategies, but fundamentally, they’ll continue to find ways to invest in international markets. For example, real estate firm Cushman & Wakefield predicts more Chinese companies will put money into logistics firms whose holdings include warehouses and related real estate. And the firm believes Chinese developers SEPTEMBER/OCTOBER 2017
SECTION SPECIAL FEATURE HEADING
will probably continue to pursue residential developments in other countries, The Australian Financial Review reported. Chinese investors could also use offshore entities to make deals, CBRE Research noted in a report released after the controls were announced. “Large investors already have money in circulation via the balance sheets of insurance companies and other investment management platforms they have acquired,” the report stated. “They are likely to use these offshore platforms to engage in property acquisitions.” Investors could also work through entities they own in Hong Kong or participate in joint partnerships. “Our data shows that China remained the largest source of cross-border commercial real estate investment capital (both new and capital already 30
circulating offshore) from Asia in H1 2017,” said Robert Fong, director of research for CBRE Asia Pacific. “New regulations should help to ensure that future outbound investment is more financially sound and strategically focused, but the impact of Chinese capital on key global real estate markets should continue for some time.” Take the first half of 2017 as an example; government officials have been tightening down on outgoing investments since the end of 2016, but even so, Chinese investors still put $25.6 billion into U.S. real estate for the first half of the year, up from $10.1 billion during the same timeframe a year earlier, CBRE Research reported. Even so, Morgan Stanley forecasts that Chinese investment in international real estate could drop by 84 percent this year.)
WHY U.S. COMMERCIAL STILL ATTRACTS INVESTMENT "Multiple years of steady job growth and the strengthening U.S. economy – albeit at a modest pace – makes commercial property a safe bet for global investors looking to diversify their portfolios and generate returns outside their country of origin," said Lawrence Yun, chief economist for the National Association of Realtors. "While Class A asset prices in many large markets have surpassed pre-crisis levels, Realtors in many middle-tier and smaller markets stand to benefit from the increased interest from foreign and domestic commercial property investors." Case in point: Earlier this year, the China Life Insurance Group announced plans to acquire a controlling stake in
“Some of the acceleration in foreign purchases over the past year appears to come from the combination of more aﬀordable property choices in the U.S. and foreigners deciding to buy now knowing that any further weakening of their local currency against the dollar will make buying more expensive in the future,”
“Although nonresident foreign purchases climbed over the past year, it appears much of the activity occurred during the second half of 2016,”
“Realtors in some markets are reporting that the eﬀect of tighter regulations on capital outflows in China and weaker currencies in Canada and the U.K. have somewhat cooled nonresident foreign buyer interest in early 2017.”
“Stricter foreign government regulations and the current uncertainty on policy surrounding U.S. immigration and international trade policy could very well lead to a slowdown in foreign investment,”
Lawrence Yun | NAR’s Chief Economist
a $950 million portfolio from St. Louis’ ElmTree Funds. Those properties were located mostly in small and midsize cities where the prices aren’t as high, but the income is still steady and strong. This summer, the NAR issued its Commercial Real Estate International Business Trends Survey. Its study of Realtors found that, among U.S. commercial real estate deals involving foreign nationals, China led in both the number of buyers and sellers. Almost 70 percent of surveyed Realtors said they were part of a commercial real estate deal in 2016, and of those, 20 percent closed a deal for a foreign client. The buyer-side sales price in most cases was about $ 1 million. "Economic expansion has slowly chugged along since the downturn, but in comparison to the rest of the world, the U.S. remains one of the most
attractive and safest bets for investors,” Yun said. “There's little evidence this will change anytime soon." While there may be some disruption as the result of new Chinese rules, it would be a mistake to overestimate the impact, according to Dollar from the Brookings Institution. “The overall flow from China to the United States is too small to have a macroeconomic effect, so the Chinese restrictions should have minimal effect on our economy overall,” Dollar wrote. “However, some local real estate markets, such as San Francisco, may feel the effect of diminished Chinese activity.” JAMES HART is a Kansas City-based journalist who writes about real estate and entrepreneurs. A former newspaper reporter and editor who worked for The Kansas City Star and the Cape Cod Times, he’s the son of a Realtor and title agent who owned income properties in north Missouri.
• Chinese Buyers Lead in Purchases of U.S. Residential Real Estate. • Commercial real estate isn’t the only sector where Chinese buyers are making their mark. • According to the National Association of Realtors, Chinese buyers spent more than $31.7 billion on U.S. residential real estate from April 2016 to March 2017, compared to $27.3 billion a year earlier. They also acquired 40,572 U.S. housing units. No other country spent more or bought more. • The results were part of the NAR’s 2017 Profile of International Activity in U.S. Residential Real Estate, released this summer. The results included deals where the buyers either lived overseas or were recent immigrants to the United States. • Foreign purchases were up overall, not just among Chinese buyers. The foreign sales volume was $153 billion, up 49 percent. (Canada was a big driver of that – its purchases grew from $8.9 billion to $19 billion.) • Chinese buyers led in dollar volume for the fourth year in a row and in the number of units purchased for the third year. They were more likely to buy properties in California. • While foreign demand should stay strong, it’s possible that politics and a decline in U.S. housing inventory could stiﬂe sales.
Technology Brings Opportunity It’s not just lenders and investors who benefit by Brew Johnson THE FUTURE OF PRIVATE LENDING Many people ask if I believe the expansion of private lending will continue, or if it was merely a temporary product of the financial crisis. My answer is unequivocal: not only will private lending continue to expand, but can eventually replace traditional bank lending. Here are some of the reasons why: THE AGING HOUSING STOCK
istorically, private lenders thrived by having strong relationships with local borrowers and the ability to fill a niche within the broader lending market. By choosing to operate in a space where traditional lenders couldn’t or wouldn’t compete, these private lenders were able to capture market share in their own backyard. While these lenders could fill this niche, several obstacles to their growth remained due to the highly localized and fragmented nature of the private lending market. By way of example, capital sources were primarily limited to their personal capital, money from friends and family, and in very limited cases, banking relationships. Since raising money to fund loans can be time consuming or overly burdensome, as the ongoing management of these capital sources create large amounts
of administrative workloads, the private lending market has remained a fragmented niche or cottage industry, dominated by small, local lenders. Following the financial crisis of 2008, things started to change and private lending expanded significantly, driven by two main factors. First, banks became even more unwilling, or unable, to lend. This drove an influx of borrowers to private lenders, who happily filled the void. At the same time, investors struggling to find yield in traditional asset classes, began looking for alternatives so more money started entering the private lending market. These two trends -- the growing private lending market and expanding investor appetite -- brought forth many new entrants which further expanded the market, including online lenders and lenders backed by hedge funds and Wall Street.
Long-term trends, especially for fix and flip, are extremely positive: The U.S. housing stock is older than it’s ever been, with the average American home being almost 40 years old. At the same time, homeownership rates are near all-time lows and rental rates are at alltime highs. These stats indicate there is a need for more and better housing options for homebuyers. Fixing up aging housing stock can be a much more efficient use of capital than new development, which may be more expensive, take longer to convert to new housing, and in many cases, have a larger drain on the environment. CAPITAL AND CREDIT While the percentage of homes flipped is near an all-time high from 3.1 percent of all single-family residences in 2015 to 5.7 percent in 2016, only 31.5 percent of flips are financed. This tells me that there is a lot of opportunity for private lenders to extend credit in fix and flip. So, where do you go to get the capital? Let’s face it. Banks are bloated and hamstrung by legacy systems, infrastructure and regulation. Private lenders are more efficient and faster than banks, provide higher quality
customer service, and make loans that make sense in their respective markets. TECHNOLOGY The biggest opportunity in private lending will come from the widespread adoption of technology. The industry is increasingly populated by fintech companies looking to create new models of operation, but this doesn’t mean traditional private lenders will be left behind. Not at all. While individual lenders that apply technology may see incremental benefits to their businesses, a sea change can occur, by creating a platform that empowers any lender to seamlessly connect with any investor, anywhere in the world. A RISING TIDE LIFTS ALL BOATS Think of the way the New York Stock Exchange creates value for companies and investors by creating a platform that connects investors wanting to invest capital with companies who need capital. A similar platform for the private lending space will transform the industry for the benefit of lenders and investors, as well as borrowers and even communities. By creating a platform that allows investors to invest small amounts of money in a wide variety of loans, originated by a wide variety of lenders, in a wide variety of geographies, investors have an entirely new type of exposure and a level of diversification that wasn’t previously possible. Greater diversification should translate to lower risk and, over time, lower the return requirements that investors demand.
For lenders, the ability to access investor capital via a technology platform, makes more funds immediately available, and over time, should allow them to access more capital at a lower cost. The opportunity to participate in high yield, highly diversified loans drives investors to commit more capital to the platform, which in turn allows the lenders who can participate to make more loans and expand their businesses. It’s a snowball effect that builds on itself; more investors join the platform who make more capital available for loans, which attracts more investors, and because a technology platform can connect lenders with virtually unlimited investors, the snowball effect can continue indefinitely. The number and types of investors lenders can access via such a technology platform is potentially unlimited. Yet, the most advantageous characteristic of this model is that lenders need only transact with a single counterparty rather than each investor individually. This cuts down the administrative burdens of accessing those investors and their capital tremendously. This ability to do more with less (more loans with less time and effort spent on capital raising, administration and investor relations) can be transformative to private lenders. But it’s not just lenders and investors who benefit. The benefits of increasing capital to the system flows through to borrowers, who can increase the number of investments they can afford, and to indirect participants like communities where these fix and flip projects occur. Fix and flip borrowers hire local contractors, subcontractors and laborers. This creates local jobs and support for local businesses while
buying supplies. At the end of the rehab process, they deliver a finished property, which has the potential to improve the value of neighborhoods. In other words, technology has the ability to create a better deal for everyone and transform private lending. POTENTIAL MARKET RISKS While we believe the future of private lending is bright, it’s important to be cognizant of potential risks: inexperienced borrowers may level up too quickly or simply get in over their heads, lack of proper due diligence could miss costly renovation needs, failure to surface other risks or properly address legal requirements could also lead to major issues. Further, in rapidly expanding markets, these risks can be exacerbated with many new players entering the space and chasing opportunities. There’s also market risk. Like in all markets, the housing market ebbs and flows, and the next slowdown will mean an increase in defaults. However, by leveraging the breadth of knowledge that exists among private lenders, implementing technology and applying best practices with responsible safeguards, it’s possible to reduce these risks and grow the private lending landscape well into the future.
