The Official Magazine of AAPL May/June 2018
WHAT $1.3 TRILLION IN FEDERAL SPENDING MEANS FOR YOU MEZZANINE CAPITAL
HOW IT CAN HELP WIN NEW BUSINESS MARKETING
Jan Brzeski Bridging the Gap for Urban Renewal
ATTRACTING MULTIGENERATIONAL BORROWERS
Need funding? Find an ethical lender AAPLOnline.com/Member-Directory
LET’S TALK PRIVATE LENDING Members of the American Association of Private Lenders are the trend-setters in private real estate lending. From their voluntary adherence to a Code of Ethics to their knowledge of the private lending process, they are the gold standard for the industry. Activate your membership with the only national organization setting the professional standard for private real estate lending professionals. JOIN AAPL TODAY! • Join a viable network of industry experts • Get immediate recognition as an ethical professional • Have a voice in creating standards for the industry • Have access to exceptional professional development opportunities 2
07 WHAT'S CURRENT
Tr ending I ndu s t r y Topic s and N ew s Fr om A r ound
t h e Wor ld o f Pr i v a te L ending
10 LEGISL ATION
T he 2018 O mnibu s Bill by J ef f Levin
14 BUSINESS S TR ATEGY
14 L ending W i t hin t he Re s iden t ial I n f ill Space by B obby Mont agne
18 B r inging M ez z anine C api t al to t he Fi x & Flip M ar ke t by J onathan B ur sey
22 MANAGE & LEAD
22 M ar ke t ing to M ul t iple G ener a t ion s by Ruby Key s
34 W her e T her e's Smoke. . . by James Har t
38 Simple Way s to T hwar t E mployee Tur nover by Cher ie Ziegler
42 T hink B e f or e You Dele te by Chr is sey B reaul t
26 LENDER LIMELIGHT
26 Do Your Job! wi th Jan B r zesk i
32 C A SE S TUDY
B ung alow B eau t y
46 IR A APPROACH
A l ter na t i ve s W i t hin t he A l ter na t i ve s by Clay Malcolm
6 Way s to I mpr ove Your Fund by Kevin K im
56 INVES TOR PERSPEC TIVE
E x per ience M a t ter s by Abhi G olhar and Kenneth Igwe
60 ALTERNATIVE ANGLE
H ow L egi s la t ion C an M ove Fin tec h I n to t he Digi t al Economy
by Rober t Greenberg
66 L A S T C ALL
Ad ver s i t y Fos ter s E n t r epr eneur ial Jour ney wi th Sus an Naf t ulin
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PUBLISHER'S LET TER
R. MICHAEL WRENN
NEW OPPORTUNITIES ARE BLOOMING
Chairman, Affinity Worldwide
Late spring and early summer is time for regeneration,
perspective. In the spirit that this time of year naturally
re-evaluation and new opportunity. It is a time for new
CEO, Affinity Worldwide Executive Director, AAPL
brings, this issue of Private Lender focuses on new ways
to lead your business and on emerging niche strategies
Editor in Chief, Private Lender Director of Marketing & Member Services, AAPL
Two pieces—the Lender Limelight column on Jan Brzeski
Senior Account Manager, AAPL
KELLY SCANLON Copy Editor
SPRINGBOARD CREATIVE Design
Chrissey Breault, Jonathan Bursey, Laura Chalk, Abhi Golhar, Robert Greenberg, James Hart, Kenneth Igwe, Ruby Keys, Kevin Kim, Jeff Levin, Clay Malcolm, Bobby Montagne, Susan Naftulin, Cherie Ziegler
COVER PHOTOGRAPHY Tom Vartanian
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.
Visit www.facebook.com/aaplonline or email PrivateLender@aaplonline.com.
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and the article by Bobby Montagne on infill development—
highlight the national trend toward redevelopment of urban areas, easing the
national home shortage while creating attractive homes for those who want to live
closer to work. To illustrate the unique opportunities and challenges that infill development can bring, we have also included a case study for a downtown Santa Monica, California, project.
Clay Malcolm continues to cover the trend toward leveraging self-directed IRAs for larger returns. Robert Greenberg writes about how Congress is striving for bipartisan legislation that covers the emerging fintech industry and provides insights into
how it allows traditional and private lenders to support one another. You’ll also find a thought-provoking perspective from Cherie Ziglar on why rewarding good employees quells high turnover, saves money and increases productivity. Chrissey Breault
covers social media strategy, and Ruby Keys offers strategies for marketing to multi-
generational borrowers. Kevin Kim and Abhi Golhar contribute articles that focus on the benefits of private lending and setting up processes to facilitate success.
This edition is rich with timely and valuable information. As always, we thank our contributors and readers, our community, for striving to find new and better ways to positively
impact the private lending industry. Let us all go forth, learn how to better ourselves and our businesses, and look for new opportunity while supporting one another.
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
Are you a lender looking to meet investors that can fund your deals? Are you an investor who is looking to find new business opportunities?
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October 16-18, 2018
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WHAT’S CURRENT TRENDING INDUSTRY TOPICS AND NEWS FROM AROUND THE WORLD OF PRIVATE LENDING FUND THAT FLIP HITS FUNDING MILESTONE
Fund That Flip has
crossed the $100 million
mark in loan originations. CEO Matt Rodak founded the company in 2015, and the company has
grown to 30 associates
and helped restore more than 400 homes in over
15 states. They’ve also
developed a proprietary technology designed to
provide both lenders and
borrowers with a first-class customer experience.
» Toby Newhouse
» Brian Murphy
CIVIC FINANCIAL SERVICES ADDS TWO KEY PL AYERS As part of their expansion plans, Civic Financial Services has added two
experienced industry professionals to their team. The company, founded in 2014, specializes in financing non-owner occupied investment opportunities. Toby Newhouse has been tapped to spearhead the private money lender’s
expansion into the Pacific Northwest, and Brian Murphy has been brought in to help scale multifamily lending.
Newhouse comes to Civic with 18 years of experience in the mortgage industry. He will serve as branch manager for Civic’s first Washington state location. The company’s expansion into the Northwest will begin in Kirkland, Washington, and continue to Seattle, Spokane and Oregon. Most recently, Newhouse served as a business development executive for Rain City Capital, a hard money lender based in Kirkland. On the multifamily lending side, Murphy is charged with growing Civic’s multifamily lending division to new levels. Murphy has more than 16 years of experience in the investment and lending arenas, most recently serving as senior vice president and managing director for Los Angeles-based Wilshire Finance Partners. CIVIC currently offers multifamily lending for up to 20 units and will be expanding this soon, with 19,000 opportunity properties already identified in the markets being served.
WHAT’S CURRENT TRENDING INDUSTRY TOPICS AND NEWS FROM AROUND THE WORLD OF PRIVATE LENDING GEORGE SMITH PARTNERS SECURES
FINANCING FOR SAN FR ANCISCO HOTEL George Smith Partners has secured $45 million in bridge refinancing for the
131-room San Francisco Proper Hotel in the city’s Mid-Market neighborhood. The flatiron building is located at 1100 Market St., at the triangle of McAllister, Market and Seventh streets. The new bridge loan will allow the borrower, Kor Group, to further establish the property as a luxury lifestyle hotel in San Francisco. The funds will replace an » Ron Fountain
URBAN MUTUAL GETS
existing construction loan and mezzanine facility. Malcolm Davies, Evan Kinne, Zack Streit, Rachael Lewis, Alexander Rossinsky and Minjoo Kim of George Smith Partners arranged the financing.
Ron Fountain has been
announced as president of Urban Mutual SPC, a
specialty wholesale provider of preferred equity and
mezzanine capital to fix and flip developers through
private money lender channels. Fountain is an attorney and accountant with more than two decades of executive
experience in the mortgage sector. Most recently he
served as president of ICG, a
multibillion-dollar originator. 8
FR ANKLIN TEMPLETON ACQUIRES DATA SCIENCE INVESTMENT FIRM
Franklin Resources Inc., which operates as Franklin Templeton Investments, has
acquired Random Forest Capital, an investment firm with expertise in data science and non-bank marketplace lending.
The Random Forest team will join the Franklin Templeton Fixed Income Group investment team. Terms of the transaction were not disclosed. Jenny Johnson, president and chief operating officer of Franklin Templeton Investments, said, "The Random Forest team will complement our existing fundamental fixed income research with their expertise in private lending and bring the capability to support the firm's broader information technology and data science initiatives."
PEERSTREET R AISES $29.5 MILLION; ANNOUNCES NEW HEAD OF COMMERCIAL REAL ESTATE
PeerStreet, a platform for investing in real
estate-backed loans, has closed a Series B funding round of $29.5 million. The round was led by World Innovation Lab. The raise will allow PeerStreet to broaden the type of real estate loans it cultivates from its network of lenders and hire more talent.
SHARESTATES L AUNCHES NEW ONLINE PORTALS
The Series B follows another year of high growth for the company. It more than doubled volume from the previous year and is on
Sharestates, an online real estate investment platform, has launched new online user portals designed to optimize the real estate investment pro-
cess. The online portals cater to lenders, borrowers and third-party vendors
track to continue that trajectory. It has also significantly enhanced its suite of tools and
involved in the developmental stages of obtaining and procuring loans.
analytics for lenders over the past year and
The portals offer investors a streamlined “one-stop shop” aimed at simplify-
released a short-term investment product for investors seeking greater liquidity. PeerStreet has also hired Greg Galusha to
ing the money lending and borrowing process. The portals include interfaces for borrowers, brokers, bank attorneys, settlement agents and title companies. The company plans to add interfaces for inspection companies
lead the company’s commercial real estate
and appraisers in the coming months.
division. He will be based in the firm’s
The portals connect various systems and functions of a site, such as under-
Los Angeles headquarters.
writing and processing, that are normally independent of each other. Additionally, the portals will host all activity, documents and updates in one place.
PRESTIGE PASSES $100 MILLION IN
COMMITMENTS FOR SME LENDING FUND Prestige Funds’ Commercial Finance Opportunities Fund (CFO) has passed
$100 million in assets.
“Demand for private lending strategies is picking up around the world, and the growth in CFOs’ assets is testament to this,” said founder Craig Reeves. CFO is diversified across multiple sectors. The fund draws on the experience of nearly 100 people who are a part of Nucleus Commercial Finance, which is part-owned by Prestige. The fund’s investment portfolio runs to about 200 underlying loans, with a returns target of 6-7 percent and volatility of 1 percent. The fund carries no performance fee. MAY/JUNE 2018
The 2018 Omnibus Bill What $1.3 trillion of federal spending can mean for you by Jeff Levin
While the president's budget blueprint from last year proposed dramatic cuts in discretionary spending, the March 2018 omnibus budget signed into law was remarkable both for its high price tag and for continuing many status quo priorities set by the Obama administration.
The massive $1.3 trillion spending bill funds the federal government through Sept. 30. For executives in the construction services, development and private lending industries, it offers important funding initiatives that have been maintained and, in some cases, expanded. Some of these initiatives can be tapped for exciting private/ public partnerships. Two of the best hunting grounds for these federally funded projects are the Department of Transportation and the Department of Housing and Human Services (HUD).
WHAT’S OMNIBUS ABOUT? Before we delve into the opportunities in the Omnibus Bill, a little background on the federal budget process is warranted. Congress passed the omnibus federal allocation bill due to the bitter partisan battles over
fiscal spending. It’s a political shortcut from the normal appropriations process. The normal process (called “regular order”) is supposed to begin each February, with the president initiating a budget for the following year. In theory, it should move to the House and Senate, where each chamber passes an appropriations bill detailing major allocations. Next, a conference committee of House and Senate members irons out cross-chamber differences, and then appropriations subcommittees sub-allocate money to specific programs. Each sub-allocation is supposed to have hearings and votes as it winds through subcommittees, full committees and the floors of the House and Senate. Differences between the two chambers’ versions are to be resolved through joint conferences. Then a final bill—following hundreds of hours of public hearings on the finer program details— should reach the president’s desk by October.
