SPECIAL FOCUS: SELF-DIREC TED IR As
The Official Magazine of AAPL January/February 2018
UNDERSTANDING THE NEW TAX LAWS ALTERNATIVE ANGLE
A PEEK AT THE FUTURE OF HOUSING MANAGE & LEAD
17 TIPS FOR A PRODUCTIVE 2018
Bobby Montagne The Journey from Developer to Private Lender JANUARY/FEBRUARY 2018
07 WHAT'S CURRENT
Tr ending indu s t r y topic s and new s f r om ar ound t he wor ld
o f pr i v a te len ding .
10 LEGISL ATION
Under s t anding t he N ew Ta x L aw s by J ef f Levin
19 BUSINESS S TR ATEGY
19 B ank O n I t! by Jim Sex ton
22 W ha t 's N ex t f or R E O nline L ender s? by Michael O'Mear a
26 P i t f all s o f Tr u s t Dee d I nve s t ing by C ar r ie Cook
30 LENDER LIMELIGHT
T he Jour ney f r om Developer to Pr i v a te L ender wi th B obby Mont agne
36 A APL CONFERENCE REVIEW 42 A APL EXCELLENCE AWARDS 44 MANAGE & LEAD
44 1 7 T ip s f or a Pr o duc t i ve 2018 by Elizabeth Mor ales
46 S ome H ave I t , Some Don' t by Chr is sey B reaul t
50 A APL EDUC ATION ADVISORY COMMIT TEE G e t to K now O ur Educ a t ion Ad v i s or y C ommi t tee by H eather Elwing 54 SPECIAL FOCUS: SELF-DIREC TED IR A S
54 To L end and To Ren t by Clay Malcolm
58 I nve s tor Per s pe c ti ve by Abhi G olhar and Jason Powell
62 T he Cr ypto - Conundrum in Self-Direc ted Retirement by Clay Malcolm
St r uc t ur ing a Pr i v a te M or tg age Pool by Kevin K im
70 ALTERNATIVE ANGLE
A Peek at t he Fu t ur e o f H ou s ing by Rober t Greenberg
74 L A S T C ALL
M anaging Ri s k in Uncer t ain T ime s wi th Steve Clar k
PRIVATE LENDER ORIGINATION + SERVICING SOFTWARE
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Call (310) 499-4144 or visit dealkeeper.com to request your free demo today! 4
PUBLISHER'S LET TER
R. MICHAEL WRENN CEO, Affinity Worldwide
EDUCATION PROVIDES A PATHWAY TO A SUCCESSFUL 2018
“New year, new you” is a universal phrase this time
failures, and what we have learned from both. We
plan to work toward growth and positive change.
President, Affinity Worldwide
of year. We evaluate our past achievements and
Executive Director, AAPL
write down our personal and professional goals and
Understanding the latest private lending and real
estate trends, and how the recently signed tax
Editor in Chief, Private Lender Director of Marketing & Member Services, AAPL
Senior Account Manager, AAPL
Chrissey Breault, Laura Chalk, Steve Clark, Carrie Cook, Heather Elwing, Abhi Golhar, Robert Greenberg, Kevin Kim, Jeff Levin, Clay Malcolm, Elizabeth Morales, Michael O’Meara, Jason Powell, Jim Sexton
COVER PHOTOGRAPHY Susanna Thornton
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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Visit www.issuu.com/aapl, email PrivateLender@aaplonline.com, or call 913-888-1250.
legislation impacts the private lending industry, adds layers to consider and can energize our strategies. This edition of Private Lender magazine considers the future of private real
estate finance and what changing demographics, technological advances and the recent legislative changes mean to the industry. Several articles instruct
and demonstrate how self-directed IRAs can be used for real estate investment— and how to make these investments safely and wisely while enjoying strong
returns. We also learn how to structure private loan pools.
This issue also introduces you to the American Association of Private Lenders’
newly established Education Advisory Committee. They are a respected group of industry experts who are volunteering to build AAPL’s educational offerings and reinforce the common principles and standards of practice that we are committed to providing through the AAPL Code of Ethics.
We are truly grateful for those readers who have helped us grow and alter
the perception of private lending. Thank you in advance for investing your time with us in the coming year. Our team continues its devotion to helping you in
your private lending, business and professional journey. Let us all be diligent with self-education and the sharing of knowledge, so we can enjoy positive momentum and a bright 2018.
For article reprints or permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail PrivateLender@aaplonline.com or call 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is prohibited. www.aaplonline.com Copyright © 2018 American Association of Private Lenders. All rights reserved.
The American Association of Private Lenders is an Affinity Worldwide Company.
Executive Director, American Association of Private Lenders
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WHAT’S CURRENT TRENDING INDUSTRY TOPICS AND NEWS FROM AROUND THE WORLD OF PRIVATE LENDING EASY ACCESS TO PROPERT Y EVALUATION REPORTS
PeerStreet has introduced new resources and technology to their lenders, with the intention of giving private real estate lenders an easily accessible platform. The new
resources are designed to give PeerStreet lenders access to detailed Property Valuation Reports that allow them
to analyze property data and adjust property details to
generate accurate valuations that reflect current or future market conditions.
PeerStreet licenses the necessary data from HouseCanary, a provider of real estate valuation data and analytics.
PeerStreet is providing the service to its lenders free of charge through its lender platform. FUNDING COMPANIES HIT RECORD CLOSING MARKS
“Currently, our platform is a
robust secondary marketplace for lenders. We’ve purchased
Kennedy Funding Financial, the direct private lender based
over half a billion in loans from
closings, reaching a huge milestone and cementing their position
value in developing practical tools
in Englewood Cliffs, New Jersey, surpassed $3 billion in loan
local lenders, but we see great
as one of the largest direct private lenders in the U.S.
to grow lenders’ businesses beyond
“The reason for our success is simple,” said Kevin Wolfer, CEO.
“When traditional lending institutions tell borrowers ‘no,‘ we find a way to tell them ‘yes.‘ We’ve bucked the rigid models which have denied so many the opportunity to succeed.”
providing capital to them,” said Brew Johnson, co-founder and CEO. “In addition to providing lenders granular data
via valuation reports, we also offer standardized loan documents, submarket data and potential borrower leads.”
The firm built its lending business on providing creative solutions
for funding difficult properties and challenging scenarios. According to Wolfer, a bank or other traditional lending institution has
rigid criteria about the borrower and the type of deal that can disqualify less-than-perfect applications almost immediately, even if the opportunity they want to fund has the markings of success. Another lender, Iron Bridge Lending, surpassed a major mile-
stone with $500,000,000 in total loan origination. Helping Iron Bridge get there were more than 685 borrowers with 1,995
projects across the United States. Since inception, Iron Bridge
Lending has generated $91,196,027 in profits for its borrowers
and financed 1,995 projects as the funding partner. Iron Bridge currently lends in 25 states and is expanding into other states.
JOHNSON IS NEW BUSINESS DEVELOPMENT MANAGER
New Direction IRA, a provider of self-directed IRAs, 401(k)s and health savings accounts that emphasize
alternative assets, has hired Alan Johnson as business
development manager for the Northeast region of the
U.S. With his primary office in Morristown, New Jersey,
Johnson will work to build relationships with alternative
asset providers and issuers in New York, Massachusetts,
Pennsylvania, Washington, D.C., and Connecticut.
WHAT’S CURRENT TRENDING INDUSTRY TOPICS AND NEWS FROM AROUND THE WORLD OF PRIVATE LENDING
FREDDIE MAC EXPANDS SUPPORT FOR AFFORDABLE HOUSING, COREVEST JOINS PILOT PROGR AM The Federal Home Loan Mortgage Corp. (Freddie Mac)
SR Certificates are backed by mortgages secured primarily by
of credit risk transfer securities backed predominantly by single-
offering, the company expected to issue approximately $161 million
expanded its support for affordable housing with a new series
family rental (SFR) properties that are affordable for low-income and working families.
single-family rental housing properties (SFR Loans). In its inaugural in SR01 certificates, which includes 59 loans originated primarily by CoreVest American Finance Lender LLC.
CoreVest has recently been approved under a pilot program with
“Freddie Mac Multifamily has taken another important step
The pilot is expected to expand financing options for investors
nities across the country,” said David D. Leopold, vice president
Freddie Mac to provide enhanced liquidity in the SFR market. in SFR rentals for workforce and affordable housing.
Beth O’Brien, CoreVest CEO, said, “We are excited to partner
with Freddie Mac in multiple ways to provide liquidity to a very important part of the U.S. housing market. Providing investors
with low-cost options to finance affordable housing increases the opportunity for families to find places to live in the communities they want to be in.”
to increase the availability of affordable rental housing in commuof targeted affordable sales and investments at Freddie Mac
Multifamily. “Single-family rentals provide an important alterna-
tive for the millions of families looking for options beyond rental apartments who may not have the means to—or choose not
to—purchase a home. We are using our multifamily financing capability to help meet this critical need and ensure that as families grow, their homes can grow with them.”
CLOSING TOOL L AUNCHES Sharestates has launched its new One Click Closing tool. The feature allows return borrowers to visit a page where they can upload
all the details and documents required for a new loan. It is intended to provide a seamless transfer of closing date information without further communications. The launch of the new tool coincides with the company’s goal of providing borrowers with a streamlined funding process, so they can focus solely on identifying viable real estate investment opportunities.
“This tool is going to change the game for real estate investing,” said Sharestates CEO Allen Shayanfekr. “We all know the phrase
‘time is money.’ Well, in this case, we are saving our borrowers both. Our team has done an exceptional job of helping our borrower
base acclimate to an online solution to what was once an antiquated lending process. This new feature is a huge step for our industry and is sure to become a staple in the lending process for future platforms.”
PEERSTREET CEO HONORED PeerStreet’s co-founder and CEO, Brew Johnson, has been named to HousingWire’s 2017 list of Vanguard Award winners. The award
recognizes top leaders from all areas of the mortgage industry, including those in lending, real estate and investing. In his role as CEO, Johnson
drives the direction of the company and is commited to democratizing
access to real estate debt as an asset class for investors. Johnson has a
long history in the real estate and tech industries, having begun his career as a real estate attorney, advising some of the largest real estate development and investment firms in the country. Under Johnson’s lead, the company continues to scale its mission of making the entire real estate lending ecosystem stronger and more efficient.
“Brew is one of the brightest minds in fintech. His passion for his work and deep understanding of the industry is unparalleled,” said Brett Crosby, PeerStreet co-founder and chief operating officer. “I am
extremely lucky to have him as a friend and partner in our work to offer investors quality real estate loan investments, and to create a more
accessible and robust secondary market for real estate-backed loans.”
THINK REALT Y R ADIO DEBUTS,
CONFERENCE SCHEDULE ANNOUNCED Think Realty, which launched in 2016, has launched a national talk radio show, Think Realty Radio. The
show began airing Jan. 1, 2018,on Wall Street Radio. Think Realty is presenting four national conferences
for investors in 2018, beginning with the Think Realty Conference & Expo in Dallas, Texas, on Feb. 24 and 25. The three remaining conferences are slated
for Baltimore, Maryland, April 14 and 15; Irvine, NEW CRM AND LOS SOFTWARE PL ATFORM RELEASED
LendingWise.com, a cloud-based customer relationship management (CRM) and loan origination system (LOS) provider for hard and private money mortgage lenders, has released an all-in-one CRM and LOS
software platform. The customizable solution is designed to increase collaboration among brokers, borrowers, processors, investors and other third parties involved in loan origination.
LendingWise CEO Chris Fuelling said, “The hard money and private
money industry has been the neglected child of the mortgage industry for too long. Many lenders are forced to use traditional, off-the-shelf
mortgage software that doesn’t fit their exact business model, or they have to build out their own software, which is a huge money pit that can lead to major headaches and unexpected complications.” LendingWise provides multiple tools for the hard and private
moneylender to manage and streamline the deal intake, processing,
underwriting, closing and servicing (coming soon) of residential and commercial loans.
California, July 14 and 15; and Atlanta, Georgia, September 22 and 23.
Think Realty membership has grown by 81 percent
during the past six months. Benefits of membership
include access to national events, online educational videos, industry-focused news articles and content; data lists of lenders, wholesalers and property
managers; and deep discounts with large home improvement suppliers.
“We help investors achieve their investment goals
by providing resources that improve time management, support wealth building and foster greater
purpose in their careers and lives in general,” said
Think Realty President Eddie Wilson. “As a real estate investor myself, I know the opportunities, but I’ve
also seen the pitfalls. We’re on a mission to support investors at all levels make smart investment decisions by giving them the information they need to
succeed in one central location: ThinkRealty.com.” JANUARY/FEBRUARY 2018
Understanding the New Tax Laws How the Tax Cuts and Jobs Act impact private lending and construction. by Jeff Levin
President Trump signed the Tax Cuts and Jobs Act of 2017 (TCJA) on Dec. 22, 2017, ushering in major changes to the Internal Revenue Code of 1986, effective Jan. 1, 2018. These changes should have a significant positive impact on the private lending and construction sectors, including boosting demand for more deals and the supply of capital. Some of the earlier incarnations of the legislation included provisions and changes that would have been worrisome for both industries. However, the final bill that was signed should help drive both the private lending and construction industries because it provides modest tax relief to consumers, maintains the nation’s fiscal commitment to affordable housing and reduces the tax burden on pass-through companies. It’s fair to say that, on balance, the policy changes will lead to higher after-tax returns, increased investment and lower capital costs. The core Republican contention that this massive amount of tax relief will boost gross domestic product remains to be seen, but overall it should provide a steady tailwind for our corner of the economy. Let’s first look at the TCJA’s impact on issues specific to our industry and then widen to the larger, macroeconomic picture.