BREW JOHNSON is the CEO and co-founder of PeerStreet, and has extensive experience in technology, real estate and law. Before PeerStreet, he worked as general counsel at VirtualTourist where he oversaw the company’s $85 million sale to Expedia/TripAdvisor. Before that, he was a real estate attorney at Allen Matkins Leck Gamble & Mallory and a technology attorney at Brobeck Phleger & Harrison. At Allen Matkins, Brew advised some of the largest real estate development and investment firms in the country on a wide variety of complex real estate transactions. He continues to advise startups and is an active real estate developer, investor and private lender. Brew graduated from USC with degrees in international relations and history and earned his JD from the UCLA School of Law.
SPECIAL FEATURE SHINING A LIGHT ON INNOVATING, INSPIRING TRAILBLAZERS
SHINING A LIGHT Two trailblazing women offer inspiring insights and lessons essential to breaking the corporate glass ceiling
Amy Wan A
my Wan admits she didn’t go to law school to be a real estate securities attorney. “I wanted to be a human rights attorney and help the underserved,” she explains. After earning a juris doctor from the University of Southern California Gould School of Law and a Master of Laws from the London School of Economics, Wan worked as General Counsel for Patch of Land, a real estate crowdfunding platform, then as Partner at Trowbridge Sidoti LLP, a boutique law firm that focuses on real estate syndication and crowdfunding. In these experiences, Wan found that many smaller real estate investors could neither afford nor gain access to legal help. This realization led Wan to find her calling in helping under-served real estate investors by launching Bootstrap Legal, her new robo-lawyer software for investors who need affordable and efficient access to legal help. Through Bootstrap Legal, Wan pairs artificial intelligence with human attorneys to automate the drafting of legal documents for real estate syndication, private equity and crowdfunding transactions.
PL: HOW DID YOU COME UP WITH THE IDEA TO START BOOTSTRAP LEGAL? AW: Two things. One, I thought there was a better way to draft documents than just manually, and two, I would get calls every day from small business entrepreneurs who wanted to raise capital but genuinely couldn’t afford my services. I thought it was incredibly ironic that laws should apply to everyone, but only the rich can afford to comply. PL: HOW DID YOU TAKE IT FROM AN IDEA TO A REALITY? WHAT WERE THE FIRST FEW STEPS YOU TOOK? 34
AW: This may sound strange, but the first thing I had to do was mentally prepare. I wasn’t sure I could start a business; I wasn’t sure if anyone would invest in me to start one. Getting over my own mental barriers made me realize that my greatest challenge would be myself. Once I figured that part out, the rest was just execution. I called up a few clients and asked whether what I proposed to create was something they wanted. Everyone I talked to responded enthusiastically. PL: WHAT LESSONS HAVE YOU LEARNED ALONG THE WAY? AW: If people hate you, you’re doing the right thing and should double down.
Since our launch, I’ve gotten hate mail from real estate attorneys. They’ve accused me of taking their jobs. They’ve told me that clients want a human, not a process. First, I don’t think attorneys should be working on rote work. They should be doing the stuff that involves intellectual stimulation and creativity. If your job can be automated, then you’re seriously providing clients a lack of value. Secondly, what kind of client doesn’t want a process? One of my biggest frustrations as an inhouse attorney was attorneys who had no work flow or process. The lack of process transparency often left me— the client—in the dark. These kinds of emails make me realize how out-of-
touch a lot of attorneys are with their own clients. Instead of wanting to work more efficiently to serve their clients better and provide their clients great value, they’re thinking instead about protecting their own pocketbook. Fearful, protectionist hate messages tell me that I’ve hit a nerve and am doing the right thing. It has only motivated me to double down my efforts. PL: WHAT CHALLENGES DID YOU FACE NOT ONLY AS A BUSINESS OWNER BUT A FEMALE BUSINESS OWNER? AW: I work at a very interesting intersection of industries—real estate,
finance, technology and legal— most of which are male dominated. When I first started years ago, I was completely intimidated, and felt like I had to work harder and learn faster than my counterparts in order to command respect for myself as an expert as well as a professional. PL: WHAT ARE YOUR TOP PIECES OF ADVICE TO OTHERS LOOKING TO TURN THEIR IDEA INTO A SUCCESSFUL BUSINESS? AW: Listen to your customers about what they want. Listen to yourself when it comes to important company decisions. After that, a lot of people are going to tell you a lot of crap. Don’t listen to them, and develop a tough skin.
ǫ The cities with the shrimpiest numbers of female founders, by percentage, are Silicon Valley’s Palo Alto and San Jose, California. ǫ The cities in the United States where the combined economic clout of female founders is growing fast are: San Antonio; Portland, Oregon; Houston; Atlanta; and Riverside, California. ǫ 94% of decision-makers at venture capital funds are male. ǫ Brooklyn, New York banks more females startups than any other single city in the United States. ǫ There are just over 9 million women-owned companies in the United States. Source: Womenable and American Express.
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SPECIAL FEATURE SHINING A LIGHT ON INNOVATING, INSPIRING TRAILBLAZERS
eth O’Brien was running a private fix and flip lender when she had drinks at a conference with a Colony Capital principal, who was thinking about ways to help refinance her borrowers in longer term loans. They had also worked in adjacent businesses many years earlier at Goldman Sachs (her in real estate principal investing and he in large real estate loans). A few days later he called and said rather than work on a deal together, he thought it made more sense for her to come there and really drive the whole business. It took a few more conversations but she joined them to start the company as a separate business. They eventually wound up buying the fix and flip lender, her prior employer and combined the two products.
Beth’s background is unique in mortgages because she has been in both the commercial space and the residential space and on both the proprietary investing side and the advisory side. While investing on the proprietary side she also set up and sat on the board of two of servicers and worked closely with bringing in coinvestors and other investors. At the time, the various experiences she had may have seemed non-linear but now it is clear that having worked closely with so many constituents end to end from clients to bondholders and having done everything from sales and marketing to operations and servicing served me well in setting up a company from scratch.
PL: FIRST, CAN YOU TELL US ABOUT YOUR COMPANY COREVEST AND ITS RECENT LAUNCH? BO: CoreVest is a product built from our collective experience in the industry and the realization that finance is at the core of investing. We found that large institutions were able to purchase thousands of investment homes in a short period of time because of their access to capital. However, smaller and mid-sized operators usually do not have that luxury and have limited access to capital. So, in 2014, we launched Colony American Finance, a specialty lender that provides residential real estate investors the much-needed financing to seize opportunities in the market and easily scale their businesses. Since inception we have closed nearly $3 36
billion in loans for more than 20,000 properties and watched the rapid rise of the single-family rental industry. It is an industry based on strong fundamentals and should be considered a core asset class among others. We have renamed the company CoreVest to represent this growth, and have expanded our financing capabilities through a new capital source to provide even more products to help investors. It is our goal to continue to do what we started three years ago; that is, to bring Wall Street to main street and be the financing arm for real estate investors. The employees are in a unique position where they work in a startup environment that has a flat structure and the ability to scale their careers quickly. But they are doing so with a team that has access to institutional
capital and institutional credibility in the capital markets. PL: IS THERE AN EVENT OR EXPERIENCE EARLY IN YOUR LIFE THAT DETERMINED THE COURSE YOU ULTIMATELY CHOSE? A DEFINING MOMENT? BO: Not a single event but I was taken in college by a quote from Louis Pasteur (I was a Biology major) that “chance favors the prepared mind.” He said it in the context of scientific discovery but I have always thought it was true in business innovation and opportunity as well. If you work hard and keep learning, the pieces will become relevant later. I have seen this happen time and time again in my career. I am absolutely the product of my experiences coming together so that I could take advantage of being in the
right place at the right time. PL: WHAT WAS THE MOST LASTING AND IMPORTANT PIECE OF ADVICE YOU EVER GOT? BO: I was once told in a review not to worry about whether any particular feedback was true or fair but just to understand that it is a person’s perception. Once you do that you can focus on dealing with the perception rather than whether you are in the right or the wrong on something. It really helped me try to understand how I was coming across as a professional and that managing perception was an important part of managing your career. It also helps you build business empathy and be able to see things from the viewpoint of your coworkers and clients. PL: YOU ARE A WOMAN OF MANY INTERESTS, IN BUSINESS AND IN YOUR PERSONAL LIFE. TELL US A BIT ABOUT THAT AND HOW IT HAS ENRICHED YOU AND CONTRIBUTED TO YOUR SUCCESS AND DEVELOPMENT AS AN INDUSTRY STANDARD BEARER. BO: When I am not thinking about SFR mortgages, I am probably cooking or planning a dinner party or shopping in the farmers market for local produce. I love pulling together what is available in new and interesting ways. The key to me in cooking is to bring out the essential of the item I am working with, maybe in a unique way, but usually in a way that showcases what that item is already good at. At work, I love putting teams together that also may have unique characteristics but I have learned you need to play to people’s strengths. Almost all employees can be successful, sometimes it’s a matter of making sure they are in the right job.
PL: TELL US ABOUT ONE OF THE EARLY LESSONS YOU LEARNED – MAYBE A HARD LESSON – AFTER YOU FIRST GOT ON THE MANAGEMENT TRACK. WHAT WAS THE RESULT OF THAT? BO: Always be prepared to drive the meeting even if you don’t think you are going to be called on to do so. If you are at the table, make sure you can lead the discussion and that you are not just a passive bystander. You are at the table for a reason. I once made the mistake, in the middle of a fundraising, thinking that because I was going to the investor meeting with the global leader of the group, that he would run the meeting and I would chime in as necessary. He immediately passed the meeting on to me, causing me to flounder. It really took me some time to recover even though I had given the pitch many times. To his credit, he did not jump back in but let me get my footing again and waited until we had left the client before giving me the immediate constructive feedback I deserved.
PL: WHAT CHARACTERISTICS DEFINE A GREAT LEADER? BO: Leaders should inspire confidence and get people to buy into their vision. But more than just lead they should be able to coach and replace themselves with the next group of leaders or they will never scale. In the past three years, I have led a team of five, a team of 20 and a team of 65. I want to be leading this company at 100 and 1000 as well understanding that I will need to evolve with it. PL: WHAT KEEPS YOUR WORK INTERESTING AND FULFILLING FOR YOU? BO: Working in a new asset class is particularly rewarding. We make decisions all day long that are sometimes mundane but they impact the business. You get to see in real time whether your decision works or not. The good news is you can then change course if it does not work. Most industries are so set by now, you can’t have nearly the same impact.