Due to continuous infighting, regular order has been ignored for years. Instead, the government has relied upon the omnibus bill, which completely skips the committee-level work. More than 2,000 pages of sub-allocations were hurriedly cobbled together in closed-door meetings by party leaders and staffers and bundled into floor votes for the House and Senate. After a quick conference between the two chambers, the omnibus bill was sent to the president, chock full of so many surprises that the president threatened to veto his own party’s work. He did reluctantly sign it. Many of these surprises offer significant opportunities for public/private partnerships.
TIGER PROGRAM TRIPLED Huge funding programs are available for private/public partnerships with the Department of Transportation. One of the largest is called the TIGER program, short for Transportation Investment Generating Economic Recovery. This funding contributes to public/private infrastructure projects such as toll-roads, bridge repairs, earthquake-related improvements and railway projects. Although the president’s plan was to eliminate TIGER
funding altogether—despite other promises around funding infrastructure projects—the Omnibus Bill tripled it to $1.5 billion through Sept. 30. Private companies, including developers, construction companies, service providers and others, can partner with public entities to apply for TIGER grants. Check for existing projects being applied for by state and local governments, transit agencies, port authorities and metro planning organizations. Also, a significant portion of the TIGER funding was allocated to Native American tribal lands. Recent awards are shown on the U.S. Department of Transportation’s website. According to the government, the primary criteria for receiving TIGER grants are considerations related to safety, state of good repair, economic competitiveness, quality of life and environmental sustainability for each project. Secondary criteria include innovation and partnerships. One still-unexplained surprise is that the Omnibus Bill increased the percentage of TIGER funding that must be set aside for rural projects. This used to be 20 percent of allocations, but the Omnibus Bill
requires it to now be 30 percent. No one is quite sure who made the change. This means there is nearly half a billion dollars available to be spent on public/ private projects for rural towns and counties over the next six months that was pretty much unanticipated. So, if you primarily focus on urban projects, it’s worth spending some time to investigate opportunities out in rural areas. Check the census bureau’s site for counties with fewer than 85,000 residents. A second surprise of the Omnibus Bill is that it now allows grant money to be used to pay for the earliest stage of project planning and design. This was intended to help smaller public/ private partnerships that don’t have sufficient capital to get through the planning stage. So, developers and construction companies should keep a sharp eye out for programs, particularly in the rural counties, that can get off the ground with funding from a TIGER grant.
OTHER TRANSPORTATION GOODIES Other gems in the Omnibus Bill include significant support
FUNDING FOR HUD
“The $1.3 trillion Omnibus Bill is filled with intriguing opportunities...” for public/private initiatives in the transportation infrastructure sector: F ixing America’s Surface Transportation (FAST) Act // This is funding for highway and transit development, and it is fully funded up to its previously authorized spending level. Construction companies working on various federal- and state-level projects are breathing a sigh of relief. Just weeks before the Omnibus Bill passed, things appeared to be going the opposite direction. But rather than find some programs to cut, Congress fully approved $55.6 billion to cover prior commitments. The largesse went even further—the funding was supplemented with an unanticipated $3.4 billion more in general funds. These are split approximately 75 percent for highways and 25 percent for other transit.
S tate-level funding for transportation projects // Nearly $2 billion of new highway funds will
be distributed at the state level for the construction of highways, bridges and tunnels. The Omnibus Bill’s new $834 million for transit will be distributed through existing formula and discretionary programs.
I nfrastructure for Rebuilding America (INFRA) grants // These grants, which are designed to support major freight investments, got a significant boost. INFRA grants are focused on “shovel ready” projects in which a local sponsor is significantly invested and ready to start construction. Eligible INFRA project costs may include reconstruction, rehabilitation, acquisition of property (including land related to the project and improvements to the land), environmental mitigation, construction contingencies, equipment acquisition and operational improvements directly related to rail systems.
The HUD nabbed a 10 percent increase in its total budget through Sept. 30. HUD public/ private opportunities have certain advantages over traditional projects. Qualifying HUD projects can provide developers with access to a flexible source of long-term debt to support challenging capital structures. HUD’s tax credit incentive projects work a little differently, but also have significant perks. Developers can sell the tax credits they earn for building these projects to institutional investors. Spread over 10 years, tax credits can nearly equal the entire cost of the project. For example, if an equity investor puts in $10 million in capital over 10 years, they can effectively recoup $10 million in credits, plus gain additional tax benefits. Meanwhile, the developers can earn a developer fee of about 10 percent of the project cost. Specific programs that will see an infusion of money from the Omnibus Bill include: C ommunity Development Block Grants (CDBGs) // Developers should pay attention to the $300 million increase in funding for CDBGs. For example, Section 108 of the CDBG
program offers loan guarantees for economic development, housing rehabilitation and medium and large-scale development projects. Loans typically range from $500,000 to $140 million, depending on the scale of the project or program. They can be combined with private capital and private financing. Section 108 financing offers some unique benefits, like spreading out project costs over time due to flexible repayment terms, while offering lower interest rates than you can get from non-public debt sources. S ection 202 Housing for the Elderly // This is funded at $678 million, which represents a major increase from the $502 million for fiscal year 2017. This appropriation sets aside $105 million for new Section 202 construction and project-based rental assistance, which represents the first significant amount of new construction funding since 2011. H OME Investments Partnership Program // This program is funded at $1.36 billion, up from $950 million in fiscal year 2017, which represents an increase of more than $400 million and the highest funding HOME has seen in seven years. This program pushes federal
block grant money to state and local authorities to support new low-income housing projects. T he Project-Based Rental Assistance (PBRA) Program // The program will receive $11.5 billion, up from $10.8 billion in fiscal year 2017. PBRA funds Section 8 housing assistance payments to owners of multifamily rental housing. The rental assistance makes up the difference between what a qualifying low-income household can afford and the approved rent for housing in a multifamily project. When PBRA started, the assistance was provided for new construction or the substantial rehabilitation of buildings. Today it’s only eligible with existing housing. While funding is no longer available for new builds, if you own or want to acquire property that’s already approved for Section 8 assistance, you can rely on federal support to remain in place this year. T he Tenant-Based Rental Assistance (TBRA) Program // The program will receive $22.015 billion, up from $20.292 billion in fiscal year 2017, a $1.72 billion increase. TBRA
programs subsidize individual households rather than projects. However, if
you own a rental property with qualifying tenants, the TBRA programs provide guaranteed payments to make up the difference between the amount a household can afford to pay for housing and the local rent standards. Other TBRA programs can help tenants pay for costs associated with their housing, such as security and utility deposits. HUD-supported low-income housing may not be as sexy as the newest high-density mixed-use project, but they certainly can produce a great deal of value.
Public/private projects can be a lucrative opportunity for construction companies, developers and other business providers. Even private lenders can find a seat at the table when it comes to complex capital structures that may need a combination of financing sources. The $1.3 trillion Omnibus Bill is filled with intriguing opportunities, particularly within the Departments of Transportation and HUD. With a little homework, exciting and innovative projects can be brought to life, making a difference both for your organization and for your community. ∞
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.
BUSINESS STR ATEGY
LENDING WITHIN THE RESIDENTIAL INFILL SPACE Offering a menu of tailored loan types and structures is essential to winning these deals. by Bobby Montagne
“Buy land, they’re not making it anymore,” Mark Twain famously said. This sentiment is perhaps most appropriate in U.S. cities and inner suburbs where land is increasingly scarce.
In the city of Alexandria, Virginia, a suburb that borders Washington, D.C., there has been one available residential building lot in the entire city limits since 2016. One. According to March 2018 CoreLogic Case-Shiller data, the record-low housing supply throughout the country continues into 2018. This housing shortage, coupled with rising prices, makes meeting housing needs even more challenging across the country. This is where infill development comes in. Widely defined as
developing or revitalizing properties within existing urban areas, residential infill development projects refurbish vacant and blighted properties as well as those simply in need of renovation. Private lending fits into this space perfectly, providing the capital to renovate these homes as well as creating livable spaces where they are needed, all within an urban core that is close to jobs and retail. These projects often have the added benefit of increasing density (i.e., creating a rentable unit in a basement, subdividing a lot to add an additional house or converting a row house to two
condominiums). Though they all involve properties in cities or inner suburbs, not all residential infill development projects are the same.
BUY FOR 10, FIX FOR 5 AND SELL FOR 20 Many residential infill projects involve straightforward fix and flips in up-and-coming neighborhoods. We use a simple formula when analyzing these fix and flip deals: buy for 10, fix for 5 and sell for 20. This
“Widely defined as developing or revitalizing properties within existing urban areas, residential infill development projects refurbish vacant and blighted properties as well as those simply in need of renovation. Private lending fits into this space perfectly...”
is an easy ratio to explain to borrowers as they search for potential projects. The formula works whether they’re buying for $200,000, fixing for $100,000 and selling for $400,000 or buying for $3 million, fixing for $1.5 million and selling for $6 million.
Deals that fit this ratio provide roughly 25 percent gross margin to the borrower, a safe level of lender exposure and high potential borrower ROI. Assuming the borrower puts 20 percent of the acquisition price into the deal in equity, he or she can receive an ROI of 100-200 per-
cent, depending on the length of the renovation. As lenders, we want borrowers to understand and then undertake profitable projects. A positive borrower experience with regard to knowledge as well as ROI will keep borrowers coming back for additional loans.
While these straightforward fix and flip deals are common in the private lending space, it’s important to be agile and knowledgeable enough as lenders to finance the more complicated deals as well. Residential infill markets can be especially complicated, where added
BUSINESS STR ATEGYÂ
density as well as zoning and use changes are common.
CONDO CONVERSIONS Condo conversions are increasingly popular in the Washington, D.C., metro area as well as many other older cities with a housing stock that includes an abundance of aging row houses. When the buy prices in gentrifying neighborhoods continue to increase, the profitability of a simple fix and flip project is reduced for real estate
investors. With the buy higher than desired, construction costs relatively fixed and the prices of renovated units not rising exponentially, the profit margins for flippers are squeezed. One good option to increase profits on the purchase of an urban row house is to convert it into two condo units. Instead of buying for $550,000, renovating for $300,000 (not including loan costs) and only being able to sell for $950,000 (a deal that most private lenders wouldnâ€™t do and most investors shouldnâ€™t do), a flipper
can buy for $550,000, renovate for $400,000 and sell two units for roughly $600,000 each, or a total exit price of $1.2 million. While the potential profit is very enticing, the complexity of the process scares off many real estate investors. Frequently, the condo conversion involves more complicated construction: adding another level, digging out the basement or adding an addition off the back. However, the most difficult part of the process is the actual zoning approval and condo registration
Our knOwledge and experience
sets us apart 16
process, so this type of project is not for the first-time real estate investor. The permit process is lengthier and more complicated than a traditional fix and flip. There are often zoning or neighbor issues too, and complying with the many rules about preserving existing architectural features such as mansard roofs are more challenging when adding another story or another entrance. After obtaining needed zoning approvals, there are other considerations the flipper cannot
ABOUT THE AUTHOR
BOBBY MONTAGNE Bobby Montagne is the
overlook, including providing required parking for the new number of units, providing a sprinkler system and increasing the water and gas capacity needed because of the additional bathrooms and kitchens. The flipper must also go through a two-phase process to obtain a certificate of eligibility to convert the use of the property, obtain a tax exemption for the subsequent sale and then register the condo. Beyond just registering the name, the flipper must create a condo budget with estimated repair value and escrowed amount of shared maintenance expenses over the first 12 months of operation and be prepared to contribute or get a bond for 10 percent of the construction costs that will be set aside for two years after the last condo sells. First-hand knowledge of and experience with the condo conversion process is extremely valuable information to provide
to your borrowers when they undertake this challenging, yet potentially very rewarding, type of renovation project.
