Private Lender by AAPL

SPECIAL FEATURE: AAPL'S ANNUAL CONFERENCE REVIEW

Winter 2024

LENDER LIMELIGHT

Building a new Future Featuring Kendra Rommel

COMPLIANCE Funds: New SEC Rules Page 14

MARKET TRENDS Office to Multifamily Page 20

OPERATIONS Auction Best Practices Page 70

WINTER 2024

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The Official Magazine of the American Association of Private Lenders

FUND MANAGEMENT

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WINTER

2024

CONTENTS 14

05

CORNER OFFICE

20

42

F orge t N ew, Seek Renewal 

FUND MANAGEMENT 42  A re Inves tor Lead

70

88 ANNUAL CONFERENCE REVIEW

Gener a t ion Funnels Right

06

for Your Busines s?

CASE STUDY

46  To Sc ale, or Not to Sc ale?

C ommerc ial Mi xed Us e 

94 2023 A APL EXCELLENCE AWARDS

Building Rebor n as Af fordable Housing Uni t s

50

LENDER LIMELIGHT

96

VENDOR GUIDE

98

LAST CALL

B uil din g A N ew Fu t ure 

08

COMPLIANCE 08  N ew Flor ida L aw Rais es C oncer ns for Flor ida

with Kendra Rommel

58

Pr i va te Lender s

STRATEGY

E nt repreneur ship:  M y Pa t h into Pr i va te Lending

58  M ak ing Af fordable Housing Wor k

14  U nder s t anding t he N ew SEC Pr i va te Fund Rules

62

20

MARKET TRENDS 20  A Pr imer for O f f ice to Mul t i f amil y C onver sions 30  M ar ke t Upda te: C api t al Sources 34  T he Cur rent St a te of t he Pr i va te Lending Indus t r y

OPERATIONS 62  E x tending Your Lending J our ney: Char t ing a C our s e t ha t Inc ludes Ser v ic ing 70  R esident ial Pre - Forec losure Auc t ion Bes t Pr ac t ices 78  D o Your Bu dg e t s an d I n s p e c t ion s Agre e?

82  P u t t in g Bu s in e s s Pro c e s s Au toma t ion to Wor k f or Yo u

WINTER 2024

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FUND MANAGEMENT

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PRIVATE LENDER BY AAPL

CORNER OFFICE

Forget New, Seek Renewal LINDA HYDE

President, AAPL

We may be ringing in a New Year, but there’s no need to make it a New You. The conversations coming out of

KAT HUNGERFORD Executive Editor

our annual conference almost exclusively point in one direction: Success in 2024 will not be gained by finding

DAVID RODRIGUEZ

new frontiers, gutsy pivots, or anything else that may

Design

resemble a shiny penny.

CONTRIBUTORS Katie Bean

The tenor instead appears to be leaning toward a

Kevin Bull

biggest takeaways.

focus on revisiting lending fundamentals. Here are the

Gary Bechtel Alex Buriak

Chris Crovatto

Nema Daghbandan, Esq. Tom Hajda

Alex Kaddah Sam Kaddah

Mack A. Major III

Stability > Scale Outfits with secure, stable capital and the ability to balance sheet have a leg up.

For those looking to capital raise, this is not a market for new entrants (at least, new entrants not backed by known personalities). Investors are looking for experience,

Rodney Mollen

reputation, and established infrastructure—and they can afford to be choosy.

Kendra Rommel

Underwriting Versus Volume

Jack O’Flaherty John Santilli

John Seeburger

Two modes of thought are bubbling up here. First, in an inventory-strapped market,

Kyle Shea

underwriting criteria must change to meet the assets borrowers are bringing to

Scott Ward

tightening your belt with fewer deals. Trust your gut; you already know which one is

Thierry Tremblay

COVER PHOTOGRAPHY Joe Leaphart

Private Lender is published quarterly by the

the table. Second, do not relax credit and valuation standards, even if it means right for you.

People > Systems

American Association of Private Lenders (AAPL).

Technology makes originating, underwriting, and servicing loans faster and easier

presented as fact by authors or advertisers.

practices. 2024 should be the year of HR: Evaluate personnel to ensure you have the

AAPL is not responsible for opinions or information

SUBSCRIPTIONS

Visit aaplonline.com/subscribe.

BACK ISSUES

Visit aaplonline.com/magazine-archive, email PrivateLender@aaplonline.com, or call 913-888-1250.

For article reprints or permission to use

than ever. These systems do not replace the foundation of solid hiring and training right person (and personality) in each seat. This includes yourself. Are there any hats you should (or shouldn’t) be wearing?

Rather than charting a new path this year, start by revisiting the cornerstone elements of your business. What’s working and why (or why not)? With the market still in a transition period, it’s the optimum time to focus internally on what needs to happen to shore up stability. (Hint: It’s nothing new.)

Private Lender content including text, photos, illustrations, and logos:

E-mail PrivateLender@aaplonline.com or call

913-888-1250. Use of Private Lender content

without the express permission of the American Association of Private Lenders is prohibited.

LINDA HYDE

President, American Association of Private Lenders

www.aaplonline.com

Copyright © 2024 American Association of Private Lenders. All rights reserved.

WINTER 2024

5

FUNDCASE MANAGEMENT STUDY

After

Commercial Mixed Use Building Reborn as Affordable Housing Units A rundown and abandoned building outside of Philadelphia welcomes five residents after renovation—and produces immediate passive income for investor.

JOHN V. SANTILLI

A

s a private lender in the fix-to-flip and fix-to-rent space, Rehab Financial Group (RFG) works regularly with local real estate investors, converting distressed properties into affordable housing units.

In the workforce community of Frankford, located about 20 minutes north of Center City, Philadelphia, RFG helped a local investor convert a dilapidated eyesore of a commercial mixed-use building into five

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PRIVATE LENDER BY AAPL

units of affordable housing plus renovated storage space.

RFG’s investor, Angelo, targeted an undervalued asset in the challenging Frankford section, a designated “opportunity zone” in Philadelphia where investors are incentivized through tax abatements from the city. The building was built in 1935 on a 1,540-square-foot lot. The building itself

was approximately 2,592 square feet, structured as a multifamily with four bedrooms and four bathrooms. At the time of purchase, the building had been abandoned and was uninhabitable.

Angelo was able to acquire the building at a price of just $49 per square foot for $127,000. Using a 100% premier loan from RFG, the purchase price and renovation

Before

After

Before

costs of $369,000 were fully financed for 12 months.

Angelo recently stated, “I feel like RFG has grown with me. When I was first learning the flipping business, they had me focus on single-family homes. After I had some successes, I brought a mixed-use property to them that had a commercial space on the first floor. They listened to my plans and approved my loan.”

Because this unique private loan does not require a down payment, Angelo was able to begin the renovations immediately using cash on hand. Renovations included taking the building down to the studs, running all new electrical and plumbing, and reconfiguring the space to accommodate

JOHN V. SANTILLI

five new affordable housing units. Each of the renovated apartments were configured as one-bedroom/one-bath units.

The renovation was intended to provide improved housing stock for the many individuals in Frankford on a fixed income as well as local veterans. Renovations took a year, after which all units were promptly rented for $1,300 a month.

The building was refinanced from the construction loan into a 30-year mortgage, with After Repair Value appraised at $570,000. Angelo realized a profitable gain on zero down due to RFG’s 100% program. He was able to refinance without issue, and the project yielded immediate passive income.

John V. Santilli is the chief revenue

officer of Rehab Financial Group, which he joined in July 2019. Santilli covers new business sales, client retention,

operations, and marketing. In addition, he works to expand sales channels

and maximize all opportunities that

drive growth in order to maintain RFG’s position as a leader in rehab financing.

Prior to joining RFG, Santilli gained 25 years of lending and marketing executive leadership experience

across multiple private and public

marketing-dependent companies.

WINTER 2024

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FUND COMPLIANCE MANAGEMENT

New Florida Law Raises Concerns for Florida Private Lenders Law restricts certain foreign persons from acquiring real property in Florida.

TOM HAJDA

8

PRIVATE LENDER BY AAPL

A

new Florida law is raising concerns for private lenders.

Although its greatest impact is on transactions that finance Florida real property purchased by certain foreign persons associated with the People’s Republic of China, it also affects transactions that finance the property purchases of people associated with certain other foreign countries.

The new law does not appear to apply directly to private lenders who finance prohibited purchases of Florida real property. However, Florida government agencies are developing new rules to implement the new law. Here’s a summary of the law’s current and potential impact on private lenders: 1

T here are secondary market repurchase obligations if a transaction is found to be in violation of the law.

2 T he state of Florida can order

a property forfeiture (with the state's subsequent sale of the property not necessarily being in the lender's interest).

3 R ules are forthcoming from the

three Florida agencies tasked with implementation that may penalize lenders where the main law does not.

4 L enders risk running afoul of the

Fair Housing Act while trying to be compliant with the new law, especially since the Florida Real Estate Commission has yet to publish the promised form of affidavit that would help limit liability.

Florida is one of 12 states to enact a foreign ownership law in 2023 and is now one of 24 states that restrict certain foreign investments in land located within their state.

OVERVIEW OF NEW LAW Specifically, the new law: 1

L imits foreign principals from the People's Republic of China from owning, having a "controlling interest" in, or acquiring additional real property in Florida on and after July 1, 2023.

2 L imits foreign principals from other

"foreign countries of concern" from owning, having a controlling interest in or acquiring: Additional agricultural land.

P roperty on or within 10 miles of a military installation.

P roperty on or within critical infrastructure facilities (e.g., chemical manufacturing facilities, refineries, electrical power plants, water treatment facilities, wastewater treatment plants, liquid natural gas terminals, telecommunications central switching offices, gas-processing plants, seaports, and spaceports and airports).

The restrictions on property ownership within 10 miles of military installations and critical infrastructure are particularly problematic, because there are no clear rules guiding how to measure the 10-mile requirement.

Foreign countries of concern include: People’s Republic of China Russian Federation Islamic Republic of Iran Democratic People's Republic of Korea Republic of Cuba Syrian Arab Republic.

The Venezuelan regime of Nicolás Maduro

WINTER 2024

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COMPLIANCE

Foreign principals include: Government

officials or members of parties from the foreign countries of concern.

E ntities or a subsidiary organized or having a principal place of business in a foreign country of concern.

of the management or policies of a company, whether through ownership of securities, by contract, or otherwise. A person or entity that directly or indirectly has the right to vote 25% or more of the voting interests of the company or is entitled to 25% or more of its profits is presumed to possess a controlling interest.

P ersons domiciled in a foreign country of concern and who are not citizens or lawful permanent residents of the United States.

Exceptions to the new apply, including:

A ny person described above that has

A de minimis indirect interest

a controlling interest in an entity or

in real property, which is

subsidiary formed for the purpose

either of the following:

of owning real property in Florida.

Controlling interest means possession of the power to direct or cause the direction

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EXCEPTIONS TO THE NEW LAW

PRIVATE LENDER BY AAPL

1 A person’s ownership of registered

equities in a publicly traded company owning the land if the person’s

ownership in the company is either less than 5% of any class of registered equities or less than 5% in the aggregate in multiple classes of registered equities.

2 A person’s noncontrolling interest in

an entity controlled by a company that is both registered with the Securities and Exchange Commission (SEC) as an investment adviser as long as the person is not a foreign entity.

A person’s acquisition of additional real property by devise or descent.

A person’s enforcement of security interest or through the collection of debts, as long as the person sells or divests the real property within three years after acquiring the real property.

Grandfathered property acquired before July 1, 2023. However, these persons may not purchase or otherwise acquire by grant, devise, or descent any additional real property in Florida. Persons who exercise this exception and others must register with the Florida Department of Economic Opportunity.

Natural persons who hold a current visa not merely for tourism or official documents confirming asylum in the U.S., where the documentation authorizes the person to be legally present within Florida, may acquire up to 2 acres not on or within 5 miles of any military installation in the name of the person who holds the visa or official documents. These people may still not acquire agricultural land.

PENALTIES FOR VIOLATING THE NEW LAW If a violation of the new law’s restrictions occurs, the Florida Department of Economic Opportunity is authorized to bring an action for the forfeiture of the property, meaning the state files a lawsuit against the foreign principal to obtain title to the property held in violation. If a court determines that property is held in violation of the law, the court must order a judgment of forfeiture and the Department “may sell” the property.

People’s Republic of China from acquiring additional real property.

Closing agents with actual knowledge that a transaction will result in a violation of the act may also be penalized.

In addition, a grandfathered person who

fails to file a registration with the Florida Department of Economic Opportunity is

subject to a civil penalty of $1,000 for each day the registration is late. The Florida

A foreign principal that purchases and a person who knowingly sells real property or any interest therein may commit a misdemeanor.

Department of Economic Opportunity or

It can be a felony to violate the section prohibiting foreign principals from the

the real property or any interest acquired

the Florida Department of Agriculture and Consumer Services may also initiate a civil action in circuit court for the forfeiture of in violation of the act.

WINTER 2024

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COMPLIANCE

“

PRIVATE LENDERS ARE ADVISED TO USE AFFIDAVITS FROM PURCHASERS STATING THAT THE TRANSACTION COMPLIES WITH THE NEW LAW."

CHALLENGING THE NEW LAW Florida Government Support. The De Santis

administration and the Florida Legislature strongly support this new law; therefore, it may prove difficult to successfully challenge the law through traditional lobbying efforts.

Rulemaking Process. The Florida

Department of Economic Opportunity, Florida Department of Agriculture and Consumer Services, and Florida Real Estate Commission have kicked off a rulemaking process that would enable private lenders to comment on and influence the final rules. For example, private lenders, working through the AAPL, could suggest an express carveout from liability under the new law for lenders financing the purchase of Florida real property. The Geraci Law Firm will update private lenders on the rulemaking process and would be happy to assist lenders in submitting comments.

Legal Challenges. In May 2023, a lawsuit

was filed by certain Chinese citizens and a Florida real estate broker in the U.S. District Court for the Northern District of Florida seeking an injunction against implementation of the new law, claiming the law violates the Equal Protection Clause, Due Process Clause and Supremacy Clause of the U.S. Constitution and the Fair Housing Act. The challenge 12

PRIVATE LENDER BY AAPL

is supported by and coordinated with the American Civil Liberties Union, the ACLU of Florida, DeHeng Law Offices PC, the Asian American Legal Defense and Education Fund, and the Chinese American Legal Defense Alliance.

The U.S. Department of Justice filed an amicus brief in support of the plaintiffs. As part of the amicus brief, the Department of Justice asserted the new law violates the U.S. Constitution and Fair Housing Act and argued the new law conflicts with existing federal regulations governing real property and national security.

The plaintiffs asked the court to halt the enforcement of the new law. However, on August 17, 2023, the federal judge issued an order denying the plaintiffs’ request. As a result, the state of Florida continues to enforce the law.

The state of Florida is strongly defending the new law, and the attorneys general of Arkansas, Georgia, Idaho, Indiana, Mississippi, Missouri, Montana, New Hampshire, North Dakota, South Carolina, South Dakota, and Utah have filed a joint amicus brief supporting the new law.

whether a person is a “foreign principal” because of potential Fair Housing Act liability. Instead, transaction parties, including private lenders, are advised to use affidavits from purchasers stating that the transaction complies with the new law.