INSPIRATION THROUGH ASSOCIATION AAPL’S 8th ANNUAL CONFERENCE NOV. 12-14, 2017 | AAPLCONFERENCE.COM SEPTEMBER/OCTOBER 2017
Real Estate Crowdfunders Turn to Auto-Invest Gain immediate access to deals for your investment strategy by Brian Fritton
utomatic investment tools are gaining traction with real estate crowdfunding platforms as a way for investors to obtain greater access to transactions that meet their investing criteria. Technology working in the background does the bulk of the work for the investor, putting their money into deals that meet their pre-selected criteria. The benefits of automatic investing to the real estate investor are multifold: IT LEVELS THE PLAYING FIELD Auto investing technology brings opportunities to passive investors with full-time careers - doctors, lawyers, teachers, business professionals and others - to invest automatically alongside sophisticated full-time investors such as hedge funds, day traders and financial institutions.
IT IMPROVES FLEXIBILITY With automatic investing, investors don’t need to be at their computers or mobile devices as the emails on the latest deals come across their inboxes. Under the manual method, popular real estate crowdfunding transactions on some platforms are fully funded within minutes or hours, leaving investors who aren’t able to watch for the new opportunities to hit their email inbox at a disadvantage. Until deal volume increases on some of these platforms, many deals will sell out before investors even see them. IT MAY ALLOW FOR HIGHER INVESTMENTS Some auto-investing features, depending on the platform, allow an investor to participate in more projects for the same dollar amount versus the manual investment method.
IT INCREASES PORTFOLIO DIVERSITY Real estate investors are better able to diversify their portfolios by taking advantage of more investments with a lower minimum investment in each opportunity. INVESTORS GAIN ACCESS EVEN WHEN DEMAND IS HIGH There are a number of different ways that individual real estate crowdfunding platforms will select deal participation when the demand exceeds supply. Patch of Land, as an example, uses a pro-rata formula to guarantee that investors get into all high-demand deals that match their criteria, although they may not get in for the full dollar amount they seek. Investors who invest more per month with certain platforms might get a higher pro-rata share in such instances.
WHAT’S INCLUDED IN AUTO-INVESTING? While each real estate crowdfunding platform’s auto investing feature is somewhat unique to their site, all have some general features that investors are likely to find: • An account dashboard that explains how to set up an account and provides data on an individuals’ past transactions. • An investor-controlled decision on the total amount of funds invested per month. Once an investor’s monthly limit is reached, auto invest programs stop placing orders. • An investor-controlled determination of how much money to put into each transaction, up to the monthly total investment commitment. • Greater flexibility on minimum investment amounts. Some platforms allow an investor to invest less money into each deal if they are using the automatic feature. • The ability to set multiple parameters to uniquely define desired deals. These parameters may include annual percentage rate (APR), loan-to-value (LTV), the investment type (e.g., residential, commercial, multifamily, purchase loans, refinance loans, rehab loans), the term of the loan, and after-repair value (ARV) of rehab loans. • A direct connection to a bank account or platform funding portal for seamless investing via automatic withdrawals. • A cancellation policy with a timeframe for investors to get out of a particular auto-invested deal. There may be monetary penalties attached, depending on the platform or the number of times an investor seeks to cancel an auto-invest transaction. • Real-time data; Some platforms may provide high-level data that shows an investor how many investments are available based on the investment
criteria selected. This allows an investor to see what investments are available based on their pre-selected criteria on each platform and make comparisons to see which sites offer the most opportunities for the types of deals they seek. • Robust underwriting data. • Technology-driven real estate crowdfunding sites have a host of data at their disposal which allows them to vet deals before offering them to the crowd. This provides piece-of-mind to investors because risks have been quantified and only deals that meet the platform’s standards are being offered. HOW AUTO INVESTING HELPS LENDERS While the multiple benefits of automatic investing are fairly obvious to investors, real estate crowdfunding lenders stand to benefit as well. Using data gathered from investor parameters selected in a respective platform’s auto invest feature, the lender is able to see if a loan will fully fund or by what percentage it will fund before the loan documents are ever signed or approved. This data helps determine whether an appetite exists on a particular real estate crowdfunding platform for a specific loan. If the crowd has no appetite for the loan, then it won’t be made. If there’s a huge appetite for a particular loan type, more of them may be offered.. Lenders who have built this type of auto-investing technology in an intelligent way will have an audit history to see how investing parameters have changed over time, which will help to make smarter lending decisions now and into the future. Lenders, armed with auto-investing data, will be able to draw trend lines on how investors are or are not changing their investing parameters. For example, a lender could look at whether investors are opening up their credit box to higher LTV loans this fall compared to what they were doing a year ago. Is the
appetite for riskier loans on the rise or on the decline? In another example, the data might show that investors are funding commercial deals at a higher percentage than residential loans as compared to their past investing behavior, or they may have stopped funding rehab loans altogether. With the range of parameters available for study, lenders with robust technology have a wealth of data at their fingertips that can be used to make future lending decisions. This could mean making a decision to deny a loan application because “crowd” investors have no appetite to fund it while prioritizing another loan through the approval and funding process because of high demand from investors. In a win-win for investors and for lenders, auto invest technology allows lenders of real estate crowdfunding sites to be proactive in offering products (loans and real estate deals) that its investors want to invest in while avoiding deals investors have no desire to fund.
BRIAN FRITTON oversees Patch of Land’s technology strategy including engineering, infrastructure, information security and mobility. Brian has over 10 years of technology leadership and implementation experience across a wide range of development languages, enterprise frameworks, UX/UI, API-centric products, serviceoriented infrastructure and high-availability architecture. He has led teams in setting strategic product vision and execution in the search industry, Online ad exchanges, billing and accounting, media and financial services.
SECTION HEADING LENDER LIMELIGHT WITH MICHAEL TEDESCO
LENDER LIMELIGHT WITH MICHAEL TEDESCO
MICHAEL TEDESCO BUILDING A STRONG FOUNDATION KNOWING HOW ALL THE MOVING PARTS FIT TOGETHER AND WHAT IT TAKES A TEAM TO BECOME THE BEST
spark, just one small idea is all it takes to create a world vision in which we all help each other. Michael Tedesco enthusiastically shares his ambition, knowledge and driving force behind the inception of Appraisal Nation. With his “Steel City” roots, in his Carolina headquarters, he and his team are changing vendor perceptions and building a nation of support in the process. Tedesco now opens up to Private Lender, giving much praise to those around him who have helped him build this business from an idea to the top Inc. 5000 AMC two years running. PRIVATE LENDER: TELL US A LITTLE ABOUT YOURSELF WITH A FOCUS ON WHAT MOTIVATES YOU. Michael Tedesco: I am the second of six children. My father was a steel worker and my mother was homemaker. We grew up in poverty and bounced around
quite a bit in the Pittsburgh suburbs. By the time I was 16 we had lived in over 30 different places. Thankfully, no matter how poor we were, my parents always worked to keep us in the same area and keep us together. I remember how hard my dad would work to be able to provide what little we did have and I remember how he always put his children first. I can recall a time when school was canceled for a snowstorm (and this was Pittsburgh - normally it would take a foot or better to cancel school.) He was outside at five in the morning scraping the ice off his car getting ready to go to work. I might have been 8 or 9 at the time, so when I saw him I told him school was canceled so he didn’t have to go to work. He looked at me, smiled, picked me up and brought me back inside, sat me on the counter and said, ‘Mike, when other people depend on you, you can never let them down.’ At this particular
time, I didn’t realize what he meant. But when I moved out on my own at 17 followed at 19 by the birth of my first son Bailey, I quickly realized the point of his comment. I worked the sub-prime market in the early 90s, worked hard for years and took a promotion that sent me to Virginia Beach where I met my amazing wife, Allison. She also had a son named Bailey (same age, too) and when my employer was purchased in 2001, I convinced Allison to move back to Pittsburgh with me. We got married, had a third wonderful son, Ryan, and by 2005 we moved to North Carolina. In 2006, I recruited my partners and within a year we were up in my attic starting Appraisal Nation. We worked tirelessly for years with roads being mapped out and we began growing organically. Over the years, we’ve created jobs, friendships, and opportunities for so many more people than just ourselves.