BIFURCATED LOANS Condo conversions as well as other larger, more complicated deals often require some alternative loan structuring to win the deal and benefit the borrower. Many of these deals involve quick buys, and then long delays for plans, permitting and zoning before any construction can begin. Paying interest on the entire loan from day one is not often desirable or possible for the borrower from a cash-flow perspective. One solution is bifurcating the loan, or breaking it into two parts. The first phase is for acquisition, soft costs such as architect and permit fees, and possibly demo. After the plans are approved and permits are received (often 4-6 months later),
the second phase of the loan is funded, which includes the capital for construction. This type of structure also provides less risk for the lender, because the lender’s exposure is increasing with the project. As the property goes through the permitting and entitlement process and increases in value, the lender’s loan amount can also increase. Rather than having to stretch the LTV or use an ARV that really isn’t yet accurate, the two-phase process is beneficial for both the lender and the borrower.
founder of Walnut Street
Finance, a leading private lender in the mid-Atlantic
and member of the American
Association of Private Lender’s Education Advisory Committee. Walnut Street Finance
is the sponsor of the Walnut
Street Finance Fund II LLC, a $30 million private lending
fund offered under SEC Rule 506. It allows investments as
low as $50,000 and provides a preferred dividend of 9 percent with no fees.
In cities with thousands of similar row houses, not all deals look alike. Even when operating almost exclusively within the residential urban infill space, offering a menu of tailored loan types and structures is essential to winning deals. Having the agility and expertise to fund myriad projects sets successful lenders apart. ∞
BUSINESS STR ATEGYÂ
Bringing Mezzanine Capital to the Fix & Flip Market Mezzanine capital can help private money lenders win new business. by Jonathan Bursey
ezzanine capital, aka “Mezz,” is essentially preferred equity or second mortgage debt that is needed to bridge the gap in the capital stack between first mortgage debt and sponsor (developer) equity.
Mezzanine financing is most commonly used by developers in the commercial and new construction residential real estate development marketplace. They use it to secure supplementary financing for development projects—whose funding requires
a substantial equity contribution (e.g., greater than 25 percent of the project cost). Investors who use mezzanine financing may be able to procure developments without using much or any of their own funds, because mezzanine capital may fund up to 100 percent of the total project cost as a blended cocktail with the first mortgage. It is generally known as an institutional debt instrument recognized as “third-party equity.” That’s because it is often collateralized
BUSINESS STR ATEGY
by the property owner pledging equity in the entity to a thirdparty investor. In other words, the instrument holder, an investor, will receive a portion of the profits from the gain on sale when the asset is sold. The investor may also receive a portion of the rental income if the asset is held. It can also be collateralized by a second mortgage and receive an interest rate, although some first mortgage lenders do not allow any subordinate liens on the property for a variety of rea-
sons. Placing one can trigger an immediate technical default by the borrower. A tri-party intercreditor agreement is usually required to overcome the first mortgagee’s objections. The interest rate, or shared appreciation percentage, that mezzanine capital commands ranges widely within the industry. For larger projects, where the mezzanine portion is in the millions of dollars, a preferred interest rate between 8-18 percent is common. It can be more, depending on the
EQUITY PARTICIPATIONS | TRUST DEEDINVESTMENTS AVAILABLE OPPORTUNITIES
leverage and risk. For smaller projects, mezzanine capital is much less institutionalized, meaning that specialist mezzanine financiers operating in this space have a wider scope of what is deemed equitable; therefore, the interest rate and/or shared appreciation (profit split) can be negotiated with the sponsoring developer. Another interesting point relating to the instrument having debt-like characteristics is that often the interest rate on the note is in line with federal minimums—the Applicable Federal Rate—which is deferred until maturity/exit and deducted from the monies owed according to the shared appreciation agreement. One of the most important reasons to include debt-like characteristics is to make the note saleable on the secondary market. Boutique investment firms that are focused on the deployment of preferred equity and mezzanine capital look for opportunities to provide liquidity to developers and investors who need to fill the “financing gap” in residential real estate development projects, including existing property improvements (fix and flip rehab projects) and
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.
new ground-up construction. Preferred equity and mezzanine products can greatly complement private money lenders’ first mortgage loan programs by allowing both the developers and the lenders to affect more projects—permitting developers to spread their own funds across more projects, and thus achieve higher overall profits.
EXPANDING DISTRIBUTION CHANNELS As stated, providing preferred equity or mezzanine capital to a development on a one-off basis benefits both the developer and the private money lender by enabling existing deals to close that otherwise have a shortage of capital. An even more strategic objective is to enable experienced builders and developers to expand their business by taking on additional portfolio projects, when they have the necessary construction infrastructure and excess deal flow to do so, but are cash constrained. The goal is to take fix and flip developers completing five projects a year to 10, and those completing 20 projects a year to 50. A survey of private money lenders across the country with volumes of $5-20 million per
“... providing preferred equity or mezzanine capital to a development on a one-off basis benefits both the developer and the private money lender by enabling existing deals to close that otherwise have a shortage of capital.” month indicated that if they were able to offer a preferred equity or mezzanine capital product up to 100 percent of the equity stack (100 percent combined LTC/LTV) for their most preferred Developer clients, they would be able to increase their monthly volume by an additional 38 percent. They noted that if they had an equal or better first mortgage product as their competitors, they would experience an increase in loan volume based solely on marketing the product to mid-volume professional developers, with a view of pre-qualifying them for the approved future projects list. Saving a developer considerable time and angst searching for equity capital from friends, family and other limited partners is a great service. It can reduce developer headaches by allowing developers to work with one sophisticated insti-
tutional partner. And in many instances, it can allow developers to retain more of the profit than bringing in an alternative third party that is a less sophisticated investor. Depending on the preference of the first mortgagee private money lender, a mezzanine financing product can be cleared to fund (via tablefunding arrangement) according to a program matrix and seller’s guide. Or, it can be kept separate and funded directly by a specialist mezzanine financier working in unison with the primary lender.
INNOVATIVE BRIDGE FINANCING PROGRAMS Some investors will also provide preferred equity in the form of true bridge financing to projects where there is a short-term shortage of capital—whether
the gap is in the initial stages of opening escrow for the earnest money deposit or due diligence “soft cost” requirements—or to projects involving timing delays with construction drawdowns, construction overruns, consultant costs and other time-sensitive special circumstances. Innovative programs around circumstances like these fill a critical gap in the developer and investor lending marketplace. Bridge financing solutions offer quick-and-easy financing for real estate investors and developers who need immediate capital for a variety of unforeseen circumstances that require creative, decisive and rapid execution. Essentially, they are a short-term project financing solution, pending the arrangement and approval of alternative funding that will see the project through to completion. The capital advanced by bridge financiers is senior to the developer’s own capital, but junior to any existing first- and second-lien mortgages.
ABOUT THE AUTHOR
JONATHAN BURSEY Jonathan Bursey has spent
several years in the finance field in global markets.
Currently, he is responsible for business development
at Urban Mutual, a boutique investment firm representing family office, private
equity and institutional funds with offices in Century City, Manhattan Beach and West Hollywood, California.
He attended the Business School at Nottingham
University where he studied finance, accounting and
management, receiving the second highest grade.
A unique blend of valueadded developer- and investorcentric products can help private money lenders differentiate themselves from their competition and win new business they could not have otherwise acquired. ∞
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MARKETING TO MULTIPLE GENERATIONS by Ruby Keys
Reach various generations—especially millennials—with your message.
Mortgage professionals are typically savvy marketing people. They have to be. However, today there is somewhat of a disconnect in the way mortgage services are marketed across multiple generations. It is well-known that millennials are a buying force in real estate, but targeting this generation while ignoring others could be a profit killer. So, how are you structuring your multigenerational marketing approach?
GENERATIONAL MARKETING Generational marketing is merely an approach to customer relations management, product presentation and communication that recognizes different generations as requiring separate marketing models.
Naturally, multiple generations make up the current real estate customer base, and they are uniquely different and require a marketing approach that matches their desires, beliefs and mindset. The sidebar on p. 23 explores the characteristics that define each generation.
HOW GENERATIONS COMMUNICATE Communication plays a key role in any sales operation, and the more you refine your communication techniques, the more business you will create. It sounds strange, but with all the options available today to reach your customers and prospects, the question is still how to reach them. Recent surveys have shown that although most businesses communicate via
telephone, there is a significant segment of individuals who prefer communicating online. Learn to reach prospective clients via email, texting, Facebook, Instagram, Twitter and other social media platforms. This approach will allow you to contact more prospects and give customers a variety of options for communicating with you. A Forrester Research Survey showed that for individuals preferring online communication, Generation Y was the largest group at 44 percent, followed by Generation Z at 41 percent and Generation X at 39 percent. Only 27 percent of Baby Boomers preferred online communicating over interacting by phone. The survey demonstrates that many consumers prefer to be contacted and communicated with using email or text. If your business does not use this communication strategy, you could
HOW GENERATIONS COMMUNICATE be missing out on a large segment of the real estate market. The solution is to implement a multichannel communication mindset and policy.
GROWING UP IN THE AGE OF THE INTERNET Millennials grew up in the age of technology. They entered their teens during the tech boom of the 90s. They most likely don’t remember not having the internet and may well be the most technically diverse population in America. Marketing to this group is a wholly different endeavor. Both millennials and Gen Zers grew up surrounded by technology and embrace it in their daily life. By the time most of them had reached high school, their education had evolved from written books to online studies. They were immersed in the technology realm by necessity, but they quickly learned that understanding and mastering technology was not only recommended but essential to success in today’s workplace. They communicate faster and more efficiently than previous generations, and they are ready to take on the next big technological advance. By using more online communication channels, you will be
able to relay information more quickly and be readily available to answer questions or address concerns with these generations. Although the older generations may prefer to converse by phone or in person, the largest segment of homebuyers and borrowers now relies heavily on the internet for their shopping, evaluation and navigation of lending and real estate offerings. Mobile technology has made tremendous strides in the past 10 years. With their handheld devices, people can now shop, work, communicate, sign documents and interact quickly from almost anywhere. By taking advantage of this communication revolution, you can expand your reach and provide your clients with the most up-todate information in the quickest possible format.
MILLENNIALS & BRANDS Millennials have shown that they have a dedicated loyalty to a brand. Social media can help develop and deliver a brand millennials will want to participate with. Whether
Baby Boomers (1946-1964) This generation came of age in the 1960s. They are typically free-spirited and experimental individuals with a focus on self-improvement through exploring nontraditional techniques and values.
Generation X (1965-1979) This group is made up of independent, skeptical, entrepreneurial, careerfocused individuals who came of age during the early days of the internet revolution. They went through their youth grappling with the emergence of AIDS, rising divorce rates and the fall of communist Russia. Generation Y (1980-1994) This is the millennial generation. It’s a group that has emerged as tech-savvy, environmentally conscious and socially liberal. They grew up with the emergence and expanded use of the internet and are responsible for the explosion of social media. Generation Z (1995-2018) This group, known as the “Next Generation” has never known life without computers or the internet. They are typically hyper tech-savvy, social and brand aware, family-focused and highly educated. They had to mature during the war on terror. MAY/JUNE 2018
MANAGE & LEAD
it is educational, social awareness or merely a feature article about their age group, a marketing campaign that resonates with this group will elicit participation. Most millennials are looking for the following: Trustworthiness // Millen-
nials look to build trust with whom they do business. So, pursuing trust with millennial clients from the beginning is paramount to a continuing relationship. Upfront honesty and sincerity, truthfulness in the process, and finishing what you begin, will help lock up a customer for life. Online Presence // Millenni-
als do everything online. They work online, they shop online and they pretty much live online. A mortgage company with a strong online presence and brand, coupled with online processing and customer service, will earn the respect and the business of this generation. Peer Support // Based on the
popularity of Yelp and online reviewers, millennials value the input of their peers on all types of services and products. Mortgages are no different. When the time comes to purchase a
property with a mortgage, this demographic will research, review recommendations and ask friends. A mortgage company with strong performance reviews will rise in rank. Social Consciousness // Grow-
ing up during the war on terror, and beginning their careers during the recession, millennials have a keen awareness of how small actions affect world events. They seek out and do business with companies that have a social conscience. Exceptional Communication //
Raised on technology that allows people to communicate with anyone instantaneously, it is no wonder that millennials want to converse with their mortgage lender in much the same way. More than communication, for the most part, they want to be involved in the process. Providing up to date and accurate information will go far in earning their trust.