LOWER PASSTHROUGH RATES By now, even the casual news reader is aware that the TCJA restructures individual and corporate tax rates, with particular benefit both for C corporations, where the top bracket is reduced to 21 percent, and for pass-through entities like limited liability companies (LLCs) and S corporations. The TCJA effectively lowers the tax rate for individual and trust owners of certain “qualified” S corporations, LLCs, partnerships and sole proprietorships by providing a 20 percent deduction on qualified business income. The deduction is limited to 50 percent of the W-2 wages with respect to such business; or if greater, the sum of 25 percent of the W-2 wages plus 2.5 percent of the cost of qualified property acquired during the year. This is one of the most significant impacts on our industries. The benefit of these lower tax rates should make it possible for investors and developers alike to create new, more efficient ownership vehicles. This benefit though is somewhat limited by a distinction for owners of “specified service businesses,” where the principal asset of the business is the reputation or skill of one or more of its employees or owners, such as businesses in the fields of health,
law, consulting and financial services, as these pass-through entities are generally not eligible for the 20 percent deduction. There is a small taxpayer exception to both the wage limitation and the “specified service business” exclusion: Both generally do not begin phasing in until owners have adjusted taxable income of more than $157,500 ($315,000 for joint filers). Overall, for the lending, real estate and construction industries, the new legislation should be highly beneficial. Before the TCJA, investors seeking the advantages associated with C-corporation status had to become a real estate investment trust (REIT); otherwise, they would be treated with high entity-level taxation. Under the new law, investors may enjoy some of the tax advantages previously enjoyed by an REIT, while gaining the ability to build capital through earnings retention and to engage in a variety of operating businesses that previously were not permissible for trusts. In addition, investors will now have more flexibility to match depreciation schedules with real property economic value. This will reduce or eliminate the need to participate in “likekind” exchanges to preserve their basis when they decide to sell. In this way, an owner would be free to reinvest the proceeds
from a sale in any assets they want at the time, without facing the adverse tax consequences they used to contend with.
IMPACT ON HOUSING MARKET Overall, the TCJA should continue the nation’s longstanding fiscal support of individual homeownership and strengthen opportunities for homebuilders to add much-needed housing inventory to the market. There’s an argument that some down-
side effects may be felt for luxury housing with price tags above $1 million. This is particularly in the high-state tax areas like the Northeast and California, but this is subject to debate due to changes in the alternative minimum tax and other factors. The housing industry could use the help. Even after eight consecutive years of growth, new residential construction in 2017 was well below the 1.4 to 1.5 million-unit annual rates averaged in the 1980s and 1990s, according to a study by the Joint Center for Housing
Studies at Harvard University. In fact, even with the bounceback from the effects of the Great Recession, housing completions in the past 10 years still just totaled 9 million units— 4 million units fewer than in the next-worst 10-year period that began after the “stagflation” 1970s era, and despite today’s much larger population. Together with steady increases in demand, the low rate of new construction has kept the overall market tight, depressing the gross vacancy rate to its lowest point since 2000.
Compared to earlier versions of the legislation in the House— which proposed to eliminate the mortgage interest deduction— the TCJA should keep consumer demand stoked. It maintains most of the tax deductions most homeowners benefit from. Specifically, the new law: M aintains the mortgage interest deduction for new home purchases and the deduction for second homes, although it reduces the mortgage interest cap from $1 million to $750,000.
R etains, for existing housing indebtedness incurred before Dec. 15, 2017, the current-law limitations of $1,000,000 ($500,000 in the case of married taxpayers filing separately). However, no interest deduction is allowed for interest on home equity debt after 2017. L imits deductions for state and local income tax, including property tax and the choice of income or sales tax, to $10,000 per filer. M aintains the existing rule allowing homeowners to exclude up to $250,000 (or $500,000 for married couples) in capital gains on the profit from the sale of a home if they have lived in the house for two of the last five years. Earlier, the House and Senate each proposed to make this rule stricter, but neither provision made it through the final committee, to the relief of participants in the lending and construction industries. R etains the present maximum rates on net long-term capital gains and qualified dividends: 15 percent and 20 percent, depending on income levels.
“The TCJA should continue the nation’s longstanding fiscal support of individual homeownership and strengthen opportunities for homebuilders to add much-needed housing inventory to the market.”
IMPACT ON LUXURY HOUSING There’s a fair amount of concern that one downside of the TCJA on the industry may be the $750,000 cap on the Mortgage Interest Deduction (MID), which could be felt in the luxury residential real estate market since it reduces the nominal after-tax value of pricy primary residences. According to Bloomberg, there are currently more that 2 million homes worth greater than $1 million nationwide. Looking at the top 10 highest-cost markets, inflation-adjusted median home values climbed more than 60 percent over the last seven years, so increasing amounts of housing inventory are expected to push past that $1 million threshold each year. In those top 10 real estate markets, million-dollar residences are relatively common, accord-
ing to a report by the website Trulia. They compose more than half the residential stock in cities like San Francisco and San Jose, and represent a big share of Los Angeles (16 percent), New York (12 percent), Seattle (7 percent), metro D.C. (6 percent) as well as other markets. Even among nominally lower-cost regions like Atlanta or Nashville, there are still plenty of neighborhoods where plus$1 million housing is common. Those arguing that the TCJA puts pressure on the luxury market point to the new rule that limits deductions for nonbusiness state and local tax expenses (SALT), including property and income taxes, to $10,000 ($5,000 for married filing separately). California, for example, has among the highest taxes in the nation in addition to its pricy real estate. Its base sales tax rate of 7.5 percent is higher than that of any other state, and its top marginal income tax rate is 13.3 percent, the highest state
income tax rate in the country. Given the political and economic divide between red and blue states, the changes to MID and SALT deductions have received their fair share of negative press. Although these arguments are politically saleable, it is fair to say that the extent of the impact on the high-end residential housing remains open for debate. Most likely this is a wait-and-see issue due to three significant, countervailing factors:
01 B ecause the bill also
doubles the standard deduction, fewer people will claim the MID and SALT deduction overall. The weakened MID and SALT deductions could be a wash for a lot of taxpayers, given the new standard deduction.
02 F or taxpayers in the
coastal blue states where prices and SALT rates are high, those who can afford luxury real estate mostly have been subject to the AMT anyway, which historically wiped out a lot of their MID and SALT deductions. Under the TCJA, the AMT exemption amounts are going up, which may offset part or, for some people, all the lost benefit of the reduced MID
and SALT deductions. The AMT exemption amounts will increase to $70,300 for single filers and $109,400 for joint filers, and they will phase out for those taxpayers at $500,000 and $1 million, respectively. This is significantly better than the status quo AMT exemption amount for single filers of $54,300, which begins to phase out at $120,700; and for joint filers, where it is $84,500 and begins to phase out at $160,900. Although these changes will end after 2025, the new AMT thresholds may well offset any risks to luxury real estate that the mortgage interest and SALT limitations pose, at least for the foreseeable future.
03 T he luxury residential
real estate market historically correlates positively with the major stock market indices, which are likely to continue to climb due to the much lower marginal tax rates for corporations. This may sound counterintuitive at first because, according to Case Schiller and many other analysts, over the long term the overall housing market is negatively correlated to equities. When stock
markets plunge, investors typically move money
into real estate and
REITs. However, when it comes to luxury resi-
dences, the correlation is positive historically,
because bull markets
supply high net worth buyers of real estate
with both liquidity and consumer confidence.
the final TCJA retains PABs so that programs that include the 4 percent Low-Income Housing Tax Credit (LIHTC) and the Historic Tax Credit (HTC) maintain their effectiveness as tools to produce affordable housing. The 4 percent LIHTC funds a third of affordable housing construction, while the HTC has been used to fund renovations to more than 40,000 historic structures since 1981.
Many investors, builders and private lenders were relieved to see the TCJA protected various affordable housing options by protecting private activity bonds (PABs), which had been in the firing line in earlier incarnations of the bill. PABs are tax-exempt bonds issued by or on behalf of local or state government for providing special financing benefits for qualified projects. The financing is most often for projects of a private user, and the government generally does not pledge its credit.
LIHTC and HTC tax credits were created by the 1986 Tax Reform Act to incentivize private equity to fund lowincome housing development. The credits, also known as Section 42 credits, are attractive because they reduce a taxpayer’s federal taxes on a dollar-fordollar basis, much more beneficial than tax deductions that simply reduce the amount of income the tax rate is applied against. The "passive loss rules" and similar tax changes made in 1986 reduced the value of tax credits and deductions to individual taxpayers, so individual investors claim less than 10 percent of current credit expenditures.
Without PABs, economists with the National Affordable Housing Bureau trade group had estimated that the inventory of lower cost rental property would have plunged by more than 750,000 units over the next decade. Fortunately for the industry and lower income families alike,
But despite these benefits for affordable housing, the National Association of Local Housing Finance Agencies pointed to a macro issue concerning the reduction of the corporate tax rate. The concern is that the greater attractiveness of public company equity (and debt) due
IMPACT ON AFFORDABLE HOUSING PROGRAMS
to the lower marginal tax rates will reduce demand for LIHTC. Because the bill also cuts the corporate tax rate from 35 percent to 21 percent, this will inherently lower the value of both credits and lead to fewer affordable housing units and renovated historic buildings. “Unlike previous versions of the legislation, important affordable housing tools, including private activity bonds, the low-income housing tax credit, the New Markets Tax Credit and the Historic Tax Credit were fully preserved in the final bill,” NALHFA Executive Director Jonathan Paine said. “The corporate tax rate will be lowered from 35 percent to 21 percent, however, which will likely cause a reduction in housing credit equity.”
ments,” if such are prepared by the taxpayers. B usiness Interest Expense Limitations // The TCJA limits the deduction of net interest expense for businesses with average gross receipts in excess of $25 million. The deduction is generally limited to 30 percent of adjusted taxable income (after adding back depreciation and amortization expense).
OTHER PROVISIONS Some other details in the final bill are very interesting to both industries and to their tax advisers, who are sure to be busy during the next 12 months: C arried Interest Rule // This was retained in the final Act, but assets must be held for three years. eal Estate Interest R Deduction // Now developers have a choice between the following: » L imiting their interest
deduction to 30 percent of net income without regard to depreciation, amortization and depletion. This distinction
makes the limitation less restrictive than one based on adjusted gross income. » A 100 percent deduction for business interest, but with certain trade-offs.
D epreciation Election // Beginning in 2018, the TCJA provides real estate investors and owners of multifamily units with a choice for depreciation, with the option of either a 27.5-year or a 30-year depreciation schedule, depending on how they elect to treat their business interests. This is a valuable tool to help customize cash flow and retirement/estate planning according to individual preferences.
S mall Business Methods of Accounting // Beginning after 2018, small businesses with average gross receipts of $25 million or less will
be allowed to use the cash method of accounting,
regardless of whether it is a C corporation or a part-
nership with a C corporation
partner. Moreover, taxpayers that meet the $25 million
gross receipts test are not required to account for inventories.
Revenue Recognition //
The TCJA generally requires accrual method taxpayers subject to the “all events
test” for revenue recognition to be in conformity with its “applicable financial state-
orporate Net Operating C Losses (NOL) // For losses generated after 2017, the TCJA limits the NOL deduction to 80 percent of taxable income and disallows most carrybacks, but generally allows indefinite carryforwards. usiness Entertainment B Expenses // The TCJA generally repeals the business deduction for entertainment, amusement or recreation expenses. The 50 percent deduction for business meals is generally retained. D omestic Production Deduction // The TCJA repeals this popular deduction. A ffordable Care Act (ACA) or “Obamacare” // The TCJA repeals the ACA’s individual mandate to buy health insurance by making any required payment $0 beginning in 2019.
IMPACT ON LENDERS The TCJA is mostly good news for lenders given the lower tax rates for corporations and pass-throughs and potential stimulus for the economy. However, near term there is a certain amount of pain because many lenders will need to take big charges in the fourth quarter of 2017 because of the pending changes. This pain is just temporary—the lower corporate tax rate in the legislation will sharply lower the value of tax-deferred assets, forcing
write-downs. Lenders will have to immediately shrink the size of an asset on their balance sheet because the future value of the tax deductions will be worth less. Nearly all lenders should feel some short-term effect since a tax-deferred asset is generated through loan-loss reserves, but the amount of the charge-offs will vary considerably based on the level of reserves and other factors. Among the large banks, only Citibank has indicated the size of its charge. Citi estimates it will take a short-term $16 billion
to $17 billion hit, but even for regional banks, the charges could be sizable. Capital One Financial, for example, may record a charge of about $976 million, according to an estimate by FIG Partners. For other major banks, the impact is significant too. FIG Partners estimated that U.S. Bancorp’s charge could total $514 million; the $19 billion-asset First National Bank of Omaha may record a $50 million charge; the $30 billion-asset Associated Banc-Corp may take a $36 million charge; and the $27 billion-asset Hancock Holding in
Gulfport, Mississippi, could record a $29 million charge.