Many form affidavits are available on Florida real estate industry websites, including the Florida Land Title Association at https://www.flta.org/ForeignInterests.

Importantly, the Florida Real Estate Commission was tasked with preparing a form affidavit so real estate purchasers can certify that (1) they are not a foreign principal or (2) the transaction will otherwise comply with the law. It does not appear that the commission has published the form of affidavit.

TOM HAJDA

Tom Hajda is senior counsel with the

Geraci Law Firm. He has more than 30 years of experience providing advice

with respect to consumer and business regulatory matters, compliance management, nationwide state

licensing, governmental supervision and examination management, corporate

governance, strategic acquisitions and other matters. Hajda has designed

and executed for clients’ regulatory

compliance strategies, including the Bank Secrecy Act, Home Mortgage

WHAT SHOULD PRIVATE LENDERS DO? Florida industry professionals generally advise parties to a Florida real estate transaction to avoid efforts to determine

Disclosure Act, Equal Credit Opportunity Act, Truth in Lending Act, Real Estate

Settlement Procedures Act, Fair Housing Act, Privacy, and Information Security.

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Made with love in Miami, FL WINTER 2024

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COMPLIANCE

Understanding the New SEC Private Fund Rules What are the rules—and who do they apply to?

JACK O’FLAHERTY

0

n Aug. 23, 2023, the Securities and Exchange Commission (SEC) adopted a new set of rules and regulations for private funds. The rules can be broken into six categories, summarized in the accompanying table.

As noted in the table, a portion of the rules apply only to funds whose advisors are registered with the SEC (often referred to as a Registered Investment Advisor or RIA), and a portion apply to all private funds. The final rule adopted by the SEC

is over 600 pages, and the dust is yet to settle on exactly how all the rules will be applied by fund managers and enforced by the SEC. That being said, lawyers, compliance teams, fund administrators, and other professionals in the space have been actively engaged in conversations to flush out the details in time for implementation.

NOTE: The dust is still

settling with respect to the regulation changes covered here and their impact on funds in the real estate lending space, specifically as it relates to funds that rely on the 506c and 506b exemptions. There are various schools of thought on their applicability, and it’s crucial that you discuss your specific situation with your legal counsel before acting. Further note that there are currently active lawsuits attempting to appeal the rulings discussed in this article.

According to the SEC final rule, it is “designed to protect investors who directly or indirectly invest in private

SUMMARY OF NEW SEC RULES AND REGULATIONS

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RULE

SCOPE

TIMELINE (FROM NOVEMBER 2023)

ESTIMATED EFFORT

Quarterly Statement Rule

Registered advisors only

Funds with >1.5B AUM: 18 mo Funds with <1.5B AUM: 18 mo

High

Mandatory Private Fund Advisor Audit Rule

Registered advisors only

Funds with >1.5B AUM: 18 mo Funds with <1.5B AUM: 18 mo

High

Advisor-led Secondaries Rule

Registered advisors only

Funds with >1.5B AUM: 12 mo Funds with <1.5B AUM: 18 mo

Medium

Restricted Activities Rule

All private funds

Funds with >1.5B AUM: 12 mo Funds with <1.5B AUM: 18 mo

Medium

Preferential Treatment Rule

All private funds

Funds with >1.5B AUM: 12 mo Funds with <1.5B AUM: 18 mo

Medium

Other Rules (Compliance Rule; Recordkeeping Rule)

Registered advisors only

Funds with >1.5B AUM: 60 days Funds with <1.5B AUM: 60 days

Low

PRIVATE LENDER BY AAPL

funds by increasing visibility into certain practices involving compensation schemes, sales practices, and conflicts of interest” and is “designed to prevent fraud, deception, or manipulation by the investment advisers to those funds.” The SEC also clearly is thinking about future advisor and fund inspections, as they also note that part of the reason for the adoption is “to better enable our staff to conduct examinations.”

specific situation and the impact the new

Let’s discuss whether the rules apply to you as well as what the new rules are.

We’ll cover the main points of the release, but it’s important for you to discuss your

are also a large and growing number of

rules have on your fund with your legal, compliance, and accounting team.

Although not everyone in the private lending space will be impacted by the rule, many lenders will. There are a large and growing number of private debt funds that are managed by RIAs—meaning they will have to comply with all rulings. But there private debt funds that are not registered that will also have to ensure compliance with certain rules that were adopted.

DO THE RULES APPLY TO YOU? The adopted ruling, at some level, will impact all private funds. So, if you are a fund manager for, or an investor in, a private debt fund, be sure you understand what you will be required to do to remain compliant.

As noted in the table, the quarterly statement rule, audit rule, and advisor-led secondaries rule only apply to RIAs, and the restricted activities rule and the preferential treatment rule apply to all private funds.

RIAs. These are advisors that have

registered with the SEC or at a state level.

WINTER 2024

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COMPLIANCE

The good news is that if you’re an RIA, you likely already know it. Under the Investment Advisors Act of 1940, certain private fund advisors are required to register with the SEC. Although there are certain exemptions that can often be taken, generally if you have $150 million of assets under management (AUM) and uncalled committed capital, you are required to register.

with the SEC and you’re pooling private investor capital in a fund that you then use to originate or purchase loans, you would fall under this category.

Private Funds. Per the ruling, “private

Quarterly Statement Rule (registered

funds are privately offered investment vehicles that pool capital from one or more investors and invest in securities and other instruments or investments.”

If you are relying on an exemption that prevents you from needing to register

WHAT ARE THE NEW RULES? The SEC provided a detailed listing that describes all the adopted rules in detail. Here is an overview of the rules: funds only). For many, this is considered

the most significant adopted rule because it substantially increases the reporting required for fund managers to provide to their investors. Registered funds are required to provide quarterly

statements to their investors within 45 days after the end of the first, second, and third quarters and 90 days after the end of the fourth quarter. (Note: If you’re a fund of fund, the timeline is 75 days and 120 days, respectively.)

In terms of the substance of the reporting, some have referenced the existing Institutional Limited Partners Association (ILPA) reporting framework as a comparable reference point for fund managers thinking through updates to be made.

Covering the specific reporting requirements is outside the scope of this article, but it’s worth noting that the reporting includes a detailed accounting of fees paid to the manager and its affiliates, detailed fees

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“

BECAUSE OF THE BURDENS OF COMPLYING WITH THIS RULE, YOU SHOULD EXPECT YOUR COSTS TO INCREASE BOTH IN-HOUSE AND WITH YOUR OUTSOURCED ACCOUNTING OR FUND ADMINISTRATION TEAMS."

paid by the fund, details on calculations of fees, inception-to-date annual performance returns (total returns for liquid funds and IRR and multiples for illiquid funds). Fund managers should discuss the reporting

updates and plans with their fund administrators and compliance teams.

Because of the additional burdens of complying with this rule, you should expect your costs to increase both

in-house and with your outsourced accounting or fund administration teams.

Audit Rule (registered funds only). This

rule requires registered funds to hire an independent audit firm to perform an audit of the fund’s financial statements.

The audit must be performed by a Public Company Accounting Oversight Board (PCAOB) registered audit firm. The report, along with financial statements, must be distributed to investors within 120 days after year-end. In addition to the financial cost associated with hiring an audit firm, fund managers should also consider the in-house resources required to coordinate and manage the audit team during their fieldwork.

LEARN. DIFFERENTIATE. GROW. We now offer our signature Certified Private Lender Associate and Fund Manager courses online, so you can earn your status from the comfort of anywhere — and promote it everywhere.

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WINTER 2024

17

COMPLIANCE

“

and prospective investors. Information

THE ADOPTED RULING, AT SOME LEVEL, WILL IMPACT ALL PRIVATE FUNDS...BE SURE YOU UNDERSTAND WHAT YOU WILL BE REQUIRED TO DO TO REMAIN COMPLIANT."

investors before they invest in the fund.

For existing investors in an illiquid fund, information needs to be provided as soon as reasonably practicable after the fund’s fundraising period. For existing investors in a liquid funds, the information needs to be provided as soon as reasonably practicable following

Advisor-Led Secondaries Rule (registered

more than one of the advisor’s entities are

the investor’s investment in the fund.

funds only). Advisor-led secondaries are

invested in the same portfolio company.

Other Rules (registered funds only).

defined by the SEC as transactions that offer “fund investors the option between selling all or a portion of their interests in the private fund and converting or exchanging them for new interests in another vehicle advised by the adviser or any of its related persons.” Given the advisor’s involvement in both sides of the transaction and the conflict of interest that comes with that, the new rule requires fund managers to obtain a valuation opinion or fairness opinion from an independent party. There are also other written summaries and communications with investors that are detailed in the rule for these transactions.

Restricted Activities Rule (all private funds).

The rule restricts (but not prohibits) private funds from the following activities, unless certain consent and disclosure criteria are met: Charging or allocating fees to the fund associated with a governmental or regulatory investigation of the advisor or related party to the advisor.

Charging or allocating any advisor “regulatory, examination, or compliance fees or expenses” to the fund.

Reducing any fund-level clawbacks by advisor taxes.

18

needs to be provided to prospective

The advisor borrowing money from a private fund client.

For each of the restricted activities, there is generally a disclosure-based or consentbased exception. Ensure you discuss and review each with your compliance team.

Preferential Treatment Rule (all private

funds). If you are a fund manager, you likely

are familiar with or have engaged in investor side letters, which are separate agreements with individual investors that have specific, oftentimes preferential, terms for the investor compared to other fund investors.

The adopted rule prohibits all private fund advisors from the following preferential treatment (via side letter or otherwise):

As noted, these rule summaries are a high-level look at the adopted rules.

The SEC provided a robust and detailed write-up, and it’s key for fund managers to discuss implications of the rules with their compliance and accounting teams.

JACK O’FLAHERTY

Providing preferential redemption rights to an investor the advisor reasonably expects will have a material negative effect on other investors, unless legally required by law or unless it is extended to all fund investors.

Providing preferential information to an investor about portfolio holdings or exposure the advisor reasonably expects will have a material negative effect to other investors, unless extended to all fund investors.

Providing preferential treatment to

Non-pro rata allocation of fees and

an investor without providing written

expenses by a portfolio company when

disclosure to both current investors

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Registered advisors need to document their annual review of policies and procedures in writing. They also are required to keep various books and records as it relates to the rules.

Jack O’Flaherty is a CPA and a founding partner and managing member at High

Divide Management, a fund administrator that specializes in providing outsourced financial reporting, investor reporting, and CFO consulting to real estate

lending funds. Before HDM, O’Flaherty managed the financial reporting for Columbia Pacific Advisors’ bridge

lending funds and was an auditor in the alternative investment practice at PwC.

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WINTER 2024

19

MARKET TRENDS

A Primer for Office to Multifamily Conversions Several converging factors are making office-to-multifamily projects more appealing for investors and capital providers. Here’s what you need to know.

GARY BECHTEL

T

he onset of the pandemic and the subsequent years brought several market realities to light. One is the need and demand for housing virtually everywhere in the country. The other reality, particularly in light of the work-from-home phenomenon, is the U.S. simply has too much unwanted office space.

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PRIVATE LENDER BY AAPL

Housing prices have reached levels no longer attainable for many young adults, and the market for decent rentals is often competitive, particularly in areas close to employment centers. Multifamily occupancy, rent growth, and development surged across most U.S. markets, fueling investor appetite and asset values. The

pace of the expansion has since cooled, but the sector remains healthy, with absorption back in positive territory, vacancy at 5.1%, and rents at a record high of $2,184, according to a Q3 2023 CBRE report.

Even more telling are long-term construction trends, which have skewed in favor

of single-family homes versus denser quarters. According to the Bipartisan Policy Center, 8.4% more single-family home permits were awarded between 2000 and 2021 than the historical average of the prior 40 years. At the same time, permits for housing with five or more units declined by 16.4%.

is getting wider, while tenants continue to exhibit a preference for smaller leases and Class A space. All of this is making it harder for office owners to generate enough net operating income (NOI) to service their debt.

According to recent studies, U.S. office values could decline by as much as 30%, or more than $500 billion, by the end of this decade.

multifamily (OTM) projects has changed little during the past 10 years. During the past two decades, OTM conversions have accounted for just 1% of overall multifamily deliveries. With much of that product at the upper end of the market, the OTM conversion strategy hasn’t done much to help address the nation’s housing crisis.

Compare that to the office sector, depicted in Table 1, which is undergoing a massive reset as the definition of the workplace evolves. Companies have been shedding unused space for several quarters, resulting in sustained negative absorption and vacancy hitting a 30-year high of 18.4% by third quarter, with a mere 40 bps difference between downtown and suburban offices. Conversely, the margin between asking and taking rents

There’s a reckoning coming for the office sector, and a bank of underutilized and obsolete Class B and C office assets will be left in its wake.

A SHIFTING TIDE IS REDEFINING CITY CENTERS The problem with OTM is office buildings aren’t always good candidates for conversion. Turning offices into apartments isn’t a simple matter of sectioning off space. These buildings often have centralized plumbing, electrical, and

Given these conditions, it would make sense to turn that unwanted office space into housing—in theory. The truth is that despite the perfect cocktail of multifamily versus office fundamentals, the rate of office-to-

TABLE 1. PREVALENCE OF OTM CONVERSIONS CORRELATED TO OFFICE VACANCIES Almost all of the top 15 markets for current and upcoming OTM conversions also have the nation's highest office vacancies 30%

5,000 4,500

25%

3,500

20%

3,000 15%

2,500

Office Vacancy

Square Feet, Thousands

4,000

2,000 10%

1,500 1,000

5%

hin gt on

,D .C.

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n

lis ea po

Ma

nh at ta Mi nn

ele s ng Lo sA

us to n Ho

nt y, Co u ld

s/F t.

Wo r fie Fa ir

Source: CBRE Research

CT

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0% Cle ve la

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500

WINTER 2024

21

MARKET TRENDS

HVAC systems that must be overhauled to accommodate individual units with kitchens and bathrooms. Office buildings’ deeper and wider floorplates also require creativity to allow for natural light and other necessities expected in multifamily units. In addition, myriad building codes and requirements can add to the cost and timeline of the conversion project.

For this reason, it’s tough to justify a conversion without focusing on high-end properties in urban cores, employing a unique approach, or both. In San Diego’s Gaslamp District, for instance, one sponsor bought a semi-vacant mixed-use building for $8.2 million in 2019. It then converted three floors of former office space into 27 microunits averaging 336 feet and renovated the existing restaurant on the

22

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ground floor. The sponsor implemented a high-end marketing strategy, banking on the success of a new office and technology campus rising across the street. The project has been completed and is currently undergoing lease up.

The other issue is that, by now, many of the viable assets in major downtowns have already undergone the process—take Lower Manhattan’s post-9/11 resurgence or the fruits of Los Angeles’ Adaptive Reuse Ordinance, for example. As conversion opportunities shrink and migration trends move away from primary markets, investors and developers are looking to infill and suburban locations for options.

The type of available office product prevalent in these markets—older vintages with smaller floorplates, campus-style

office parks with parking, and shorter buildings with smaller cores and operable windows—is also physically and financially conducive for conversion to multifamily.