HOW TO MAKE GENERATIONAL MARKETING WORK Millennials are the most prominent generational group since World War II. They will become the largest homebuying demographic by 2025. They are loyal but will also move on if they do not feel their needs are being met. Real estate professionals must understand that the younger generations are no different from those that came before them in that they expect customer service, to be respected and to be valued as a customer. While the approach to marketing may be slightly different for each generation, the message about what you provide should remain the same—effective communication, clarity, transparency, responsiveness and finding the right solution. These elements transcend generations and will help you resonate with more prospects and earn business from all generations of borrowers. ∞
ABOUT THE AUTHOR
RUBY KEYS Ruby Keys is the marketing
and media director at Geraci LLP. A graduate of Vanguard University with a degree in marketing and public
relations, she joined Geraci to promote all aspects of
the firm’s services and grow Geraci Media. Ruby focuses
on the marketing and communication details at Geraci LLP, including planning all Geraci Media’s corporate confer-
ences, overseeing business
development and managing the overall structure of the loan originator magazine, Originate Report.
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Call Go Media today for a free consultation (470) 878-2000 or visit us online at www.TryGoMedia.com MAY/JUNE 2018
LENDER LIMELIGHTÂ WITH JAN BRZESKI
DO YOUR JOB!
Thatâ€™s the mantra Jan Brzeski has followed in his career, and itâ€™s led him to success as an entrepreneur who revitalizes urban communities. by Laura Chalk MAY/JUNE 2018
LENDER LIMELIGHT WITH JAN BRZESKI
Jan Brzeski is the managing director and chief investment officer of Crosswind Financial and Arixa Capital Advisors. Brzeski has learned powerful lessons from life’s ups and downs, not only from his extensive background in investment and finance, but also as an entrepreneur who had to start over again after the internet stock market bubble burst in 2002. He shares those lessons with Private Lender and discusses the national trend toward—and his company’s focus on—urban redevelopment.
Have you always been interested in real estate investing, or did your interest grow out of your economics studies at Oxford University and experiences in media and finance?
In 2000, my college roommate and I decided to sell a business we had started in 1994. I call this experience “the rollercoaster ride” because when we sold the business, it looked like a big success. But we sold for stock to a company that encountered big problems when the
first internet bubble burst. I eventually had to lay off all my employees. Then I got laid off as the acquirer scrambled to cut costs to survive. After I got laid off in 2002, I decided to look for a company in Los Angeles that would allow me to learn the business and ultimately acquire equity or buy the business. I met a very established real estate investor and went to work for him. I found I really enjoyed real estate because it combined my passion for entrepreneurial business with a financial framework that made things a little more structured and predictable. I didn’t end up taking over that family business, but I did find niches where I could make investments and ultimately launch our fund business.
Why does your company focus on smaller urban renewal projects? I started Arixa Capital in 2006, but until 2010, I mostly worked with the founder of the family-owned real estate business that I had joined in 2002. In 2009, I identified the opportunity to make bridge loans to investors who were purchasing homes from banks and at foreclosure auctions. I liked the yield and mitigated risk on these loans versus buying distressed real estate.
I discovered this niche because I had a home equity line of credit, and some of my contacts were having their home equity lines shut down by their lenders. I drew down my entire line because I thought I would need the money to take advantage of opportunities. I needed a place to put that money to earn some yield while I was looking for investment opportunities. It turns out that this interim strat-
they renovate and repurpose residential properties in coastal urban California neighborhoods. I really like the diversity and richness of our major California cities, so everything we do is interesting to me. Every property tells its own story, and I enjoy visiting new neighborhoods and seeing how they are evolving over time. (See p. 32 for an example of an historic property that Arixa funded.) In recent years, we have seen a national trend toward urban revitalization. What value do urban renewal projects provide to investors and to the community?
egy grew into Arixa’s focus as a business. We launched a fund to originate and invest in this type of loan, and the loan size, at the time, of well under $1 million per loan fit nicely with the capital I was able to raise from friends and former co-workers. I was able to raise $100,000 to $300,000 at a time, versus increments of millions at a time that were needed to sponsor larger investments.
Over the years, we’ve continued to lend to our base of borrowers as they evolved from doing distressed investing fix and flip loans to all sorts of redevelopment projects. We’ve focused on residential-oriented projects that includes projects up to about 25 units. We like urban markets close to the best jobs because I personally saw how much real estate values crashed in the downturn in secondary and
tertiary markets. As a lender, our focus is preserving capital. It’s a lot easier to do that in markets where the peak-to-trough value drop in the downturn was 25 percent, versus markets such as Inland California where it was 50 or 75 percent. Have you had a favorite investment project? I like all our investments! Our borrowers are very creative as
In urban coastal California, we have a major traffic problem. The freeways were designed for the 1960s. Today, we have passed the “tipping point”: Because of population growth, the freeways basically don’t function anymore. As a result, our historical solution to housing, which was to subdivide and develop land on the edge of the metropolitan area, no longer works. Young people realize there is no quality of life if your commute takes three hours out of every day. They are seeking ways of living closer to their jobs—ideally with a commute that avoids freeways altogether. Also, the city provides access to many amenities that people
LENDER LIMELIGHT WITH JAN BRZESKI
want. These factors help to explain the trend toward urban revitalization. At the same time, the supply of new housing close to the best jobs is restricted severely by the difficulty of getting projects approved and built in an urban environment. While some very large projects are being built, Californians are not generally used to living in very large buildings. Personally, I like lots of natural light and the ability to open my windows and have a deck for grilling and entertaining. Very large buildings such as high-rise apartments, which might work in New York, don’t naturally fit what most people are looking for.
» J an Brzeski discusses project plans with Craig Knight, owner of Vitruvian LLC. Arixa is providing financing for a property Vitruvian is developing at 954 5th Street in Santa Monica. (See story on p. 32.)
The largest need, in my view, is for lots and lots of smaller renovation and redevelopment projects. These projects are perfectly suited for nimble, smaller developers. These projects bring value to the communities where they are located and the residents who live there. They also provide good opportunities for investors who provide equity or debt to the up-and-coming developers who serve those niches. What personal setbacks have you turned into valuable life lessons or building blocks? I referenced the “roller coaster ride” of starting a business in
1994 with my college roommate, growing to 100 employees, selling it in 2000, and then seeing the acquiring company’s stock drop by 97 percent as the bubble burst. Having to lay off my employees was crushing. In 2002, I had to basically start my career over at age 36, with a wife, a child and a mortgage. It was very humbling. It helps me keep my eye on the ball every day. Have you had any mentors that have helped you professionally and personally? I have had great mentors since I got involved in real estate full time in 2002. My employer at that time, Sam Freshman of Standard Management Company, has mentored a lot of people, many of whom have gone on to do very well. I also really appreciate my relationship with Bob Barth, with whom we have a joint venture called Crosswind Financial, and with the founders of Loan Oak Fund. One great thing about the real estate business is that experienced people in our industry generally are open to meeting and sharing their knowledge. We are all trying to navigate that next market cycle as carefully as possible and avoid making unnecessary mistakes. What does success mean to you? Success starts with my family— being a good husband and father, son to my 93-year-old parents, and brother to my two
"I REALLY LIKE THE DIVERSITY AND RICHNESS OF OUR MAJOR CALIFORNIA CITIES, SO EVERYTHING WE DO IS INTERESTING TO ME. EVERY PROPERTY TELLS ITS OWN STORY, AND I ENJOY VISITING NEW NEIGHBORHOODS AND SEEING HOW THEY ARE EVOLVING OVER TIME." sisters. On the business side, I want to be able to keep working for as long as I can. My mother has stayed young for her age by constantly setting goals and working toward them, including playing tennis twice a week and doing art projects. I would like to keep working and building our company’s reputation, putting clients first and celebrating their victories. In the process, we’ll see how far our small business can go. Are you a goal-setter or do you have a master plan? I like setting goals for each year and having longer-term goals. Our five-year goal is to be the most respected non-bank real estate lender in California, in our market of smaller balance
loans. It’s ambitious because we have some great companies in our region. I am also pretty good at setting challenging, but achievable, longer term goals. However, I am pretty weak at operationalizing everything that needs to happen in between those two ends of the spectrum. For that, I need good people around me. Fortunately, we have a terrific team. How do you keep up to date on the economy and current events that may impact your business and investors? I read a lot. I also talk with a lot of successful people. I meet with business owners and investors several times every week, and
I try to listen carefully to what they are saying and seeing in the market. The difference between investment managers who survived the financial crisis with a good reputation and those who ruined their reputation lies in how carefully they paid attention to certain important details. We also regularly invite smart and accomplished people to give a talk to our entire company. I enjoy these talks and learn a lot from them. What advice would you give others starting a real estate investing business? Here are a few that come to mind: K now yourself, your priorities, your strengths and your weaknesses. N ever compromise on the character of the people you are going into business with. T ry to start something that can be profitable and grow from there.
are going well and try to be prepared to keep the ship upright for when they are going to go sideways. Recently I’ve started to appreciate the wisdom in Patriots head coach Bill Belichick’s mantra: “Do your job!” It kind of sums up everything in three words. What do you want your legacy to be? Being a good husband, father, son and brother are first on the list. Being supportive of my friends. Being a good leader for my company and a mentor to the next generation of people there. And being a valuable resource to people trying to move forward in our industry, helping them when I am able. ∞
ABOUT THE AUTHOR
D on’t get discouraged when you make mistakes.
What professional philosophy guides you? I’ve found that things go better when I don’t get too enamored with myself. Instead, I try to just be thankful for the things that
LAURA CHALK Laura Chalk is public
relations manager for Affinity Worldwide.
She can be reached at
(816) 398-4111, ext. 86172 or
CASE STUDYÂ BUNGALOW BEAUT Y
Bungalow Beauty Breathing new life into an historic bungalow
etting any new construction approved in Santa
Monica is very difficult.
Beach locations are coveted, yet approvals for building near the beach are hard to obtain. The property at 954 5th Street is just five blocks from the beach, and it comes with another challenge: retaining, moving and rebuilding the bungalow, which is on the Historic Register.
It takes a special kind of developer to take on such a project. A developer with the skills to carry out the work, but also one that has a passion for historic homes. It also helps when the funder sees the value of investing in urban renewal. Eric Fishburn and Craig Knight of Vitruvian LLC were able to buy the property at a price that made the project pencil out positivelyâ€”and they know their work on restoring the bungalow will have a positive community impact too. Their funding came from Arixa, a company with a history of helping to revitalize urban communities.
Client/Borrower // Eric Fishburn and Craig Knight of Vitruvian LLC Originally Built // 1908 (bungalow has an historical designation) Architecture // Craftsman Bungalow Location // 5th Street, just north of Washington Blvd., in North Santa Monica, CA Financer // Arixa Capital Advisors LLC Loan Amount // $4.75 million LTV // 52%, based on completed value of the project LTC // Approximately 75% Credit Score Considered // Both borrowers have good credit, but they prefer to
work with non-bank lenders in many cases to get higher leverage and to spend less time dealing with banks' reporting requirements and bureaucracy.
Borrower Experience Level // High. Both borrowers/partners have more than
20 years of development and construction experience.
Interest Rate // High single digits Length of Loan // 16 months, with two 4-month extension options
SUMMARY OF OPPORTUNITY The opportunity to create three new units on a property in the highly desirable and walkable area of Santa Monica is rare. The opportunity to also restore a century-old structure on the same property is even rarer. The demand for the units will be robust.