THE CASE FOR ECONOMIC GROWTH The main premise of the TCJA is to boost economic growth and funnel overseas corporate profits back to U.S. soil, ultimately to benefit workers, households and investors and, of course, the construction and private lending industries. For individuals, the TCJA retains seven tax brackets, with rates ranging from 10 percent to 37 percent,
RATES AS LOW AS 8.50% AZ, CA, CO, FL, GA, HI, NV, OR, TN, TX, UT, WA
• Funding in as few as 4 days • Non-owner occupied SFRs, 1-4 units, multi-family & condos • 1, 2, & 4 year terms
• Line of credit financing • Loans up to 90% of the purchase price (Max LTV is 75-80%) • Foreign National program
with the top rate down from its previous rate of 39.6 percent. This will represent a net tax cut for most taxpayers. It doubles the standard deduction for individuals, and increases the child tax credit to $2,000 per qualifying child, up to $1,400 of which may be refundable. There is also a $500 nonrefundable credit for qualifying dependents other than qualifying children. The adjusted gross income threshold for phasing out the credits is increased to $400,000 for joint filers and $200,000 for others. The effect of these reductions should be expansionary for the economy until these elements sunset in 2025. However, it remains to be seen how other external factors will play out, not the least of which is the Federal Reserve’s policy over the next several years. Before passage of the TCJA (and continuing through press time), the Fed was expected to maintain its policy of steady but modest rate increases. So far, the consensus is that status quo is likely, but any deviation from this path that results in a stricter monetary policy from the Fed could undo the expected GDP benefits of tax reform. It’s a high-wire balancing act, because the combination of profit repatriation and tax relief could goose
inflation above current expectations, essentially robbing Peter to pay Paul. Even just some early signs of creeping inflation as a result of this tax relief could have the effect of causing the Fed to alter its course. Jay Powell, the incoming chairman of the Federal Reserve Board nominated by President Trump, is a bit of a wild card. He is expected to stay the course on monetary policy if the economy continues its steady growth, but it’s less certain where Powell would lead the Fed if inflation rises more than expected. Powell, a member of the Fed’s board of governors since 2012, has consistently voted with current Fed chair Janet Yellen to slowly raise interest rates and sell off assets that the Fed bought up in the wake of the severe recession of 2008 and 2009. Colleagues consider him to be a centrist and a pragmatist, but he lacks the deep background in economics that some of his predecessors had. He also has expressed skepticism in the past about the unconventional measures that the Fed took after the recession. Fed aside, economists are all over the map regarding the potential for the TCJA to boost GDP over the long term. The optimistic view is that tax reform will bring solid economic expansion, although the amount of growth acceleration is unknown at this juncture. For example,
economists at Fannie Mae expect it could add a half percent or more to annualized economic growth above baseline each of the next couple of years, due to investment increases driving productivity gains resulting in real income growth. The pessimistic view is that there may be no incremental expansion as a result of the TCJA because most of the personal income tax reductions are temporary, while the permanent reductions for corporations may fail to deliver the promised economic expansion. The fear is that corporations, to whom much of the dollar share of the tax revenue reduction applies, will mostly use their lower tax burden to buy back their stock and cut larger dividends, yielding no tangible improvement in GDP nor unleash job growth, boost middle class income levels or lead to increasing capital investments. The pessimists include in their gloomy assessments the impact of the growing deficit and national debt and the potential for interest payments on the national debt to begin crowding out private capital down the road. At the end of the day, a prudent professional in the private lending or construction industry is wise to stay on top of the details even if the true endgame with GDP is not knowable at this stage. There’s plenty of work to keep tax planners and invest-
ment strategists awake for nights on end. This is the most significant new change to the tax code in more than three decades, and it offers tremendous possibilities for those who keep abreast of the developments and tailor strategies to take advantage of all the new twists and turns. ∞
ABOUT THE AUTHOR
JEFF LEVIN Jeffrey N. Levin is the
founder and president of
Specialty Lending Group and Pinewood Financial, which
together provide a full suite of boutique private real
estate lending services in the Greater Washington, D.C.,
area. 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 and panelist and is
also a member of the American Association of Private
Lender’s Education Advisory Committee. He earned a bachelor’s degree from
The American University in Washington, D.C.
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BANK ON IT!
Money, interest and private lending can come together to create fascinating and profitable investments. by Jim Sexton
f you are like most people, you’re looking for a safe, reliable, high-yield income on your money. Private lending is a proven, time-tested, income-producing system of lending money and
If you understand the banks’ trade secrets, techniques and methods you can earn the same high-yields that the banks don’t want you to know about. If you apply these secrets, techniques and methods, you too can be the bank.
collecting interest. Let’s look at some new ways of thinking and doing when it comes to investments.
THE SECOND OLDEST BUSINESS Private lending is a business model that is hundreds of years old, yet it is one that very few people understand. In the early years, say 300 B.C. and after, people who loaned money were called the moneylenders. More recently, from the 1200s forward, the moneylenders took an image-marketing class and rebranded themselves. As part of the rebranding, they did away with the robes and donned suits and ties. They renamed themselves the bankers.
THE FINANCIAL SECRET OF MONEY If we could zoom out and take a 30,000-foot view of money and interest, we would clearly see the financial secret of money. The following two sentences is all we see at 30,000 feet: T hose who don’t understand interest, pay it. T hose who do understand interest, collect it.
When you make a loan, you start earning interest the very next day. Your money earns interest every day, 365 days a year. Interest works even when you don’t. Once you make the loan, you can be doing other things or vacationing anywhere, and your interest income stream is working for you 24/7.
ALTERNATIVE INVESTMENTS Let’s be clear. Alternative investments do not equate with more risk than stocks, bonds and real estate. Loaning money and collecting interest is a time-tested, income-producing alternative that can provide a solution to the challenge of having your money make money. Unfortunately, you will not hear about loaning money and collecting interest from your stockbroker, your financial adviser, your Realtor, your insurance agent or your banker. You see, none of these professionals make any money, fees or commissions when you act as your own bank and start loaning money and collecting interest.
FOUR TYPES OF PRIVATE LENDING INVESTMENTS If your current investment strategies are not generating the income or yields you are seeking, then consider the following four private lending programs. They will take you outside of JANUARY/FEBRUARY 2018
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“When you make a loan, you start earning interest the very next day. Your money earns interest every day, 365 days a year.”
your current mindset and show you how to massively increase your yield. PRIVATE LENDING PROGR AM #1
In this type of lending, you are making “direct loans” on real estate at no more than 65 percent loan-to-value. Only make direct loans on commercial property and investment property (business loans). Do not make owner-occupied residential loans. Have an experienced real estate attorney draw up the appropriate documents for the loan. Once you close on your investment, your interest income stream starts the next day.
PRIVATE LENDING PROGR AM #2
In this type of lending, you are selling a property that you own and owner financing” the property. You can owner finance any type of property. Have an experienced real estate attorney draw up the appropriate documents for the loan. Once you close on your investment, your interest income stream starts the next day.
PRIVATE LENDING PROGR AM #3
In this type of lending, you are purchasing an existing loan on real estate. You are purchasing the loan at “discount” (less than the current balance of the loan) or you are purchasing the loan
at “face value” (the actual current balance of the loan). Either way, once you close on your investment, your interest income stream starts the next day. PRIVATE LENDING PROGR AM #4
In this type of lending, you are purchasing a “tax lien certificate” from the local government authority. By purchasing a taxlien certificate, you are paying the past due property taxes to the local government for a property owner. The government authority then gives you a taxlien certificate (a piece of paper/ certificate) that states the property owner now owes you for the property taxes with interest. The thing to know is, property taxes that are past due, or owning a tax lien certificate, is a lien on a property that has priority over a first mortgage lien. You can’t get a better secured investment than this. Once you close on your investment, your interest income stream starts the next day.
EARN 10- TO 30-PERCENT YIELDS In each of the above four lending programs, you can earn a mind-blowing 10- to 30-percent yield on your investment dollars. You can earn these high yields using our concept called the SDL (Sub-Divided Loan). Let’s take a look.
First, divide the loan amount in half. Use ”investment money” to fund 50 percent of the loan amount, and use a line of credit to fund the other 50 percent of the loan.
HERE’S A REAL EXAMPLE. Property Value
(60 percent LTV)
I nterest Rate
interest only (loan is for one year and then balloons)
onthly M Payments
$600 mo./ $7,200 yr.
orrower pays B 3 points
(3 points/points are pre-paid interest) ( I use $30,000 of my money and $30,000 at 5 percent from my line of credit to fund the loan)
The loan is for one year. The borrower paid $1,800 in points (points are pre-paid interest) and paid $7,200 in actual interest. That is $9,000 collected from the borrower. The lender paid $1,500 interest on their line of credit for the year. That leaves $7,500 interest income on the original $30,000 investment. That $7,500 income on the $30,000 investment is a 25 percent yield on the $30,000 investment! Can you say, “Be the Bank”?
There are four basics in the life of a private lender:
01 F inding the money to invest
02 F inding the deals to invest in
03 Closing the transaction 04 Tracking and collections Each of these is very important, so do your due diligence. The same is true of the four private lending programs. Due your due diligence and
get into the weeds with the details. There are many books, magazines, articles, seminars, organizations, mentors, counselors, business people, lenders, investors and attorneys who can guide you through the step-bystep process for each of the four. You now have a choice: You can pay interest, or you can collect interest. ∞
ABOUT THE AUTHOR
JIM SEXTON Jim Sexton and his company, Blue Ocean Mortgage, are
members of American Association of Private Lenders.
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What’s Next for RE Online Lenders? A gap in the market gives online lenders an opportunity if they define their position in the larger market. by Michael O’Meara
t is becoming increasingly apparent that there is a sizable shift occurring within the online real estate lending world. Original models are not
working, and the lines differentiating online and non-online lenders are further blurring. Recent industry observers are imploring the still-fledgling industry to change strategies
or perish. Change, become profitable or fade away. Sounds a little Draconian, but reality is not always kind. Here are three strategic challenges the current online real estate lending platforms should address to define their position in the larger market going forward.
01 I nstitutional vs.
02 E xpanding the invest-
with private investor money or you elect to move to the institutional investor strategy.
03 R isk sharing and
Institutional investors dictate what they want and how they want it. There is no right or wrong answer, but it is not a coincidence that many platforms are moving toward the institutional investment community to fund debt, especially midsized commercial real estate loans. It is much more effi-
ment product (longer duration loans) investor advocacy
INSTITUTIONAL VS. PRIVATE INVESTORS So where do you go, and what do you do? The answer depends on whether you choose to stay
cient to have deep pockets for funding larger loans; however, swings in the market can affect their appetites greatly. Institutional investors are generally programmatic and want volume for their program, so your platform needs to be an efficient and prolific originator to fill a commitment. The more challenging group is private investors. Private investment is a very sizable
“If a platform had its own money invested alongside its investor, it would establish a real investment partnership and truly align all interests—and build a deeper trust quotient with investors.”
market, and there is a great opportunity should you choose to pursue or maintain this course. There are also challenges the current online platforms face and changes that need to be addressed when following this strategy.
Not all accredited investors are experienced real estate investors. Many of these investors are not openly shopping the internet trying to find good real estate debt investments. Maybe one day, but not right now. It is also a misnomer to believe that
“if you build it, they will come.” Another is be happy and stay with you and never lose money because you are “transparent.” You must earn and respect their investment dollars and never assume that just by putting deal documents online ensures that
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an individual investor fully comprehends the underlying risk(s) involved or insulates you from investor blowback if a deal goes bad. Proprietary credit scoring also may not provide enough clarity to the investor to understand the risk, or how you have identified and interpreted it. Transparency alone does not ensure comprehension. Private investors need trust, and that can be achieved through understanding and aligning with the platform’s credit philosophy and culture, a history of demonstrable integrity and a
highly experienced investment management team. You have to pass the smell tests—and keep passing them.
investment vehicles for private investors to broaden funding capabilities and volume.
one year or less. That is why it is popular with the current online and non-online private money platforms.
This is not necessarily an either/ or issue. There is no industry rule or protocol that would preclude a strategy to include both private and institutional investors. You must be prepared to manage the distinctive expectations of both. Institutional investors may provide a deeper funding source, but they also may be narrower in investment scope. It would, therefore, be a wise decision to create
EXPANDING THE INVESTMENT PRODUCT (LONGER DURATION LOANS)
This is a viable market but, ultimately, a limited market because:
01 T here are no barriers to entry.
02 T he sheer number of Recent history has shown us that private investors are attracted to short-term debt investments. The residential fix-and-flip segment provides very short loan terms, or what can be called micro terms, of
existing and new platforms offering that money is large.
03 T he fierce competition
will denigrate credit and leverage standards and drive down yields.
There is nothing wrong with this type of investment, but there is a gap in the current market between very short micro term loans (residential fix-and-flip) that are dominating the current private investment offerings and the longer duration term loans of 3-5 years, or mini term loans attracting institutional investors (mainly middle market commercial real estate bridge loans). Accumulating enough private investors to fund a middle market $5-10 million loan amount could be daunting and inefficient. However, offering shares into a diverse pool of longer term small balance commercial and investment real estate loans would be efficient and an attractive offering to private investors. The gap can be filled by creating and promoting longer duration mortgage investment offerings for the private investor community. Educating investors, wealth managers, advisors, IRA professionals, etc. can expose and enlighten the private investor community to the benefits of portfolio diversity through longer investment durations. This will open even greater investment opportunities within the wider segment of the market. If this process starts now, it can be a strong hedge against any downturn in the availability of the micro term loan market or a viable alternative portfolio diversification strategy.
RISK SHARING AND INVESTOR ADVOCACY Risk sharing is a fundamental and time-tested practice within the money lending business. It comes in different forms, from co-investing to risk retention to buy-back provisions and much more in between. Dodd-Frank has brought this back to the forefront by basically mandating credit accountability between sellers and buyers of securitization bonds. Even fintech leaders are recognizing the future of lending and investing by advocating ”skin in the game” as a risk mitigant. With the recent serious missteps within the online-lending industry, including allegations of fraud to gross negligence, a risk sharing program can build and reinforce trust and strengthen lender/investor accountability. It may not be enough to be a platform for other people’s money. If a platform had its own money invested alongside its investor, it would establish a real investment partnership and truly align all interests—and build a deeper trust quotient with investors. A risk sharing strategy can be accomplished through financial engineering methods that create different investment structures for different investment/risk tolerances. It sends a strong professional message of “I believe
in my product, and so can you.” It can also take the guesswork out of having to choose the right real estate investment platform. A firm that structures a large part of its business around the risk sharing concept will have a competitive advantage over firms that are in reality only middleman platforms, giving that firm a true market differentiator. The universe of online and offline, traditional and nontraditional mortgage lenders, brokers, conduits and debt aggregators is vast. Competition is fierce and will get fiercer as more people enter the pool and as the economy cyclically slows or contracts. All successful mortgage firms utilize technology as an integral tool, and most credit fundamentals have been around for a long time. As we witness the new mortgage fintech firms and the traditional mortgage bankers becoming closer in strategy and appearance, who will survive? What will set you apart not only from your immediate peers but from the larger, competitive market? It is time that online lenders mature and realize the need to find their space at the larger table and that just being a middleman, or a deal matchmaker, may not be enough to meet the competitive challenges that lie ahead. ∞
ABOUT THE AUTHOR
MICHAEL O'MEARA Michael O’Meara is a highcaliber mortgage finance professional with more
than 35 years of industry
experience in commercial/
residential real estate lending, investments and credit/risk management. He currently
provides advisement services to de novo and growth-
focused mortgage lending operations. Previously, he
was president of BCP, a
nationwide proprietary small balance CRE lending portal and chief credit officer of Capmark Investments LP
(formerly GMAC Institutional Advisors), a debt and equity
funds management platform. He can be contacted directly at momeara@institutional-
mortgage.com or via LinkedIn.