LENDER LIMELIGHT WITH MICHAEL TEDESCO My dad’s words resonate back to me, ‘When people depend on you, you can never let them down.’ Many things depend upon Appraisal Nation now: my family, my partners’ families, my employee’s families, our 700 plus clients and in extension, their families. All of these people motivate me. PL: DID YOU KNOW YOU WANTED TO WORK IN THE APPRAISAL BUSINESS? WHAT DID YOU THINK YOU WANTED TO BE AS A “GROWN-UP?” MT: I didn’t even know this industry existed when I was a kid. Like most boys, I loved sports and thought I could be a ballplayer. As a teenager, I realized I had gift for sharing information and thought maybe I could be a pastor or a teacher but never really knew what I wanted to be when I grew up. Life has a funny way of directing you to passions you never knew existed. I have always loved helping people, and in so many ways I get to do that. It takes a lot of moving parts to make a loan work and the appraisal is a vital piece of it. Knowing and understanding the collateral you are about to lend hundreds of thousands of dollars on is very important. I love what I do: meeting people, building relationships, gaining trust, providing jobs. I love all of it! Although I still don’t know what I want to be when I grow up, I do know I want to make a difference, and I know Appraisal Nation makes a big difference for all of our clients. I am very proud of that. PL: WHAT DO YOU THINK YOU WOULD BE DOING IF YOU NEVER DECIDED TO TAKE THE PATH YOU ARE ON NOW? MT: More than likely I would be in lending. I was a 19-year-old loan officer back in the day, and quickly became one of the region’s top producers. I loved 44
the feeling of a first-time homeowner closing on their loan, as well as doing a refinance to consolidate all their credit cards, or providing a loan that helps pay for their children’s college. There is something very satisfying about the handshake and the thank you at the end of a deal that, unless you have done it before, you may not quite understand it. That’s why I enjoy what I do now, because I do understand the needs of the loan officer and we work very hard to make sure our part goes smoothly so they get that handshake. PL: WHEN DID YOU ESTABLISH YOUR COMPANY AND WHERE DID THE IDEA ORIGINATE? MT: In late 2000, I was sitting across from Brian (one of my partners now). At the time, we were both managers for the largest AMC in the country. I stood up and noticed that every top-level employee was assigned to one of the big five accounts (Chase, WAMU, B of A, etc.). They had over 100 clients at the time but every resource went into just those five. If you weren’t one of them you got minimum wage employees fresh out of high school with little to no training. I remember seeing this, realizing it, and I leaned over to Brian and said, ‘If we treated the little guy the way they treat the giants we would have an amazing company.’ That was the first time I ever envisioned working for myself. Watching people not get what they deserved just because of their size frustrated me. A few years later I saw an opportunity. I immediately recruited Brian and our other partner, Anthony. We jumped on it. That’s one piece of advice I would give to anyone, seize the moment. If you have a great idea, jump on it and commit 100 percent. No one ever looks back and says, I’m glad I didn’t try. PL: WHAT WAS THE BIGGEST
CHALLENGE YOU FACED WHILE GETTING YOUR COMPANY UP AND RUNNING, AND HOW DID YOU OVERCOME IT? MT: Initially we were pretty fortunate. I built pretty good relationships and when we opened the doors, lenders came on, and we had business from day one. Unfortunately, we opened in June 2007 and the market quickly crashed. At the time, we were getting our orders via fax; one day we had 60 faxes, and the next day we had 6. I called our clients and spoke with all the loan officers but it was the same across the board. Nobody was getting a loan. We spent the next three years struggling to survive. We would go months without getting paid and gaining new accounts in a down market was near impossible. I had to work weekends at a flea market selling football jerseys to keep my family going but at no point did my wife ever tell me to quit. Not once did my partner Anthony ever have a doubt this would work, and never did Brian ever stop working the long hours that were needed to get through the lean years. That’s what it takes for a company to be successful. You need 100 percent buy-in from everyone: your family, your partners and especially yourself. PL: WHAT’S THE MOST HELPFUL TIP OR HACK YOU’VE EVER LEARNED, STUMBLED ACROSS OR BEEN GIVEN? MT: Every morning, my wife puts a motivational note on my coffee, every single morning. They’re always different, always random and always positive. She reminds me every day to stay positive, love the life we have been given, and enjoy the ride. PL: WHAT HAS BEEN YOUR GREATEST ACHIEVEMENT SO FAR?
LENDER LIMELIGHT WITH MICHAEL TEDESCO
MT: When I had the idea for Appraisal Nation, I asked my two partners to take a big chance and a big risk to trust me that we could make something amazing out of nothing. Their faith and hard work was paramount in the success of Appraisal Nation. Over a decade ago the three of us walked up into my attic and started building relationships and earning trust. Since then, we have moved several times and now have two 10,000 square foot office spaces, our appraisal office in Cary, North Carolina, and our title office in Pittsburgh, Pennsylvania. Both offices are built with open layouts and sometimes my partner Anthony and I will stand in a corner just to peer out at what we created. Over 100 employees, 700 clients and 8,000 brokers all trust us. This is by far my greatest professional achievement. PL: WHAT DOES SUCCESS MEAN TO YOU AS AN ENTREPRENEUR AND BUSINESS OWNER? MT: I define character as doing the right thing even when no one is watching. About eight years ago when we were
just coming out of struggles, a new client I signed came back to us after 60 days and said that over 90 of their reports were not done by appraisers from their investor’s approved list. It was a complete nightmare. We lost the client and all their loans were on hold by the investor. I spoke to the owner and explained his team never told us they sold to that investor. He understood but they had loans frozen, they had upset loan originators and confused borrowers. There was no way of saving the relationship. Despite this, we decided to redo all their appraisals at our own expense. We saved almost every file but it cost us nearly six figures. A few months later the owner of that company called me up, he thanked me for what we did and he gave us his retail business for the next six years until he sold his company. On top of all of that, the loan officers remembered and as they moved on to different companies they always referred to Appraisal Nation as the go to AMC. Through struggle, is progress. Those referrals, turning negatives into positives, truly being able
to help and make a difference, that’s what success is to me. PL: WHAT ENTREPRENEURIAL ADVICE DO YOU DISAGREE WITH? MT: ‘Its business, it’s not personal.’ I fundamentally disagree with this. I tried to separate the two for many years but I found once I accepted Appraisal Nation was as much a part of me as my wife and children are it was then we began to thrive more. Separating the two was almost living two lives at a certain point. You must be true to yourself and dedicate that life to 100 percent of everything you do, otherwise you’re not truly committed to either. So much of who I am and what I am is put into Appraisal Nation, and so many facets of Appraisal Nation exist because of my beliefs and my convictions. Why would I not wan to share that? PL: WAS THERE EVER A LOW POINT WHEN YOU ALMOST CALLED IT QUITS? MT: Years ago, we had a client, totaling over 60 percent of our business, leave
without warning. It crippled us. We had to lay off nearly 50 employees and our books turned upside down overnight. We struggled and had to make very hard choices laying off people we cared about but we also saw some pretty amazing team members rise up. On two separate occasions, we had employees and managers come to us during this time, ask to take pay cuts so other employees could keep their jobs. It was then I knew we would survive. We had the greatest asset any company could ever have. We had people who cared. Honestly, it was a tough time, down thousands of orders and heading into the winter, one of my partners proposed shutting the doors. It was then I told him we should double down, put everything in marketing and really let people discover how great of an AMC we are. It would involve spending months again not getting paid and having to work many extra hours, but it was here we rose from the ashes and learned our true strength. Real success can only come with perseverance. We invested in marketing, hired some of the best sales people in the country, and I spent, what felt like years on the road. Since that time, we have grown over 800 percent and our largest client is now only 7 percent of our business. PL: WHAT ARE A FEW THINGS YOU TELL YOURSELF WHEN THE CHIPS ARE DOWN? MT: ‘Can’t rain all the time’ is a movie quote that comes to mind in those moments. I then remind myself I have never failed. Never. I may have lost a time or two but I don’t know how to fail. Failing is giving up, quitting, and that’s not me. I don’t know how to fail. There is always a solution, always. You just have to find it. Kites rise highest against the wind. Use the challenge to your advantage and if you happen to be feeling down, throw in a Rocky movie.
PL: DO YOU HAVE A FAVORITE QUOTE? MT: ‘Whether you think you can or think you can’t, you’re right.’ So much of everything we do is determined by our mindset in which we do it. When things get tough you can push through and work until you accomplish it or you can quit and say you can’t do it; but it really is up to you. PL: IS THERE ANYTHING YOU DO DAILY TO HELP YOU GROW AS AN ENTREPRENEUR AND BUSINESS OWNER? MT: I continue to get out into the field and talk to our customers daily, learn what they are going through, and what we can do better for them. Building long term systemic relationships is such a big part of this process. The more I know what is happening in all sectors we provide products to, the more we are able to provide solutions. PL: IF YOU COULD OFFER A PIECE OF ADVICE, WHAT WOULD IT BE? MT: I know of three things that when used in conjunction can make any company successful: hard work, knowledge and dedication. Nothing easy is worthwhile and nothing worthwhile is easy. If you want a great company, put the time in to make a great company. Always be willing to concede that there are many far wiser than you, and be willing to be smart enough to use their knowledge. Hire people who care, people who take ownership and truly want to make your company a better place, and always care more than they do. Another piece of advice would come from a story I love to share about a young boy who woke up early one morning and went to the beach. When he stepped onto sand he noticed that thousands of starfish as far as his little
eyes could see had been washed up on shore from a bad storm the night before. They were dying and immediately the boy bent down and picked one up and tossed it back into the ocean. He did this again and again, picking up as many starfish as he could over and over. An old man sitting on a pier was watching the boy for quite some time. Eventually the old man walked over to the young boy and consoling him said, ‘Son, you can’t possibly help all these starfish, there are thousands of them.’ The little boy looked at the old man then peered down the beach at the countless starfish, he bent down, picked up another and tossed it in the ocean. ‘I helped him,’ he said. We may not be able to save everyone but doing what we can, when we can, make a big difference. Never feel too small to make change and never let someone stop you from making the world a better place. PL: LOAN ORIGINATORS LIKE TO BLAME APPRAISERS FOR THEIR TRANSACTIONS FALLING APART. DO YOU HAVE ANY ADVICE TO GIVE THOSE ORIGINATORS? MT: I don’t like to generalize and say all originators do this because I believe there are many originators out there that recognize the appraisers are simply the conveyors of the markets’ data. For any originator who finds this happening to them frequently, I would recommend he begin asking more questions at the beginning of the application. The more you know about the collateral up front, the more prepared you are to make informed decisions. PL: WHAT TYPES OF THINGS DO YOU DO TO KEEP CURRENT? MT: I read a lot, everything from CFBC articles to, of course, Private Lender. I also attend a lot of the classes at the many trade shows we attend. Last SEPTEMBER/OCTOBER 2017
LENDER LIMELIGHT WITH MICHAEL TEDESCO
year Appraisal Nation attended over 40 shows and I attended 30 of those. Approximately every other week I am at a show listening and learning. PL: CAN YOU SHARE A LIFE MEMORY OR TWO THAT YOU RECALL MOST FREQUENTLY? MT: Because so much of my personal life and work life is combined, many of my closest friends work with me. This summer we had a conference in Hawaii. Two of my closest friends, Dave Roberts, our director of compliance, and Anthony Mattia, my partner and COO, invited me golfing at Turtle Bay, which was a great experience. When we got to the 17th hole we found this great spot behind the green that looked out to the Pacific Ocean. It was magnificent, so we all took the opportunity and hit a few deep into the waters. It was spectacular and for a moment we all
INC. MAGAZINE UNVEILS 36TH ANNUAL LIST OF AMERICA’S FASTESTGROWING PRIVATE COMPANIES 48
felt like kids again, young, and free and not a care in the world. That was a great memory but I am so very fortunate I get to make amazing memories all the time with some of the best people in our industry. About five years ago our SVP of Development, my brother, John Tedesco, invited a small private lender to one of our after parties. I never heard of the company, but John took the time with their director and we began doing their appraisal, forging a friendship. That small company was RCN who is now one of the largest players in private lending. Their director, Jeff Tesch, and I have made great memories all over the country. From John serenading a live concert while we all floated along the San Antonio Riverwalk, to roof top dinners in South Beach, to the night life in Las Vegas. We spend so much time on the road it’s important to find great people to spend it with.