The project is complex, and few companies with the skills needed would take on such a project with only four units. Although the project was approved in 2008, the previous owners let permits expire. Plans were reapproved in August 2016. The project includes moving the historic 1,316-square-foot bungalow from the middle
to the front of the 7,484-square-foot lot, completely restoring it to like-new condition, and building the three new attached townhomes in the former backyard. The townhomes will each be between 1,700 and 1,850 square feet. In addition, there is an underground garage with eight spaces with direct access to all four units. âˆž
MANAGE & LEAD
Where There’s Smoke... Do your employees deserve extra vacation time for giving up cigarettes? by James Hart
In a lot of ways, quitting smoking is its own reward. But one company has found a surprising new way to incentivize employees to put away their cigarettes. Piala, a Japanese marketing firm, gives nonsmokers six extra days of vacation since they’re not taking time during the workday for smoke breaks. That’s roughly the amount of time an average smoker will spend on smoke breaks over the course of a year. The new policy has already had some success. Last fall, in the first few months after the rule was announced, four of Piala’s workers decided to quit smoking. Ever wonder how much time the average American workplace spends on smoke breaks? Halo Cigs, a company that makes e-cigarette and vaping products, conducted a survey of 1,000 people employed in an array of industries. Some industries came out a little better in the study than others. For example, the average smoker in real estate, rental and leasing goes for a smoke break for about 20 minutes on a typical workday, or 5.1 days over the course of a year. That looks pretty good compared to the technology field, where smokers might lose an hour and 21 minutes to breaks
in a typical day, or 20.5 days for the year. Those in the finance and insurance industry spend 20.2 days per year on smoke breaks.
U.S. TOBACCO USE, BY THE NUMBERS
BUT IS IT FAIR? Still, does six extra days of vacation sound a little too generous? In Halo’s survey, only 16.4 percent of smokers and 13.6 percent of nonsmokers thought it was fair to give nonsmokers six or more extra days off work. But many did think three to five days would be a good idea—specifically, 41.9 percent of nonsmokers and 28 percent of smokers. The survey also asked smokers how many vacation days they would want in exchange for quitting smoking. On average, they wanted another 11 days. Smokers who work in real estate said they would ask for 13 days in exchange for giving up cigarettes. There were some deep disagreements over whether smoke breaks themselves were fair. Only 25 percent of nonsmokers think the breaks are fair, while more than 80 percent of smokers do, Halo’s survey found. Piala introduced its new vacation policy partly because the nonsmoker employers were frustrated by how much time the smokers were taking for breaks. As the media reported,
of U.S. adults smoke cigarettes
of men are smokers
of women are smokers
16 million + Americans have a smoking-related illness
deaths per year are blamed on tobacco internationally
Source: Centers For Disease Control and Prevention, Society for Human Resource Management
MANAGE & LEAD
HOW OTHER EMPLOYERS HANDLE SMOKING
of companies allow smoking in the workplace
of those companies have rules governing smoking
limit the amount of smoke breaks an employee can take
the company operates from an office on the 29th floor, and the building’s designated smoking area is in the basement. So a typical break might eat up about 15 minutes. Of course, in addition to morale, there are other reasons why companies might want to encourage their team members to kick the habit. According to the Centers for Disease Control and Prevention (CDC), smoking-related illnesses cost the United States billions of dollars each year—in the form of nearly $170 billion for direct medical care and at least $156 billion in lost productivity.
HEALTHIER CHOICES 1 On average, smokers don’t live as long as non-
smokers do—life expectancy is about 10 years shorter, the American Cancer Society reports. If someone can quit smoking before they turn 40, they can erase about 90 percent of their odds of dying from smoking-related illness.
2 Former smokers often say their food tastes
better after they gave up cigarettes. Their skin is clearer, and their sense of smell is sharper, too.
3 Within 1 to 9 months after quitting, a smoker should see their coughing and shortness of breath diminish.
4 One year after quitting, a former smoker’s risk
of coronary heart disease is half that of a current smoker’s. Within 15 years, the risk is the same as it would be for someone who doesn’t smoke.
5 Risks of stroke and various cancers also decline the longer someone has given up cigarettes.
6 Prices vary from state to state, but a pack-a-day cigarette habit can easily cost more than $2,000 a year.
If you’re concerned about your employees’ health and want to help them quit smoking, your policies can have an impact. In 2009, the International Agency for Research of Cancer determined that workplaces with “no smoking” rules helped reduce how many cigarettes their smoking employees consumed. And there was strong evidence those policies contributed to other workers giving up smoking entirely. Instead of giving employees extra time off, employers can
incentivize different behavior by enacting “smoking surcharges,” as the Society of Human Resource Management puts it. For example, making smokers pay more for company-sponsored health insurance. About 45 percent of surveyed HR pros said their team members had started smoking less after that rule went into effect. Penalties aren’t the only way to get a result—you can also make a point of sharing information on why quitting is so beneficial. About 41 percent of HR professionals said their companies saw less smoking as the result of an information campaign. That’s one thing to remember about smoking. Quitting might be difficult on an individual level, but together, we can make great progress toward greater health. Back in 1965, more than 40 percent of American adults were smokers. Compare that to today, when approximately 15 percent of all U.S. adults smoke, according to the CDC. Of course, that’s still 36.6 million people, so there may just be room for improvement yet. ∞
MANAGE & LEAD
SIMPLE WAYS TO THWART EMPLOYEE TURNOVER How to retain your best employees— and even encourage them to recruit others like themselves. by Cherie Ziegler
Have you ever totaled the dollars you spend to advertise job openings? Or, calculated the time human resources and other management personnel spend to interview candidates—and then multiply that by their hourly rates? Have you considered the time it takes a new person to get up to speed and be efficient, accurate and fully productive—in terms of dollars?
Analysts estimate that replacing an employee can cost anywhere from four to seven times the annual salary of either the incoming or the outgoing employee. You would no doubt agree that the money could be better spent on other areas of your business. A certain amount of turnover is healthy for companies. New people can bring new thoughts, ideas and approaches that can help your company evolve and succeed. But a lot of turnover is needless—and preventable. Here are some ways to keep your current excellent employees happy, productive and looking forward to coming to work every day.
INCLUDE YOUR CURRENT EMPLOYEES Think about the excellent employees you currently have. They do a quality job, arrive on time, don’t take excessive breaks, leave on time, and if they’re exempt from overtime earnings, they often work during evenings and weekends—their brains don’t just stop because they aren’t in the office. They’re quite often thinking about improvements to implement, new projects or clients to pursue and hitting deadlines. Their work ethic makes them want to improve
“If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.” RED ADAIR
and succeed, which in turn helps the company improve and succeed. You would probably like to have more employees like that, right? Where do you find them, and how would you know whether a person has a work ethic and personality that fit in with the rest of the group, plus the skills and experience to do the job? You already have access to one source, and you probably don’t even realize it. Your current employees are a potential wealth of referrals for positions that you may have open. Not only do they know the company and what you are probably looking for, they will feel valued if you include them in the search. So, do you have an employee referral program, where your employees recommend their friends and family (if your company allows family members)? When you interview people, are you more eager to speak with people who were referred by someone you already know and trust, or are
you just fine with a complete unknown? You call references, right? Are those people you know, or are they strangers, whose word you might not be able to trust? Rewarding your current employees to help bring in people who are like-minded and a good fit not only makes the employee feel good (they helped the company and got a monetary reward to boot!), but it can help keep recruiting costs down because you may end up filling the position based on word-ofmouth alone. (If your company is a government contractor, has a union presence, or other requirement that open jobs be advertised, you will not totally escape this expense, but you can possibly lower it when you have the assistance of current staff.) Including current employees will show them you value and trust them, which can foster their loyalty to your company.
CAREER PATH Do you give your employees a career path to follow? Or, do you think people don’t want to advance in their careers and should be happy to stay in the same job for years on end, earning only the minimal increase each year and never being allowed to progress up the ladder? (There are people who don’t want to change jobs and want to be left alone to do what you hired them to do—that is fine for some, but not for everyone). When you started out in the workplace, did you have dreams of doing something bigger than what you were first hired to do? Were you loyal to the company that gave you the opportunity to try different jobs, expanded your knowledge base and possibly helped with the costs of a formal education that put you in a position for your next job? Creating the succession plan, largely from within, makes sense on so many levels. You already know these people, how they fit into the organization, and their work ethic and values. If they are contributing
MANAGE & LEAD
“Analysts estimate that replacing an employee can cost anywhere from four to seven times the annual salary of either the incoming or the outgoing employee.”
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to the vision you have for your company, you likely want to keep these people happy, right? As you assess the needs of the organization and compare them to the abilities of your current staff, begin drafting an outline of career paths for your employees. Determine what additional training, experience and/or education they might need to be ready for their next step when the time is right. When you communicate these plans to your employees, the result will be resoundingly positive,
and they’ll want to know when they can start. Change can take people out of their comfort zone and make them nervous. However, when the change is benefiting them, and they can understand the reason why the change is taking place, they tend to embrace it. People don’t necessarily want to leave your company, but they typically do so to gain a promotion, experience a new challenge, interact with or report to other people and, yes, sometimes for more money.
ABOUT THE AUTHOR
CHERIE ZIEGLER Cherie Ziegler has
more than 25 years of experience in human
resources across multiple industries, including
restaurants, engineering consulting, mining and
DON’T BE STINGY WITH PAY How much is any particular job worth to your company? What is the standard annual increase you budget for—is it 3 percent? 5 percent? Is it based on what other companies pay for similar positions? Do you use professional salary surveys to gauge the appropriate ranges, or do you just pick a number? If your current employees were to leave and you had to look outside the company for a replacement, would you offer the same amount that your current employee was paid, or would you accept the possibil-
ity that you might need to pay more to get a qualified person to accept the job? If you’re willing to pay that much more to a stranger, why would you not pay that to a good employee you already know and might have future plans for?
to get up to speed and perform at the predecessor’s level? All of these can be translated into dollars, but employers don’t always take them into consideration when deciding a current employee’s salary increase.
Being stingy with salaries has other hidden costs. In addition to likely paying the new person more, what does that new person’s inability to be autonomous do to productivity or group dynamics? Does a new person come in and disrupt the flow and synergy, sometimes putting projects at risk?
Some turnover is good, but it comes with a cost. Is there a better way to spend your company’s money than having a high turnover rate? Why not reward your current employees in the first place? ∞
tation and distribution, health care, software
development, customer care call centers and
banking. She is a Certi-
fied Employee Benefits Specialist and has her
PHR and SHRM-CP certifications. She earned her bachelor’s degree
in HR management from Ottawa University.
Let’s be optimistic and say the new person is a great fit and causes zero disruption. How long does it take that person
MANAGE & LEADÂ
Think Before You Delete Social media offers an opportunity to deliver exceptional customer service and build brand advocates— but it opens your company to negative exposure, too. by Chrissey Breault
f you serve the public, at some point, someone will be upset about something you said, did or believe. Count on it.
When your company engages in social media, you create more awareness for your business.
Social media allows you to build your brand, enhance customer service and create advocates. But along with that expanded presence comes the potential risk of negative comments. And with social media, those comments aren’t delivered privately in an email, over the phone or
face-to-face. They are out there for anyone to see—current customers, prospects, vendors and other stakeholders.
BEING “SOCIAL” HAS ITS RISKS Understandably, you may struggle with even engaging in social media because of the potential risks. You may think that providing a platform that can fuel debate and negativity isn’t good for business. Consider, though, that much of the reason more businesses don’t accelerate faster is because someone is afraid of risk. Taking risks goes hand in hand with growing a business. Successful businesses try to think about risk as “calculated risk.” When viewed in that manner, risk doesn’t mean carelessly plunging into each new opportunity. It means acknowledging the fear and then weighing the advantages and disadvantages in order to make a logical decision that gives you a chance of success. The reality is that a social strategy is a necessary part of most businesses today, even though it does carry some risk. But there’s a risk to not having a social strategy, too. Without one, customers may become bored with your product, service or program. Or, they
may fail to see the “personality” behind your company that can give you an advantage over competitors. A good social strategy can open the door to new possibilities, and it can show your audience that you genuinely care about the industry, users, services or products. When deciding on your social strategy, take the time to identify possible risks. Pinpoint the potential negatives, and form plans to put out fires if something goes wrong. By evaluating the risk in advance, you can more accurately aim for success with your social media strategy.