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PART 2 OF A 3-PART SERIES
PITFALLS OF TRUST DEED INVESTING: LOAN-TO-OWN UNDERWRITING by Carrie Cook
Trust deed investing is generally considered a safe investment, but there are risks—just as there are for any investment. In this threepart series, we are tackling some of those risks. In the November/December issue, we addressed conflict of interest. In this issue, we’ll look at loan-to-own underwriting. We’ll conclude the series in March/April with the third pitfall: lack of diversification. PITFALL #2 – LOAN-TO-OWN UNDERWRITING In the loan-to-own underwriting scenario, the mortgage broker focuses solely on the loan-to-value of the property. Why would a mortgage broker only focus on the loan-to-value when underwriting a loan? There are a few reasons. The first reason goes back to the first pitfall: conflict of interest. The mortgage broker is only acting in the capacity of a broker. Orginate, fund and done could also imply predatory lender. What this means is the broker determines a loan-tovalue to be so low that investors imply there is no way they could possibly lose money on the investment and, unfortunately, it is sold that way to them. This ensures the loan will fund and the mortgage broker will get paid an origination fee.
Unless you understand the valuation methodology of how the loan-to-value calculation was determined, many of us would not know any better than to think, “Why not invest?” Loanto-value is a speculative determination at best, prescribed by a few methodologies. Keep in mind that some mortgage brokers are governed by regulatory bodies that determine how this calculation can be marketed to potential investors. Yes, you read that correctly: the governing agency may be determining the loan-to-value. Let’s discuss this further. Some regulatory agencies determine the acceptable valuation methodologies that mortgage brokers must use when marketing a trust deed investment. In some cases, these valuation methodologies include only a third-party appraisal. So, if you happen to have an appraisal completed by a less-than-average, first-time appraiser, you may be banking your funds on their valuation. We are not here to discredit appraisers who are unprofessional and not following the standard code of conduct rules to follow, but it is important to realize that every appraiser will determine a different value for the same property. Which one is accurate, and how can they be different? The difference in value from one appraiser to another could be as much as 50 percent higher or lower. That
will obviously have either a positive or a potentially negative impact on what you thought was a rock-solid investment based solely on the loan-to-value. Aside from the appraisal, what other valuation methodology did the mortgage broker perform? Do they know something you do not? This is where you should be cautious of a mortgage broker’s hidden agenda. The phrase loanto-own has various meanings. Watch out for those who have an intent to lend on a property with the hope that the borrower defaults on their obligation, thus allowing the mortgage broker to quickly foreclose and sell the property at a significant gain to the mortgage broker, not you. To protect yourself, read the loan servicing agreement the mortgage broker provided. This document should disclose the charges the mortgage broker assesses and the use of proceeds from the sale. If the document does not clearly define this information, require that it be provided to you in writing, with the ability for you to have access to the final closing statement. When this type of mortgage broker is underwriting the loan, the most important thing to them is to underwrite it with a very low loan-to-value, because they want to take that property back. That is their goal. The broker doesn’t focus on the borrower’s ability to pay or the exit
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strategy. That’s a big pitfall for you if you are an investor and the exit strategy has not been considered. Why? Because all the mortgage broker is looking at is that low loan-to-value and potential back-end equity return they will get.
In this situation, the mortgage broker touts that the low loanto-value is your insurance plan, so that if something goes off track with the performance of that loan, you’re collateralized at a low low-to-value. That is true, but there’s no focus on
“What is the solution to loan-to-own underwriting? It is loan-to-own underwriting. How can the pitfall and the solution be the same?”
the borrower’s ability to pay or the exit strategy, increasing the risk for investors, rather than decreasing it. Instead, the mortgage broker wants the borrower to default on the loan, so they can foreclose on the loan. They foreclose and take that property back. Then on the back end when they sell the property, they will be participating in an equity paycheck. As the investor, you are the one who is responsible for getting that property back; you’re the one who will be coming up with the fees to pay to take that property
back or hold on to that property. That means you might incur expenses along the way. That’s a huge pitfall. You have all the skin in the game, not the mortgage broker. You are positioned, if there is a downturn in the market, for potential losses. Even if there’s not, you’ll pay those fees upfront, and then the mortgage broker will sell the property and return your fees and principal, but he’ll keep a portion of the equity or all the equity from the sale. That is a second payday for those types of mortgage brokers. They get paid
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Call us today at 833.401.6546 or visit 5arch.com to learn more.
upfront to fund the loan. Then, after you have paid the expenses to get your property back, they sell the property and that equity is a second payday.
SOLUTION # 2 – LOAN-TO-OWN UNDERWRITING What is the solution to loan-to-own underwriting? It is loan-to-own underwriting. How can the pitfall and the solution be the same? Loan-to-own underwriting is the value of the property in
relation to the amount of the loan. For example, a $1,000,000 valuation based on a broker price opinion (BPO) with a $700,000 loan on the property equals a 70 percent loan-tovalue. It is very important in the underwriting process, but it is not the only consideration. A mortgage broker should consider the borrower’s ability to pay and exit strategy to ensure that the loan will be beneficial to both the borrower and the investors. You do not want to underwrite the loan so that the borrower fails. A good mortgage
EQUITY PARTICIPATIONS | TRUST DEEDINVESTMENTS AVAILABLE OPPORTUNITIES
CALL US AT 866-897-6966 EXT. 110/112 We have Whole & Fractional Equity Participations and Trust Deed Investments that can be invested with Capital Accounts and Retirement Accounts such as Self Directed IRA's, Pension Plans, 401k's, Roth's and many other qualified accounts. We are third party custodian friendly.
broker will ask, “What if we have to take a property back?” not “We hope to take the property back.” A good mortgage broker will have a contingency plan in place, where the loan-toown strategy would come into play if the borrower defaults. A good mortgage broker has the confidence and experience to maintain a pool of funds allocated for these situations. They will be able to outlay the expenses upfront, instead of doing a capital call to the investors, with the confidence that recouping those outlaid funds will be returned upon the sale of the property. Although a good mortgage broker would look at it from an equity perspective, they would not look at it as an equity play so that they could make equity profit on the back end themselves. They know that with the built-in equity, they can recoup their fees and expenses and return 100 percent of principal to investors, and possibly backowed interest. Further, if there is additional equity, it does not go to the broker; it goes to the investors. Loan-to-own could have two different strategies in underwriting. You need to take a hard look at the mortgage broker before investing and identify whether their loan-to-own strategy is one that is a benefit to the investor. ∞
ABOUT THE AUTHOR
CARRIE COOK Carrie Cook is the president of Ignite Funding; CEO of Preferred Trust Company
and COO of iManagement
Group. Since her appointment at Ignite Funding, Cook has led the team to fund more than $315 million in loans
with investor capital. Cook
currently manages a capital
client database totaling more
than $85 million in real estate investments and is a licensed mortgage broker with the
Nevada Mortgage Lending
Division. As chief executive officer of Preferred Trust Company since August
2014, Cook redeveloped the custodial services business, ensuring clients effectively and accurately utilize their retirement funds to invest
in alternatives such as real estate, metals and LLCs.
Cook oversees the custody
of approximately $250 million in client investments and
cash holdings. As the COO
of iManagement Group, she specializes in managerial
services of investment funds.
LENDER LIMELIGHT WITH BOBBY MONTAGNE
Astute observation, bold action, personal responsibility and a willingness to adjust are the keys to Bobby Montagne’s success. by Laura Chalk
LENDER LIMELIGHTÂ WITH BOBBY MONTAGNE
Bobby Montagne, CEO of Walnut Street Finance, has overseen billions in transactions over his three decades in the real estate industry. Having invested much of his successful career on the development side, he learned first-hand the unique challenges that real estate investors and developers face. His rich experience, constant self-education, willingness to take calculated risk and his empathy with developers sets him apart as a private lender.
You have decades of experience and success in commercial and residential property development, sales and finance. What initially drew you to the real estate industry?
I grew up in Northern Virginia and watched my neighborhood double in size. Roads were constantly widened, and new shopping centers popped up everywhere. I intrinsically learned real estate development and, at an early age, knew I wanted to be a part of it.
than I did buying, zoning and building buildings. I knew it was the right decision when my wife, Bridget, told me she was proud of me. You created Walnut Street Development Capital in 2010 to purchase, renovate and resell classic Washington, D.C., row houses, generating 150 million in revenue. What led you to undertake this project? Did you have an affinity for historic Washington neighborhoods?
After working for other companies in the real estate industry, you started your first company, Walnut Street Development, in 1997. What was the impetus behind that move? What was the biggest challenge you faced, and when did you know it was the right decision? I worked for others in the real estate development and finance industry for 10 years before setting out on my own. I was lucky. I met Harley Cook, my mentor, to whom I owe so much. Early in my career and through the years, he taught me what it
took to be a successful real estate developer. He taught me that I am responsible for every aspect of my development project and that every detail matters. I watched what he did, what he did not do, how he conducted himself and tried to emulate his style. I have fallen short, but I know what a great developer and business man looks and acts like. The impetus behind the move to go out on my own is a good question. I guess I wanted to see if I could do it. The biggest challenge was securing reliable capital. I spent more time chasing money
I do love the history and charm of D.C. neighborhoods, but the real motivators in choosing D.C. row houses were volume and proximity. With thousands of distressed properties in such a small area, it just made logistical and financial sense. I could manage multiple projects that were literally on the same street, or certainly in the same neighborhood, rather than houses in the suburbs that were not only farther apart but very different styles. I did renovate and flip many suburban properties as well, but as I got entrenched in D.C. neighborhoods, and really started understanding what features a Wardman row house should have and what it should sell for in Petworth, for example. It just made sense to specialize and focus on D.C. neighborhoods.
What was the impetus behind the creation of Walnut Street Finance? How has your background prepared you for running that company? After the Great Recession, a lending vacuum was created restricting debt capital flow to infill and fix-and-flip developers and investors. We noticed that worthy real estate development projects sponsored by worthy rehabbers and investors were not getting done, strictly due to lack of capital. We pivoted from a developer to a lender in late 2015 to fill this void and have not looked back. Our two decades of boots on the ground development make us a better, more empathetic and capable lender. How do you keep up with the latest developments with the economy, financial and real estate markets? I read a lot, talk to everyone and, more importantly, listen to what they have to say and consistently meet new people. What are your biggest motivators? What gets you up and going each day? I love building businessesâ€” starting something from scratch and turning it into a thriving entity that can completely stand on its own. Something that
LENDER LIMELIGHT WITH BOBBY MONTAGNE
impacts people’s lives in positive ways, including meaningful work, consistent investment returns and unlimited growth opportunity for anyone willing to put forth the effort. Is there anything you do daily to help you grow as an entrepreneur and business owner? Observe, take action and adjust. Whether it’s online or in several daily newspapers, white papers or books, I am constantly reading and learning about not only our industry but about national trends, growing businesses, behavioral economics, etc. I’m also constantly analyzing my business and adjusting what is working and what is not, whether that’s hiring new people, building new vendor relationships or taking our website in a new direction. I’m not afraid to take chances on new ideas or pivot when I see that something isn’t working well. What was your most gratifying moment in business? So many gratifying moments, it’s hard to pinpoint one. My best move in business was getting on the sidelines in early 2006 and staying there for over a year.
Early 2006 was about a year before the housing market crash and Great Recession. What tipped you off to the coming collapse? In late 2005 and early 2006, we were delivering three residential buildings, including over 500 condo units. And, we were getting ready to break ground on three new residential buildings, all in or around Washington, D.C. My equity partners at the time were a father and son team, Tom II and Tom III Dungan, and this was not their first rodeo. They kept a close eye on the markets and my activities, focusing on a combination of sold units per week and access to capital for our new buildings. Long story short, we were having trouble selling the last 30 units out of 500 in our existing buildings. At the same time, we had several debt suitors seeking our business for our new projects. [We] realized we must be at the top of the market—slow sales and easy money. We quietly sold our development projects and moved to the sidelines to weather the approaching storm. What advice do you have for beginning entrepreneurs? Look for ideas and inspiration everywhere. For example, an instructional golf website inspired my company’s edu-
cational video series. Don’t be afraid to borrow ideas from the best and brightest. Look to the leaders in your industry, or any industry, to see what they do best and how they do it. Absorb those lessons and best practices into your business. What has been your greatest achievement so far? Easy. Matthew and Annie, my two kids who make it all worthwhile and fun. What life lessons or character traits do you try to instill in your children? Simple. Do what you say you’re going to do, and take massive action.
and is a foundational principle I live by: It is not what happens to you that matters, what matters is what you do about it — how you perceive it, take action and see your plan through regardless of the circumstances. What would you like your legacy to be? I believe God favors the bold, and I am hopeful to leave this planet a little brighter by acting on and sharing this thought. ∞
ABOUT THE AUTHOR
How do you like to spend your time away from work? Away from work you can typically find me in one of three places: golf course, restaurant or grocery store. I love food.
Is there anyone who has influenced your life?
Laura Chalk is public
My father. His strength of character was unquestionable, so when he said something, you listened because you knew it was either true or would become true. One of the things my dad taught me at an early age has stuck with me my entire life
She can be reached at
relations manager for Affinity Worldwide.
(816) 398-4111, ext. 86172 or
A APL CONFERENCE REVIEW
CONFERENCES ARE AN AWE-INSPIRING RUSH OF PRESENTATIONS, CONVERSATIONS AND POTENTIAL MEET-UPS. That was definitely true about the Association of Private Lender’s (AAPL’s) eighth annual conference.
The 2017 AAPL conference was held in Las Vegas, at Caesars Palace, where an exciting 2-1/2 days of networking, presentations and buzzworthy discussions about private real estate lending were featured.