PL: SHARE A STORY ABOUT THE MOST UNIQUE, STRANGE, WEIRD APPRAISAL YOU’VE EVER DONE? MT: We will do over 100,000 appraisals this year, needless to say we have seen our fair share of outstanding properties. Unfortunately, most of that is covered in NDAs. There have been many unique experiences though, for example, appraisers who have to take dog sleds to get to properties or properties so deep in national forests they can only be accessed certain times of the years. PL: WHEN WAS THE FIRST TIME IN YOUR LIFE YOU REALIZED YOU HAD THE POWER TO DO SOMETHING MEANINGFUL? MT: When 9/11 happened, everyone was devastated. I had a cousin in World Trade Center Tower 1. I was hurt, I was angry, I couldn’t believe anyone would
Inc. magazine ranked Appraisal Nation No. 1265 on its 36th annual Inc. 5000, the most prestigious ranking of the nation’s fastest-growing private companies. The list represents a unique look at the most successful companies within the American economy’s most dynamic segment – it’s independent small and midsized businesses. Companies such as Microsoft, Dell, Domino’s Pizza, Pandora, LinkedIn, Yelp, Zillow and many other wellknown names gained their first national exposure as honorees of the Inc. 5000.
The 2017 Inc. 5000, unveiled Online at Inc.com and with the top 500 companies is the most competitive crop in the list’s history. The average company on the list achieved a mind-boggling three-year average growth of 481%. The Inc. 5000’s aggregate revenue is $206 billion, and the companies on the list collectively generated 619,500 jobs over the past three years. Complete results of the Inc. 5000, including company profiles and an interactive database that can be sorted by industry, region, and other criteria at inc.com/proﬁle/appraisal-nation.
do this to America. The next day I went to the recruiter’s office, explained I had a son and a good job but I wanted to do something to help. I ended up enlisting in the Air National Guard. I served an eight-year commitment and stayed state side the entire time but I was able to do my small part. I believe if everyone contributes a little, we can make a big difference in the world. IS THERE A PERSON IN YOUR CAREER OR LIFE THAT REALLY MADE A DIFFERENCE? MT: God puts many people in your life for reasons you have no idea why until you are looking back. I know now that several people made a world of difference in my life. When I was a young boy we went to a small country church. The pastors there, Anthony and Geraldine Sobieski, ran the church.
They didn’t have a lot but what they had they gave freely - their time, their love and their knowledge of right and wrong. They truly taught me how to be a better man. My wife is another with whom I am eternally grateful. I never knew someone could be so unselfish, so caring and so giving to dedicate her entire life just so our family could be happy. My brother, John, my partners Brian and Anthony, our executive vice president, Al Ballard, all have helped shape Appraisal Nation and in turn helped shape me. PL: THERE’S NO RIGHT OR WRONG ANSWER, BUT IF YOU COULD BE ANYWHERE IN THE WORLD RIGHT NOW, WHERE WOULD YOU BE?
experiences, meeting new potential customers, gaining their trust and being able to help them. I also, unabashedly, love my family. I talk about them to clients, share photos at shows, and am so proud to be the father and husband I get to be to these wonderful people. Finally, as a Pittsburgh native, I am passionate about my sports teams: Steelers, Penguins and Pirates. I love my Black & Gold. So, if I could be anywhere, doing anything, I would want to be with all the people I love, my family, my partners, my sales team, my close clients, all of them together, watching the Pittsburgh Pirates win the World Series at PNC Park.
MT: I love being on the road meeting our clients, learning about their
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CFPB Gives a Look into New HMDA Portal New HDMA gateway streamlines a confusing reporting process. by Bryan Redington, Esq. more clarity to the first regulation. The newest rule calls for lenders to report the names, ages and credit scores of borrowers along with other aspects such as debt-to-income ratio and the combined loan-to-value ratio. New regulations also require that lenders provide such information in a database system. This is the primary reason for the agency’s latest creation.
he Consumer Financial Protection Bureau (CFPB) unveiled its latest portal created to satisfy changes to the Home Mortgage Disclosure Act (HMDA). The agency gave the mortgage industry a first look at the gateway in August. The CFPB portal will be useful for institutions seeking organized reporting and transparency. Instead of providing obscure HMDA reports and modified Loan Application Registers to the public, institutions will be able to direct their patrons to the HMDA gateway where such information will be uniform and readily available for viewing. A new HMDA regulation was enacted in October of 2015. The regulation expanded the amount of data that lenders are required to provide in their reports. Nearly two years later, the CFPB proposed a cleanup rule that gave
Although the full web-based tool will not be available for use as soon as some may have hoped, the CFPB plans to launch a beta version of the system near the end of the third quarter of 2017 that institutions can use to input required information. Such data will serve to help the CFPB further perfect the portal for a better user experience. The full version of the system will not be released to the public until after such changes are made, which will be well after the fourth quarter. Nevertheless, the portal will still be productive, as the CFPB is slated to release the geocoder and universal loan identifier tools during the fourth sector of this fiscal year. It is not until after the gateway’s full version goes live that financial institutions will see the entire benefit and convenience of the new CFPB portal. Those responsible for their
company’s HMDA reports will need to create an account before being granted access to the back-end of the system. Once in the portal, users will have an opportunity to input information and ensure proper formatting for delivery of accurate disclosures. The CFPB system is designed to reject reports that are not correctly formatted or are lacking pertinent information. Such a feature makes the life of the reporter easier in the long run since he or she will not have to revisit flawed documents after they have been submitted to the bureau. There is also a File Format Verification tool that allows users to test the configuration of 2017 reports before receiving a system automated rejection notice. The CFPB plans to release a new verification tool for documents created for the 2018 disclosure year. The goal of this new portal is to streamline and simplify the oftenconfusing reporting process for those who hit the required thresholds. The new system will relieve a major pain point for companies who face daunting year-end submissions and formatting of HMDA data.
BRYAN REDINGTON is a Transactional Associate in the Banking and Finance section of Geraci Law Firm. He obtained his Bachelor of Arts degree in American Law History from the University of California, Berkeley in 2010 with cum laude honors, and then went on to graduate from University of Oregon School of Law in 2016. He has experience in clerking for both civil litigation and criminal defense firms and has a passion for transactional law.
DAREN BLOMQUIST KEYNOTE SPEAKER
PLUS • Conference Agenda • Featured Speakers • VIP Reception • Title Sponsor SEPTEMBER/OCTOBER 2017
MEET YOUR HOSTS Linda Hyde
Director of Marketing & Member Services / Editor-in-Chief of Private Lender magazine
WHAT DO YOU THINK ABOUT WHEN YOU’RE ALONE IN YOUR CAR?
WHAT DO YOU THINK ABOUT WHEN YOU’RE ALONE IN YOUR CAR?
Depends on the day I had. Sing at the top of my lungs or sit quietly thinking about the day’s events. I prefer singing.
If I’m not thinking about work or my dogs then I’m typically having an argument with the talk radio morning show. I know they can hear me!
DO YOU HAVE ANY ADVICE FOR YOUR PREVIOUS BOSS? Always remember your worth! YOU’VE BEEN GIVEN AN ELEPHANT. YOU CAN’T GIVE IT AWAY OR SELL IT. WHAT WOULD YOU DO WITH THE ELEPHANT? Politely decline! I don’t have space for an elephant and think it should be in a sanctuary where it can live as natural as possible. A PENGUIN WALKS THROUGH THE DOOR RIGHT NOW WEARING A SOMBRERO. WHAT DOES HE OR SHE HAVE TO SAY AND WHY ARE THEY HERE? He says, “Man it is HOT out there. Wanna get a drink?” He is here because his flight was delayed due to mechanical issues on Southwest so he had some time to kill. WHAT’S YOUR FAVORITE ‘90S JAM? Really anything 2Pac or Snoop. I really liked the Beastie Boys, too. WHAT WAS THE LAST GIFT YOU GAVE TO SOMEONE? WHO DID YOU GIVE IT TO? A picture frame with my daughter’s recital picture and a Boulevard Brewery beer Chapstick. A good friend of mine that shares an obsession with Chapstick and the unusual flavors. 54
DO YOU HAVE ANY ADVICE FOR YOUR PREVIOUS BOSS? Learn how to manage or lead personnel that are older and more experienced than you. You could’ve helped morale immensely. YOU’VE BEEN GIVEN AN ELEPHANT. YOU CAN’T GIVE IT AWAY OR SELL IT. WHAT WOULD YOU DO WITH THE ELEPHANT? Name it Gracie! Then teach her how to get things off top shelves for me. I wonder if my dogs would like Gracie? A PENGUIN WALKS THROUGH THE DOOR RIGHT NOW WEARING A SOMBRERO. WHAT DOES HE OR SHE HAVE TO SAY AND WHY ARE THEY HERE? He said he’s here because he’s going to “teach me how to chill like a penguin.” Then he handed me a frozen margarita with chips & salsa. WHAT’S YOUR FAVORITE ‘90S JAM? Return of the Mack! (by Mark Morrison) WHAT WAS THE LAST GIFT YOU GAVE TO SOMEONE? WHO DID YOU GIVE IT TO? I surprised my 7-year-old niece with dog drool flavored soda from Rocket Fizz while I was in Pittsburgh.
Tim Drape Senior Account Executive
WHAT DO YOU THINK ABOUT WHEN YOU’RE ALONE IN YOUR CAR? Depends, day driving -- work and current events, night driving --non-work stuff. DO YOU HAVE ANY ADVICE FOR YOUR PREVIOUS BOSS? Don’t sweat the small stuff. YOU’VE BEEN GIVEN AN ELEPHANT. YOU CAN’T GIVE IT AWAY OR SELL IT. WHAT WOULD YOU DO WITH THE ELEPHANT? Give it away to a petting zoo. A PENGUIN WALKS THROUGH THE DOOR RIGHT NOW WEARING A SOMBRERO. WHAT DOES HE OR SHE HAVE TO SAY AND WHY ARE THEY HERE? Can I borrow some sunscreen and water for my horse? WHAT’S YOUR FAVORITE ‘90S JAM? Tom Jones’ cover of Talking Heads Burnin’ Down the House WHAT WAS THE LAST GIFT YOU GAVE TO SOMEONE? WHO DID YOU GIVE IT TO? I gave my wife a pop-up birthday party in July.