That helps to explain why a growing share of conversions are in areas traditionally considered secondary and tertiary markets. Primary, gateway markets accounted for five of the top 10 cities with the most converted apartments in 2020 and 2021, continuing a longtime trend. In 2022, however, Los Angeles was the only major city on the roster, with locales like St. Louis, Missouri; Kansas City, Missouri; Tucson, Arizona; Kissimmee, Florida; and Alexandria, Viriginia dominating the list. And, according to Rentcafe’s analysis, Tier I markets account for just four of the top 20 cities for future conversions.

These trends are predicted to continue as the strategy gains steam and investment capital flows to more attractive markets. For OTM projects, these are markets where current and projected demand and rent growth for multifamily is higher than for office space.

A RALLYING CRY FOR CIVIC LEADERS Vacant commercial buildings are also a bane for local governments that rely on property taxes for revenue. A reduction in the tax base means there’s less capital available to fund public services, further reducing a market’s prosperity. Turning an underutilized office asset into housing can both boost the property’s value and create an influx of residents to help support local

“

RECOGNIZING THAT THE SAME ZONING RULES AND REGULATIONS THAT HELPED CITIES MANAGE SPRAWL IN THE PAST ARE NOW HINDERING THEIR ABILITY TO ADAPT AND EVOLVE, MUNICIPAL AND STATE OFFICIALS ARE AGGRESSIVELY TRYING TO ADDRESS THE CRISIS.

businesses and offset lost tax revenue. Yet years of conversion trends have shown that the math on the types of OTM projects that would help transform cities won’t work on a massive scape without public involvement—and investment.

Recognizing that the same zoning rules and regulations that helped cities manage sprawl in the past are now hindering their ability to adapt and evolve, municipal and state officials are aggressively trying to address the WINTER 2024

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MARKET TRENDS

crisis. Public leaders everywhere are introducing legislation and initiatives to make conversions more attractive to developers. Several cities and states are offering new tax abatements, tax credits, grants, loans, and other incentives to promote OTM conversions. Others have allocated funds for future programs or are conducting studies on how to stimulate OTM activity in their towns.

Officials are also leveraging tools that are already in place, such as historic tax credits, tax-increment financing, and low-income housing tax credits.

Existing programs are being adjusted and expanded, with officials streamlining approval processes and easing certain regulations to remove monetary and

24

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bureaucratic hurdles, rezoning areas to allow for more and denser residential product, reducing the age cutoff of applicable buildings for certain programs, and expanding the programs’ reach beyond core business districts to infill and outlying neighborhoods.

Federal-level activity is also promising.

Efforts to address the nation’s housing crisis are intensifying, and OTM conversions are a large component. In January, sponsors introduced a new version of the Revitalizing Downtown Act, which would provide a 20% tax credit on qualified office conversions of properties more than 25 years old. Such bills support trends indicating that nearly all currently scheduled OTM projects are

on properties built before 2000, shown in Table 2. HUD has also released a notice of funding opportunity for a study of post-pandemic OTM conversions.

In October 2023, a dedicated working group formed by the Biden-Harris Administration released a 54-page guidebook laying out new and existing opportunities in which the federal government can facilitate the conversion of office space to affordable housing, including reduced development costs and identifying underutilized federal assets that are well-suited to conversion.

Existing federal programs can also help support OTM conversions. These include longstanding programs like historic tax credits, new markets tax

credit (NMTC), low-income housing tax credits (LIHTC), tax increment financing, and opportunity zone incentives. Also relevant are initiatives that would help subsidize energy-efficient, sustainable retrofits and development, like the EPA’s $27 billion Greenhouse Gas Reduction Fund and renewable energy tax credits.

Multiple incentives and financing tools can also be combined to help offset the cost of OTM conversions and create market-rate and affordable units. For instance, by combining a state credit and federal historic tax credits with NMTCs or LIHTCs, an investor with a qualifying OTM conversion can cover as much as half of their construction costs—effectively increasing the project’s equity component and ultimate NOI. It’s important to note, though, that many of these programs come with caveats that investors and lenders must consider, such as minimum hold periods or the inclusion of affordable or workforce housing.

The surge of public support for OTM suggests conversions may not just become easier, but even encouraged, throughout much of the country. As OTM conversions become more understood and commonplace, so will opportunities for investors and providers of capital.

PRIVATE DEBT CAN FUEL OTM CONVERSIONS Many traditional lenders and investors view conversions as risky endeavors; rising interest rates and the stricter financing climate put an even bigger damper on the strategy. The nuances of OTM conversions, however, make them a natural fit for private real estate lenders.

An OTM conversion is the exact type of transitional situation that would qualify for a bridge financing. Sponsors have long been using bridge loans for value-add

TABLE 2. OTM CONVERSIONS BY AGE OF PROPERTY Nearly all of the office-to-multifamily conversion projects scheduled to deliver in 2023 and beyond are in properties built before 2000.

OTM conversions slated for delivery in 2023 and beyond will remove 33.9 million square feet of office space from the market. Of the 154 buildings involved, only seven properties totaling 1.1 million square feet were built after 2000.

Pre-1900 1900-1949 1950-1979 1980-2000 Source: CBRE Research

projects, making capital improvements to upgrade or reposition underutilized or obsolete properties. Because these deals are rarely straightforward, bridge lenders are used to evaluating transactions on a case-by-case/market-by-market basis.

Private lenders, most of which operate in the middle market, are also familiar with the type of real estate suitable for conversions.

Although headlines have focused on the transformations of large office towers to luxury apartments in the nation’s top CBDs, there are far more OTM conversion opportunities among older, smaller buildings outside of major cities. These structures also have smaller floor plates, working windows, and other features that are conducive for residential conversion.

The key is to find markets with greater demand for apartments than for Class B office and properties that would lend themselves well for residential conversion. Research shows that in

Post-2000

most markets, it’s older Class B/C office assets. These assets are smaller in size than modern buildings, but larger in number—and market impact. One JLL study reported that since the pandemic, nearly 80% of overall negative absorption has been in buildings delivered before 1980. Considering the average age of U.S. office buildings is 53 years, that equates to a tremendous amount of reuse opportunities.

The construction period for conversions is roughly three times faster than for new builds, reducing time-to-market by as much as two years. That corresponds with the average term of bridge loans, which typically max out at three years after extension provisions. Conversions can also cost 20% to 40% over new builds, given the reduced timeline and ability to reuse building materials. Both factors help to mitigate risk in the deal while effectively increasing returns.

An added benefit is that conversions WINTER 2024

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MARKET TRENDS

are typically more environmentally friendly than construction.

The success of any project depends largely on the capabilities of the sponsor, so it’s important for lenders to be comfortable with the borrower, its resources, track record, and business plan. By the time a sponsor approaches a bridge lender for an OTM project, it should have already completed a tremendous amount of due diligence, market research, and financial and legal analysis, as well as any third-party environmental and engineering studies.

Preliminary approvals, entitlements, and permits should be in place. If public funds are being used, the sponsor will likely have submitted all the necessary documentation in advance, because the approval process

can be long and complicated, and some subsidies don’t kick in until after occupancy.

If the sponsor doesn’t have a firm grasp on all facets of the project, lenders will perceive greater risk in the transaction.

For lenders, the risks associated with conversions are similar to construction and can be addressed through underwriting, contingencies, interest reserves, and other mitigants.

The inclusion of public subsidies shouldn’t be a deterrent either. In fact, subsidies often work in sponsors’ favor since they can help the project’s overall success. For instance, Red Oak has successfully provided bridge financing on a few Washington, D.C., multifamily rehabilitations under the federally funded Housing Choice Voucher Program, which provides partial

to fully guaranteed subsidized rent to landlords. Some of them had an added bonus of being in an opportunity zone.

Any caveats associated with public funds, though, must be factored into the deal terms. For instance, many public programs require minimum hold periods, so the sponsor’s exit plan will likely include permanent financing or another form of payoff, rather than a sale. A borrower might also use a bridge loan to fund a project while its application for HUD financing is being reviewed—a process that can take six months or longer. If tax credits are being utilized, often the property can’t be subject to a lien. In these cases, the collateral for the bridge loan isn’t the physical asset. Rather, it’s the expected tax

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credits. The loan provides the necessary capital to complete the conversion. Upon stabilization, the sponsor will repay the bridge loan using the interest generated by the expected tax credit investments.

with deliveries. The sustained reduction

residential conversions, the window

in office demand and tenants’ continued

to buy them cheaply has passed and

flight to quality will render millions of

investor appetite remains high. As

square feet of older product obsolete.

office values will fail to keep up with their counterparts, they will remain

Office is accounting for a growing share

the primary target for reuse.

of overall delinquencies. Many loans

MOMENTUM IS BUILDING

As of July 2023, 122,000 units worth of new conversions were under way, with 45,000 of them in former office buildings, per Rentcafe’s analysis. Future conversions are expected to grow by 63%, and OTMs will comprise a greater share of these projects as more sellers adjust their valuations.

are coming due in the next couple years and rising debt servicing costs continue

Although conversion activity this cycle has slowed slightly from the initial surge earlier in the pandemic, a convergence of factors will make OTM projects more appealing for investors and capital providers:

to pressure borrowers. Owners will need to decide whether to refinance, get the assets off their balance sheets, or put capital into improvements.

Given the tighter lending climate, the

Nearly one billion square feet of U.S.

latter two options are more likely.

office space is currently vacant. With more than 100 million square feet under

Although property types like hotels

construction, vacancies will likely increase

and industrial are more conducive to

A more recent report from CBRE supports this theory (see Table 3 below and Table 4 on page 28). About 100 office

TABLE 3. OFFICE-TO-MULTIFAMILY CONVERSIONS IN THE U.S.

Completed

Underway

Announced

MSF (right axis) 17.0

18.0

80

16.0

70

14.0 67

60

10.0

50 7.7

40

1

30 3.9

2.7

3.8 22

14

10

17

18

2017

2018

2019

17

16

2021

4.0

3.2

12

2020

23

2.8

2022

2023

3 9

10

11 2016

6.0

13

2.6

1.2

8.0

5.7

4.6

20

0

12.0

2024*

Millions of Square Feet

Number of Buildings

90

2025*

2.0 10

2026 & beyond*

0.0

Source: CBRE Research

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MARKET TRENDS

TABLE 4. TOP MARKETS FOR UPCOMING OTM CONVERSIONS OTM Projects delivering in 2023 and beyond

Washington, D.C.

21 Buildings

Dallas/Ft. Worth

10

New Jersey

18

Manhattan

6

Cleveland

4

Cincinnati

6

Minneapolis/St. Paul

12

Houston

3

1,500,000

Atlanta

4

1,500,000

Los Angeles

11

Phoenix

8

996,500

Chicago

1

982,600

Columbus

4

Philadelphia

5

Fairfield County, CT

6

4,900,000 4, 100,000 3,600,000 2,600,000 2,000,000

# Number of Buildings

1,700,000

Office SF Total

1,600,000

1,200,000

884,900

OTM PROJECTS NATIONALLY Office Space Involved: 33 MSF Number of Buildings: 154 Average Building Size: 220,100 SF Average Building Age: 1961

834,900 783,500

Source: CBRE Research

GARY BECHTEL

28

conversions are slated for delivery this year alone, up from a longtime annual average of 41. Another 201 conversions have been started or announced. These projects account for some 60 million square feet of space, or 1.4% of U.S. office inventory—a 20-basis-point uptick from last year. As expected, the markets with the most conversion activity not only have higher-than-average vacancies but also higher numbers of older buildings.

calling for 21,000 units to be created in

OTM projects make up 118, or 48%, of all upcoming conversions, with plans

an OTM conversion project can be a

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the coming years. Office-to-mixed-use conversions account for an additional 18% of total projects. Most of the office conversions are thus far scheduled for 2025 or later, just in time for the expected rebound of both the multifamily market and broader economy. If the market demand and financial specifics are favorable, a strong sponsor with great candidate for a bridge loan.

Gary Bechtel is the CEO of Red Oak

Capital Holdings and Oak Real Estate

Partners, where he leads the investment

management leadership teams with direct oversight of all portfolios and lending

strategies. During the past 37 years, he has been involved in closing more than $10

billion in commercial debt transactions.

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MARKET TRENDS

Market Update: Capital Sources For lenders to thrive in the current demanding capital landscape, understanding the pulse of the market and the factors driving it is of utmost importance.

ALEX KADDAH, SAM KADDAH, AND KENDRA ROMMEL

I

n today’s financial market, capital is a precious commodity. The current dynamic between borrowers and lenders is undergoing a seismic shift.

The shortage of discretionary capital has led to an increased premium for capital demands. In other words, there’s a lack of available funds that can be freely used, so there is an extra cost associated

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with meeting capital requirements. This shift affects how deals and loans are

being done. Loan-to-value ratios (LTVs),

interest rates, and deal flows are creating challenges and opportunities that echo throughout the financial landscape.

Private lenders must have a layered capital stack with multiple sources of funding to

be successful beyond 2023. This is because institutional capital sources are volatile and susceptible to market changes.

Lenders with their own capital, warehouse and leverage lines, relationships with existing correspondence or syndication partners, family offices, and institutional investors will be the most viable and stable lenders in the space.

DIVERSIFICATION STRATEGIES What are some recommendations for diversifying capital and creating multiple capital stack resources? Consider these: 1

F unds and loans on balance sheet in the form of funds, private placement, and syndication.

2 F amily office backing 3 W arehouse and leverage lines 4 S trip returns as a fund

source of its own

5 S pecialty institutional funds like

insurance company investments, pensions, and endowments

6 T raditional institutional lines

IMPACT ON LTVS

In 2023, institutional capital sources were once again unreliable. These sources are often driven by Wall Street dynamics, interest rate changes, and economic changes. Additionally, the decisionmakers at institutional capital sources often lack the experience and depth to understand private lending. They also lack the tools and technology to scale their risk management assessment.

One notable exception is a new trend with a couple of lenders who know how to underwrite and fund loans and who are backed by fully or recently sold-to committed institutional funds. These lenders have displayed exceptional underwriting and risk management skills, direct ownership with a favorable cost of capital, and trust in their leadership.

The current market conditions have triggered a distinctive ripple effect on LTVs, a fundamental metric in lending that determines the ratio between the loan amount and the appraised value of the asset. With capital becoming scarcer, lenders are exercising caution, leading to a more conservative approach in determining LTVs. This conservative approach is evident in various sectors, from real estate to small business loans. Lower LTVs act as a safety net for lenders, reducing their exposure to risk in an uncertain market. Consequently, borrowers face the uphill task of bridging the gap between the loan amount they require and the reduced valuation of their collateral.

discretionary funds, coupled with the situation with Treasurys and the bond markets, has triggered a surge in interest rates, creating a costlier borrowing environment.

In response to this shift, lenders have adjusted their rates upward to balance the risk and maintain profitability.

The increased rates are a deterrent for borrowers, compelling them to reconsider their financial and investment strategies.

Businesses and individuals now face the challenge of evaluating the sustainability of borrowing at these escalated rates.

This market scenario has woven itself into deal flow dynamics. Transactions that would have swiftly materialized in a more liquid market now face extended timelines and increased scrutiny. Deals that previously met funding criteria with ease are now subjected to rigorous evaluations, creating a bottleneck in the flow of transactions. This scenario affects various industries, from real estate acquisitions to startup funding, constraining opportunities and altering the pace of business development.

FINANCIAL PLANNING IS CRITICAL

INTEREST RATES DRIVE BORROWING COSTS

Amid these shifting dynamics, borrowers find themselves in a position where strategic financial planning is imperative.