COMMUNITY POLICIES AND GUIDELINES Social media policies and guidelines provide your business a framework to carry out your social media strategy and implement your social media tactics. They can also have a direct impact on the success of your social media endeavors. Social media guidelines: P rovide a way to implement your social media strategy and improve your social media performance. G ive everyone the information they need to work together. M ake it easier to build your social communities online.
MANAGE & LEAD
M ake it possible to respond to emergencies before they get out of hand.
guidelines should clearly state your policies about the kinds of posts that will be deleted.
One thing to keep in mind is that if you are going to create a forum where customers can discuss anything, you should be open to allowing the discussion to be negative, but respectful. There are limits—spam, swearing and hate posts, for example, are items that you will likely want to restrict. You need to be clear about the rules of the forum. Your community
If you decide to allow negative discussion on your social accounts, you still must monitor any negative comments about your business, because a crisis can grow very fast. It is important to know how and when to respond to any social media attack and have your action guidelines ready to respond to a negative situation before something gets out of hand.
A negative comment about your business can range from a simple complaint to a post made by someone who is so upset they have gone off the deep-end trying to make sure you and the rest of the world knows the anger they feel. How you respond is key, not only to addressing the concerns of the angry person but to retaining the goodwill of others who read the post. Here are some keys to remember
01 Respond no
02 Be patient and
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03 C ontact the
04 Respond back to the original post.
05 Do not remove negative posts or comments.
06 L et your community respond.
As a very last resort, block unreceptive and blatantly hostile posters.
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Your “response” team should have both social media and
business expertise. You will need to delegate enough resources to maintain an ongoing presence on your social sites. On one hand, the people interacting on behalf of your company must be knowledgeable of various legal terms and what they mean in your business environment. They also need to be aware of global implications of your online communication and avoid inappropriate comments about competitors or others online. On the other hand, they must also remain positive, be helpful, add value and be transparent. Those individuals must be entrusted with cultivating relationships and building community on your social media profiles. It is not always easy to balance all these criteria, especially for those who are new to social media.
BIG COMPANIES VS. SMALL COMPANIES Most big companies have existing communication policies, and those guidelines should also apply to social media communications. Smaller companies, unlike their larger counterparts, may not have comprehensive communication guidelines that cover a variety of possibilities. They might just need
one well-crafted set of guidelines, some good judgment and an understanding of social media and the company’s online strategies. Where smaller companies tend to go wrong is thinking they don’t need social media guidelines at all. Smaller companies can benefit greatly from having them though. Social media guidelines will: K eep them focused on their social media strategy.
time to fit in with how your company communicates and the changing trends. Be excited for the discovery process and the implementation of your community guidelines—you can only reap the benefits. ∞
ABOUT THE AUTHOR
P ermit them to benchmark their progress and better evaluate what to do next.
Companies that maintained an active and extensive social media presence saw four times the ROI compared to companies that limited their social media presence.
Visual content is more than 40 times more likely to get shared on social media than other types of content.
More than 4.4 million videos were uploaded directly to Facebook in February 2016, generating over 199 billion views.
L et them better manage the time they invest in social media. CHRISSEY BREAULT
DON’T REINVENT THE WHEEL The easiest thing you can do to help you create social media guidelines is to research other companies like yours. Reach out to those social managers and ask them questions. Secretly, every social manager wants to feel that “celebrity” status. The best part is that the more you engage on social media, the more you will learn. Don’t be afraid to break something. Seeking input or feedback can help you tweak your guidelines from time-to-
Chrissey Breault is the director of marketing and member services for the American
Association of Private Lenders (AAPL). Before joining AAPL,
78 percent of people who complain to a brand via Twitter expect a response within an hour.
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
Top brands on Instagram are seeing a per-follower engagement rate of 4.21 percent which is 58 times higher than on Facebook and 120 times higher than on Twitter.
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
More than 1 in 3 internet users say they go to social networks when looking for more information about a brand or product.
in Adobe Web Design and volunteer management.
Sources: HubSpot, ReelSEO, Lithium, Hootsuite
IR A APPROACH
Alternatives Within the Alternatives Don’t overlook pursuing lucrative segments
with your tax-advantaged retirement dollars. by Clay Malcolm
hen individual retirement account
(IRA) providers talk about
how your self-directed IRA can invest in almost any
alternative asset, we really
mean it. Common strategies in real estate, precious metals and private lending may grab the headlines, but don’t forget about other potentially lucrative facets within those industries. Identifying an overlooked or disregarded investment model can prove especially valuable when coupled with 46
the tax advantages self-directed retirement accounts offer. Pre-tax plans like traditional IRAs allow you to defer taxes on your contributions (deposits) and only pay taxes on distributions (withdrawals) down the road. Simplified Employee Pension (SEP) IRAs and Solo 401(k)s, whose annual contribution limits are far higher to accommodate the earning potential of self-employed individuals, provide the same tax-deferred contribution benefit. Post-tax plans like Roth IRAs somewhat flip the script by charging account holders
with paying full taxes on their contributions, but qualified distributions can be completely tax-free regardless of how large the account grows. If you can turn a $5,000 Roth contribution into $30,000 through a quality self-directed strategy, you’ll get to keep every penny of your $25,000 profit if you follow the IRS rules. Health savings accounts (HSAs) provide an intriguing combination of pre-tax and post-tax benefits. Subscribers to single or family high-deductible health plans can make taxdeferred contributions to their
HSAs and pay no taxes on distributions, regardless of the account holder’s age. To garner their tax-free benefits, distributions from HSAs must either cover or reimburse the account holder for qualified medical expenses. The list of qualified medical expenses is quite extensive. You don’t have to wait for some obscure medical emergency to take advantage of these big-time benefits. Let’s examine the possible ways that you can apply your expertise in private lending to three somewhat specialized (yet increasingly popular) invest-
ment opportunities, all while yielding the tax benefits of IRAs, 401(k)s, HSAs and other such accounts.
CRYPTOCURRENCIES Popular cryptocurrencies like Bitcoin, Ethereum and countless others exploded onto the investment scene last year. For those familiar with Bitcoin, its 2009 debut and 2017 low price of roughly $775 per unit may seem like distant memories. The pioneer crypto achieved an all-time high of approximately
$19,200 just before the New Year, bringing an early Christmas bonanza of profits to early investors who cashed out at that time (all price figures courtesy of www.tradingview.com). The market has since pared those remarkable gains (Bitcoin sat at around $6,820 as of April 1), but enthusiasm appears to be alive and well. Similar price spikes in other cryptocurrencies have prompted otherwise skeptical investors to try to find the next millionaire-making token. As a private lending professional, you may have considered ways to tap the cryptocurrency
investment arena without succumbing to the rapid price swings of direct ownership. Although doing so would carry its own set of risks, you could accept cryptocurrencies as collateral for a loan of fiat (government-backed) currency. Should a borrower default on his or her loan, you may find cryptocurrencies easier to collect than property or security assets. If you envision broad applications of the blockchain technology on which cryptocurrency exchanges are based, financing blockchain-based businesses could be another avenue. The
crypto-craze has inspired new tech companies to try to harness the blockchain to revolutionize supply chains and utilize smart contracts in everyday business. Some of these startups have been using initial coin offerings (ICOs)â€”public offerings of equity-based tokensâ€”as a means to raise capital, but fraud and consumer confusion in this space has drawn increased scrutiny from the U.S. government and outright prohibition by others around the world. In a statement released on the Securities and Exchange Commission website, Chairman Jay Clayton pointed MAY/JUNE 2018
IR A APPROACH
out that “enthusiasm for obtaining a profitable piece of a new technology ‘before it’s too late’ is strong and broad. Fraudsters and other bad actors prey on this enthusiasm.” Considering this sentiment, it’s possible that legitimate ICO companies, in an effort to avoid subpoenas and other crackdown measures, may seek more traditional financing to fulfill their visions if they’re not yet positioned to offer publicly traded shares.
BRIDGE LOANS Titans of industry like PayPal have recently dipped their toes into private lending, providing consumers with the confidence of trusted brands without the negative stigmas of big banks. Specifically, these companies have begun offering easy access to financing for retail purchases. Anyone looking to buy a TV through their laptops or smartphones can choose between “buy now” or “show me financing options” and acquire a mini-loan if they select the latter. Furthermore, consumer perception has soured toward payday lending and its predatory practices. Scrupulous private lending professionals can help fill this growing demand for short-term, small balance loans with their self-directed IRAs.
Because retirement money must maintain legal separation from personal money, you can most easily initiate bridge loans by obtaining checkbook control of your IRA funds. To do so, instead of lending money directly from your IRA,
this strategy can apply to any lending activity, but it affords a degree of flexibility for borrowers who need smaller amounts for shorter periods of time. Earnings from interest payments must return to the LLC (and the IRA by proxy) and may
“Just about any private lending segment that you can legally pursue with your personal funds can also be pursued with your tax-advantaged retirement dollars.”
you can open a private entity (typically an LLC) with your IRA. The LLC will be the asset within the account and, upon naming yourself as manager and funding the account with your IRA money, you’ll be able to personally initiate loans on behalf of your IRA-owned LLC. Having direct access to your IRA money can allow you to follow your preferred qualification and due diligence procedures and dole out loans as quickly as you deem appropriate. In truth,
never flow into your non-retirement account. Intentional and unintentional prohibited transactions like this happen more frequently with LLCs in retirement plans, so the IRS may be inclined to take a closer look. To ensure full IRS compliance of your self-directed retirement account, don’t hesitate to consult with your IRA provider, an attorney or a tax professional.
REAL ESTATE The success available through real estate investing is certainly no secret, but this hands-on field isn’t everyone’s cup of tea. Mortgage origination can expose your note portfolio to a steady demand for property, but not without magnified dangers. Anyone looking to avoid the banks may do so with good reason; less-than-stellar credit can bring a high degree of risk to a six-figure loan, even if you try to balance the risk with a higher interest rate. Fortunately, you can enter the real estate market without threatening your bottom line with these possible pitfalls. As with any alternative asset, self-directed retirement investors can take full advantage of property ownership as well as other, more specialized segments of the industry. Smaller loans to help land owners develop property or achieve other such goals have become more in vogue, especially as online marketplaces for these opportunities continue to expand. Just as individual investors can explore internet platforms, acquire factions of larger loans and earn a
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IR A APPROACH
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
percentage of the interest, private lenders can comb the internet for eager real estate investors who need capital.
MORE TO CONSIDER Should one or all these investment scenarios capture your interest, there are a few distinctions between investments with personal funds and investments with your IRA worth bearing in mind. It may help to remember that the IRS regards your retirement account as the investing entity, even though you’re the engine that makes decisions and drives transactions. All applicable paperwork must be titled in the name of your IRA, and an authorized representative from your IRA provider must provide signatures where required. For instance, the investor “name” specified on a loan or security document
would be “IRA Custodian Company, FBO [For Benefit Of] John Q. Client Traditional IRA [Account Number] #1234567.” Instead of signing on the dotted lines, you would sign as “read and approved” in the margins or otherwise away from the actual signature lines. This will notify your IRA provider that you, as the account holder, approve the transaction in question without actually signing on behalf of your account. Due to strict IRS rules surrounding self-dealing practices with one’s retirement money and assets, an IRA cannot provide direct benefit to or receive direct benefit from disqualified persons. These persons include the account holder; linear family members of the account holder, such as parents or children; any spouses of the aforementioned individuals; or any person or company with fiduciary respon-
sibility over the retirement account involved. Nonlinear family members, business partners and friends who don’t fall into one of these disqualified categories may conduct business with your IRA at their (and your) leisure. The beauty of self-directed retirement investing lies in your creativity. If none of the options discussed here appeal to you, you have the power to find the niche that will. Just about any private lending segment that you can legally pursue with your personal funds can also be pursued with your tax-advantaged retirement dollars. With a full spectrum of investment opportunities at your disposal, you can hedge your bets against Wall Street and help protect (and hopefully grow) your retirement nest egg despite the volatility that may exist in other markets . ∞
than 12,000 clients nationally. He oversees most avenues of
marketing, teaches continuing professional education and
informal classes and webinars, and facilitates the training of business development and
client representative teams.