AAPL 8th ANNUAL CONFERENCE & EXHIBITION November 12-14, 2017 Caesars Palace | Las Vegas
INSPIRATION THROUGH ASSOCIATION At the 2017 American Association of Private Lender’s (AAPL) Annual Conference this November, you’ll discover inspiration through association and build towards a better tomorrow. Packed full of enlightening sessions with expert speakers and a variety of networking opportunities, AAPL’s 8th Annual Conference is the only place to be if you want to learn new skills and broaden your horizons.
HIGHLIGHTED EVENTS Sunday, November 12 AAPL member who attend the 2017 Annual Conference are eligible to participate in professional designation training: Certified Private Lender Associates (CPLA) and Certified Fund Manager (CFM). Completion of professional designation training indicates the members: • Achieved industry recognition and set themselves apart from their peers. • Gained an up-to-date understanding of federal laws and regulatory issues specifically affecting the private lending industry. • Developed a strong foundation and technique for better underwriting and servicing of loans. • Ensured business and documentation are compliant and adhere to industry best practices. 9:00 am - 6:00 pm
Certified Private Lender Associates Designation Courses (Members only)
Private Lender Associates: The CPLA designation provides a comprehensive overview of the principles of private lending. It also includes detailed information on the current federal laws and regulations surrounding the industry. Upon successful completion of the full day course, AAPL members in good standing wil be entitled to use the CPLA designation and logo, demonstrating their commitment to education and their desire to achieve industry excellence. The CPLA requires annual membership and continued education.
Designation availability for $349 9:30 am - 1:00 pm
Certified Fund Manager Designation Courses (Members only)
Fund Manager: The CFM designation bridges industry practices, investment theory, and ethical and professional standards to provide investment analysis and portfolio management skills. This intensive four-stage course, designed by industry veterans, will help you answer the question, “Is mortgage fund my next growth opportunity?” Topics include: Mortgage Pool, Fundamentals - Vision and Execution; How to Structure, Capitalize and Administer a Mortgage Pool Fund; Creation and Launching of the Fund; and on-going Fund Administration. The CFM requires annual membership and continuing education.
Designation availability for $349 1:00 pm - 5:00 pm
Exhibitor check-in and set-up
7:00 pm - 9:00 pm
VIP Networking Reception (Invitation only)
Monday, November 13 7:30 am - 5:30 am
Attendee check-in open
8:45 am - 9:00 am
Opening Remarks: Eddie Wilson, Affinity Enterprise Group
9:00 am - 10:00 am 10:15 am - 11:15 am 12:30 pm - 1:30 pm
Keynote Address Featured Speaker: Daren Blomquist Lunch (on your own)
4:00 pm - 5:00 pm
5:30 pm - 7:00 pm
Tuesday, November 14 12:30 pm - 1:30 pm
For the full conference agenda visit
* Agenda is subject to change
DIVE DEEP INTO
ANALYZING MARKET DATA with Daren Blomquist
Well-respected industry expert helps investors understand good properties based on markets, cash ﬂow and ROI.
SECTION HEADING KEYNOTE SPEAKER PROFILE: DAREN BLOMQUIST Daren Blomquist brings his unique perspective on real estate investment marketing to the American Association of Private Lenders’ 8th Annual Conference. In addition to his role as senior vice president of communications at ATTOM Data Solutions, he is also executive editor of the Housing News Report, a monthly newsletter named best newsletter by the National Association of Real Estate Editors in 2015 and 2016. Blomquist has been quoted in hundreds of national and local publications and has appeared on many national network broadcasts including CBS, ABC, CNN, CNBC, FOX Business and Bloomberg. PRIVATE LENDER: CAN YOU DESCRIBE YOUR TYPICAL DAY? Daren Blomquist: A typical day for me begins with a morning run of two or 3 miles before saying goodbye to my wife and three kids, and heading to the office. I’ll often have a few media interviews lined up by our Senior PR Manager, Jennifer, by the time I get in. If it’s a day we’re publishing a report there will often be more than just a few media interviews lined up. Whether in preparation for the media interviews or for a report we’re publishing (or even just for fun, believe it or not), I spend at least an hour or two every day combing through some type of real estate data. The afternoons are usually less heavy on the media interviews and more focused on data research, analytics, interviewing folks and writing for our Housing News Report newsletter or assisting our data solutions sales folks on a call with a current customer or prospect who might have questions about some of the data or reports we publish. I get into the office a little later than most, but I like to also stay later and have a couple hours of peace and 60
quiet after most have left, to focus on projects that are best done with few distractions. Favorite part of most days is arriving home to my kids running out to greet me. They’re still young enough they haven’t become jaded and distant from their dear old dad. PL: WHAT ARE SOME OF THE CHALLENGES OF YOUR JOB? DB: One challenge is too much data and not enough time to fully dig into all of it as much as I’d like. That’s a good problem to have I suppose. An exciting development in the last few years has been the partnerships we’ve developed with other data-loving clients, thanks to our expanding bulk data licensing business. Those clients each have their own niche in the real estate industry, or in other industries that rely on real estate data, and do have time to dig into aspects of the data that we don’t. It’s been enriching to work with those clients on different joint initiatives and learn from their research and expertise. PL: WILL YOU SHARE YOUR MOST REWARDING PROJECT YOU’VE WORKED ON, AND TELL US WHY YOU FOUND IT REWARDING? DB: One of the most rewarding projects came about because of another challenge that we faced here at ATTOM. That challenge is dealing with the massive volumes of data that ATTOM collects and finding ways to organize and analyze said data. We have tax, deed and mortgage data on 150 million U.S. parcels updated daily as new transactions occur and going back for 20 years or more. Each transactional record on those 150 million properties (think of how many times the property you live in now has been sold or had a mortgage taken out in the last 20 years)
has hundreds of data fields associated with it. This adds up to billions of rows of data in our data warehouse, with myriad added each day. A few years back, I realized that we needed some sort of tool to more easily access this data without taking time away from our database engineers every time we needed to provide aggregate data to the press or for a report we were publishing. Based on this need, our crack staff of database engineers built proprietary data cubes that package this data into a much more convenient format for myself and others in the company to use, both for publishing reports to the press as well as creating custom reports for our customers. The creation of these cubes turned out to be prescient, and I’ve come to realize not many of our competitors or customers have had the foresight to build something that really democratizes the data across an organization, so it is not just limited to those who can code in SQL or whatever database language is used. PL: WHAT PROJECT DID OR DO YOU CONSIDER A CLASSIC "WAR STORY,” WHAT WERE ITS CHALLENGES AND LESSONS; AND WHAT WOULD YOU DO DIFFERENTLY NOW? DB: The first market trend report we published was our foreclosure report, starting back in 2005. We were a new player in the world of real estate data reports, and got a lot of push back from established players who tended to focus mostly on positive aspects of real estate, only mentioning foreclosures and defaults in passing. In 2006 and especially 2007 when our foreclosure report began to show huge jumps in foreclosure activity, the push back
increased. Not only did it come from others reporting on the housing market but also from others in the industry, including some local government agencies who had a vested interest in keeping rose-colored glasses on when it came to the real estate market. This bubbled up to members of the press who covered our data, and I remember several intense conversations in which I had to defend our data vigorously against attacks of overcounting and sensationalizing the numbers. Our report was not perfect, but it turned out to be right in terms of the coming foreclosure crisis and ensuing home price crash. It took several years before others in the industry realized this, let alone admitted it. A key lesson learned from this battle is to quickly acknowledge and correct mistakes. We did make several adjustments to our methodology and reporting based on critiques, but I wish in hindsight, we had addressed these even sooner. Another key lesson from this experience is to trust the data when it’s overwhelmingly pointing in the same direction, as was the case with the foreclosure numbers in late 2006 and early 2007. While I think we staunchly defended the data and even publicly warned of a coming bubble bursting, we didn’t necessarily put our trust in the data, both as a business and personally. If I saw now what I was seeing then I would probably immediately put my house on the market and wait out the coming downturn. But at the time I didn’t completely trust what I was seeing in the data enough to put my money where my mouth was. Similarly, as a business, if we had completely trusted the data showing a coming crisis, we would have made some different
decisions that would have saved us some pain down the road. PL: WHAT WAS YOUR FIRST JOB? AT THAT POINT, DID YOU HAVE ANY IDEA THAT YOU’D BE WHERE YOU ARE TODAY? DB: I can answer this question in two ways. My first job as a kid at around 11-years-old was delivering newspapers. I delivered the Wichita (Kansas) Eagle. I had no idea at that point where I would end up. My first job out of college was writing for a newspaper in central, rural, Illinois. I really liked the part of the job that involved understanding how different things worked and explaining that to the audience. But I realized that didn’t necessarily need to be in the context of a newspaper journalist. I remember the janitor stopping by my desk one night late when I was working on deadline to finish an article, and he predicted that I’d be the only one of the group of reporters there to end up in The New York Times. By that he meant I would be writing for The New York Times as a reporter. That never happened, but in my current job I’ve seen my name appear several times in The New York