As the gap between desired loan amounts and the reduced valuation of collateral widens, borrowers must explore innovative ways to secure the financing they need.

This may involve seeking out alternative assets that lenders find attractive or working on enhancing the appeal of their existing collateral.

Simultaneously, the landscape of interest rates has undergone a significant transformation. The scarcity of available

Additionally, as the lending landscape has become more competitive, it's essential for borrowers to sharpen their WINTER 2024

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MARKET TRENDS

negotiation skills. Understanding the nuances of different lending sources, from traditional banks to private equity firms, can help borrowers identify the best fit for their specific financial needs.

STAYING NIMBLE On the other side of the equation, lenders are navigating a terrain where adaptability and innovation are the keys to success.

In an environment where traditional lending practices are being reevaluated, lenders must explore new strategies to mitigate risks while ensuring profitability.

Collaborative partnerships with alternative capital sources can open up opportunities for lenders to diversify their portfolios and reach a broader range of borrowers. Moreover, staying well-informed about market trends, macroeconomic factors, and regulatory changes is paramount for lenders to make informed decisions and respond effectively to the evolving financial landscape.

Private lenders, in their quest to navigate this tumultuous market, are looking toward diverse sources of capital to fund their loans. Traditional sources such as banks and financial institutions continue to play a pivotal role but are increasingly cautious and stringent in their lending and partnership practices. Alternative sources such as private equity firms, debt funds, hedge funds, family offices, sovereign wealth, and crowdfunding or fractionalized platforms are gaining traction, offering unique solutions to bridge the gap left by the tightening of traditional lending practices. These nonconventional sources are often more flexible and creative in their approach, providing opportunities for both lenders and borrowers to explore innovative financial structures.

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Adaptability and agility are key to navigating the challenges posed by scarce and cautious capital. In-depth market analysis, staying updated on regulatory changes, and meticulous risk assessment are indispensable tools in a lender’s arsenal. Moreover, fostering relationships with diverse capital sources and embracing innovative lending strategies can be a game-changer in this evolving financial terrain.

It's essential for lenders to recalibrate their risk assessment methodologies, factoring in the increased uncertainty and volatility in the market. Diversification of loan portfolios, a prudent allocation of capital, and vigilant eye on market trends are vital strategies to weather the storm. The ability to identify opportunities in sectors with untapped potential or undervalued assets could be a pivotal skill in this landscape.

Furthermore, communication and transparency with borrowers have never been more crucial. Setting realistic expectations about lending terms, rates, and potential challenges can foster a stronger and more resilient relationship with borrowers. This transparency also aids in building trust, essential in a market where uncertainty looms large.

In conclusion, current market conditions, characterized by the scarcity of discretionary capital, have necessitated a change in thinking in the lending landscape. The impact on LTVs, interest rates, and deal flow is palpable, challenging both borrowers and lenders to adapt and innovate. By exploring diverse sources of capital, adopting nimble strategies, and maintaining transparency, lenders can navigate this turbulent landscape.

ALEX KADDAH

Alex Kaddah is the lead data analyst at Liquid Logics. He also fills in with vice president of sales and operations responsibilities.

SAM KADDAH

Sam Kaddah is president and CEO of

Liquid Logics, a company that provides

fintech and NextGen SaaS for the private equity lending space. He is skilled in

building consensus, producing results, and streamlining operations.

KENDRA ROMMEL

Kendra Rommel is principal and co-founder of Futures Financial. Rommel spent many successful years as a processor, funder, post closer, and operations manager.

In 2009, Rommel became asset manager at Kondaur Capital. She’s spent the last 12 years in asset management, capital

markets, and private lending. Rommel

holds multiple state originator’s licenses.

The leading capital provider for private lenders

360 Experience

White Label Table Funding

Full Back Office Support

Full Technology Suite

Concierge Service

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The Current State of the Private Lending Industry Previously unavailable industry data made accessible through AAPL gives members a competitive edge.

NEMA DAGHBANDAN, ESQ.

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E

arlier this year, Lightning Docs, the official loan document platform of the American Association of Private Lenders (AAPL) joined forces with AAPL to bring to light up-to-date state-of-the-industry data that had previously been unavailable for those in the private lending sector.

Union presentation showcased steadily improving numbers across both bridge loans and rental loans through the first three quarters of 2023.

BRIDGE LOAN VOLUME UP 59% IN 2023

THE DATA POOL Lightning Docs' algorithms have analyzed more than 39,000 loans worth more than $24 billion since 2018. The survey results for the first three quarters of 2023 captured more than 2,000 loans per month at a value of more than $1 billion in aggregate loan amounts per month.

After reviewing data gathered from this unique data set, we can confidently state that 2023 trends are not as bad as many prognosticated entering the year.

In fact, our October 2023 State of the

A bridge loan in this context means an interest-only loan of 36 months or less duration, with a balloon payment after the term. Bridge loans may be fix-andflip loans or construction loans, or they may contain no construction feature and simply be a short-term financing option to “bridge” the borrower to a future sale or refinance. According to our data, visualized in Table 1, bridge financing has grown by 59% from February 2023 to September 2023. February 2023 was a historic low point for bridge volumes nationally.

From March 2022 (which was an historical high point for bridge loan production)

through September 2023, bridge loan volume is still down about 20%-25%. Therefore, this year’s overall production levels are expected to be less than last year in aggregate. Regardless, the sentiment of volumes is still better than expected from clients and users that we’ve polled.

BRIDGE LOAN INTEREST RATES AND AVERAGE LOAN AMOUNTS HOLD STEADY ON MACRO LEVEL Lightning Docs’ data in Table 2 (see p. 36) showed that the national average interest rate has stayed fairly level throughout the year, with a low point of 10.97% in April and a high point of 11.27% in September, after starting the year at 11.08% in January 2023. The survey excludes any loans that it considers anomalies, including those with interest rates below 4% or above 15% as well as any loans greater than $2 million or less than $50,000.

TABLE 1. BRIDGE LOAN VOLUMES BY USERS January - September 2023 1300

1219 1025

1010

11%

936

975

9%

748 650

8%

1131

1102

1112

10%

7%

1%

711

5%

44%

59%

325

0

Jan-23

Feb-23

Mar-23

Apr-23

May-23

Jun-23

Jul-23

Aug-23

Sept-23

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MARKET TRENDS

TABLE 2. BRIDGE LOAN RATES & AVG. LOAN AMOUNT January - September 2023 11.30% $446,217

11.25%

11.24%

$442,254

11.27%

$450,000

11.21% $434,377

11.18%

$435,000 11.16%

11.14%

11.08% $421,347 11.05%

$420,000 $419,207

$411,160

10.97% 10.93%

$405,000

$400,006

$397,175 $392,778

10.80% Jan-23

$390,000 Feb-23

Mar-23

Similarly, the average loan amount fluctuated throughout the year. It started at almost exactly $400,000 in January, dipped to $392,778 in April, then rose dramatically to a high-water mark of $446,217. It then tumbled nearly 8% to finish at $411,160 in September.

Bridge loans are truly a local business, so although national data trends are interesting, one must understand what is happening at the local level to get an appreciation of any true rate and amount trends. A stark example of this fact is in Atlanta, Georgia, which is composed of two separate counties. There was a 100-basis point spread between those two counties in September 2023.

36

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Apr-23

May-23

Jun-23

Jul-23

Aug-23

Sept-23

TABLE 3. BRIDGE LOAN INTEREST RATES September 2023

14% Average Interest Rate: 11.3%

3% 18%

65% of loans had an interest rate between 11%-13% Rate: <10% 10%

29%

11% 12% >=13%

37%

Avg. Loan Amount

Bridge Loan Rates

11.14%

Even though national interest rates were an average of 11.3% for September 2023, there is a broad diversification of actual interest rates that comprise this amount. In September, 65% of loans had an interest rate between 11%-13%. Further analysis shows 36% of loans had an interest rate between 11%-11.99%; 29% of loans had an interest rate of 12%-12.99%; 18% of loans had an interest rate of 10%-10.99%; and 14% of loans had an interest rate of 13.01% or higher. The outlier of the bunch was interest rates below 10%— just 3% of loans fell into that stratum in the first three quarters of 2023. Funny enough, when clients ask about competition, many say their competitors are providing 9% financing. The data does not support these claims, as shown in Table 3.

TABLE 4. TOP BRIDGE STATES BY VOLUME 2022

2023 SO FAR

SEPT 2023 BRIDGE INTEREST RATE AVERAGE

California

California

11.12%

Florida

Florida

11.15%

Texas

Texas

11.26%

Georgia

Illinois

1%

11.34%

Illinois

Georgia

1%

11.83%

Massachusetts

North Carolina

2%

10.99%

Pennsylvania

Massachusetts

1%

11.06%

North Carolina

New Jersey

5%

10.79%

Tennessee

Pennsylvania

2%

11.40%

Ohio

Ohio

11.35%

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WINTER 2024

37

MARKET TRENDS

TABLE 5. RENTAL LOAN VOLUMES BY USERS January - September 2023

886

900 769 675

450

5%

13%

609

5%

490

468

17%

672

640

768

755

10%

2%

14%

31%

57%

225

0

38

Jan-23

PRIVATE LENDER BY AAPL

Feb-23

Mar-23

Apr-23

May-23

Jun-23

Jul-23

Aug-23

Sept-23

TABLE 6. TOP RENTAL STATES BY VOLUME

TOP THREE STATES BY VOLUME HOLD STEADY FROM 2022

2022

2023 SO FAR

Texas

Texas

Florida

Pennsylvania

2%

New Jersey

Florida

1%

Pennsylvania

New Jersey

1%

Illinois

Ohio

5%

New York

Illinois

1%

Connecticut

New York

1%

California

North Carolina

1%

North Carolina

Maryland

5%

Ohio

Indiana

1%

As seen in Table 4, the top three states by volume of bridge loans held steady year over year for the first three quarters of 2023. California, Florida, and Texas took the top three spots for the second straight year, followed by Illinois and Georgia to round out the top 10.

Upwardly mobile states in the volume chase included North Carolina at No. 6, up two spots from 2022, and New Jersey climbing from 13th to eighth in the same period.

New Jersey’s ascent is one of the most perplexing trends of the year considering its average interest rate of 10.79% is the lowest among the top 10 states, and it also has one the nation’s longest foreclosure processes.

TERM RENTAL LOAN VOLUMES ON STEADY RISE Term rental loans, defined as 30-year DSCR (Debt Service Coverage Ratio) loans, mirrored bridge loan volumes through the first quarters of 2023, up by 57% from January and moving higher in almost every month this year. The biggest surge—31%—came in March.

In terms of state specific volumes, depicted in Table 5, Texas remains the No. 1 state for term-rental loans, while Pennsylvania surged up two spots to second among the states, bypassing both Florida and New Jersey. Also making big positive moves inside the Top 10 for the first three quarters

WINTER 2024

39

MARKET TRENDS

TABLE 7. RENTAL LOAN RATES & AVG. LOAN AMOUNTS January - September 2023 8.40%

$450,000

8.30%

$400,000

8.20%

$350,000

8.10%

8.14%

$299,181 $287,680 $266,013

$246,774 8.00% 8.00%

8.01%

$258,502

$300,000

$254,442 $267,371

$249,631

7.93%

$271,639 $250,000

8.01%

7.90%

$200,000 7.89%

7.87%

7.80%

Avg. Loan Amount

Rental Loan Rates

8.31%

$150,000 7.79%

7.70%

$100,000

7.60%

$50,000

7.50%

$0 Jan-23

Feb-23

Mar-23

of 2023 were Ohio, up five spots to fifth, and Maryland, up 5 spots to No. 9. Both Connecticut and California dropped out of the top 10 from 2022 to 2023, shown in Table 6.

TERM RENTAL INTEREST RATES AND LOAN AMOUNT AVERAGES SEE MORE VOLATILITY Unlike bridge loans, which have remained fairly steady, according to Table 7, term rental loans are primarily securitized and much more sensitive to the movement of the Treasury markets. Term rental interest rates started the year at 8%, averaging just shy of $300,000 per loan. Interest rates dipped to a yearly low of 7.79% in May, while the low 40

PRIVATE LENDER BY AAPL

Apr-23

May-23

Jun-23

point for borrowing amounts was $246,774 in

Jul-23

Aug-23

Sep-23

high of $287,680 in March. Interest rates

You can stay ahead of the competition with our ongoing State of the Industry webinar series, available to all current AAPL members.

with an average loan amount of $271,639.

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WINTER 2024

41

FUND MANAGEMENT

Are Investor Lead Generation Funnels Right for Your Business?

Understanding the ins and outs of using digital lead generation funnels can help fund managers attract more targeted and enduring investors.

KEVIN BULL

T

he real estate investment landscape has evolved dramatically since contacts were stored and managed in Rolodexes. As a forward-thinking professional in the real estate investment domain, you recognize that attracting new capital is no longer confined to traditional networking.

The modern investor relations landscape demands a blend of innovative technology and savvy marketing—ingredients essential for any sector's growth and vitality. Investor lead generation funnels have emerged as a useful tool for investor engagement and capital acquisition, for example.

Let’s explore the practicalities of investor funnels and their pivotal role in expanding your fund, securing investor interest, and fostering enduring partnerships.

SETTING THE LEGAL STAGE A landmark shift occurred with the introduction of the JOBS Act of 2012, specifically Regulation D 506(c), which facilitated general solicitation and paved the way for investor lead generation funnels. This milestone made it legally compliant to tap into the vast potential of digital marketing platforms like Meta.

42

PRIVATE LENDER BY AAPL

THE SILVER LINING Recent global economic and health crises have accelerated the consumer shift toward technological solutions in numerous aspects of daily life. The realm of online investing, once met with skepticism, now thrives as a new norm.

The “working from home” movement has also resulted in more investors being comfortable “investing from home.” The modern investor's comfort with digital platforms has significantly increased, fostering a flourishing marketplace for investor funnels.

WHY META STANDS OUT In the bustling digital realm that is bursting at the seams with new social platforms, why select Meta for investor lead generation funnels? The rationale is that it’s multifaceted and thoroughly tested.

The Original Pioneer. As a trailblazer in the

social networking world, Meta possesses a wealth of data harvested from billions of user interactions. At least 70% of all internet users have an active account on one of the three Meta platforms, providing a vast pool of data that is a goldmine for targeting potential investors.

Demographics. Although most social

platforms have their sights set on attracting younger users, Meta has steadfastly held onto its older demographics—who also represent substantial purchasing power. According to a Pew Research 2021 report on social media, 73% of Americans ages 50 to 64 use Facebook, and half of those 65 and older say they use the site—making Facebook the most used platform among this older population.

Custom Audiences. Meta’s native targeting

limitations make it difficult and expensive to advertise to high-net-worth audiences.

However, by uploading your own custom data sets based on high net worth, you can harness the platform’s powerful algorithm to pinpoint target your desired audience. Overcoming this limitation helps focus your advertising budget on prospects that match your investor avatar.

Creative Control. Your advertising

campaign should reflect your unique brand, conveying your value proposition to investors in ways that are easy to understand and generate curiosity. Meta advertising helps you communicate your story with custom videos (e.g., commercials) and graphics (e.g., tombstones) in a way that other

tools like Google Ads, LinkedIn messaging, and cold outreach cannot.