A APL CONFERENCE REVIEW
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“We are humbled and inspired by the work of each nominee. These were difficult decisions for the AAPL Awards Committee to make. Each recipient embodies AAPL’s core values and does their fair share to advance AAPL’s mission of changing the perception of private lending. It was our privilege to recognize their outstanding work.” LINDA HYDE Executive Director of AAPL
A APL EXCELLENCE AWARDS
THE AMERICAN ASSOCIATION OF PRIVATE LENDERS (AAPL) ANNOUNCED THE WINNERS OF THE 2017 AAPL EXCELLENCE AWARDS AT THE ORGANIZATION’S 2017 ANNUAL CONFERENCE ON NOV. 14 AT CAESARS PALACE IN LAS VEGAS. AAPL's Awards Committee selected the following winners (from left to right):
A.J. Poulin, Applied Business Software,
Service Provider of the Year
Bob Eakin, JCAP, Community Impact Award Erica LaCentra, RCN Capital, Lender Member of the Year Nema Daghbandan, Esq., Geraci, LLP,
Emerging Leader Award
AAPL’s 2018 Excellence Award nominations open
Jan. 1, 2018. More information about AAPL’s Excellence Awards can be found at www.aaplonline.com.
MANAGE & LEAD
17 ABOUT THE AUTHOR
Tips for a Productive 2018 by Elizabeth Morales
What exactly is productivity? In terms of motivation, let’s define it as doing what you need to get done in the perfect amount of time and with the right amount of effort. Of course, the perfect amount of time and effort will differ from person to person. Still, there are small changes anyone can apply to their routine to accomplish more and become more productive than ever. 01 P UT DOWN THAT DOUGHNUT! Sugar gives
ELIZABETH MORALES Elizabeth Morales is the busi-
ness development director for Applied Business Software, creators of The Mortgage
Office and The Loan Office,
loan servicing software. She has a bachelor’s degree
in Spanish literature and a
master’s in business administration. She has extensive experience in leadership
and a diverse background in
public, corporate and creative fields. She can be reached at email@example.com.
you a rush that leaves you weak when it wears out. Avoid the doughnut in the morning and the soda in the afternoon. Try substituting foods containing more natural sugars. Locally grown honey, fruits (bananas, apples, pineapples), veggies (sweet potatoes, beet, carrots) and good carbs (whole-wheat bread, brown rice) are good alternatives. Cutting down on sugar will also help you lose weight, which in turn will make you feel better about yourself. Productivity will increase because you won’t feel so sluggish. And remember, when you are happy, your brain releases the
three “happiness” hormones: endorphin, dopamine and serotonin.
02 D ON'T HIT THE SNOOZE BUTTON TOMORROW. You know there are times when you hit it multiple times. When your alarm starts blaring tomorrow morning, get up, go to your kitchen and drink water. Not coffee. Water. Jump in the shower right after. Water changes your mood, gets your metabolism going, gets rid of toxins in your body and hydrates you. Basically, it prepares you for the day.
03 L EAVE THE CELLPHONE IN YOUR OR PURSE. Cell
phones can be a distraction. You may want to check your social media, start texting or checking email. These tasks tend to
absorb you. You can’t just look at one thing because something else might pop up. Since machines read our behavior, then anything they suggest will be insanely interesting to you.
04 D ON'T MULTITASK. Finish one thing before starting another. Concentrate all your efforts on one task. You will finish it faster, unless you are part of the 2 percent of the population that research has found can successfully multitask. Since you likely aren’t, do one thing at a time and put all your effort into it.
05 C LOSE YOUR MAILBOX. Seeing that email pop up in the corner of your screen will make you want to click on it and reply right away. Remember, don’t multitask. If you are expecting an important email from someone, then create a rule or alert so you’ll know the email came in.
06 S EPARATE YOUR DAY INTO BLOCKS. Allow a certain amount of time for recurring tasks: an hour to respond to emails, an hour to catch up on news, an hour to meet with decision-makers and so on.
07 D ON'T LEAVE THINGS FOR THE LAST MINUTE. When planning, remember that things don’t always go the way you thought they would. You may get a call from a sick child, a parent, a sibling or someone else who needs your time. If you get in the habit of not waiting until the last minute, these interruptions won’t be as difficult to deal with. Remember your mom’s saying: “Don’t leave for tomorrow what you can do today”?
08 G ET 8 HOURS OF SLEEP. That means don’t fall asleep with the phone by you either. Our phones are attached to our hips, and bedtime does not seem to be the exception. Your body uses sleep time to recuperate. Don’t pull your good old college all-nighters.
09 W ORK OUT. More specifically, work out in the morning, if at all possible. Research shows a morning workout burns more fat calories—both during and after the workout—than one in the evening. A morning workout increases your mental clarity for up to 10 hours after you are finished working out.
10 E AT BREAKFAST. Breakfast is the most important meal of the day. Again, skip the doughnut. It has been proven that eating a healthy breakfast improves concentration and performance.
11 D ON'T ATTEND EVERY MEETING. This is a tricky one because of the old saying “If you are not at the table, you are on the menu.” However, be choosy with the meetings you attend. Decide or ask if it is necessary for you to be there. If you do need to attend, explore the possibility of teleconferencing to save travel time. Meetings take a lot of time, and it’s not always imperative that you attend.
12 U SE TECHNOLOGY TO YOUR ADVANTAGE. Get reliable software to automate your back office and free up more hours in the day to get more of what you need: investors. There is an app for everything you can think of these days. Your homework is to determine where you lack and then look for solutions for it.
13 F IND INSPIRATIONAL MATERIAL. If you listen to podcasts on your way to work, home or during lunch, you will find yourself getting motivated and inspired. In turn, you’ll set and reach more goals.
14 S CHEDULE TASKS. Trello is a good organizational app to keep track of big picture things as well as little details.
15 S CHEDULE MEETINGS EFFORTLESSLY. Doodle is an app that allows you to create an event or meeting, list your desired times and then send an email to meeting participants so they can pick their preferred times from the list you provided. Doodle will automatically alert when people select their preferences, and you can then choose the time that suits the most people. People you email don’t need to create a Doodle account to respond to you.
16 S AVE TIME SCANNING. Download the Genius Scan app. You can productively scan one or multiple pages from your phone.
17 H IRE A COACH. If you have tried everything and still seem to be caught in the non-productive aisle, then get a coach. If you are sick, you go to the doctor. If you don’t know how to invest your money, you get a financial planner. So why not get a coach when you aren’t happy with productivity or can’t seem to set and achieve business goals? A coach can see things that you don’t and suggest solutions you have not been able to implement or carry through for a more productive year. ∞
MANAGE & LEAD
THERE ARE NO EASY WINS IN PUBLIC RELATIONS Press coverage is priceless, but only if you strategically integrate it into your marketing plan. by Chrissey Breault
s a businessperson who may be interested in increasing your visibility, its important to be familiar with how public relations works.
It may surprise you to learn that many of the stories you see on television or in the newspaper are generated by people just like you. They send information to the media, usually via news releases and personal contacts. That means you can actively seek publicity for you or your company. But you must make sure it’s newsworthy and that 46
you’re pitching the right media outlet for your story.
mented with a call to you or a spokesperson.
Before you start a public relations campaign, consider who will handle the relationship with the media and familiarize yourself with some tactics that can improve your chances of getting a reporter’s or editor’s attention and help you avoid some common mistakes.
Choosing the right spokesperson to represent your organization is vital, regardless of your industry or how big or small your company is.
SELECT A SPOKESPERSON The best media outlets won’t run your news releases verbatim. They will use the information from them, supple-
The media prefers to talk with senior executives, or someone who has some level of authority. So, it’s important to select a spokesperson who has authority in his or her position. They need to dispense information to the public. They may need to answer tough questions about pending decisions or industryrelated trends.
The best spokespersons have magnetic personalities who can get the media to be more interested in your company and write more about it. Further, they can connect with their audience. They can get the audience to like them and see things their way. Charismatic personalities get the audience to support a product or cause, even when people at first have reservations or are doubtful. Larger companies usually hire public relations firms to serve as the liaison between the public and the organization. Smaller companies usually choose an employee, either a principal,
You want to create lasting relationships and become the go-to source for your industry. Automatically assuming that the reporter wants to cast you in a bad light isn’t going to capitalize on the opportunities you could have! If the spokesperson you chose has that attitude, you have chosen poorly and have set yourself up to fail. Time to go back and rewrite your communications plan. Here are 10 important ground rules to know when working with reporters:
01 T HERE IS NO OFF-THE-RECORD.
executive or manager. Who you choose is up to you. Just make certain he or she can speak on behalf of your company or organization and compel the audience to move in your favor. One final note: The spokesperson you choose should go through media training. There are important techniques in how to communicate specific bits of information and steer clear of problematic or contentious questions. Anyone who interacts with the media or customers directly will benefit from media training. Even the most articulate, natural
speakers can benefit from understanding what to say, what not to say and how to say it in select “sound bites.” The biggest mistake you can make is believing that interviews are to be conducted as conversations!
GROUND RULES First things first: Drop the attitude. Making statements such as “I told the reporter I refuse to speak with him unless he gives me approval of the story before it runs,” only makes you sound arrogant and cocky. It will get you off to a bad start with your media contacts.
Reporters or journalists don’t agree on what the term “off-the-record” means. Don’t make any assumptions that you are friends with the reporter. Don’t make flip comments that are meant to be humorous. They can be used against you.
02 N EVER SAY “NO COMMENT.”
There is no phrase more damning in a spokesperson’s vocabulary. This response makes you look like you’re hiding something. The public regards a person who says, “no comment” as guilty. Go ahead. Grab a megaphone and scream that you are a fraud.
03 Y OU DO NOT HAVE TO TELL A REPORTER EVERYTHING.
Let’s make this clear. Just
because you shouldn’t ever use the words “no comment” doesn’t mean you have to reveal everything you know to every reporter who asks. There are times when you legitimately cannot and/or should not comment on something. In those instances, your strategy should be to “comment without commenting.” All that means is that you respond with an explanation as to why you cannot answer the question.
04 N O, YOU CANNOT “APPROVE”
A STORY. Just because you may wear the big-wig pants and be accustomed to directing employees doesn’t mean you get to approve a story. Most reporters will reject the request and also resent how they were treated. Reporters have absolutely no obligation to share their final story with you, so don’t ask.
05 Y ES, YOU CAN REQUEST QUESTIONS IN ADVANCE.
Okay, sometimes you can. This is a case-by-case situation. There is a lot of disagreement among public relations professionals and no consistency from reporters. The better strategy is to avoid asking major news outlets for questions, but reporters working for smaller news organizations, soft JANUARY/FEBRUARY 2018
MANAGE & LEAD
trade publications, or even the entertainment press are often willing to share their questions with you before an interview. Don’t deny an interview if questions aren’t provided to you. You can ask for the angle of the story to help form your responses for the appropriate sound bite.
wrongdoing. It is better to receive media training, so you can handle any questions that come from “left field.” If you do get a “left field” question, remember to treat the reporter with courtesy and respect. Don’t argue. You can be firm, but never confrontational.
06 Y OU CAN DECLARE TOPICS OFF-
07 Y OU CAN TAPE THE INTERVIEW.
LIMIT . It’s not the greatest
idea to do this though. Many times, reporters will disclose such agreements to their audience and that will probably make you look guilty of some
This isn’t a practice that everyone recommends. It can create a defensive environment before you even get started. However, if you are already expecting a hostile environment,
recording the interview is advised. Check with your state’s laws. Many require you to notify the party that you are recording. Since you already know to be respectful and courteous, you should just tell the reporter either way.
Y OU CAN OFFER TO FACT CHECK A STORY. Offering to fact
check a story is different than requesting to see a story before it’s released. Hiking up your big-wig pants and asking a reporter for your story in advance suggests arrogance and
makes you a controlling executive. On the other hand, making yourself available to check an article’s key facts is (usually) regarded as helpful. The reporter may call you or send you an email to review a single fact or a key section for review.
09 Y OU CAN LIMIT THE TIME OF
THE INTERVIEW. Limiting the length of an interview is one strategy that helps you prevent the interview from turning into a harmful conversation. If you believe the reporter is primarily
interested in digging for dirt, tell the reporter that you would love to talk, but only have a brief window—10 or 15 minutes. Giving interviews a time limit shouldn’t be your standard operating procedure, but it’s a useful tool for situations that are the rare exception to the rule.
10 T IMELINESS IS RELEVANCE. Be
timely. Just as you have a schedule to keep each day, so do reporters. In most cases, they are on tight deadlines. They will be grateful for your courtesy in responding quickly or promptly. Hearing “couldn’t be reached for comment” on the five, six, and ten o’clock news does not create a favorable impression for you or your company.
CAPITALIZE AND GROW Press coverage is priceless, but only if you strategically integrate it into your communication and marketing plan. Public relations marketing, when used effectively, can engage consumers who have an increasing ability and desire to be engaged and talk back. It can cost effectively add to the power of any strong advertising campaign, especially when you’ve created compelling and consistent messages that engage your target audience.
SHARE IT ON SOCIAL MEDIA If your company uses social media, this is a great place to share news. Not only will the fans of your page see it, but you can tag media outlet and their fans will see that it was tagged in a post. This in turn will bring potential clients or audience to your Facebook page attracting more likes or fans of your product or brand. Showing your fans that you were thought of as a reliable and trustworthy source for the media will illustrate that you are truly an expert on your industry. Tweeting and sharing on your LinkedIn profile is also a must. The more clicks and views the article gets from your shares will score major points with the editor, thus increasing your chances of them wanting to use you as a source or work with you again in the future. Always remember to include the link to the original article.
POST IT ON YOUR WEBSITE Having a permanent place on your website highlighting media hits is imperative. If you don’t already have a “Press” page, do it now. Consider separating the media hits into print, online and television. When people are searching your website,
it’s important to show off how awesome you are through your media hits. This shows them how credible you are and how aware the consumer is of your brand.