Times as a source. PL: IN FACT, HOW DID YOU GET TO THIS POINT? DID YOU SET OUT SPECIFICALLY TO ATTAIN YOUR CURRENT JOB AND EXPERTISE? DB: I had the fortune to get in on the ground floor with a company (RealtyTrac) early on and then grow along with the company, in part learning on the job and in part being given the opportunity to align my job description with my education and skill set. I moved from Illinois to California in 2001 because my wife and I wanted to be closer to family (in this case her family). The first job I happened to find through a temp agency was answering phone calls from customers for a startup foreclosure real estate website called RealtyTrac. I was around employee number five, but the new owner of the company had just inked a deal to have our foreclosure data posted on Yahoo!, so not long after I got there, the phones started ringing off the hook and our revenue started to skyrocket. After a couple of years growing under the umbrella of customer service, eventually managing a team of probably around 10 customer service reps, I was given the opportunity in 2005 to help launch a new PR reports program. The foreclosure report was the foundation of this program. For the next seven years I was the behind-the-scenes, nuts-and-bolts resource for that report, with my boss being the public face of the report. During SEPTEMBER/OCTOBER 2017
SECTION HEADING KEYNOTE SPEAKER PROFILE: that time, I learned a ton about real estate, real estate data, foreclosures and investing. When my boss found a new job around 2012, I stepped into his role as the public face of that foreclosure report along with a couple other reports we were also publishing at the time. Since then, we’ve been able to expand our stable of regular real estate reports to about a dozen, thanks in large part to a much broader footprint of real estate data long with proprietary tools to help work with that data and discover new and interesting trends. PL: WHAT WERE THE WAYS YOU PREPARED YOURSELF TO REACH THIS PINNACLE? DB: Showed up consistently. Listened actively. Took instruction and criticism seriously. Followed directions diligently. Waited for opportunities patiently. PL: HOW WOULD YOU ADVISE SOMEONE JUST STARTING OUT TO PLAN FOR THEIR FUTURE? DB: Most importantly, do the task in front of you consistently well and you will be given other bigger opportunities, even if it takes longer than you’d like. Secondly, document long-term plans and goals, periodically revisiting those to check progress and recalibrate if needed. I believe the first piece of advice is most important because hard, diligent work will almost always lead to good places, even if it’s not exactly the places you planned for. The latter piece of advice is only effective when built on the foundation of the first, however, I would acknowledge I am not as good at putting the second piece of advice into practice. PL: WHO ARE THE INDIVIDUALS YOU ADMIRE, IN BUSINESS OR IN LIFE? AND WHY? DB: My longest-term boss, Rick Sharga, (2005 to 2012) who taught me so much of what I know and whom I have emulated in so many ways after taking over his role when he left. I continue to follow his career and communicate with him, and I am still learning from him. One of the key lessons from him was that he managed subtly but effectively. He was not heavy-handed but was willing to give key pieces of advice at appropriate times. He was willing to be transparent, letting me in on communication with the media and others so I could learn just by watching what he did and how he communicated. On the personal side, I would point to my dad, who died in 2013 but who continues to have a profound impact on 62
SECTION HEADING DAREN BLOMQUIST my life through wisdom he shared and the example he was while he was still alive. PL: YOU’VE HAD QUITE A VARIED CAREER. WHAT HAS BEEN THE MOST ENJOYABLE STOP ON YOUR CAREER JOURNEY? WHAT HAS BEEN THE MOST FULFILLING? DB: The most enjoyable was probably in the behind-the-scenes role in the RealtyTrac PR reports machine that I had between around 2005 to 2012, particularly earlier on when we were developing the program and also when we were the “belle of the ball” when it came to foreclosure data during the height of the housing downturn. The most fulfilling has been in the more public-facing role I’ve taken on since 2012. Although that has been more stressful, it’s also been more fulfilling to have more control as well as be able to point to tangible examples of what I’ve done that are more visible. PL: WHAT CAREER WOULD YOU CHOOSE IF YOU WEREN’T DOING WHAT YOU DO NOW? DB: It’s a tossup between going back to being a journalist and going into full-time investing. I’d probably lean toward the latter for two reasons: I have so many people I’ve met over the years who would be great mentors for me in investing, and journalism unfortunately is somewhat dying. PL: FORECASTING IS A MAJOR PART OF WHAT YOU DO. SO, CAN YOU TELL US WHAT YOU SEE AHEAD – BOTH SHORT-TERM AND LONG-TERM – FOR THE PRIVATE LENDING LANDSCAPE? DB: The current environment is
favorable for private lenders, with the current regulatory-heavy environment that impacts big bank lenders and other publicly traded lenders much more so than private lenders, and the glut of capital searching for good returns and often landing on real estate as a great investment option. That should continue at least for the short term although the pendulum is beginning to swing the other way with the presidential election foreshadowing more deregulation in the world of financing, along with the likelihood of interest rates rising, albeit gradually, going forward. Deregulation in lending may be good for private lenders also, but I think the net effect will actually be negative as it will create more competition. PL: WHAT CHALLENGES LIE AHEAD FOR PRIVATE LENDERS, AND FOR THE REAL ESTATE INVESTING INDUSTRY IN GENERAL? DB: Higher interest rates, although they have not really materialized yet, continue to be a looming threat for lenders as well as real estate investors. Rising interest rates should cool demand from owner-occupant buyers and that will in turn trickle down to fix-and-flip investors. Rising interest rates could be good for buy-and-hold investors as they will likely increase demand from renters, but those buyand-hold investors will be less likely to want to refinance in a higher interest rate environment. Another challenge for investors is staying disciplined in an overheated housing market. There is still certainly plenty of opportunity in an overheated housing market, but there is also the danger of getting burned if investors
stray from the basic tenants of properly valuing real estate and then buying low and selling high. That may mean losing out on some tempting deals for investors, which is challenging in its own right. But investors need to remember that in many parts of the country housing is cyclical and that the up cycle we are in will not last forever, in fact we expect some type of correction in the next five years. PL: HOW WOULD YOU COMPARE THE U.S. ECONOMIC CLIMATE WITH THAT OF OTHER COUNTRIES? DB: The U.S. economic climate is still the best in the world in my opinion. That’s not to say we can’t learn from other countries and what they are doing, but all things considered, I still think the U.S. economic climate offers the best chance for individuals and businesses to succeed. PL: YOURS MUST BE A RATHER STRESS-FILLED JOB. HOW DO YOU DECOMPRESS? DB: Running helps quite a bit along with other workouts. Exercise in general helps me decompress, along with physical labor believe it or not. I don’t always enjoy it, but I find working on the house, in the yard and on my back slope (which has to be cleared each year) is a nice outlet. PL: WHAT IS YOUR FAVORITE AWAY-FROM-BUSINESS ENDEAVOR? DB: Traveling for fun as opposed to business. Road trips with the family or going on further-away trips with just my wife are some of my favorite memories.
FEATURED CONFERENCE SPEAKERS
DENNIS CISTERNA III
CEO GreenZone Properties
Chief Strategic Oï¬ƒcer Cache Private Capital
Owner/CEO Liquid Logistics
President Rehab Financial Group
Managing Director RNC Capital
NEMA DAGHBANDAN, ESQ.
Partner Geraci Law Firm
Director of Sales Civic Financial Services
Founding Partner Larocca, Hornik, Rosen, Greenberg & Roca
MELISSA MARTORELLA, ESQ
Marketing Manager RCN Capital
Managing Partner Geraci Law Firm
CEO Walnut Street Financial
Managing Director, Head of Mortgage & Real Estate Debt Alternatives
President Aï¬ƒnity Worldwide
Vice President National Real Estate Insurance Group SEPTEMBER/OCTOBER 2017
GET TO KNOW AAPL’S ADVISORY COMMITTEE MEMBERS WHAT THREE TRAITS DEFINE YOU? I am passionate, dependable and creative. A real-triple threat. WHAT IS YOUR PERSONAL PHILOSOPHY? There is no easy recipe for success and realizing that allows you to look at things objectively and make the most out of every new opportunity. WHAT IS ONE THING YOU CANNOT RESIST? Adorable cat videos.
WHAT’S THE WEIRDEST JOB YOU’VE EVER HAD? I was a Bud Light Girl right after college and that job was pretty much exactly what you would expect, although I did work a few odd events, including an Oktoberfest celebration and beer tasting at a nursing home. IF YOU COULD DO ANOTHER JOB FOR JUST ONE DAY, WHAT WOULD IT BE? If it was just for one day, I’d be a movie stuntman, because how awesome would that be?
WHAT THREE TRAITS DEFINE YOU? Caring, Committed, Hard working. WHAT IS YOUR PERSONAL PHILOSOPHY? Treat people with respect and do unto others as you would have them do unto you. WHAT IS ONE THING YOU CANNOT RESIST? Chicago Deep Dish Pizza. WHAT’S THE WEIRDEST JOB YOU’VE EVER HAD? Hauling ice around the State of Wisconsin in the winter.
IF YOU COULD DO ANOTHER JOB FOR JUST ONE DAY, WHAT WOULD IT BE? Be a World Famous Chef – I love food and I love people. What more fun could I have!
WHAT THREE TRAITS DEFINE YOU? Hard work, loyalty to my team and family-first. WHAT IS YOUR PERSONAL PHILOSOPHY? Work hard to make sure your company can be as successful as possible while making sure that your employees are also able to be as successful as they can possibly be. WHAT IS ONE THING YOU CANNOT RESIST? Chocolate ice cream. WHAT’S THE WEIRDEST JOB YOU’VE EVER HAD? I used to drive the ball collecting cart at a driving range.
ETHICS COMMITTEE 66
IF YOU COULD DO ANOTHER JOB FOR JUST ONE DAY, WHAT WOULD IT BE? I would be a famous DJ. They get such great perks like their own private jet.
WHAT THREE TRAITS DEFINE YOU? Unyielding integrity, solutions oriented, with balance between discipline and levity. WHAT IS YOUR PERSONAL PHILOSOPHY? Always work for something greater than yourself. WHAT IS ONE THING YOU CANNOT RESIST? Time with my wife, especially if it includes Indian food or live music.
WHAT’S THE WEIRDEST JOB YOU’VE EVER HAD? One time in Manhattan, a complete stranger lady that looked relatively normal asked me to watch her two-year-old son while she ran into a store that appeared to be adult-oriented. She came out a few minutes later with a small bag. Super weird. IF YOU COULD DO ANOTHER JOB FOR JUST ONE DAY, WHAT WOULD IT BE? President of the United States or host of The Price Is Right.
WHAT THREE TRAITS DEFINE YOU? Awkward, compassionate, driven. WHAT IS YOUR PERSONAL PHILOSOPHY? Work hard and be yourself. WHAT IS ONE THING YOU CANNOT RESIST? Cute puppies! WHAT’S THE WEIRDEST JOB YOU’VE EVER HAD? Personal shopper for Nema when he left his clothes at the airport. But really, I don’t think I’ve ever had a really “weird” job.
MELISSA MARTORELLA ETHICS COMMITTEE
IF YOU COULD DO ANOTHER JOB FOR JUST ONE DAY, WHAT WOULD IT BE? Veterinarian.