Conversion Tracking. Meta's conversion-

tracking technology is invaluable to a long-term capital raising strategy.

Integrate conversion tracking into your sales funnel to target prospects that emulate your most successful leads. This process enables continuous and automatic refinement of ad delivery and lead quality.

relations and fund management. This involves being actively involved in the initial strategy, relentless pursuit of data, continuous updates to advertising creative and copy, and an airtight lead follow-up sequence. Use a data driven approach to increase conversion rates at each stage, optimizing your inbound investor interest (and capital).

MULTICHANNEL OUTREACH CRAFTING A MAGNETIC ADVERTISING CAMPAIGN The most successful investor funnels will come from those that combine innovative digital marketing strategies with your established expertise in investor

Multichannel outreach allows you to communicate with your new leads where it’s most convenient for your prospects.

Start off with at least two channels (e.g., text messaging and email). Test and measure the results from adding in

new channels (e.g., ringless voicemail, Facebook Messenger, Instagram DMs, WhatsApp messages, and live chat).

OPTIMIZING LEAD FOLLOW-UP Core to the success of any investor funnel is your post-engagement strategy—everything that happens after leads convert on your advertisement. The MIT Lead Response Management Study delivers a sobering statistic: Your odds of contacting a lead increase a hundredfold if you reach out to them within five minutes of their initial conversion as opposed to 30 minutes. This statistic underscores the necessity of rapid response in order to maintain the interest of potential leads.

WINTER 2024

43

FUND MANAGEMENT

ARTIFICIAL INTELLIGENCE IS YOUR ALLY

REPORTING IS A REQUIREMENT

Previously, fund managers had to hire sales development representatives to support their main closers with tasks such as nurturing prospects and scheduling meetings. Now, by leveraging conversational AI, you can effortlessly and immediately nurture your investor leads, positioning your brand as responsive and reliable. By building or hiring an AI sales assistant, you can increase investor lead conversion rates compared to a traditional sales development representative, while also saving time, money, and management headaches. There are several providers for AI sales assistants geared toward lenders/ originations, including InvesTechs.

Investor lead generation funnels are a long-term strategy to generate interest, build relationships, and grow your investor base. Using them requires patience and an adequate advertising budget. This considerable investment demands robust reporting to ensure your decisions are based on accurate, real-time and actionable data.

WHAT TO MEASURE The world of advertising is full of buzzwords, acronyms, and fancy phrases vendors use to validate their retainers.

Ultimately, your success comes down to a handful of key metrics, which

will seem like common sense to you; however, they’re not what advertisers are taught to look for. Maximize the ROI of your investor funnel by staying focused on the metrics that matter.

Cost Per Qualified Lead. This initial metric

establishes the baseline of your advertising efficiency. Your cost per qualified lead can range anywhere from $15-$50 and bear results. Be sure to take a long-term approach by prioritizing lead quality over quantity. Optimizing your campaigns simply for cost per lead often results in low quality leads, which are unlikely to convert, wasting your ad budget and time.

Cost Per Meeting Scheduled. The number

of meetings scheduled is a key indicator of investor relations activity levels.

AAPL membership is the standard of excellence among private lenders and the foundation supporting the industry’s viability and growth.

Join the oldest and largest association providing for private lender education, ethics, and advocacy at aaplonline.com/join.

44

PRIVATE LENDER BY AAPL

When you have honed into your desired cost per meeting, the next step is to strategically increase your advertising budget to fill your calendar with as many qualified investor leads as possible.

Meeting Attendance Rate. Having a

schedule full of meetings is beneficial, but your organization loses valuable time and resources when leads fail to attend. Although it's inevitable that some leads will miss their meetings, you can mitigate this with prompt and consistent confirmations and reminders. Simply implementing SMS reminders will substantially boost the likelihood of your investor leads showing up to their meetings.

Sales Cycle. Even if your investor leads

are well-qualified, they are often new to your company's offerings, and they will take extra time for due diligence or await an opportune moment.

Consequently, your sales cycle on these leads—spanning from initial contact to receiving capital—can often range from three to six months. By tracking the duration required to convert a lead into an investor and strategically shortening this period, you can significantly enhance your return on investment.

KPIs can create substantial value downstream. For example, cutting your cost per qualified lead by 10%, or boosting your meeting attendance by 5%, can lead to a significantly larger positive shift in your cost per investor.

When you calculate the ROI on repeat investors generated from your investor funnel, be sure you’re sitting down.

Cost Per Investor. The primary goal of your

BUILDING YOUR CAPITAL RAISING MACHINE

When put into a spreadsheet, it's clear that minor adjustments to these

Adopting investor lead generation funnels isn't merely about keeping pace—it's about setting the pace, establishing thought leadership, and fostering connections that transcend traditional limitations. Your expertise in real estate investment, paired with the powerful digital tools, has the potential to grow an enduring investor base. As the real estate landscape continues to evolve, those who leverage investor funnels will find themselves

reporting strategy is pinpointing your cost per investor, which in turn informs your true cost of capital. When you achieve a stable and predictable cost per investor, you're then in a position to strategically scale your advertising budget and sales team to meet your capital-raising objectives with confidence. Your sales team’s ability to close investor leads will have the most impact on your cost per investor.

at the forefront of raising capital online—not only as participants but as architects of its transformation.

KEVIN BULL

Kevin Bull is the co-founder of

InvesTechs, a consultancy and digital marketing agency. It specializes in raising investment capital for

established real estate and other private investment funds or syndications.

Bull's background is in advertising,

brand development, and professional presentation. He has specific

expertise in raising capital from high-net-worth individuals.

WINTER 2024

45

FUND MANAGEMENT

To Scale, or Not to Scale?

In this turbulent market, fund managers are asking themselves whether to double down or buckle down.

SCOTT WARD

M

anageable growth and increased market share are typically the goals of every new and existing fund manager. But in the current market, whether to grow and expand a company’s footprint and assets under management or to hunker down and circle the wagons has most finance professionals pacing the living room floor during the wee hours of the morning.

An argument can made either way.

46

PRIVATE LENDER BY AAPL

TO SCALE! If you are one of the professionals in our lending world who is considering making the move to grow, here are some things you should consider.

First, think about how the growth of your company will meet the needs of your current client base.

Also evaluate whether expanding will help you successfully meet the

new needs your clients may have as market valuations change.

Second, it’s always a solid idea to look to others who are scaling successfully or who are mainstays in the marketplace.

Ask yourself, “What are the other successful players in my swim lane doing?” Keep in mind, however, that all markets are not the same. What may have been a major win in the

last market is not necessarily going to be a win in today’s market, which is characterized by the tightening of capital.

A CRE Analyst report shows a definite downward trend in big brokerage earnings for a few major players as of October 2023. The third-quarter earnings for the top six commercial lending houses (Newmark and Walker Dunlap) show some eyebrow-raising declines in commercial income. Other major players like CBRE, JLL, and Colliers have leveled off and stayed flat through stabilized growth or idol continuance. CBRE is down 11%; JLL, 9%; and Colliers, 4%; whereas Newmark is down 25% and Walker Dunlap is down more than 30% from 2022.

On the other side of the fence, however, are direct lenders in the fix-and-flip and DSCR spaces. Many of these direct lenders have shown massive fundings and success.

These companies have long track records and are supported by experienced staff.

files, new banking relationships, and other new staff.

3 C lear Vision of Markets and Asset

Classes to Pursue. This is perhaps the

most important. A defined and strictly adhered to mission statement is a growing company’s best friend because it helps you measure performance and whether you achieve your goals.

The private real estate lending market is highly competitive, fast-paced, and consistently impacted by external factors.

Strong and constant recruitment of capital infusions are important because they are a stabilizing force. A fund manager’s internal control of its own discretionary capital is important to managing growth and attracting new investors.

Understanding the risks in our current turbulent market as well as creating strong internal documents to support streamlined policies are paramount for

repeat success. Growth definitely can be achieved, but it must be tempered with a savvy and sharp plan to execute your vision as well as a multifaceted capital approach that covers many bases.

NOT TO SCALE! The flip side of the coin is to stay close to home and ride things out, all while staying strong and being known as the “go to company” in your focus area. History has shown that companies that are true “tent poles” of a local market do well and reduce long-side risk because they are such experts in their own backyard.

In today’s turbulent capital market and fast-moving real estate space, it has become very attractive to stay put and focus on what you specialize in.

Micro market ownership is always a solid path for quality relationship

Most debt funds and REITS are not as large and established, so it isn’t really fair to compare apples to apples in this instance. If you’re trying to grow a smaller firm or fund, do so through goggles that clearly show manageable metrics that you can achieve through a slowand-steady wins-the-race approach.

Remember, even the big and successful funds have seen their fair share of bumps in the road. They all have the following in common as they strive for consistent growth.

1

R ealistic Expectation of Capital Availability and Leverage.

Without these, it is hard to bring on new clients.

2 Proficient and Dedicated Team.

You need people to manage new WINTER 2024

47

FUND MANAGEMENT

building and repeat business. Following this strategy prepares a company for potential explosive growth when the market changes again, because you have served your local clients successfully and earned their trust during tougher times.

Companies (debt funds, REITS, brokers) that dominate a select MSA and product vertical typically emerge each quarter with strong numbers and happy investors. Why? Because through small and managed advances, they are able to stay true to their mission statement and key skill sets. Having trained and local “in-house talent” pays off by earning client confidence tenfold.

Besides dominating your local market, another crucial element of high-performance profitability when embracing a micro approach is sticking

with asset classes your company knows very well. Branching into an entirely new lending lane isn’t a great idea in rocky times. Keep your focus on loan exits that can be achieved. A quality dismount is worth its weight in gold, both for the health of your fund and for its reputation for underwriting quality deals. Niche specialization always works best with a smaller team, a clear vision of that asset’s unique market, and a way to dismount should the current market get any tighter.

There are pros and cons to scaling or not scaling your company, but one thing is certain: If you aren’t ready to scale, it’s OK. Growth is a process. If you embrace it with patience and a longterm outlook for success, it will serve you and your investors well. There are great deals and quality returns to be had, even in today’s landscape.

SCOTT WARD

Throughout his extensive 25-year

career, Scott Ward has successfully

underwritten and closed thousands of

private money residential, commercial, and raw land investment loans. He has

been involved with several equity funds that specifically focused on investment property throughout many verticals (all non-owner occupied) covering

11 states. He is a panel speaker for real estate equity investments and

commercial development properties as well as an AAPL-certified fund

manager and a current member of the AAPL Education committee.

AAPL MEMBER SPOTLIGHT YOUR NAME HERE. >> ALSO YOUR COMPANY!

The AAPL Member Spotlight offers the opportunity for our entire network to get to know you, your experiences, and how you have benefited from your AAPL membership.

Check out past Spotlights at aaplonline.com/spotlight, then complete the form at aaplonline.com/spotlight-form to step into the spotlight yourself!* *Members are added to the Spotlight queue in the order in which they are received. You must have Named Member status at publish time.

48

PRIVATE LENDER BY AAPL

WINTER 2024

49

LENDER LIMELIGHT WITH KENDRA ROMMEL

BUILDING A NEW FUTURE When Kendra Rommel wanted to grow her network, she didn’t have a university alumni group to tap into. Instead, she looked to her CrossFit gym, just one of many unconventional approaches she’s relied on to move her career forward.

KATIE BEAN

WINTER 2024

51

LENDER LIMELIGHT WITH KENDRA ROMMEL

R

ommel’s approach to building her career and her company has been outside-the-box since she started mortgage lending at 17 years old. Going her own way has paid dividends, first as a successful salesperson and now as principal and co-founder of Futures Financial.

FROM TANNING SALONS TO MORTGAGES Rommel says she was humbled early on in life, learning from disappointment that “we each have a purpose and we should be living a purpose-driven life.”

She grew up in Orange County and loved playing sports. But she “had sports taken from me” during her sophomore year of high school—she was ill and spent a lot of time in the hospital. Even when she returned to school, her doctors wouldn’t allow her back on the basketball court. At the time, they thought she had leukemia; later in life, she discovered she had been battling an autoimmune disease.

“That kind of catapulted into finding the best ways to stay healthy and navigating the health care system,” Rommel said.

Although she couldn’t play the sport she loved, she filled her extra time by working.

“I had all your standard 15-year-old jobs, you know, like a tanning salon, a bathing suit shop. I was in sales. I sold bathing suits at the end of Main Street in Huntington Beach, making at the time $5.25 an hour. Now my son thinks $15 an hour is a rip-off,” she said ruefully.

52

PRIVATE LENDER BY AAPL

“

WE EACH HAVE A PURPOSE AND WE SHOULD BE LIVING A PURPOSE-DRIVEN LIFE.”

She moved on from the bathing suit shop to Nordstrom, where she was successful again in sales. Her skills in that area caught the attention of a friend.

“My buddy decided I should be in mortgage,” she said. “I didn’t know anything about mortgage. I didn’t know how to spell the word, much less how to sell it.”

Still, she made the leap, jumping into homeowner-occupied lending in the mid-’90s.

“I would be selling loans at like 12% to 15% to the homeowners, so private money now selling at 12% seems like a walk in the park,” Rommel said.

Fast forward about a decade. Rommel married in 2005 and started a family soon after, welcoming a son in 2006 and a daughter in 2008. She was juggling work and motherhood when the subprime mortgage crisis hit, leaving her uncertain about a path forward.

She decided to start her own processing

center, packaging up loans for banks. In that role, she developed relationships with loan officers all over the country.

As Rommel describes it, although “the market was all wonky” in the wake of the housing bubble’s collapse, it led her to new opportunities. Using her experience with nonperforming loans, she pivoted, joining an asset management company. After six and a half years there, she got into the private lending space at Civic Financial Services.

At Civic, Rommel said she was able to flex her entrepreneurial muscles, creating “a business within a business.”

She was given leeway to brand her team and cater to the needs she saw in the marketplace. Rommel even created a business plan for how she wanted to market and operate her team, which she said her boss supported. Building the Rommel Team helped launch her onto a path of new ideas that eventually led to her founding Futures Financial.

WINTER 2024

53

LENDER LIMELIGHT WITH KENDRA ROMMEL

LIFE-CHANGING CONVERSATIONS It was at Civic that Rommel realized the potential for learning from her fellow Cross Fitters.

“I used to do the 5 a.m. class every day, and I would talk to my gym owner about running this small business and how most successful people came to 5 and 6:15 a.m. classes,” she said.

Rommel liked being around other smart businesspeople and had been investing in mentorship groups for professional development.

“I don't know even what I was looking for, necessarily, other than to surround myself with like-minded people who could identify opportunity—help with a road map, what it would be to get to the next step, the next step, the next step, from people who have succeeded and failed,” Rommel said. “I was around the right people, and it seemed like I would get a lot of information that I could apply to my life, but I never really got what I wanted and needed.”

One morning during the chat with her gym owner, inspiration struck.

“I said, ‘Can I interview you?’” she said.

From that conversation, The Rommel Report podcast was born.

The idea for an interview was twofold.

Selfishly, Rommel said, she just wanted to pick the brains of these driven business owners. But she didn’t want to turn people’s personal time into networking time.

“I ultimately talked to my gym owner and was like, ‘Hey, we have a network here of highly successful people. I'd like to talk to them, but I don't want to make this space a business space because we all went there to work out,’” she explained.