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 Northwestern
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6 WAYS TO IMPROVE YOUR FUND Adopting these approaches will help reduce your liabilities and foster success. by Kevin Kim
Managing a private lending fund is not easy. You need the help of accountants, compliance experts and, of course, reliable salespeople to ensure that your fund operates efficiently and continues to grow. So, what are the key factors to operating a successful fund? First and foremost on your list should be reducing liability. Many tasks go into fund management, but most should be focused on running a compliant operation that reduces risk and promotes profitability. That is what every fund manager strives for. Accomplishing this feat takes a consistent and well-considered approach.
Let’s look at six key areas where you can improve your fund and reduce your liabilities.
In the realm of fund management, the No. 1 reason for investor liability is poor investor communication. The No. 1 investor complaint is “I didn’t know that.” Why is that the case? Because the sponsor or fund manager did not properly communicate the ups and downs of the fund’s performance and did not adequately communicate their plan to resolve the downs, or how to continue the ups.
In today’s world, quickly communicating with clients is easy, but it has also become somewhat impersonal. Emailed statements, disclosures and updates on smartphones are all great, but the best fund managers incorporate a personal touch. One practical solution is to improve the quality and frequency of investor reporting. The best fund managers will deliver institutional quality reports about the performance of the fund. This includes key metrics such as average interest rate, loan-to-value (LTV), property types by percentage, fund ROI, investor ROI and foreclosure/default rates. It will also include a very straightforward
message (1) addressing the fund manager’s plans to continue success and resolve distressed assets and (2) outlining key initiatives for growth. One more practical solution is to add a personal touch and be more intentional with your investors. Try a simple task: allocate one hour a week on your calendar to call three or four investors, just to talk and answer questions. Improving the investor experience creates happier investors and increases the likelihood they will invest more.
There are several different types of funds and investment vehicles in the private lending space. Some may have complex business models or multiple business arms associated with the fund. This is a smart approach to increase diversification and provide hedging opportunities for a competitive marketplace. However, there are many situations where actual or perceived conflicts of interests can arise. A properly constructed private placement memorandum (PPM) can reduce risk by disclosing
potential conflicts and waiving certain conflicts that may arise. However, no matter how well drafted your PPM is, the No. 1 tenet is always to put the investors’ interests first. This is tantamount to executing the fiduciary duty imposed on a fund manager or sponsor by local corporate laws and federal securities laws. When facing a potential conflict, the best question to ask is: “Is this in the best interests of the investors?” Taking back REO to the exclusion of the fund, lending outside of the fund, lending to an affiliate or doing deals in another fund managed by the fund manager all raise these issues. Whether the fund manager’s action results in a loss to the fund or a profit, transparency will set you free. Clearly disclosing the conflicts that will arise is always a good idea, but also disclosing the plan of action when the conflict arises is an even better one. This transparency is expected and is part of the equation. However, not disclosing certain actions could lead to animosity or apprehension among the fund’s investors, and that is never a good thing.
“Compliance is not merely an afterthought, but a necessity. So, an ounce of prevention goes a long way.” How do fund managers ensure they are properly managing a conflict? First, is this conflict addressed in the PPM? If so, does it outline a plan of action? If not, it is important to present an action plan that is equitable to investors, puts their interests first and is committed to in the future. Fund manager’s need to walk-in the shoes of the investor and evaluate things from their perspective. If you would not do something as an investor, you should not do it as a manager. Most managers are ambitious and want to grow their fund, to make it more efficient and profitable. However, crossing lines to chase quick returns does nothing for your bottom line except create acrimony and distrust among fund investors. Stepping back and questioning
your decisions against your client’s best interest is key to reducing risk and earning trust.
DON'T CUT CORNERS
Fund managers are always thinking of the profitability of their fund and long-term growth. But sometimes eagerness gets in the way of prudence, and a manager will try to take a shortcut to save on costs and maximize income. Today’s regulation-heavy environment for all things financial has made it increasingly difficult to know how to operate within the white lines without drowning in red tape. Compliance is not merely an afterthought, but a necessity. So, an ounce of prevention goes a long way. You could do a hundred things right, but one wrong turn could spell disaster. Make it a priority to engage with a competent
compliance attorney to ensure your lending business and your fund comply not just at formation, but on an ongoing basis. Investing in the right compliance team can help you avoid mistakes, reduce your risk exposure and prevent engaging in a business that places you and your investors at risk.
DON'T TEST THE PPM
Misrepresentation of facts is primarily a legal term used in securities circles, but it is a crucial reason funds use a private placement memorandum or offering circular and prospectus. A PPM is designed to disclose the nature of your business, assess risk and disclose potential returns and restrictions. Often, fund managers choose to test the limits of their PPM. If there is an opportunity presented that is outside of the PPM or circular, fund managers often engage in “side deals” that may lead to omissions or misrepresentations. Side deals are often determined legally to be of “material fact,” and if these facts are not disclosed in offering documents, an investor may make accusations as to omission of facts. Many side deals may be acceptable, if they are disclosed to the
fund’s investors. If you wait for an investor to ask about a side deal, it could open the fund to scrutiny on all its dealings. Once one investor gets a side deal with better benefits than other investors, it will not be long before others are asking for the same deal. Pretty soon, you are changing terms to meet the demands of your investors for fear of losing them. It is sometimes challenging for fund managers to stick to the original terms of their offering for all investors, but holding everyone to the same rules will, in the long run, reduce your risk of misrepresentation, earn the loyalty of current investors and attract new institutional investors.
Financial reporting is a critical aspect of any managed fund. Even if you do everything right, one mistake, misstatement or incorrect servicing report can put you at risk to lose all credibility with your clients. The most important thing to investors is their statement. If inaccuracies occur, no matter how insignificant, it opens your underwriting, loan manage-
ment and servicing to investor scrutiny and questions. First and foremost, it is prudent to look over your accounting statements. Numbers from previous months should be compared against the current account. Any numbers that stand out as new or excessive should be reviewed and evaluated to find out what caused the discrepancy. Discrepancies should be verified and corroborated and, if necessary, audited to ensure they are accurate. Another way to ensure the integrity of your accounting is to use a third-party accounting firm. Many fund managers loathe paying a monthly fee to an outside firm when they
could just as easily hire an in-house accounting manager. However, an outside accounting firm can lend credibility to your fund as a sort of independent reconciliation firm to validate your numbers. There are experts who can help reduce investor liability by handling the day to day accounting tasks, along with reducing the time it takes to produce monthly accounting statements.
MAKING YOUR COMPLIANCE COUNT
Although most fund managers and private lenders make compliance a priority, the devil is in the details, as they say. With a new administration and a rapidly changing regulatory
environment, it is impossible for a fund manager to stay up to date on new legislation and new rules. Whether it is investor communications, accounting, reporting or servicing, there are areas where being out of compliance could spell disaster for your fund. It is not all about getting good people to work for you, although that is part of the equation. Itâ€™s about aligning yourself with service providers to assist with accounting, auditing, servicing, compliance and reporting functions. These partnerships will not only help relieve the stress of day-to-day management but ensure that you reduce investor liability and increase the likelihood of continued success. âˆž
ABOUT THE AUTHOR
KEVIN KIM Kevin Kim is an experienced
corporate and securities law
attorney with Geraci Law Firm. Kevin focuses his practice on
real estate matters, including private placements and
alternative investments for
private lenders, real estate developers and other real estate entrepreneurs.
EXPERIENCE MATTERS Working with a private lender who speaks the language of real estate can have a big impact on your project and your business. by Abhi Golhar and Kenneth Igwe
If you are looking for financing for your latest real estate investment project—whether it is a fix and flip, a buy and hold or a new property you are developing—you probably started your search with a traditional lender. If so, you may have been frustrated by the process.
Why is financing with traditional lenders so frustrating? After all, they have products designed for real estate, right? Well, yes and no. They do have products designed for residential buyers, but they don’t really have the flexibility to create products geared toward real estate investors and their projects. In many ways, the whole process of a traditional lender is the opposite of what an investor requires. Why? T ime-consuming processing means more carrying costs for your project, including property taxes, utilities, interest payments, retainers and marketing costs.
N arrowly defined product offerings mean less flexibility for your individual project needs and goals and the inability to structure the project the way you like to work. F ocusing on individual transactions ignores the flow and movement required for a productive investment business, including the ability to cross-collateralize. S tringent regulatory requirements add time and remove flexibility throughout the process, and layers of bureaucracy slow down the process even more.
How can real estate-focused private lending help? Because of their focus on real estate and
real estate investment, private lenders can provide products and processes that conventional lenders and loan products can’t even approach. Here are just some of the benefits of the real estate experience a private lender brings to the table.
FLEXIBILITY TO STRUCTURE THE DEAL A private lender can add value by structuring the deal the way you need it. That means a range of available funds, a range of possible interest rates and a range of acceptable application guidelines. A private lender, for example, can eliminate worries that your credit score will be
five points below a bureaucratically-defined “acceptable” level or that there will be an arbitrary limit applied for how much you can borrow on your project. You’re not waiting for word from on high about your deal, because a private lender is the decisionmaker. That means you can discuss terms that make sense for your lender’s business and yours, without a lengthy waiting game. It also means that you can discuss the project with your lender, knowing that your lender understands the needs and requirements of your business. Fast Application and Closing Process // The stan-
dard bureaucracy of a conventional lender involves scores of lenders, underwriters, reviews and more. Those layers of middle management slow down both the consideration of the application and the funding and closing of the loan itself. And, after the closing, you’ll hope and pray you never need to ask a question about or adjust the terms of your loan—you won’t even know where to start. With a private financier, the buck stops at your lender’s desk. You get your questions answered, application approved, and loan funded faster and efficiently. That means fewer
days in process, lower carrying costs and quicker turnaround from purchase to monetization.
multi-family properties requiring ongoing financial monitoring and adjustments.
Lending Based on After Repair Value (ARV) // Most
By working with a private lender, you can structure the loan to the particulars of your project. Need construction or rehab costs factored in? Check. Need the ability to extend the loan terms if construction is delayed by weather or labor shortages? No problem. Want to convert a short-term loan scenario into a long-term buy
investment properties require construction—whether a new build, a fix and flip renovation, or a rental property needing a quick refurbish. Traditional lenders only lend based on the current market value of the property, leaving you to figure out financing for construction and rehab on your own. By contrast, private lenders’ real estate knowledge and market insight allows them to structure your loan based on the projected value of the property after building, improvements or updating. With one loan encompassing all your project needs, you’ll spend less time managing finances and more time making the project the best it can be. Diversification of Properties and Exit Strategies // Con-
ventional real estate lending is based primarily on one scenario: Buy and hold as-is for many years before eventual resale. But real estate investment offers a variety of exit strategies and property uses— from short-term fix and flips to long-term buy and hold, from new construction projects of just a few months to large-scale
Abhi Golhar is a nationally
Kenneth Igwe's areas of exper-
Think Realty Radio and CIO of
estate, finance and banking.
syndicated radio host of
Summit & Crowne, a real estate investment firm in Atlanta.
He has been investing in real
estate since 2002, always using a value-added approach to
identify acquisition targets. Golhar educates thousands of people through his daily
radio shows, weekly blogs and
YouTube. Have questions about how you can set up your busi-
ness to advance and finish well? anywhere on social.
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and hold? That can be accomplished too. By providing a variety of options and custom designed loan products, a private lender ensures the best possible results no matter what your next project brings.
tise are general business, real He was previously a chief
operating officer of Brisco
Capital Group, an oil distribu-
tion company, and an associate director of Wharton Gladden, an investment banking firm. He holds a bachelor's of
science degree in mathematics from Morehouse College.