WHAT THREE TRAITS DEFINE YOU? Accessible, organized, trustworthy. WHAT IS YOUR PERSONAL PHILOSOPHY? Always be sincere and genuine. WHAT IS ONE THING YOU CANNOT RESIST? Coffee. WHAT’S THE WEIRDEST JOB YOU’VE EVER HAD? Hard money lender
IF YOU COULD DO ANOTHER JOB FOR JUST ONE DAY, WHAT WOULD IT BE? Sommelier. SEPTEMBER/OCTOBER 2017
American Association of Private Lenders’
VIP RECEPTION Members & Sponsors Exclusively invited to join us for cocktails and hors d’oeuvres at OMNIA Nightclub in Caesars Palace. Non-members and guest can register for $149 each. RSVP Required. Sunday, November 12, 2017 7:00 p.m. - 9:00 p.m. 68
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MANAGE & LEAD
Not Just a Dollar Amount Treating your clients well can offer great results by Romney Navarro
lients entrust us with their money. A lot of money. In return, we make them more money. Simple, right? That may be the outside-looking-in view of the lending industry and there may be firms out there that operate on this principle. However, most of us know it’s much more than that. Yes, we’re a business so our primary purpose and ultimate responsibility is to make sure we’re generating the financial gains we’ve promised our clients. But in addition to results, we need to be transparent and down to earth. This has to be reflected in our service. STRONG RESULTS & GREAT SERVICE It’s crucial, first and foremost, that any business provides results. If your business can’t perform up to and beyond expectations, you simply have
no business being in business. It takes a lot to be successful in the lending industry. You have to build a talented and reliable team, constantly refine your strategy, and work hard day-inday-out. Focusing on the real estate market, we all encounter our share of obstacles. To overcome those obstacles, include contingencies that specifically address issues that could threaten the investors’ capital. In fact, some companies have a whole team of “cleaners,” so to speak, for when things get hairy. Those folks are the market strategists whose job it is to make sure you don’t end up with stranded assets. By doing so, you can offer your clients safer investments with more stable returns. Constantly try new approaches to your business and new methods of tightening up your processes. This
shouldn’t be news to anybody; you throw out what doesn’t work and double down on what provides the best results. Over the past year, many companies have been aggressively growing their portfolio to provide a broader range of opportunities. They decided to use the rapid growth they’ve witnessed to reinvest in their business. This way, they can strengthen their ability to deliver strong results and great service to clients. There are two main areas of business that most determine, additional reinvestment would provide the greatest overall benefit: TECHNOLOGY – it moves fast, doesn’t it? Businesses need to keep up with the latest systems and tools available or you will find yourself lagging behind SEPTEMBER/OCTOBER 2017
MANAGE & LEAD
the competition. By investing in new tech, you gain invaluable efficiencies in your business. All the hardware and platforms added to the mix can help minimize oversights, and save employees a great deal of time – which translates into money. HUMAN CAPITAL -Without a talented and dedicated team, you are not able to provide the results your clients expect. That’s why it is crucial to invest in your team. By growing your in-house capabilities, you will be able to better control costs, timeliness and quality of everything you do as your business continues to scale. Lastly, listen to your clients. They can be your biggest cheerleaders, but they can also be your harshest critics. It’s important to take their feedback with humility, and figure out how to implement meaningful changes that improve their experience, generating the best possible outcome which, for them, is a steady return on their investment. TRUST & VISIBILITY The next component of a clientfocused organization is communication and visibility which fosters trust between your clients and your firm. It’s even more necessary when you’re working with hundreds of thousands of dollars of someone else’s money. In case you didn’t already know, clients can get a little agitated if they lose visibility of their capital investments. Maintain transparency with your network of 70
private lenders. Your team should stay in regular contact with clients and be accessible to answer questions or address concerns. That’s part of the day-to-day. Sometimes that’s not enough; it’s certainly no substitute for face-to-face contact. All your clients should know the folks who are responsible for their investments and what the results of those investments look like. Throughout the year, try to weave in different ways to engage your clients in a less formal environment. Transparency is one of the added benefits of private lending in the real estate market as compared to investing in mutual funds, the stock market or even your own 401(k). Therefore, from time to time, leverage this aspect of your business model by holding open houses to showcase a recently completed property. It gives investors a chance to see how you put their money to work. By doing this, you not only get an opportunity to connect with your clients but provide an extra level of transparency into projects they’ve funded.
your clients with educational segments that will give them something to apply to their financial strategies long after they walk out the door. Likewise, all your email touches and other collateral should contain more than just updates and company promotions. Secondly, work to build a community among your network of lenders by organizing events which are strictly focused on client appreciation, without any promotional or salesy angles. Finally, realize philanthropy is just as important to many of your clients as it is to you. You can encourage your clients to give back to the community. Look at opportunities through Habitat for Humanity or hosting an annual charity golf event. These efforts allow everyone to invest in your community whether they want to contribute monetarily or otherwise. While the outcome of your investments is critical to your business, it isn’t just about money-in and moneyout. Though that may be a big part of it, the clients who invest with you are not just a dollar amount. They’ve supported you through the years and have made a significant contribution to your success and your continued growth. And, let’s face it, they could invest with anybody. That’s why you should do your best to show your appreciation because without them, you couldn’t do what you do.
EDUCATION & COMMUNITY The final ingredient of a successful investment firm is to provide your clients with additional value beyond just making them money. There are two ways to do this that are well received. One way is to try to create entertaining, educational content. Empowering your clients with information will make them more confident in the investments they make with you. Try to provide
ROMNEY NAVARRO joined the Noble Capital family of companies in 2008, bringing extensive experience in structured finance and commercial lending. He oversees the business development and marketing functions of Noble and its affiliated entities, Streamline Funding, Emerge Real Estate and Acute Financial. He is the co-host of Noble Capital’s Real Wealth Blueprint radio show, and the founder of the Investment Real Estate Roundtable of Texas which has more than 4,000 members in the five major metro areas of the state.
MANAGE & LEAD
4 Steps to Creating a Customer Turning prospects into purchasers by Eddie Wilson
ften you hear the adage that it takes five to seven touches in marketing for someone to make a decision. Lifelong marketers and those who study trends have developed four steps every person takes before becoming a customer. Sometimes these steps take months and sometimes you see it work in a matter of seconds. How long it should take for conversion depends on your business, but the steps are universal. Once you learn the following steps your methodology can adjust. Most people want to know if they should do more traditional or social media marketing. That is more of an efficiency question. Once you understand the underlying steps everyone takes to make a buying decision, you can plug elements of marketing into each of the
steps, based on a desired outcome. The steps are also very linear. You must take the first step and then sequentially “walk” to the final step.
This is where you hear catch-phrases like “brand awareness” or “brand identity.” The heart of this step speaks to the most basic questions: do your potential customers even know you exist? If your potential customers do know you exist, how will they become your customers?
2 CONSIDERATION Most companies fall right here. They publicize their brand to the masses and everyone knows about them, but when a client considers using them, there is not enough good information to help the potential customer make their choice. You should have a very robust program for people considering your company. This would include, blogs, podcasts, Q&A, online PR, etc. You cannot put enough good information out there for your potential customers.
STRATEGY SUGGESTION Use mass media and social media to create awareness or a consciousness of your company or service.
STRATEGY SUGGESTION Run through an exercise with your company where everyone has a computer. Pretend that everyone is a customer looking for what you provide in your area. Then begin to allow everyone on your team to search for their needs, online through social media and so on. You will discover what your potential customer is experiencing when they search for your product or service. How well is your company represented when the customer is considering your product or service?
3 PREFERENCE This is a step that often you cannot control. People have inclinations as to whom they want to work with. They may want to do business with a large company because they feel it is safe, or they may prefer to do business with a small company because they think it is more innovative. In this step, it is important for “you to be you.” Do not change who you are. Show the
customer what it is like to do business with you before they do it. STRATEGY SUGGESTION It would be helpful if you had videos or blogs to outline the process of doing business with you. Then let natural selection take its course while being diligent with every opportunity you receive.
4 PURCHASE In this fourth and final step, the potential customer becomes a customer to someone, and hopefully they are a loyal customer for you. You should try to predict the moment that your customer will pull the trigger and make their decision. It is important to save a few of your marketing dollars for this step. Guiding them through the process and giving them a good feeling along the way will cause them to a be a repeat customer. Once a person has walked down the steps and the commitment is made, there are two subsequent steps beyond the purchase for consideration: loyalty
and advocacy. STRATEGY SUGGESTION Social Media, Pay Per Click, and videos could aid this process. Check all your marketing efforts against the steps to be sure you are considering what phase your potential customer is currently experiencing. You can measure your marketing efforts to determine how to advance your potential customer to the next step in the process and make the necessary adjustments.
EDDIE WILSON graduated from The Ohio State University with a degree in Broadcast Sales and Marketing. He also studied marketing at Georgia Tech and business management at Emory University. He is most known for taking a talk radio station in Atlanta to the level of “Most Listened To Station in the World” (Radio and Records Magazine, 2002). He has owned his own advertising agency and worked with clients including Pepsi, P&G, Buffalo Wild Wings, and Mail America. He is now the President of the Affinity Worldwide and speaks across the country, including at wellknown universities, on the topics of branding, marketing and innovation in business.
LAST CALL WITH CHRIS RAGLAND
ALL INVESTMENTS REQUIRE GRIT Take Your Punches & Learn Your Lessons I
n our industry, the phrase we hear kicked around every day is “all investment involves risk.” This is true for lenders, for borrowers and for businesses. Every business has its share of challenges and obstacles but I would say that in our industry, the stakes are higher than average. My colleagues and I have learned a lot of valuable lessons while building our business into what it is. The most important lessons have come from taking our lumps. When you get knocked down, you just have to get back up, dust yourself off and get ready to scrap. In the earlier days of our business, we tried a lot of different approaches in order to build the strongest business model possible. We even dabbled in other business ventures, like commercial real estate. In hindsight, we realize this diluted the focus on our core discipline – private lending. Then the sub-prime mortgage bubble exploded and the Great Recession hit our economy like a tactical warhead. Obviously, no one in the financial industry was ready to contend with the aftermath. The chaos that resulted from the downturn in the real estate market created innumerable problems for businesses in the industry, many of which reverberated through the entire economy. But, it also opened up a lot of opportunities for investment, and it necessitated a fundamental change in our business. This is when we realized we needed to refocus our approach. We had to make a lot of sacrifices over the subsequent years to bolster our company, and luckily, everyone on our
team was prepared to step in the ring and start swinging. We recognized the importance of building up a bulwark against future economic downturns. Here are some of the safeguards we put in place. First and foremost, we learned to focus on our strengths. Straying too far from our core discipline just spread us too thin. We also decided we needed to operate with little to no debt on our books. This keeps us nimble because we’re beholden only to our clients. Finally, we set aside reserves. Having cash on hand allows us to better combat whatever economic calamity might happen down the road. The Great Recession was brutal for our country, and we believe we’re much stronger for having weathered it, both as a company and as individuals. No business model can account for every single eventuality. There are just too many unknowns. This means you’ll get knocked down from time to time, but it’s the getting up
and fighting back that makes you who you are. So yes, all investment involves risk,but what’s more important to remember if you want to be successful, is all investment requires grit.
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