54

PRIVATE LENDER BY AAPL

The podcast became an extension of Rommel’s personal brand. One of the interviews was set up by her marketing team instead of by Rommel herself.

It was with David Bianchi, an actor, producer, and screenwriter who was slated to talk about cryptocurrency and NFTs. Leading up to the interview— even on her way there—Rommel said she was tempted to cancel because she didn’t know anything about the topic.

“It sounded so boring,” she said.

“I didn’t know how to create conversation around this.”

At the behest of her team, she kept the appointment. As it turned out, the conversation was life changing.

“So, I end up showing up to his house in L.A. I'm sitting there and I find myself thinking of 5,000 different things I should be doing other than sitting in this guy's house—until he starts talking,” Rommel said. “I said, ‘Break it down for me; talk to me about NFTs in very layman's terms.’ And he starts explaining it. All of a sudden, this lightbulb goes on about how I can change the private lending space based on the things he's telling me. It had nothing really to do with crypto. It had everything to do with the technology behind crypto and NFTs. And I left there feeling encouraged and inspired and on fire to launch my own company beyond what it was at Civic.”

THIS OR THAT? CALL OR TEXT: Call COFFEE OR TEA: Coffee REALITY TV OR SCRIPTED SHOW: None, I prefer no TV.

MOUNTAIN OR BEACH: Mountain DOG OR CAT: Dog NIGHT OWL OR EARLY BIRD: Early bird.

I’m worthless after 10 p.m.

READ OR PLAY A GAME: It depends if I’m alone or with somebody. I definitely would prefer playing a game with somebody.

DINING INDOORS OR AL FRESCO: Indoors

PLAN AHEAD OR WING IT: That’s a mixed bag. Professionally, plan ahead.

Personally, wing it. I hate not being prepared with work stuff.

On her way home, Rommel called her friend David Rosenberg, a colleague from the asset management company and talked to him about her vision.

in this new vehicle beyond what we are doing now,” she said.

“He had to listen to me for an hour and a half, or however long I was on the 405, about how I was going to disrupt the private lending space and how I could impact people

It was more than a pipe dream. Rommel picked the name, Futures Financial, and dreamt of what the brand and company would represent. She decided to launch in the second quarter of 2022. Once she began

FAVORITES WAY TO RELAX: That almost never happens. Hanging with my kids, working out, or just sitting out by the pool.

WEEKEND ACTIVITY: Dirt bike riding, hiking, camping. Anything outdoors, really.

SEASON: I’m torn right now between fall and spring. Fall is football, so I really like fall. Spring is great though, too.

PLACE TO TRAVEL: This is going to sound crazy, but I really loved Coeur D’Alene, Idaho. It’s not even out of the country. It’s right here, but it was beautiful. You have to go in the fall. It’s just something I can’t explain.

Pictures will never do it justice.

QUOTE: There’s one right now I want to apply to my life: “Do it like a 4-year-old in a Bat cape. I just like it because it’s that fearless, intense, fun approach to stop overthinking. I think it’s just so applicable to my life because I tend to overthink everything.”

GUILTY PLEASURE: Everyone thinks I eat healthy all the time, and I am a sucker for baked goods like cookies. I will order from Milk and Cookies no matter what time of night. And I do love doughnuts.

setting it into motion, she reached out again to Rosenberg to give him an update and jokingly asked him to come work with her.

“He was running a boutique firm out of Beverly Hills doing private money. He is successful in his own right and had a very, very great partnership. So, I didn't

even think twice that he would leave his partnership,” she said. “But I said, 'Why don't you come to Futures?' Well, two weeks go by, and he goes, ‘OK.’ I said, ‘OK what?’ He goes, ‘I'm coming to Futures.’”

Once she recovered from the shock, they began having serious conversations

about the partnership. Rommel described their skills as complementary: “He was more capital markets focused in his own business, and I was more sales development operations focused—front-end focus is what I call it.”

They launched the company in April 2022.

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LENDER LIMELIGHT WITH KENDRA ROMMEL

INVESTING IN PEOPLE Rommel’s goal is to “disrupt the industry the way we know it.” Futures Financial offers business-purpose loans for real estate investors using a full balance sheet model. There are no institutional investors and only a small portion of paper is sold.

While she, of course, wants to grow the bottom line, Rommel is also passionate about investing in her team. Futures’ four employees own a portion of the company so they can invest in their own future, she said.

Early in her career, Kendra Rommel was labeled “the bulldog,” she

“Just like everyone we service every single day, they're building wealth on real estate,” Rommel said.

It’s a touchpoint for her in considering how men and women are

Everyone is cross-trained so they can continue to grow in the company without hitting a ceiling, she added.

“I guess I'll take it as a compliment, but it's no different from

“I think for me, the goal is to continue to have the discernment to bring on the right team members internally so that Futures’ branding integrity remains intact, our culture remains intact, and our vision remains intact,” she said.

“The growth will happen if we have the right team.”

Part of that culture is providing personalized service to clients and creatively problem-solving to help them get a loan quickly and efficiently.

“We want to help people,” Rommel said.

“Our business is a vehicle for exactly that—we want to see people succeed. We want to create successful transactions that help people succeed. We want to build a community internally where people can get to a place they want to in their life where they have financial freedom or maybe make investments they wouldn't

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BATTLE OF THE SEXES—FOR EQUAL RECOGNITION

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said, probably relating to her approach.

“I think people think I'm really mean, but I'm not really mean. I'm just very direct,” she said.

viewed in the workplace.

anyone else going after what they want,” she said. “The softspoken girl or lady is maybe just as tenacious, but we just have different approaches. We all tend to follow kind of a groove of what's been groomed into us. And even in our thinking, you know, it takes active awareness to break the cycle of some of that stuff.”

Likewise, she sees some sacrifices by male colleagues go unnoticed or unappreciated, such as traveling for work.

“A woman sacrifices and people are like, ‘Oh, how do you do it?’ But a man sacrifices too every day. It's just accepted as a norm because they're supposed to be … the breadwinner. So, anything they do from a professional sense is just accepted. That could include traveling all the time, being gone all the time. And I will tell you that the men still want to be at home. … And so that's a massive sacrifice.”

Even in acknowledging the ways entrepreneurship has affected her family life, Rommel said her experience is not unique to mothers.

“It’s sacrifice, it’s challenge, it’s good days, bad days, it’s fear.

There's so much, but I think it's felt by men and women. It's just not maybe talked about by men and women.”

have otherwise made. That's what we want to be part of. We don't just want to be another lender in the space that says we dropped a billion dollars. No one cares, and those businesses go out of business.”

Building her dream company hasn’t been without challenges. Rommel reflected on the beginning as “a year of learning.”

The economy was more favorable when Futures started in 2022 than it was in 2023.

There are small and large hurdles she encounters every day as an entrepreneur.

Those include sacrificing time with her children, now 17 and 15, and making changes to her family’s budget as the business gets through the startup period.

Even though she considers herself to have “literally the best possible partnership” with Rosenberg, Rommel acknowledged the journey has had ups and downs.

“Sacrifice for any entrepreneur is highly undertalked about,” she said. “Entrepreneurship is a lonely, lonely journey.”

KATIE BEAN

Katie Bean is a former newspaper and magazine editor who

loves telling the stories of

businesses and great leaders.

She is based in Kansas City.

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STRATEGY

Making Affordable Housing Work Helping lower-income households achieve their dream of home ownership can offer private lenders and investors an opportunity to profit while revitalizing neighborhoods.

MACK A. MAJOR III

W

hen most private lenders think about affordable housing, they think of people living below the poverty level. That’s why most private lenders avoid investment in marginalized communities.

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The problem is most people don't understand the difference between what affordable housing is and what makes housing affordable.

Affordable housing is an opportunity: It's possible to create an ecosystem

that adds value to the projects you invest in. Before we delve into the ecosystem approach, let’s take a look at why traditional affordable housing projects historically have not been appealing to private investors.

maintenance of affordable housing units.

Most private lenders would never consider funding traditional affordable housing projects because nothing about affordable housing fits their lending guidelines. The cost of construction for a standard fix-andflip loan may be $50-$100 per square foot and for ground-up construction about $110-$150 per square foot. By comparison, the average cost to build affordable housing units starts at about $250-$300 per square foot in most urban areas. It can exceed $1,000 per square foot in cities like Los Angeles and San Francisco.

So, the cost to build is extremely high, the NOI is lopsided without government subsidy, and everything says to run away—fast! The majority of traditional affordable single-family residences and multifamily residences are renovated or built for renters. Given this, for the near future, there’s no possibility of homeownership or income-producing real estate investment for the masses.

TRADITIONAL AFFORDABLE HOUSING The purpose of traditional affordable housing is to provide options for people with limited financial resources, ensuring they have access to affordable, safe, and adequate housing for their families.

Affordable housing has traditionally been made available through government programs, nonprofit organizations, or private developers participating in affordable-housing initiatives. Income restrictions are in place to ensure it is reserved for those with lower incomes. These restrictions vary by location and program.

Financial incentives such as subsidies, tax incentives, and grants are provided to developers or property owners to help offset the high cost of construction or the

But this doesn’t have to be the case.

THE ECOSYSTEM APPROACH Using an ecosystem approach to investing in lower-income communities, you can intentionally and successfully fund the acquisition of lower-cost land for new construction and/ or homes needing renovation.

Adopting this ecosystem approach allows private lenders to view these underserved, mostly urban, areas as golden opportunities for generating strong returns on investment while simultaneously positively impacting social and economic change in these communities and their residents. A strategy that works is to acquire and lend in neighborhoods adjacent to prosperous

or up-and-coming areas. They contain the necessary resources and infrastructure already needed to support the new growth.

One caveat: It's important for you to have “boots on the ground” to become a successful private lender in this niche lending space. Many lenders arrive unprepared to urban cities, but they leave with their tails between their legs or feeling wounded.

Why? Because they weren’t prepared—and they didn’t have the right partner.

Building an extensive network of realtors, wholesalers, title companies, appraisers, home inspectors, contractors, local code and building inspectors, and attorneys to mitigate risk is critical to success.

Depending on your agreement with any capital sources you use to fund loans, if you are allowed to handle nonperforming assets on behalf of the loan's noteholder, you can present many possible workouts to your borrower. In worst-case scenarios, a deed in lieu can be issued and you manage the remainder of the renovation so the asset can be marketed and rented, sold, set up as lease to own, and/or land contract. The noteholder recoups all their principal and makes a profit if they just stick to the plan.

As an added caveat, the note holder/private lender is provided with risk mitigation through underwriting and the vetting process that goes along with it, making your investment in affordable housing even more secure. In short, the ecosystem approach provides borrowers with increased opportunities to get their projects funded and the lender with the opportunity for a strong rate of return, risk mitigation, and endless deal flow. Remember, there will never be a shortage of deal flow, and the rate of return is usually set by the capital provider.

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LONG-TERM IMPACT As private lenders begin investing in marginalized communities, asset prices may be low due to their location in what have been identified as "bad areas." But once private lenders and investors begin to purchase the homes in these communities at a reasonable price and then renovate

them or knock them down and rebuild, they also begin to modernize the community.

the high demand for affordable quality housing in underserved communities.

In the process, residents begin to feel a sense of pride in their revitalized community.

Once a few of these renovated homes sell at affordable prices, as private lenders and investors, you are now setting the values within that area/ZIP code that no one once wanted. You are making a profit and serving

The process feeds on itself. As this process achieves success, more lenders, investors, bankers, developers, builders, contractors, and end buyers follow. The most important value of this system is that the housing becomes modernized and affordable for the end buyer. Usually, the end buyer, a working-class, tax-paying citizen, becomes highly motivated to buy a home in a location that is no longer marginalized. As a result, it becomes easier for investors to deliver quality affordable housing, whereas if the same home was in another part of town, it would be priced two or three times higher, making it unaffordable.

Private lenders and investors all over the country will begin to see that these marginalized communities are now being considered over the suburbs—and people are now fighting for these homes and your private lending dollars.

MACK A. MAJOR III

Mack A. Major III is the founder and

CEO of Major Investment Group, LLC, a

community development equity investor, and the managing partner of House Tur Investments LLC (HTI), a single-family residence and multifamily residence

commercial lender. The two companies are focused on emerging markets and revitalizing marginalized communities nationwide to create successful

real estate investment ventures and wealth-building opportunities.

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OPERATIONS

Extending Your Lending Journey: Charting a Course that Includes Servicing The lending journey doesn't have to end with loan originations. With the right captain and procedures in place, you can board a bigger boat and sail profitably into servicing.

ALEX BURIAK

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T

ransforming your operations to run a loan servicing department suc-

cessfully is not unlike the transformation of a small fishing boat into a mighty cargo ship. Both journeys require adaptation, resilience, and a keen understanding of the tides and currents of the industry to ensure the ship stays afloat and can carry as much cargo with as little crew as possible.

In this article, we’ll take you on an adventure, drawing parallels between the evolution of a lender and upgrading to a bigger ship, showcasing how lenders have transitioned to servicing their loans to increase their bottom line and retention of business. If you are a lender who is not servicing, understand you may be missing out on a voyage that generates revenue for your business.

ATTENTION, THE CAPTAIN IS ON THE BRIDGE! Before setting sail, you must understand the captain is the biggest part of the ship. Every good captain knows every bolt, weld, crew, and space on their ship. Understanding the cargo (loans) and the cargo supplier (capital lines) is paramount to a successful journey.

That understanding must also include the crew. You have your origination crew and your servicing crew. It is important for both departments to understand each other, their roles, and why things need to be the way they are. As the captain, you must take ownership of leading your team and giving them the resources to be successful on the journey.

Here are the details to consider before you set sail: Meet with your servicing team. Remind them: What your capital lines need in order to continue to service and maintain good records. Servicers should understand the funding agreement of the capital provider to ensure post-closing data can be quality controlled and managed within the company and the borrower.

Insurance, extensions, modifications, delinquencies, and foreclosures need to be addressed—and addressed in the manner in which the capital line has agreed upon.

To communicate with borrowers about what is expected of them after they originate the loan. The servicing department should echo everything the origination team should have said prior to closing.

Borrowers need constant reminders about payment dates, insurance renewals, signing of extension or modification documents, and draw information.

About what is expected to ensure good customer relations and customer

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retention. Having a good customer relations operation and automation keeps the borrower in front of servicing to manage issues. Never forget the time you didn’t know. Most borrowers may be unfamiliar with payoff procedures, payment options, and how to service an investment property. A baseline of at least monthly communication with servicing while the note is active is bare minimum.

Meet with your origination team and ser-

vicing team together. The origination team

needs to understand why they are gathering the information and what to look for that causes issues in servicing. Go back to basics regarding why the appraisal needs to be read in a particular way and why entity docs are reviewed (to avoid errors in

servicing later). Any protocol or procedure you have with your capital line must be explained to the sales side so they can better inform the borrower and obtain the material more efficiently. Nothing loses confidence in sales faster than “I don’t know why we need this, but just get it.”

common issue you have when these two

Ensure that origination has a basic under-

with a firm operation in documentation,

standing of servicing. The client is going

to be spending more time with servicing than with the sales team. Originations should be able to explain basic steps and keynote dates and be able to walk their customer through their next relationship stage with the company.