ABOUT THE AUTHOR
SHARE IT IN YOUR EMAIL NEWSLETTER Email marketing and newsletters are fantastic for developing visibility of your strong company culture by maintaining a great relationship with your target audiences and even your internal team. Showcasing your media newsworthiness is a great way to showcase your relevance and keep people excited and intrigued by what you are up to. Just be sure you are strategic about how often you send them out to your lists and be sure they are packed with interesting content that keep people engaged.
DISPLAY IT IN YOUR OFFICE If you work in an office with a waiting room or lobby, think about making a book or binder of your greatest media hits. Another option is to print and frame some to display on the wall. While people are waiting they can take a look at the book or at the wall and feel confident that they chose the right place. Doing this will leverage of the media hit even further. ∞
CHRISSEY BREAULT Chrissey Breault is the director of marketing and member services for the American
Association of Private Lenders (AAPL). Before joining AAPL, Chrissey worked in county
government as a communications expert. Her more than
15 years in communications
and marketing started in the
hospitality industry with Hilton and Marriot brands. For more than seven years, Chrissey
managed midmarket hotels
along the East Coast and the Deep South. She holds an
associate degree in hospitality and travel from Bradford
School in Pittsburgh, Pennsyl-
vania, and holds certifications in Adobe Web Design and volunteer management.
A APL EDUCATION ADVISORY COMMIT TEE
MEET AAPL'S EDUCATION ADVISORY COMMITTEE Tap into their many years of experience to take you to new heights. by Heather Elwing
The American Association of Private Lenders invites you to meet the members of the first Education Advisory Committee. Here, they share with you the reasons they are on the committee, private lending passions, skill sets and what they enjoy doing when their private lending hats come off. You’ll gain a better understanding of what it takes to achieve their goals and how that helps the future of the private lending industry. CHRIS RAGLAND The Basics // I’m the COO of Noble Capital Group LLC. The Why // I feel that I can expand upon the existing curriculum to include things I’ve learned from my direct experi-
ence, which may not be widely known by some in the industry. I want to help bring relevant and accurate information to the curriculum being established by AAPL. The Goal // I hope to bring a depth of knowledge to the content and help AAPL develop the highest quality educational program possible. The Private Lender Passion // I am passionate about the overall growth the industry has experienced in the past few years. Our niche industry is quickly gaining national attention, and I’m enthusiastic about the greater level of professionalism I see from those participating in private lending.
The Skills // I bring an in-depth knowledge of the private lending space with years of experience outside of a single expansion period. I also have an understanding of how to survive and even thrive during multiple real estate cycles. When the Private Lender Hat Comes Off // I enjoy exploring the outdoors, international travel and movies.
COREY ANN DUTTON (not pictured) The Basics // I am a private money lender and the founder and president of a womanowned, women-run private money lending firm in Salt Lake
From left to right: Chris Ragland; Andy Williams; Erica LaCentra; Nema Daghbandan, Esq.; Jeff Levin. Not Pictured: Corey Ann Dutton
City, Utah, called Private Money Utah. We are a boutique lending firm that focuses primarily on small balance, residential and commercial mortgages on assets located in the Western U.S. The Why // I started my own lending business with my own funds and later attracted other funds. I have been completely self-taught and have, therefore, had quite a learning curve as a private money lender. This experience has provided me with a ton of tools and tips that I want to share with others to help shorten their own learning curves. Being a part of AAPL’s Education Committee has given me a chance to provide valuable resources to other private money lenders to do just that: shorten their learning curves.
“How to become a private money lender” is not a topic that is just typical, college-course material. There are some online courses and one-day crash courses, but most of them are just big sales pitches for other products and services with zero educational content. I decided to take the position on the educational committee because I shared a common goal with AAPL: to give private money lenders the best content currently available for ”How to Become a Private Money Lender.” The Goal // I hope to help fill in the holes in the existing content we have available online to give even more valuable information to private money lenders out there. Second, I would like to help increase the visibility of the content, so it spreads.
The Private Lender Passion // Because the topic of private money lending is so widely misunderstood and unknown in general, I am passionate about educating both borrowers and lenders about private money lending. The Skills // Experience as a private money lender is a critical skill because you’ve got to know the “what” (e.g., know what the questions are). Second, I think it’s important to have experience with educational curriculum, particularly online curriculum. How the content is presented is just as important as what content is presented. When the Private Lender Hat Comes Off // I enjoy reading, mountain biking, snowboarding and hiking in the great outdoors.
ERICA LaCENTRA The Basics // I’m the marketing manager at RCN Capital, a leading nationwide fix-andflip lender. The Why // I strongly believe in the importance of education in any field. When I came into this industry fresh out of college, aside from what information was available through AAPL, there was not a lot of information out there about private lending and what other professionals were doing in the space. I think the education committee and what we are trying to accomplish will hopefully entice younger professionals to pursue careers in private lending and have the tools necessary to excel in this field. JANUARY/FEBRUARY 2018
A APL EDUCATION ADVISORY COMMIT TEE
The Goal // With the help of the other members of the committee, I hope to develop better educational materials and resources that would be beneficial to folks, regardless of how long they have been involved in the industry. The Private Lender Passion // My passion is trying to bring more creativity and marketing innovation to the private lending community. As a marketing professional, I’ve found that advertising and marketing strategies in our industry have not been nearly as progressive as what I see occurring in other industries. I would love to see our industry utilize more marketing technology and push beyond print ads of bridges and buildings. The Skills // I think this position requires committee members to be resourceful and willing to collaborate. Each member of the committee brings their own experience and expertise, and it is important that we pool our knowledge to create materials for others. When the Private Lender Hat Comes Off // Outside of the committee, for work, I try to stay current on different trends and innovations in marketing and advertising. Outside of work, I have a passion for cooking and truly believe that if this career
path doesn’t work out, I will start over and head to culinary school.
NEMA DAGHBANDAN, ESQ. The Basics // I’m a partner with Geraci LLP. We are the largest law firm in the country that focuses on the private lending space. We are also the general counsel for AAPL. The Why // I love watching AAPL grow. I’m just happy to help in any way I can. I spend most of my day educating private lenders about what they can or can’t do, so the education committee was a natural fit. I’m also passionate about AAPL, so I’m happy to help in any way I can. We also partner with AAPL regularly on webinars and other educational content, so it made a lot of sense to focus on our strengths. The Goal // I hope to provide useful content to the members of AAPL. The Private Lender Passion // Growth. We are fortunate to be able to be a part of the growth of so many of our clients. I am equally excited to watch members of AAPL succeed. The Skills // One of our five core values at Geraci LLP is “striving for excellence.” What that means is that a team member must have a desire to always personally and professionally grow in order to thrive at the organization. I’ve
always loved learning and teaching. Being part of the education committee is just an extension of that passion. When the Private Lender Hat Comes Off // I’m a car nut. Ironically, I drive an electric car that feels and drives like a toaster oven. I’m also fortunate to be a father of two now, and my kids have given me a new purpose and outlook on life. I want them to have a better and brighter future than me.
industry is constantly in a state of change. Understanding what is relevant is very important. When the Private Lender Hat Comes Off // I am passionate about many things. My family is by far my biggest passion. Other things I enjoy are reading, writing, yoga, skiing and traveling. ∞
ABOUT THE AUTHOR
The Basics // I'm the president of Specialty Lending Group. The Why // I love to learn, and I love to teach and share what I have learned through my life experiences. I’ve had close to 30 years in private lending and believe I could add value to our members by participating. The Goal // I would like to help advance the education mission of AAPL through education and courses that enhance our members’ experience. The Private Lender Passion // My passion is education and solving complex real estate transactions. The Skills // Thirst for knowledge, critical thinking and being open-minded. Our
HEATHER A. ELWING Heather A. Elwing is editorial manager for Private Lender and editorial assistant for
Think Realty Magazine. She is a licensed Realtor in Missouri
and holds degrees in journalism and public relations. She
is dedicated to the education
of those interested in private/ hard money lending and real estate investing.
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JANUARY/FEBRUARY 2018 53
SPECIAL FOCUS SELF-DIRECTED IR AS
To Lend and To Rent Lending and renting are alternative approaches
with intriguing similarities. by Clay Malcolm
though you, the account holder, would pull the strings. Self-directed retirement accounts give you the chance to review investments and pull the trigger on the one that’s right for you (and your IRA) as if you were allocating your personal money.
agement (and the income potential) can be very similar when comparing private lending and real estate.
In the context of real estate, you as the account holder can identify the property (commercial, residential, etc.) and specific approach that suits your needs and begin putting them to work for your financial goals. By using a retirement plan, you can alleviate stress when the tax man calls and fatten your pockets in your golden years. “Pre-tax” contributions for retirement plans such as traditional IRAs or Simplified Employee Pension (SEP) IRAs (for the self-employed) allow plan holders to defer contributions from income for tax purposes. Distributions, or withdrawals, are taxed down the road, but only once the held assets have ideally generated huge profits over many years and the plan holder has possibly fallen to a lower income bracket. With “post-tax” contribution accounts like Roth IRAs, contributions must be included with annual income. Distributions, on the other hand, may be completely tax free after five years and once the plan holder reaches age 59 1/2.
s someone whose roots are firmly planted in the world of private lending, you may be ready to tackle the real estate market, even if you may not know it! The principles of asset man-
For example, both investment strategies can be incorporated into your self-directed retirement plan. Doing so has helped motivated investors realize the earning potential of alternative assets, while garnering the tax-deferred or tax-free benefits of vehicles like IRAs, 401(k)s or health savings accounts (HSAs).
COMPARING STRATEGIES There are certain distinctions between investments with personal funds and investments with retirement funds, and you may find these factors worth pondering, given the substantial tax advantages self-directed accounts offer. When investing with a retirement plan, all income and expenses flow to and from the IRA itself and never to you personally. The account holder maintains arm’s length distance from the asset (which means no sweat equity in the case of real estate) and may not conduct certain IRA transactions with “disqualified persons.” From the onset, all documentation is titled in the name of the IRA and never in the name of the IRA holder. This reflects the direct and legal ownership of the asset by the IRA itself, even
SIMILARITIES These attributes hold true for their respective retirement plans regardless of the assets they hold. As such, if you’re already well-versed in private lending, you’re also poised to expand your existing investment expertise into the world of real estate. Some real estate invest-
ments may involve unfamiliar practices (e.g., fix and flip, buy and hold, raw land development, etc.), but you may be surprised to find striking similarities between loans and rental properties. The relationship between a property owner and a renter mirrors that of a lender and a borrower in many notable ways. Qualification // As a lender, you
likely qualify your potential borrowers as a measure of satisfying your risk tolerance. Qualifying a potential renter can be a virtually identical process. You determine monthly rental dues and lease durations on behalf of your IRA in the same way you specify interest rates and loan terms.
You may even solicit the same information and prerequisites, such as a credit check or first and last month’s rent (to serve as a down payment of sorts), before initiating the business relationship. Although you don’t secure a rental agreement with collateral the way you do with a loan, a security deposit—whose terms you can also decide on a case-bycase basis—can provide a hedge against tenants you deem risky but choose to work with. Payment Collection // There’s no added drama in collecting rent payments versus collecting loan payments. Your retirement plan can accept checks, ACH transfers, or wires depending
entirely on your preference. IRA providers are beginning to offer advanced platforms with free and user-friendly online bill pay functions to help simplify the process even further. As with everything else we’ve discussed, you would decide how to address late or missing payments. Real Estate Financing // If you’re 100 percent disinterested in rental property but still want to claim your slice of the booming real estate market, you can keep your lender hat on while helping somebody else with his or her real estate initiative. You can issue loans to put families into their new homes or help blossoming new real estate in-
vestors get off the ground, with or without their retirement plans. Plan-owned real estate is typically financed via non-recourse loans, meaning the personal funds or assets of the plan holder may not be attached as security. The investment property itself would be the only collateral in this model. As the lender, you may therefore choose to mitigate risk by asking for more money down, a higher interest rate, cash reserves or any other measures you feel are necessary. Your due diligence and talents as a lender can help you zero in on the right opportunity and reduce your overall risk. Bridge loans, construction
SPECIAL FOCUS SELF-DIRECTED IR AS
loans, non-performing notes and more are all allowable assets for IRAs as well.
SUCCESS STORIES Resounding success stories continue to emerge from the rapidly growing self-directed retirement segment of the real estate industry. One investor demonstrated the true power of his retirement plan by investing $93,000 of his Roth IRA into an LLC that dealt in land speculation. Before long the $93,000 grew to $970,000, which netted the investor a
tax-free profit of $877,000 and a less-than-a-decade return that other retirement investors would be thrilled to attain in a lifetime. Another plan holder didn’t have the retirement funds to acquire a property in full, but she used non-recourse financing to upgrade her purchasing ability. Her modest account balance became an entire property, and additional, more expensive properties became realities as well. The IRA eventually accumulated several pieces of real estate, all made possible through the power of non-recourse debt leverage.
A couple in their 40s grew their retirement plans in unforeseen ways, and they weren’t even looking for an investment property at first. They wanted a house near some of the world’s most beautiful beaches to call home during their retirement years. They targeted Belize because of its cheap raw land. They planned to develop a house by the time they reached retirement age. However, even with lower property prices, they didn’t have the personal funds to fulfil their dream. The homes in question would be even fur-
ther out of reach once constructed, and they couldn’t rely on another opportunity presenting itself decades in the future. Their bank accounts were light, but their retirement plans were flush despite having achieved tempered gains in the stock market. Once they learned a retirement plan could hold real estate, they liquidated their stock positions, rolled their retirement funds into self-directed IRAs, and each acquired half of an undeveloped property in Belize. You may be wondering, “As spouses, weren’t they
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both disqualified persons to one another?” Yes, under many circumstances, but not in their unique case. Each IRA held its own title to separate halves of the property, so as long as the money (income and expenses) remained evenly divided and IRA assets never commingled between IRAs or the holders themselves, their investment was perfectly compliant with the Internal Revenue Code. The couple began renting the IRA-owned house once it was fully constructed. Their IRAs grew at such an incredible pace
that they found themselves able to retire well before they anticipated. The couple then had a decision on their hands once their landlord days were behind them: They could sell the house and distribute the cash, or they could distribute the house itself. In addition to traditional cash withdrawals, the IRS allows plan holders to distribute physical assets without liquidation. The value of the assets would be reported as income and, upon completion of the process, would become the personal property of the account holder.