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How Legislation Can Move Fintech Into the Digital Economy Congress has opportunities to address some of the challenges financial technology firms face in the lending sector. by Robert Greenberg
the traditional banks of old. Milken noted that fintechs were cutting across financial silos and advancing rapidly in areas such as mobile banking, but they were still dealing with a regulatory apparatus built from the depths of the Great Depression.
THE EVOLVING LANDSCAPE
he pace of financial technology innovation in the alternative lending space is nothing short of phenomenal, but it has meant headaches for lenders and vendors waiting for regulation to play catch-up.
Further complicating the issue, some matters involving the fintech sector cannot be addressed by regulatory agencies alone. They require a legislative solution through the U.S. Congress due to statutory issues or other limitations. Thankfully, Congress has taken a strong
interest in the fintech industry, and it began work on some of these issues during the final two years of President Obama’s presidency—an effort that has continued under the Trump Administration. While much of what is happening in Congress feels partisan and politicized, that hasn’t been the case with fintech issues. There have been numerous opportunities for bipartisan solutions. The Milken Institute launched a fintech program in 2014 that called for new regulatory approaches to deal with innovative tech-savvy companies that operate differently from
The first real regulatory response to the dawning of this new era of fintech came in 2007 and 2008. That’s when the Securities and Exchange Commission (SEC) classified the promissory notes that Prosper and Lending Club offered to the general public as unregistered securities. This action was believed to be the SEC’s entrance into regulating peer-to-peer lenders. From 2010 to 2015, federal regulators also began increasing their attention on fintech companies as the number of businesses operating in the space exploded. Several other things were occurring around the same time. In 2012, the Consumer Financial Protection Bureau launched Project Catalyst to encourage consumer-friendly innovation in the financial products and services arena. In 2016, the U.S. Department of the Treasury published a white
paper called “Opportunities and Challenges in Online Marketplace Lending” to provide an overview of the evolving market. One of the issues the Treasury’s report addressed was the need for regulators to provide additional clarity around the roles and requirements for fintech lending participants. Also, in 2016, the U.S. Office of the Comptroller of the Currency (OCC) released a white paper detailing the framework to support responsible innovation. The OCC defines responsible innovation as “the use of new or improved financial products, services and processes to meet the evolving needs of consumers, businesses and communities in a manner that is consistent with sound risk management and is aligned with the bank’s overall business strategy.” The OCC followed up that effort with a white paper covering special purpose national bank charters for fintech firms. More recently, in March 2018, it held an inaugural “listening session” at its Chicago office that involved 30 to 40 people who discussed emerging issues, trends and current events concerning responsible innovation. This included banks and nonbanks talking about
partnerships and third-party risk management.
HITTING THE HALLS OF CONGRESS While regulators have taken actions related to the advances of tech-driven lending, some issues require a legislative solution. Lawmakers, especially those in the House, have held multiple hearings between 2015 and 2017 on fintech-related topics, including mobile payments, peer-to-peer lending, digital
currency, blockchain, the JOBS Act and online lending’s role in improving access to small business capital.
same time protecting consumers’ personal information. Still, such resolutions lack the weight of actual legislation.
From January 2015 to December 2017, the Milken Institute uncovered 71 fintech-related legislative bills. More than half of them received bipartisan support, but it should be noted that it’s been challenging to advance many of these bills. In September 2016, the House passed H.R. 835 promoting a national policy to encourage financial technology innovation, while at the
Perhaps the most impactful legislation in recent years for alternative lenders has been the JOBS Act, which passed with bipartisan support in 2012 and was signed into law by President Obama. Some provisions took effect immediately, but others required SEC rulemaking. It took the SEC more than three years to pass final rules for the equity crowdfunding provisions
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under Title III, and those didn’t take effect until May 2016. Lawmakers in the current 115th Congress have introduced a number of fintech bills, including several that affect the alternative lending space.
ALTERNATIVE LENDING EVOLUTION The digital lending space has evolved from its peer-to-peer roots with the infusion of institutional investor interest
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and competition. The space saw significant growth from 2010 to 2015 and has evolved from the days when it saw itself as an alternative to banks in a post-financial crisis where many traditional banks were lending only to the most creditworthy customers. Today, that “us versus them” mentality has faded, and it’s not unusual to see online fintech lending platforms collaborating with traditional banks or with institutional investors. Under this traditional bank-fintech partnership model, online alternative lenders partner with an issuing depository institution to originate loans. After origination, they buy the loans for sale to investors. The National Bank Act and the Federal Deposit Insurance Act (FDIC) give national banks and state-chartered banks the ability to charge interest rates based on the laws of the state in which the bank, not the customer, is located. But neither Act applies to nonbank platforms, a disadvantage for fintech lenders. Thus the partnerships have been advantageous to this new lending model. Despite tacit approval from the FDIC and OCC, the Milken Institute notes that this bank partnership model is facing
“As our world moves more deeply into a digital economy, Congress must take action to keep pace with the speed of innovation with updated and commonsense regulation...”
increased litigation risk and objections from consumer advocates and state regulatory authorities. As a result, one of the legislative issues at hand is to address “value when made” (if the loan is nonusurious when made, it remains nonusurious throughout the loan’s lifecycle) and the true lender issue. Some believe that the partner bank that is originating the loan and selling it to the fintech lending platform under this model is not the “true lender,” given the very small amount of time—which could be as short as a day—the loan remains on the bank’s book. Milken notes that courts have been divided on this issue, leading to uncertainty and lending declines in certain markets where courts have been adverse to the fintech-depository bank partnership model.
lender is found to be the ‘true lender,’ they would lose the exportation advantage that fintech lenders currently rely on to market their products and services and could be subject to penalties for violating state usury laws. The uncertainty from recent litigation has resulted in certain platforms changing their models to protect against ‘true lender’ concerns.” This litigation has threatened the fintech-bank partnership model, which Milken views as approved via updated thirdparty guidance provided by the FDIC and OCC. Bipartisan legislation has been introduced that would protect this model, where banks and fintechs are able to leverage each others’ strengths to meet the credit needs of their customers while providing a uniform, national market for credit.
The Milken Institute also supports filed legislation on the following issues:
01 E xpanded and improved
mobile-device banking // Bipartisan legislation has been introduced that addresses the opening of accounts through a mobile device. It would ensure privacy, but allow financial services providers to, with certainty, leverage technological innovations to expand services and maintain relationships with their customers. The legislation would help deal with “banking deserts”—areas with inadequate financial services that make residents vulnerable to predatory lenders that have cropped up since the financial crisis.
02 E nable the reporting of alternative data to expand access to credit // Fintech com-
panies have developed advanced algorithms to determine whether a potential borrower is a good credit risk. Certainly, such algorithms
According to the Milken Institute: “If a nonbank fintech
come with risks, such as whether a particular borrower can withstand a broad economic downturn. The Milken Institute recommends a bipartisan legislative effort to encourage the reporting of alternative, positive payment information to the credit bureaus.
03 Develop big data report-
ing standards // Several bills have been introduced that would require the U.S. Treasury Department to develop common data reporting formats that financial regulators would be required to adopt. Common reporting formats could reduce or remove reporting silos among regulated entities, eliminate duplicative reporting and save time and money for regulators and regulated entities. “Despite the hype regarding big data, it is useless unless the person or organization receiving terabytes of information is able to effectively collect, sort and disseminate it,” Milken notes.
04 Require the IRS to
automate certain data collection // IRS Form 4506-T allows a mortgage borrower to request their tax return or have it sent to a third party, such as a lender, but the process can take several days. Automation could make this occur in near real time—speeding up the mortgage underwriting process. Several bipartisan bills have been introduced to address this issue.
OTHER ISSUES ON THE HORIZON There are a host of other fintech issues affecting alternative lenders that Milken didn’t address in its white paper, but they are issues that lenders will want to watch. These issues involve customers’ financial data, regulatory sandboxes, fintech charters and outdated credit scoring models currently used in obtaining a mortgage. Several of these issues have been quite contentious, including the OCC’s proposal for national fintech charters. “Lawmakers have also raised concerns with efforts under-
taken by certain fintech firms to apply for an industrial loan charter (ILC) from the FDIC. In recent months, SoFi and Square both applied for an ILC, setting off a raucous debate over whether fintechs should even be allowed to apply for an ILC,” the Milken white paper notes. Many opportunities will exist this year for Congress to address some of the challenges financial technology firms face in the lending sector. The current bipartisan interest in fintech is a positive sign that lawmakers will reach across the aisle with solutions that will provide greater regulatory and legislative certainty and clarity to the nation’s vibrant and still-growing alternative lending sector. As our world moves more deeply into a digital economy, Congress must take action to keep pace with the speed of innovation with updated and commonsense regulation that offers flexibility for fintech lending platforms and encourages them to continue innovating in the lending sector, while providing robust consumer protections. ∞
ABOUT THE AUTHOR
ROBERT GREENBERG Robert Greenberg is chief
marketing officer for Patch of
Land. 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
$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.
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Adversity Fosters Entrepreneurial Journey Struggle breeds resilience that leads to success.
am a firm believer that you cannot really be successful until you have dealt with adversity, and even failure.
You need a struggle in your background to give you the grit and resilience to pursue success, because even in the best circumstances, things do not always go as planned. In my case, the adversity came in 2004-2010. In 1998, I left a lucrative job practicing law for an in-house job with a publicly-traded mortgage company. Regular hours, no time sheets—just a normal Monday through Friday job. That all changed in 2004 when the financial and real estate markets began to lose steam. The cash flow for the company I worked for came from securitizing loans. The cash we received from each securitization funded the loans we made the following quarter. In May 2004, the securitizing banks informed my company they would not be closing an anticipated securitization in June. Without this closing, the business was not sustainable. In an instant, the jobs of 1,100 employees, including mine, were imperiled. During the next nine months, I was one of the people asked to stay on and manage the 66
wind down of the company. On a weekly basis, I was tasked with laying off people. It was awful to go into the office every day and see people I had worked with for years leaving in tears with their belongings in boxes. I saw more and more empty desks every day. Eventually, it was my turn to leave. I was lucky. I found a job immediately. Although I did not like the job or the people I was working with, it was a paycheck. In late 2005, I found another position, with another mortgage lender. Unfortunately, after a few years, that company failed also, and I was tasked with managing a second mortgage company wind down. A pattern was beginning to emerge. After helping to close that company, I was fortunate enough to find another position with a third mortgage lender in 2008. I am sure it will not surprise anyone to read that shortly after my arrival, the partners decided to close that business too, and they kept me to manage the wind down. I had developed the unfortunate specialty of being a pro at closing mortgage lenders. It was not a position I relished, but I was good at it. The problem at being good at it was that I was always on the brink of
unemployment. As I was finishing the wind down of the third company, I laid awake at night worrying about finding my next job. My husband and I had tied our future to mortgage lending and real estate, neither of which was providing the income we had anticipated when we bought our house, cars and other items. Then, in 2010 my life changed. I was given the opportunity to take charge of my destiny. One of the partners in the company I was finishing winding down asked me if I wanted to partner with him to start Rehab Financial Group LP. I had never imagined myself an entrepreneur. Yet he and I built RFG into a very successful mortgage lending company. The first few years were very difficult, but I had learned from my prior experience that I just needed to keep showing up and doing my best and, eventually, I would land on my feet. The point is, just keep doing it. Don’t be afraid to try something you hadn’t thought of before. I believe that luck is nothing more than making yourself available for opportunity and recognizing opportunity when it is there. Take the leap. ∞
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INSPIRATION THROUGH ASSOCIATION At the 2018 American Association of Private Lenders’ Annual Conference you will discover inspiration through association that helps you build toward a better tomorrow. AAPL’s Annual Conference is packed full of enlightening sessions with expert speakers and a variety of energetic networking opportunities for professionals across real estate ﬁnance and servicing. This conference is the only place to be if you want to learn new skills and build relationships that will advance your business and your career.
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