If you want a successful servicing team, your first line of defense is having your origination team on board. The most

departments are disconnected is documentation. Servicers get the file after it closes. They don’t know your borrower and what was agreed upon—they just have the file. When your origination team knows what servicing must manage servicing will need to put out fewer fires and manage the post-closing process more efficiently.

Having these meetings will decrease confusion, increase empathy and understanding of each other’s roles, and allow you to have a direct and frank conversation about any failures and errors that need to be addressed.

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Matthew Reynolds Head of Business Development Americas

SETTING SAIL: GROWING YOUR REVENUE It may surprise you, but servicing can make up more than 70% of your monthly revenue. Most lenders got into this business as originators. They would originate as much paper as they could and then sell it off to note purchases, aggregators, and other financial institutions or investors to replenish capital and redeploy. Not a bad deal. But did you know you are leaving three other big revenue generators on the table in that scenario?

Most lenders probably don’t service because they never had to. They started a small lending operation that turned into a bigger lending operation, but

“

THE BIGGEST BARRIER YOU WILL HAVE TO ADDRESS WHEN IT COMES TO PURSUING SERVICING IS CAPITAL."

they never went back to look at their growth strategies. They just focused on the original plan: Close loans.

You may want to take another look at the servicing side again and see how much money your business may be failing to generate.

The biggest barrier you will have to address when it comes to pursuing

servicing is capital. Visit with your current capital provider to review your options.

The second barrier is personnel.

You must have someone with some accounting and financial experience to manage these numbers. Your overhead will grow as you acquire key personnel to manage the accounting, draws, collections, modifications and

insure smarter.

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extensions, all post-closing aspects, and the paperwork between title and recordings. All new personnel will need to be hired and trained.

Starting a servicing operation is not a walk in the park, but starting a lending company wasn’t either. Here are some reasons you should at least consider servicing: 1

M onthly interest payments are huge.

Depending on your volume, they can make around 70% of your monthly net revenue. Consider this: You are originating at anywhere from between 2% to 4% origination fees, on average, with average regional lenders lending at 11.9% to 13.9%. If your cost of funds were prime, prime + 1, or prime +1.5 (as

of October 27, 2023, prime is at 8.5%), you are effectively leaving that spread on the table every month. Depending on your cost of funds, that’s possibly a 5.4% spread you’re not capitalizing on.

2 C onsider extension and transaction fees.

Let’s say you sell your notes and keep the spread. The second thing you may be missing out on is extension and other transaction fees when the loan pays off. In today’s market, most lenders are writing 6-, 12-, and 18-month notes. As you know, borrowers are in these loans longer. That’s not such a bad thing as long as you underwrite the collateral correctly in the beginning. Each 6-month extension can afford your company 1% to 2% in extension fees, paid either at the time of extension or on

the back end at payoff. So, if you sell your notes, see if you can split the fees.

3 T he third missed revenue opportunity

is retention. It is perhaps the most

overlooked. Nothing kills your business faster than non-repeat business. Ask your marketing department which is cheaper— keeping a client or finding a new one.

Servicing is the department where your borrower stays the longest.

Servicing makes more financial transactions with customers than originations ever does. If you can service your own loans or retain servicing if you sell your notes, you can establish better relationships and communications with your

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borrowers, so they make their money and use it for another property with you repeatedly.

GROWING PAINS: WEATHERING THE STORMS WHILE TRANSFERRING CARGO As lenders continue their journey, they may face turbulent economic seas. Economic downturns, market volatility, and changing regulations and covenants with capital partners can make the lending journey challenging. To stay afloat, lenders must adapt and evolve. Here are some tips to help you avoid high seas and rough waves.

1

U pdate your operations with better software and communications to

reduce errors and to increase the efficiency of group projects and tasks.

2 S tay in front of markets and underwrite

conservatively. Also keep in communication with your capital partners and the state of their ship.

3 H ave key operations in place for collec-

tions and documentation processes.

4 M ake sure borrowers are touched mul-

tiple times a month on upcoming key dates, including payments, insurance renewals, modifications, extensions, etc.

Adding key automations and embracing efficiencies with communications helps keep the seas from rising on you, your team, and your borrowers. When everyone is aware, problems can be

solved. Most servicing problems start as a pinhole leak in the ship, and they aren't addressed until they become almost too big to manage. Your servicers should be communicating with your borrowers as much as your origination staff is.

COMMUNICATION BETWEEN THE BRIDGE AND THE ENGINE ROOM Poor communication is the root of almost any business or relationship problem. As our cargo ship endures the fluctuating market waves, the bridge must be able to communicate with the engine room. What is the driving force of our engine today (other than communication)?

Technology.

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Modern lenders must invest in data analytics, automation, and customer relationship management systems to optimize all department opportunities. Servicing is no different.

Here are some “ship” upgrades to consider:

3 D evelop automation emails and calen-

1 M ake loan management more efficient

4 R ecord your weekly meetings with de-

2 R educe your risk with internal

5 C onsider APIs that link your software so

with an appropriate loan origination system (LOS). Don’t shop for an LOS that fits what you are today; buy one that will still serve you six to 12 months down the line. communication systems like Slack and Teams to minimize email mishandling.

dar alerts to send to borrowers about key dates, invoices, and loan needs. Doing so reduces the manual time your team must spend on these important tasks. partments to ensure everyone is on the same page. Use your internal messaging system to collaborate on ideas and keep abreast of market changes.

you can co-manage data while decreasing manual error and time expended.

ANCHORS AWAY As lenders evolve into comprehensive loan servicers, they can navigate complex financial waters with grace and resilience. With the right technology, capital compliance, effective internal communication, and a customer-centric approach, lenders can transform their businesses into powerful ships that sail confidently toward a more prosperous future—no matter what the market throws at them. Just as a well-maintained cargo ship can weather any storm, lenders-turned-servicers can thrive.

ALEX BURIAK

Alex Buriak, senior vice president of

Jet Lending has a long history in the investment and real estate industry.

After graduating from the University of Pittsburgh and National University of

Health Sciences, he spent three years

running multiple clinics. His search for

a better avenue to raise capital to start

another practice led him to real estate.

Buriak has helped expand real estate

companies to other markets and states and has solidified and modernized

operations to achieve efficiency and

ease of business. He regularly speaks on

panels, addressing lending, business, and underwriting operations and strategies.

Buriak has bachelor's degrees in

emergency medicine and natural

sciences (focus in medical sciences)

and a doctorate degree in chiropractic, rehabilitation, and natural medicine.

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Residential Pre-Foreclosure Auction Best Practices Although the pre-foreclosure acquisition path presents complexities and challenges, the rewards can be substantial for those who navigate it deftly.

CHRIS CROVATTO AND JOHN SEEBURGER

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I

n today's residential market, potential sellers are on the sidelines, locked into low-interest-rate mortgages. With new loan rates pushing 8% nationally, those would-be sellers cannot trade up or move laterally for the same monthly out-of-pocket interest payments, creating supply gridlock.

Well-capitalized institutional buyers, first-time flippers, and desperate wouldbe homeowners further exacerbate the supply constraints by aggressively bidding

on quality available assets. To battle these competitors, investors must rely on relationships and creativity to find new properties. One of those creative options is learning how to buy properties before the foreclosure auction (pre-foreclosure).

A pre-foreclosure transaction involves the sale of a distressed property with a defaulted mortgage that is headed toward a foreclosure auction. It generally involves one of the following options: contracting with the lender for an approved short

sale, purchasing the defaulted note, buying the foreclosure judgment, or selling the property through a forward contract requiring the lender to first take title at the foreclosure auction.

Pre-foreclosure transactions provide unique opportunities for buyers of properties, private lenders, and sellers of distressed assets, but they also come with risks and complexities that need to be understood. To be active in the pre-foreclosure space, all parties should WINTER 2024

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understand the transaction from all angles (buyers, sellers, and lenders) so that challenges to a successful transaction are mitigated early in the process.

With that in mind, let’s explore several best practices when pursuing this unique and sometimes challenging strategy.

KNOW THE MARKET AND THE PROPERTY As with all real estate investments, market and property due diligence are fundamental elements of a pre-foreclosure transaction. The adage that "you make your money on the buy" holds true in pre-foreclosure transactions just as it does in more traditional acquisition channels.

Investors and lenders alike often get into

trouble when they chase volume or yield at the expense of real estate underwriting fundamentals. Identifying and sticking to disciplined underwriting guidelines or the "target buy box" is critical.

If you are entertaining a pre-foreclosure transaction, you are likely a knowledgeable investor or lender who understands real estate due diligence, but it never hurts to underscore its importance and to highlight a few unique challenges with these transactions.

The most notable challenge of many pre-foreclosure transactions is that an uncooperative homeowner often occupies the home, blocking access to the property and making it difficult to assess the overall condition of the asset. Many

pre-foreclosure properties are acquired with only a drive-by inspection. The investor or lender is making assumptions about the interior condition and potential rehab costs based on the condition and upkeep of the home's exterior. Items to look for in this instance are roof condition (a potential big-ticket repair), upkeep of the exterior, landscaping maintenance, and the number, quality, and condition of vehicles parked in the driveway and yard.

For example, a poorly maintained home showing exterior-deferred maintenance, an unkempt yard, and numerous vehicles (indicating a high number of occupants) usually reflects a similar interior condition.

In such cases, the investor or lender will want to pad the budget to assume a full interior

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renovation. Conversely, a well-maintained house with clean landscaping and a washed car in the driveway indicate the interior budget can be streamlined for a more aggressive purchase or loan on the property.

One final note of caution: When conducting due diligence, investors and lenders alike should be wary of the legal liability and potential safety risks of stepping foot (trespassing) on a property where a disgruntled homeowner faces the threat of foreclosure and eviction.

state to state and from jurisdiction to jurisdiction within a state. Buyers or lenders in a pre-foreclosure transaction must understand which prior liens and assessments will be wiped out by the foreclosure and which will survive post-sale. Conducting a lien and title search and having a title attorney review it is highly recommended as a first step.

Once the lien and title search has been satisfactorily completed, several options exist to transact on a distressed asset.

1

UNDERSTAND LIENS, ASSESSMENTS, AND LEGAL RISKS The laws and regulations surrounding pre-foreclosure properties vary from

W ith a lender-approved short sale, the defaulting homeowner, investor, and lender have consented to the sale, release of the mortgage liens, and transfer of title. This type of transaction carries the least risk

to all parties and more closely mirrors a traditional closing.

2 C onversely, a sale of the lender's

non-performing note requires the buyer to step into the lender's shoes and assume the legal and timing risk of pursuing a foreclosure judgment or settlement with the defaulted homeowner. This will have the most protracted timeline and carry the greatest risk of delays and unforeseen costs.

3 S imilarly, but with less risk, the sale

of the foreclosure judgment involves stepping into the lender's shoes after the judgment has been entered into the court records, but before the foreclosure sale date. In this instance, the legal and timing risks have been

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mitigated to a certain degree, but the risks of a borrower's bankruptcy, court delays, and unforeseen costs remain.

4 F inally, a pre-foreclosure purchase

through a forward contract is a hybrid transaction in which the lender forecloses on a property with negative equity to ensure the title reverts to the noteholder and then transfers it to the forward contract buyer. This transaction involves sharing the liens, assessments, and legal risks, where the seller will assume some and the buyer others. In most cases, the foreclosing lender is the seller, although in a short sale the seller would be the homeowner subject to the lender approval of the sale.

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“

INVESTORS LOOKING TO PURCHASE PRE-FORECLOSURE PROPERTIES NEED TO UNDERSTAND THE OPTIONS THE EXISTING LENDER AND DEFAULTED BORROWER HAVE TO PURSUE THE PATH WITH THE HIGHEST PROBABILITY OF SUCCESS." In each type of pre-foreclosure transaction, the purchase contract must clearly outline which liens, assessments, and legal risks the buyer will assume and which the seller will assume. This can vary from transaction to transaction, because there are fewer set guidelines compared to a traditional purchase or loan.

MAINTAIN SITUATIONAL AWARENESS Not all pre-foreclosure transactions are created equal. Investors looking to purchase pre-foreclosure properties need to understand the options the existing lender and defaulted borrower have to pursue the path with the highest probability of success. When a property is

headed to a foreclosure auction, there is a low probability the defaulted borrower will suddenly re-perform on the mortgage.

A major factor to consider pertains to the defaulted borrower's capacity and/or willingness to work with the noteholder toward a quick resolution versus delaying the process to stay in the property rent- or payment-free for as long as possible.

The equity value in a property may also change how the property's current lender or note holder chooses to address the default. Significant home price appreciation over the past five years has resulted in a much higher percentage of distressed borrowers now having equity over and above the debt. For a successful buy strategy, a prospective investor and their lender should determine both the

current value of the asset and the legal balance (what the borrower owes the note holder(s), including accrued default interest, late fees, default servicing fees, and the lender's legal costs).

Following are several nuanced strategies to consider en route to a successful pre-foreclosure transaction.

Modifications. If the noteholder is the

original lender, they will be much less likely to entertain a modification of the loan (since they likely tried this before the property becoming pre-foreclosure).

On the other hand, if the note holder is a secondary purchaser of the note, they likely purchased the note at a discount to the property value and the face amount on the note. Skillful note investors sometimes

assist a defaulted borrower in modifying the mortgage before the foreclosure date as a way for the borrower to avoid foreclosure and for the investor to ultimately acquire the asset at an attractive current cash yield on the modified note rate.

Short Sales. Most noteholders are more

likely to consider a short sale than loan modification. Some pre-foreclosure transactions involve a short sale whereby an investor negotiates with the defaulted borrower to buy the asset while paying off the lender at an agreed-upon price that is usually below the legal balance owed on the loan. There are certain risks to short sales versus other options, the most common being the potential for the investor and a new lender to waste considerable time pursuing a

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CHRIS CROVATTO

Chris Crovatto is a founding partner of Foundation CREF, an integrated

loan origination, asset management, and auction platform. Throughout

his 35-year career, Crovatto has been

short sale at the behest of agents, only to find out the current note holder has no desire to consider a short sale.

Pre-Foreclosure Auction Platforms. These

are platforms that offer actionable preforeclosure auctions through which the buyer can lock in a purchase price on a forward contract before the property goes to a competitive bid at the foreclosure auction. When properly executed, the pre-foreclosure auction benefits the seller (foreclosing noteholder) as well as the new investor and lender.

The seller benefits in these transactions by locking in an execution ahead of the foreclosure auction and mitigating the risk that the property does not sell or sells below the market value.The seller also benefits by having a prevetted purchaser approved prior to the scheduled option, thereby eliminating fallout caused by unqualified or nefarious bidders at public auctions. Often, preforeclosure auctions result in higher sales prices than public auctions.

The investor benefits by controlling the inventory before losing out in a competitive auction format, even if they must pay more for the asset. The pre-foreclosure auction allows an investor to plan their resources and allocate capital more efficiently, 76

PRIVATE LENDER BY AAPL

including the financing from a new lender on the pre-foreclosure purchase.

directly responsible for more than $3

Although the pre-foreclosure acquisition path presents complexities and challenges, the rewards can be substantial for those who navigate it deftly. To be successful, investors and lenders must perform quality due diligence on the property’s value and liens, assessments, and title to identify and quantify risks. This research must be combined with an understanding of state, local, and municipal foreclosure and bankruptcy laws and procedures. If that expertise does not reside in-house, a knowledgeable title and foreclosure attorney can be worth their weight in gold by helping you avoid pitfalls.

senior executive positions at several

Once the specific pre-foreclosure strategy has been identified, a well-defined contract that clearly outlines the responsibilities of the buyer, seller, and new lender will help avoid surprises at the closing table and unintended costs. Understanding and adhering to these best practices lays the foundation for a potentially lucrative channel for distressed property inventory where savvy investors and lenders can use loan modifications, short sales, or pre-foreclosure auctions to generate deal flow and achieve superior returns on their capital.

billion in structured real estate and

private equity transactions. He's held institutions, including Babcock & Brown

LP, Contrarian Capital Management, and Bank of America Commercial Finance.