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In the spirit of their original vision, they elected to distribute their dream home in kind. They had obtained their paradise in Belize at long last, all without having to empty their personal savings and while boosting their retirement earnings in ways they had never considered before. In this regard, self-direction gave this couple the power of control, both over their retirement strategies and over the individual asset they had their eyes on many years before.
ABOUT THE AUTHOR
This couple proved that a minimal background in self-directed investing can pay remarkable dividends. Their pool of retirement funds empowered them to pursue their real estate goals, expand their nest eggs with a lucrative alternative asset, and do all of it while yielding the significant tax benefits their IRAs provided. These people simply wanted an amazing home on the Central American coast, but they had to learn the real estate investment game from scratch.
that assists more than 12,000
If they can do it, you can do it. As a private lending professional, you’re already better equipped to harness the fruitful possibilities of real estate than our example couple was. Your existing business practices revolve around identifying quality opportunities and then managing your income, so why not put those skills to work in the exciting and expanding field of rental property? ∞
CLAY MALCOLM Clay Malcolm is the chief development officer at
New Direction IRA Inc., a
self-directed IRA provider
clients nationally. He oversees most avenues of marketing, teaches continuing profes-
sional education and informal classes and webinars, and facilitates the training of
business development and
client representative teams.
Malcom, who has more than
20 years’ management expe-
rience in various roles, draws
upon his teaching background to develop the educational aspects of New Direction
IRA and impart knowledge
about self-directed IRAs to its clients and prospective
clients. Malcolm received his bachelor of science degree in communications from
SPECIAL FOCUS SELF-DIRECTED IR AS
Understanding Self-Directed IRAs An individual retirement account (IRA) is one of the most important, and sometimes overlooked, options investors have for properly planning tax management strategy. b y Abhi Golhar and Jason Powell
f your goal is to grow a sizeable single-family real estate rental portfolio, you will need to
do more than achieve a high return on investment or scale
property management operations. You must understand how reducing, managing and deferring taxes is a critical component of creating longterm wealth. And sometimes you’ll want to make real estate
investments on your own instead of as part of an entity. One of the options that will allow you to do that is called a self-directed individual retirement account.
WHAT IS A SELFDIRECTED IRA? A common mistake many people make is thinking an IRA is an investment account. It isn’t!
A better way to think about a self-directed IRA is that it’s a bucket to hold your investments. An IRA can hold stocks, bonds, real estate investments and other assets with one primary objective: growing your retirement portfolio. A traditional IRA is generally managed by a financial institution and typically invested in stocks, bonds and mutual funds. A self-directed IRA is considerably different. It’s an IRA that is managed by the owner of the IRA (you) and allows for a greater degree of control and flexibility in investments than a traditional IRA. Self-directed IRAs come in several distinct types. The two options we get asked about most frequently are self-directed Roth IRAs and self-directed traditional IRAs.
The good news is this: As the owner of a Roth IRA, you’re allowed to withdraw money from it at any time and for any reason. The bad news is there is a severe penalty for the money that is withdrawn before the account owner reaches the age of 59 1/2. However, you can withdraw your money, without penalty, for specific “qualifying reasons” such as: P aying for college education for yourself, your spouse or your children or grandchildren.
IRA only if you earn less than a specific amount of money every year: $132,000 for single filers and $194,000 for couples who are married. There are limits to how much you can contribute every year as well. The maximum, annual direct contribution to a Roth IRA is $5,500. If you are age 50 or over, you’re allowed to contribute $6,500 annually. The timeframe for contributions is any time from January 1 to April 15 of the following year.
“A common mistake many people make is thinking an IRA is an investment account. It isn’t! ”
SELF-DIRECTED ROTH IRA A self-directed Roth IRA is funded using after-tax dollars. Because the capital that’s being used to buy assets (e.g., stocks, bonds, real estate, etc.) has already been taxed, the investor has zero tax obligations when these funds are later withdrawn from the account. Want to withdraw money? There’s good news, but also really bad news.
P aying for your first home (there is a limit of $10,000 here). Paying for medical expenses greater than 7.5 percent of your annual income. P aying for costs regarding a sudden or unexpected disability.
This is something else to remember about Roth IRAs. You may contribute to a Roth
Find a way to budget each month for the extra money you need to contribute to a Roth IRA. Drink less coffee or watch that movie at home instead of on the big screen. These kinds of simple budget modifications that allow you to contribute to a retirement vehicle that can accumulate sizable assets over
time is well worth the small time and capital investment you’ll make on the front end.
SELF-DIRECTED TRADITIONAL IRA A self-directed traditional IRA is a bit different from the selfdirected Roth IRA in a few ways. The biggest differences relate to paying taxes and contributions and withdrawals limits. Taxes and Contributions // The main tax difference between a traditional IRA and a Roth IRA is that contributions to a traditional IRA are pre-tax contributions. That means you pay taxes when you withdraw money. Roth IRA contributions are post-tax. You may deduct traditional IRA contributions from your taxes, but there are a few things you should know: I f you are under the age of 70 ½ and your employer does not provide a retirement plan such as a 401k, you can make contributions every year up to the contribution limit. Remember that contributions are made pre-tax.
SPECIAL FOCUS SELF-DIRECTED IR AS
If you are under the age of 70 ½ and your employer does provide a retirement plan, you still may be able to deduct your IRA contributions if your individual income is less than $61,000 per year or your joint income is less than $98,000 per year. you make more than If $71,000 per year individually and more than $118,000 per year jointly with your spouse, you may make no
deductions for IRA con-
tributions on their taxes.
All contributions must be post-tax.
If your spouse has an
ment plan and you do not, your contributions are
deductible up to a com-
bined income of $184,000, but will be phased out over $194,000.
Withdrawals // The other way traditional IRAs are different
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from Roth IRAs Is that you may make withdrawals from a traditional IRA at any time. However, you must:
ABOUT THE AUTHORS
P ay income tax on 100 percent of the amount of money withdrawn. Pay a 10 percent penalty if you withdraw the money before reaching the age of 59 ½.
Be sure to study the impact of these types of accounts on your financial future. Most important, understand the investment you choose to acquire before investing. Even in a hot real estate market, we hear story after story about real estate investors losing money because of little due diligence on single-family flip projects and long-term rentals. Self-directed investment vehicles are meaningless if you don’t take the steps to mitigate as much risk for each deal as possible. ∞
ABHI GOLHAR Abhi Golhar is the host of Real
Estate Deal Talk and managing partner of Summit & Crowne. Abhi uses a “value-added” approach to invest in real
estate renovation, new construction and development
opportunities in the Southeast
United States. He actively educates and works with investors to deploy market-driven strat-
egies that yield success. Abhi holds a bachelor’s degree in
electrical engineering from the
University of Michigan. You can find him on Twitter, Snapchat,
and Instagram - @AbhiGolhar.
JASON POWELL Jason Powell is a corporate,
securities and real estate attorney. Jason focuses much of his practice on representing real
estate operators, developers, and lenders looking to raise capital to grow and expand. He can be reached at
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SPECIAL FOCUS SELF-DIRECTED IR AS
THE CRYPTO-CONUNDRUM IN SELF-DIRECTED RETIREMENT A process for adding digital currencies to a self-directed retirement plan may still materialize. by Clay Malcolm
Over the last few decades, the internet has redefined commerce. As a result, brick-andmortar businesses increasingly are going the way of VHS. Goods from entire markets, from books and toys to cars and houses, are available from the comfort of one’s living room, at the stroke of a key.
A STILL-ELUSIVE OPTION So why, when purely digital offerings like Bitcoin, Ethereum and Ripple are more accessible than ever, and IRA providers are optimizing their online investment platforms, does the concept of a safe and userfriendly cryptocurrency IRA still seem so elusive? Decentralized transactions and ease of online access (not to mention exploding prices) have fueled the romance behind cryptocurrencies, but IRA providers are charged with oversight involving any assets under their custodial umbrellas. In other words, a measure of control and structure must be applied to an asset class
characterized by egalitarian exchange. This has presented IRA providers with a challenge in these early stages. Coupled with their 2014 designation as property, the rise of digital currencies has spurred demand among investors to put these fascinating yet volatile assets to work in their retirement plans. Property and similar commodities, like real estate and precious metals, have drawn increased intrigue among retirement investors as word has spread about the permissibility of such assets in self-directed IRAs, 401(k)s, and health savings accounts (HSAs). Now, with cryptocurrencies falling under the same category, and having already made millionaires out of early investors, the race is on to bridge the gap between retirement plan
holders and the bull run on cryptocurrencies. Amid the price-fueled frenzy, the convenience and security of cryptocurrency transactions have remained in focus. Investors seek near-instantaneous transactions as dramatic daily price swings—sometimes in the thousands of dollars— dictate the tides of significant gains and losses. The integration of IRA technology into alternative asset marketplaces has certainly boosted transaction efficiency and is trending toward the lightning pace required in the hectic arena of cryptocurrency exchanges. Platforms that offer expedited trades may be taken with a grain of salt, as they would appear to offer their prompt services at the expense of security. Online “wallets” that store digital currencies have become
popular targets among hackers looking to make a quick and fraudulent buck.
INCORPORATING CRYPTOCURRENCIES INTO RETIREMENT PLANS A variety of procedures have emerged for incorporating cryptocurrencies into selfdirected retirement plans: M ultiple Key Verification //
Under this system, separate individuals or entities possess one of three keys associated
with a given cryptocurrency account. For a transaction to transpire, two of the three keys must be applied (“turned”) as a means of providing final authorization. Depending on the policies of the entities involved and the method of storage, the keys may be disbursed among the IRA provider, the exchange platform, the intermediary company that brokers the trade or another storage facility. Utilizing multiple entities for each transaction can prevent any one of them from maliciously
manipulating one’s retirement holdings, but processing times may suffer as a result of the added coordination between parties. Finding a suitable balance has been an ongoing process for IRA providers. H ardware Storage // Hard-
ware wallets provide a hedge against hackers. Access to these cold storage devices can occur only by plugging them in to a computer or entering a complex recovery password on a similar device. Therefore, as long as the device and recovery password are kept safe, the cryptocurren-
cies stored therein should be equally safe. However, hardware storage will likely involve slower processing times and won’t be completely devoid of third-party interaction. Because retirement investors may not retain personal possession of assets owned by their plans, any cold storage devices would have to be deposited at an appropriate facility. Depository staff would then personally facilitate any cryptocurrency transfers, or the device would physically travel between the storage facility and the asset provider. JANUARY/FEBRUARY 2018
SPECIAL FOCUS SELF-DIRECTED IR AS
LLC would jeopardize the tax advantages of cryptocurrencies, precious metals or any other assets owned by the same entity.
LIMITED LIABILITY COMPANY The LLC approach affords plan holders a high degree of control over their retirement investments. Instead of acquiring and storing cryptocurrencies directly, a private entity like an LLC can be established as the plan-held asset. Once funded, the plan holder can execute investments on behalf of the LLC for the ultimate benefit of his or her retirement plan. This allows investors to purchase and store cryptocurrencies using the platforms that meet their individual preferences regarding speed and security, all while yielding the tax benefits provided by their retirement plans. The LLC route bears other considerations, regardless of the
held asset type. The IRS requires annual valuations of any self-directed investments that don’t feature a consistently accepted market value. Account holders may also draw IRS scrutiny and put themselves at risk of an audit, as self-dealing activities—intentional and unintentional alike—are strictly prohibited and far more common with plan-owned entities given the hands-on nature of this investment model. As such, accurate and comprehensive documentation of all investment activity is absolutely essential. Any improprieties among LLC holdings may result in the full distribution of the LLC itself, complete with any applicable tax and penalty burdens to the account holder. For example, a prohibited real estate transaction within an IRA-owned
Furthermore, IRA providers are required to exercise a certain level of control over the planheld assets they administer, even if that asset is an LLC and its holdings. If the IRS demands that a plan holder’s assets be frozen or that relevant investment documentation be turned over, it may be difficult to comply in the case of LLC-owned cryptocurrency. Accordingly, IRA providers may be hesitant to propose the LLC option to their clients as the potential ire of the IRS looms large under these circumstances.
WHAT DOES THE FUTURE HOLD?
rise, so there’s every reason to believe that a fast and secure process for adding digital currencies to a self-directed retirement plan is right around the corner. ∞
ABOUT THE AUTHOR
CLAY MALCOLM Clay Malcolm is the chief development officer at New Direction IRA Inc., a self-directed
IRA provider that assists more than 12,000 clients nationally. He oversees most avenues of
As providers wrestle with these factors in pursuit of the ideal crypto-IRA experience, investors are chomping at the bit to tap the ever-evolving market of digital currencies with their tax-advantaged savings vehicles. Much like the internet in its fledgling stages, struggles among emerging technology, economic opportunity, personal security and overall efficiency may continue to epitomize cryptocurrency IRAs in the immediate term. Even so, today’s technological landscape allows barriers to crumble just as quickly as they
marketing, teaches continuing professional education and
informal classes and webinars, and facilitates the training of business development and
client representative teams.
Malcom, who has more than 20 years’ management experi-
ence in various roles, draws
upon his teaching background to develop the educational
aspects of New Direction IRA and impart knowledge about
self-directed IRAs to its clients and prospective clients.
Malcolm received his bachelor of science degree in communications from Northwestern
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Structuring a Private Mortgage Pool The basics for organizing a successful fund that benefits all parties. by Kevin Kim
When structuring private loans, private lenders have various options at their disposal. They can: M ake loans on a peer-topeer basis, one investor at a time. F und based on a fractional participation plan, with several investors. F inance the transaction using a mortgage pool.
The first option requires a lender to issue a trust deed that secures the investor’s interest in the loan. If the lender chooses
to fund the loan via a “fractional interest” structure, with several investors putting their money held in a trust account, or using a fund or “mortgage pool,” the lender acts as the trustee and the servicer, offering additional benefits. There may be misconceptions about brokers looking to move from making individual loans to creating a mortgage pool, including the amount of time
and money it takes to structure the pool. However, if structured correctly, the pool becomes a benefit to your business. If done improperly, the pool could become a liability, bringing with it litigation, mistrust and lost relationships.
ORGANIZING A POOL To start, a broker must contend with lending regulations as well
as the intricacies of securities law surrounding the pooling of loans. We have all seen what happens when a mortgage pool goes wrong. Poorly planned mortgage pooling practices nearly crashed the whole system at the start of the housing crisis. A competent and experienced attorney can play a significant role in helping a private lender establish the structure needed to build and manage a robust
private money mortgage pool. There are other options out there, such as using a mortgage pool consultant or CPA, but they may be able to provide only one or two pieces of the puzzle. On the other hand, a law firm that understands the complexities of raising capital, works in close collaboration with investors, creates bulletproof contracts and deals with the daily realities that accompany
mortgage pooling and servicing, is a strong option.
the manager receives a management fee from the first funds received.
the profits are typically split among the members and the pool manager.
HOW A TYPICAL MORTGAGE POOL WORKS
The fund investors are then paid a preferred return based on the terms of the pool. The return to the fund members is wholly dependent on the amount of payments received from the mortgages, with their investment secured by a lien. If there are fees collected in excess of the preferred fund payment,
Another option is for a mortgage pool to obtain a line of credit from a bank secured by the mortgages in the pool. If the credit is cheaper than the preferred return, the pool can increase profits by increasing the credit volume, closing more loans, and allowing the members to share in more significant returns.
A common mortgage pool is established through a contract, with a pool manager acting on behalf of the pool of investors. The manager collects and manages the mortgage payments for the pool. In return,
While a credit line may provide more liquidity, there is a risk associated with this practice: Banks can decide to close the credit facility and demand payment. If this occurs, the mortgage pool must cope with repaying the loan within a oneyear close-down period.
SENIOR DEBT CLASS PRIVATE MONEY MORTGAGE POOL In another mortgage pool scenario, the pool is established as a senior debt class at a lower coupon rate, but offering more security for investors who rely on their monthly investment cash flow. Senior debt is borrowed funds that must be repaid first, regardless of the financial well-being of the company. Senior debt offers a lower rate of return but provides a safer environment for investor funds, especially those who are seeking a low-risk opportunity. Unlike a traditional mortgage pool, a private money senior debt class pool is offered at a set interest rate for a specified term. Principal and interest payments are made to the investors on a regular schedule, regardless of the payments received from the borrowers.
The amount of interest paid to investors is typically less than that of traditional mortgage pools, allowing the pool manager to retain the difference. The debt is less risky for the investor but offers a smaller financial return to the lender. The senior debt contract may also limit the amount of subordinated debt the company can hold, further reducing the risk to the investor of the firm becoming insolvent.
SENIOR DEBT BENEFITS FOR INVESTORS AND LENDERS Different investors have different appetites. There will always be accredited investors who are willing to take a risk in exchange for the highest reward. However, for risk-averse investors, even those who are accredited, monthly cash-flow and stability can be the prudent alternative, albeit with a lower return on investment. A senior debt class presents options for both types of investors. Investors who may be nervous about placing a large portion of their investment allocation into the mortgage pool basket may reconsider that strategy if they are secured by senior debt. Accredited investors who feel comfortable investing into traditional mortgage pools may at first balk at the lower returns,
but they will benefit in the long-term in the likely event of a future economic downturn. Lenders also benefit with a senior debt class mortgage pool by providing investors with a safe investment for their funds, allowing the possibility to accrue more investors from clients more concerned with stable income from their investments than a higher rate of return.
GETTING STARTED WITH SYNDICATED CAPITAL Pooling together funds from a group of investors and creating an entity for offering private loans can be an extraordinary opportunity. You won’t have to write individual contracts, and you will be able to provide a more diverse group of products to your borrowers. However, it is important to note that your success is tied directly to the mortgage pool. This statement may sound like a cliché, but your mortgage pool is only as good as your pool manager. The manager must manage the pool in a way that ensures stability and liquidity maximize returns and minimize risk. If you are considering starting a mortgage pool, it is prudent to begin with assistance from competent legal counsel. A law
firm experienced with drafting loan documents, structuring funds and pools, and conducting due diligence is important to starting your pool on the right footing. With the right amount of support and adequate structuring, your investors will have the confidence to support your endeavor with their capital. ∞
ABOUT THE AUTHOR
KEVIN KIM Kevin Kim is an experienced
corporate and securities law
attorney with Geraci Law Firm,
dedicated to providing reliable and innovative legal solutions. Kevin focuses his practice on real estate matters, focusing on private placements and
other alternative investments
for private lenders, real estate developers and other real estate entrepreneurs.
KNOW YOUR SANDBOX...THEN EXPAND IT
Continuing to add NEW MARKETS IN 2018
A PEEK AT THE FUTURE OF HOUSING As the market changes, private lenders must change along with it. by Robert Greenberg
he Mortgage Bankers Association, in a report on the future of housing, predicted the U.S. housing market would undergo one of the largest expansions in its history between 2014 and 2024, adding 15.9 million additional households. The growth
is being driven by baby boomers, millennials and minorities. It’s an interesting time to be in housing as these demographic and population changes alter the landscape—adding both challenges and opportunities
for private lenders serving the borrowers and investors in the housing economy.
SHIFTING DEMOGRAPHICS Consider these shifts:
01 H ispanic households will lead growth in the U.S. with 5.5 million additional households over the next decade. Many of these households will be millennials, and they will be both renters and homebuyers.
02 T here will be 20 million
05 R enter households are
03 New minority households
In a study released in December 2017, the Joint Center for Housing Studies (JCHS) of Harvard University predicted 13.6 million more households between 2015 and 2025. It notes that major demographic changes are on the horizon in age and race/ethnicity, among others.
more households with those over age 60, 18 million more households with those ages 18-44, and only four million fewer households in the 45-60 age group. will outnumber new white households by one-third.
04 T he U.S. will have 4.7
million new renter households and about 8.9 million more homeowners by 2025, assuming the current homeownership rate remains stable.
expected to increase, but not at the pace seen in recent years.
REACHING MILLENNIALS One notable change the lending industry has talked about a lot
is the impact of the millennial generation. The younger half of this massive generation is approaching their 20s and 30sâ€” the ages most likely to rentâ€” over the next decade. JCHS notes that nearly half (47%) of these younger rental households are minorities. As millennials age, many will also be transitioning from renters to homeowners. Suffice it to say that lenders need to be constantly vigilant and innovative in their outreach to millennials, whether they are looking for a fix-flip investor with an attractive asset-backed lending product or wanting to find home-
buyers hunting for a conventional mortgage. Either way, it’s likely technology will play a role in the decision-making process. Millennials’ use of technology is changing how businesses are run, including those in the mortgage industry. If a company’s lending platform isn’t already tapping into advanced technology, then they are already behind the curve. The millennial generation has grown up with cell phones, the internet and social media. They prefer texting and Snapchat, and consider email and phone calls outdated methods of communication. There’s been a lot of talk about the eMortgage over the years,
and there has been an uptick recently. Still, the adoption rate among traditional mortgage lenders has been pretty dismal. Technology-savvy real estate crowdfunders, on the other hand, have pushed the envelope in the past five years, with innovative technology that uses advanced algorithms to provide online real estate lending and investment platforms. Smaller, regional hard-money lenders may not have the bandwidth or the capital backing that national venture capital-funded real estate crowdfunding platforms enjoy. Yet even the smallest of private lenders will need to explore ways to embrace
technology to attract and retain millennial customers who expect to invest in real estate and borrow funds using their smartphones or tablets.
THE FUTURE IS DIVERSE Again, many of the millennials who will impact the future of housing are Hispanic, Asian, African American or of another race or ethnicity. Consider this interesting statistic from the MBA: If sex-, age- and racespecific household formation rates remain at low 2014 levels, demographic changes alone will add 5.5 million Hispanic households, 3.4 million non-Hispanic
white households, 2.4 million more African-American households, 1.8 million more Asian households and 730,000 more other households. In other words, the housing industry will have more than 10 million minority households by the year 2024. Now consider that minority households undergo more challenges on the path to homeownership. Homeownership rates for African Americans and Hispanics are below 50 percent, while the rate for whites is more than 70 percent. These rates for minority populations have been lower historically. Slow wage growth for low-income workers amid a backdrop of rising
“It will be critical for lenders to implement new methods for reaching an evolving and diverse population with lending products that meet their needs.”
housing prices, negative home equity in minority neighborhoods and the inability to afford a down payment are a few of the barriers to increased minority homeownership. The Pew Research Center notes that the homeownership gap between blacks and whites has widened since 2004. African Americans and Hispanics have a harder time getting approved for conventional mortgages than whites and Asians do. When they are approved, they tend to pay higher interest rates, Pew said. Lenders have cited debt-to-income ratios and poor credit among the main reasons for denials. To be sure, there are many complicated socio-economic challenges that impact minority homeownership numbers that lenders cannot fix on their own. These may require political, legislative, regulatory or advocacy actions at the local, state and national levels. The nation’s foreclosure and financial crisis resulted in major declines in homeownership as well as a shift in how people view the rental market. Growing numbers see it as a preferred alternative to homeownership.
THE GOLDEN YEARS Lenders have a host of opportunities, along with some challenges, in reaching millennials and minorities as future borrowers, real estate investors, homebuyers or renters. But what about aging baby boomers? The generation that’s made an indelible impact on our nation is getting older, impacting everything from health care to Social Security to the labor force. While millennials are forming households, baby boomers are reaching ages in which they, or their loved ones, will be making decisions about downsizing, assisted living, nursing home care and the own-versus-rent decision. Because this generation is so large, it’s important for lenders to pay attention to trends, as they could have a long-lasting impact on the housing economy. Will most choose to age in place, or will they put their homes up for sale and become renters after retirement or as old age sets in? Will millennials wanting to transition to homeownership or investors anticipating continued demand
for single-family rental housing swoop and scoop up their homes? Or is there a risk of a supply glut if the trend moves to condos and apartment living? If housing—no matter the type, is to appeal to aging baby boomers, what must be done to attract them? Will homes or condos need wider doors and hallways for wheelchairs? Should yards be smaller and low maintenance? Should there be a neighborhood grocery store within walking distance?
ABOUT THE AUTHOR
ROBERT GREENBERG Robert Greenberg joined
Patch of Land earlier this year as chief marketing officer.
His professional experience includes over 25 years in marketing, working with
familiar consumer brands such
as Pepsi-Cola, Anheuser-Busch and Sara Lee as well as B2B
experience in retail, technology, finance and real estate.
Recently, he led the marketing efforts for B2R Finance, where
he helped originate more than
As the market changes, private lenders must be nimble enough to change along with it. It will be critical for lenders to implement new methods for reaching an evolving and diverse population with lending products that meet their needs. They must also speak to savvy investors who understand how to capitalize on this changing landscape. Trends are quickly changing, and the outlook for housing growth will be robust in the coming years. Are private lenders ready? ∞
$1 billion of real estate investor loans that led to the industry’s first-ever multi-borrower sin-
gle-family rental securitization. At B2R, he was responsible for branding, corporate commu-
nications, lead generation and integrated marketing efforts.
He was responsible for leading the development and implementation of the marketing
automation and CRM platform that helped to deliver sales
management and operational efficiencies to enhance the
customer experience for real estate investors nationwide.
L AST CALL WITH STEVE CL ARK
Managing Risk in Uncertain Times The need to manage risk is the one certainty.
t’s three o’clock on Sunday morning, an hour north of San Francisco in a sleepy little town. The phone rings. It’s a
neighbor whose voice is barely recognizable through the howling wind tearing into the phone. A knock on the door follows shortly. “Hey, have you seen the news?” another neighbor asks. I look up at the black night sky, illuminated orange like a jack-0’-lantern, the air dry and gusts whipping at 50 miles per hour, sending cracking tree limbs and debris wherever it pleases, littering the street. Every television channel carries breaking news coverage of multiple fires across Sonoma County, the evacuations underway, the streets that are shut down, the freeways blocked. Emergency sirens wail in the notso-distant surrounding city blocks. We feel a deep pit in our stomachs, understanding this may happen to us next. Opposite the 50-mile-per-hour winds that blow the fiery uncertainty, leaving us reeling from our lack of preparation, there is an absolute certainty that seems to balance things out. In the minutes during which the emergency unfolds, I am absolutely certain of what is most important to me right now: loved ones; family photos; heirlooms; the safety of
friends, family and co-workers; escape plans; pets. Immediate next steps are most important. Everything else fades in the background. During and after the destruction and confusion, we ponder how to start over. How can we be better prepared in the future? How can we rebuild? What steps do we take next? How do we keep from having the wool pulled over our eyes? How do we prevent being taken advantage of? Most important, how do we protect against our sheer lack of knowledge or experience in such a situation? So, the question we are left with is this: In uncertain times—which is really all the time—how is risk truly managed? Here at CIS, we manage the risks within the development and construction of residential and commercial facilities through cost analysis, risk management, construction inspections and private lending guidance. We manage with the notion of “if it’s gray, you’ll pay.” In other words, if you leave anything in your power to uncertainty and it’s not black and white, it will come back to bite you in the future—in either time, money, legal ramifications and/or frustration. Preparation is key—it should be first and foremost. Second is absolute clarity in the subtle power of specifics. Having methodically detailed documentation, contracts,
plans, schedules, change orders and as many other details documented as possible is the difference between life or death in a firestorm—or having a business contract go sideways. In construction risk management, the same principles that are used in business, intertwine into all facets of life. We are left with one piece of concrete certainty: The need to manage risk is necessary. Even though I am one of the fortunate ones whose house and business remain standing, the winds of uncertainty will always blow, regardless of natural, personal or professional variation. There is and will always be an absolute need to manage risks. ∞
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