JOHN SEEBURGER

John Seeburger is a co-founder of

Foundation CREF. He brings more than 30 years of expertise to the real estate finance and investment sectors. He

plays an instrumental role managing

Foundation, including the development and expansion of the PropertyPortal™, a proprietary web-based transaction

marketplace and online auction platform.

Seeburger launched and managed institutional specialty real estate

lending platforms at Heller Financial, GE Capital, GMAC Commercial Mortgage, and Capmark. Seeburger was also a co-founding senior consultant at

a national advisory firm acquired by PricewaterhouseCoopers (PwC).

The Gold Standard In Business Purpose Loan Documents

About Lightning Docs Lightning Docs is a fully automated, cloud-based loan document solution developed by Geraci LLP. Its brief, interview-style questionnaire allows each set of documents to be tailored to your exact terms with no redraw fees or contract period.

Why Choose Us

Documents available in all 50 states Easily customizable to fit your needs Easy to access and copy old files No redraw fees or contract period Capital markets approved Securitization friendly

Many LOS platform integrations Create any business purpose loan (Bridge, DSCR, fix-and-flip, and many other product types) ARM, interest only, partial amortization, and all other amortization types Attorney quality documents backed by Geraci LLP, the nation’s largest private lending law firm

90 Discovery, Irvine, CA 92618 | info@lightningdocs.com | (949) 379-2600 | www.lightningdocs.com WINTER 2024

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OPERATIONS

Do Your Budgets and Inspections Agree?

Don’t overlook these five common examples of budget omissions.

RODNEY MOLLEN

A

s the saying goes, a picture speaks a thousand words. The problem in real estate? There aren’t enough photos!

is sufficient to renovate the subject property or whether it has omitted critical items that require repair.

Let’s be honest. How do often do you receive more than just a few basic photos of a subject property when ordering an appraisal or BPO? It’s probably not as often as you’d like. The truth is you should want to obtain that level of transparency on 100% of your loans under consideration. There are many reasons why pushing for comprehensive photos of the subject property is critical, including the following:

This article will delve into the last point to highlight the importance of obtaining comprehensive interior photos of each of your subject properties. These photos are critical for properly evaluating each deal, its feasibility, its budget, and the target ARV associated with the specific budget for the property.

1. Comprehensive photos are critical to determining whether the subject property is perhaps inferior in architectural style and quality versus the market comparables.

2. Comprehensive photos are critical to understanding current property condition.

3. As-is-value can be inaccurate and overstated if actual condition is worse than assumed.

4. With respect to RTL loans, without comprehensive photos, there is no way to evaluate whether the budget 78

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Bad (no context)

Our firm commonly flags lenders regarding insufficient budgets on roughly 8%-12% of projects we review. These flags generally indicate the investor/borrower/ contractor is either trying to cut corners or they’ve provided a generic budget, possibly before conducting their own walkthroughs. In either case, it represents risk to the lender and the possibility of facing incomplete projects months down the road—perhaps even default or REO situations. These situations can be avoided altogether by flagging this risk upfront.

The key is knowing what to look for.

Here are five considerations that might be worthwhile to look for as you conduct diligence on your prospective lending opportunities.

Bad (no context)

CEILING AND DRYWALL DAMAGE For some reason, failing to address known ceiling and drywall damage is one of the biggest budget omissions we encounter.

Quite often, these issues are only discovered with a full set of property photos.

A full set of property photos should include one to three photos of every room, and they should be taken from a wide enough view to capture the floor, ceiling, and walls/windows/doors.

Proper inspection photos should capture any and all visible damage the inspector encounters. Further, photos of damaged items should not simply zoom in on a damaged element. They need to capture

enough of the room or exterior to allow someone assessing the damage from the photographs to properly place things in proper context. Photos that zoom in on damaged items are often not useful because they can make it difficult for a viewer to understand what they are looking at, making it difficult to assess the magnitude of the damage.

because you should have a clear view of the ceilings in each room. If your reports, however, do not provide the proper quality of photos, then some important clues to look for include debris and/or piles of debris, drywall, or insulation in certain spots or corners of a room.

The commonality of ceiling and drywall damage is not surprising to us, particularly in colder/wetter climates and involving properties 50-100 years old or more. What’s surprising is the frequency of omitting these repairs from the budget.

When you encounter full ceiling or drywall damage in your photos, the next step is simple. Check the borrower’s budget to make sure it includes line items with sufficient costs allocated toward ceiling repair, insulation, drywall repair, and paint based on your assessment of the damage.

If you have a full set of proper photos, then identifying ceiling damage will be easy,

INOPERABLE KITCHEN OR BATHROOMS As surprising as it sounds, we have definitely seen situations where a property has an inoperable kitchen or bathroom, and the budget fails to properly address the issue, either because the line items are missing entirely or they do not include the full budget needed to address the issues. Accurately allowing for kitchen and bathroom situations is critical to avoiding difficulties, change orders, or budget shortfalls later in the project. Perhaps it was an omission, or perhaps the budget was produced with generic information, before/without the investor or contractor having conducted a site visit. In either case, this one is critical to catch!

EXTERIOR SIDING AND DISREPAIR

Good (context)

Scenarios in which investors or their contractors focus on the interior items and really neglect to perform a thorough inspection of the exterior is fairly common. The rest of the budget might look great, but a finished project that has rust, deterioration, or full WINTER 2024

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OPERATIONS

disrepair will face difficulty in the market, requiring seller concessions that typically outweigh the cost to address them in the first place. Make sure you have a complete photo set of the entire exterior, and review it to determine whether necessary exterior repairs or upgrades are missing from the scope.

SIGNIFICANTLY INFERIOR APPLIANCES, BATHROOMS, OR FINISHES In many instances, properties are furnished with some very outdated and/or inferior elements, including bathrooms, appliances, and other finishes. This is often why the seller is willing to sell at a price that makes sense for the investor. Be sure to identify whether budgets account for keeping the existing elements in place, particularly if doing so could have a detrimental effect on resale value. Sometimes bathroom upgrades will include a new toilet or

vanity, but inferior mirrors, lighting fixtures, and tub/surround are omitted.

Another common situation is for the investor to upgrade kitchen counters and/ or cabinets without replacing appliances that appear to be 40 years old. These are warning signs that are worth questioning!

MATERIAL-DEFERRED MAINTENANCE Thoroughly scan the full set of inspection photos to identify material issues of deferred maintenance. Items in this category can include missing or deteriorated HVAC units, systems, pool equipment or pools in disrepair, doors/window damage, bowed flooring indicating issues with subflooring, and more. If you spot anything, review the budget to determine whether the key line items are included. If they are included, then determine if the costs allocated appear sufficient to fully address and resolve the issue.

In all these cases as well as others not mentioned, the central theme is the same.

Investors are moving quickly, and so are their contractors. As a lender, it’s important to take the steps to protect your capital and conduct the proper level of diligence to ensure the budget being proposed is fully reflective of a comprehensive, thorough property inspection. Make sure you have full photographic evidence of the subject property, and try to avoid relying on straight appraisals or other reports that provide you with only three to five property photos with a big “trust me” emoji. Your capital deserves better!

RODNEY MOLLEN

Rodney Mollen is the founder and

CEO of RicherValues, a software and

valuation services provider that delivers quality, comprehensive intelligence for lenders and investors on residential

assets nationwide. He has more than 20 years’ experience acquiring, managing, renovating, and selling more than $1.2 billion in REO and NPLs nationwide.

At Sibson Consulting from 2001-2006, Mollen consulted for small cap to

Fortune 50 companies. From 2005-

2009, he acquired and managed his

own private real estate deals for infill

residential redevelopment in California and Arizona. He began building the

technology prototypes for RicherValues in 2017 and launched in 2019.

Mollen earned master’s and bachelor’s Good (shows older appliances)

degrees in economics from UCLA, graduating summa cum laude.

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Reimagined

By challenging the status quo, applying lessons-learned and defining a clear vision of how to be a better lender, CV3 Financial is changing the game for real estate investing. Thanks to our people-first philosophy and experienced team, who has worked together for years, we are able to deliver a superior customer experience and accelerate our clients’ success.

EXPERTISE. PARTNERSHIP. RESULTS.™ CV3financial.com | @CV3financial

NMLS ID #2478266. For more licensing information visit https://nmlsconsumeraccess.org. Loans made or arranged pursuant to California Finance Lenders Law License 60DBO-183355. Arizona Mortgage Banker License #1047792, Florida Mortgage Lender License #MLD2457, Oregon Mortgage Lending License #2478266, Utah Mortgage Entity License 13576219. This is not a commitment to lend. All offers of credit are subject to due diligence, underwriting and approval. Not all borrowers will qualify and not all borrowers that qualify will receive the lowest rate or best terms. Actual rates and terms depend on a variety of factors and restrictions may apply. CV3 Financial Services LLC reserves the right to amend rates and guidelines without notice.

WINTER 2024

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Putting Business Process Automation to Work for You Business process automation (BPA) can help businesses streamline their operations, enhance efficiency, and reduce human intervention in repetitive tasks. But which parts of your business should you automate—and how?

THIERRY TREMBLAY

P

rivate lenders deal with complex processes ranging from loan origination, underwriting, risk assessment, and document management to compliance and security.

Despite the complexities of the industry, most small private lenders aim to start out with little to no overhead. They defer the selection of systems and creation of processes because they can be costly and there may be no immediate need for them. However, because most lenders scale quickly without much marketing, growth is inevitable.

If you determine your growth goals are beyond two to five loans a month, then you should be focusing on business process automation (BPA) immediately. It’s much easier to establish these processes before you need them. By the time you do need them, it’s almost too late because you are overwhelmed with volume and inefficiencies—and you have little time to stop and carefully select the right vendors and focus on the business requirements necessary to make the proper decisions.

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“

IF YOU’RE NOT TAKING EVERY OPPORTUNITY YOU GET TO MAKE AN INVESTMENT WITH AN INFINITE RETURN, YOU’RE NOT A VERY GOOD INVESTOR.”

SHOULD I BE FOCUSING ON BPA? Here’s a quick checklist to determine whether BPA should be on your radar: Your loan application form is not connected to your loan origination system (LOS).

Your prospective borrowers send their forms and attachments via email.

You store your borrower data in more than one data source.

You need to hire more people to allow you to process twice as many loans.

Your departments have their own independent systems that aren't feeding from the same current

—TOMMY NIGRO, NORTH OAK INVESTMENT

central database and have their own subset of information.

It regularly takes you more than one week to fund a deal.

Your team has made costly data entry errors in the past.

You don’t have a set of latest documentation readily available for auditors to aid compliance and auditability.

If one or more of these situations applies to you, read on.

WHY IS BPA IMPORTANT? Without automation, executing loan processes involves input from multiple

people. This approach is prone to mistakes, resource intensive, and timeconsuming. Automation guarantees compliance with standards and regulations and offers scalability. Accidentally add an extra zero and you turn a $100,000 loan into a $1,000,000 loan.

As their loan operations grow more complex, private lenders need solutions that increase efficiency, improve accuracy, and maintain compliance. We’re talking about being able to handle not only greater volume but also wide fluctuations in volume without needing to add to headcount.

WHAT SHOULD YOU AUTOMATE? As you begin to consider automating your processes, anything you do once a day should be automated, if it hasn’t been already. Save yourself, your staff, and your bottom line the burden of repetitive moWINTER 2024

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FIGURE 1: MAJOR STEPS IN THE LENDING AND SERVICING PROCESS LOAN APPLICATION LOAN FORM SUBMITTED

LOS RECEIVED

DEPOSIT IS RECEIVED

UNDERWRITING RISK ASSESSMENT

CREDIT DECISIONING

DUE DILIGENCE

ATTORNEY PREPARES DOCS

LOAN APPROVED

LOAN SERVICING CONSTRUCTION DRAW

LOAN EXTENSION

tions and build automations around them.

You’ll spend a great deal of time automating a task, but once it’s automated, you’ll save an infinite amount of time going forward.

UNDERSTAND YOUR CURRENT WORKFLOWS The first step in automating is understanding your current workflows and processes. You’ll need to document every step and the parties involved in completing tasks and activities.

Creating a mind map of your current workflows not only helps you visualize the processes but also makes it easier to identify bottlenecks, redundancies, or opportunities for automation.

Here is how to do this: Capture All Steps. Start with

capturing every step in the process, no matter how minor it appears.

Identify Dependencies. Highlight

how one task affects another and how

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LOAN CLOSES

they are dependent on each other. For example, construction draw requests can’t be processed before pictures and proof have been provided.

Highlight Key Players. Identify all

stakeholders involved in each step and note their roles (e.g., accounting, loan processing team, borrower, legal).

Identify Decision Points. Mark the places

where the decisions made will impact the direction or outcome of the process (e.g., size of the project, credit score of the applicant, financial potential).

Pinpoint Bottlenecks. Highlight potential

bottlenecks or areas where flow often gets blocked (e.g., where the decision of the CEO is needed, repetitive and duplicate data entry, communication with external parties such as lawyers and escrow).

Figure 1 is a map highlighting a few major steps most lenders take. Your map, however, should contain every little step your team works through.

IDENTIFY WHAT WORKS AND WHAT DOESN’T Once you have a clear idea of your current workflows, evaluate those processes. Determine which aspects work well and which ones do not. Some of the factors to consider are the time taken for task completion, rate of errors, and interdependencies. Understanding the strengths and shortcomings of your current business processes is an essential foundation for BPA, because it helps you set clear expectations and define your automation objectives.

Next, identify which aspects of these processes are functioning well and which parts are problematic. Here’s how: Analyze Performance Indicators. Review

key performance metrics to identify areas of success versus those that consistently underperform (e.g., the number of loans one agent can process per month).

“

WE HAD ONE PERSON DOING FIVE LOANS PER MONTH AND WE STILL HAVE ONE PERSON [BUT NOW] AT 25-30 LOANS PER MONTH, THANKS TO PROCESS AUTOMATION WE'VE BEEN IMPLEMENTING.” —CORT CHALFANT, MANAGING MEMBER AT NEXUS PRIVATE CAPITAL

Gather Employee Feedback. Employees

involved in the processes you identify may be aware of glitches and inefficiencies that aren’t visible at the managerial level. They can also share what's working well and should be retained.

Customer Feedback. Customer can

provide insights about the processes that impact them directly (e.g., when borrowers say they aren’t willing to learn a new complex system to apply for a loan).

Compare with Industry Standards.

Comparing the efficiency of your business processes with industry standards can shed light on the areas where you are excelling and where you lag.

If you’re wondering how you stack against other private lenders, here are two of OpsDog’s KPI benchmarks that may help: A n average employee can process eight loans per month.

T he top 5% most efficient employees can process 15 loans per month.

In our experience, lenders that implemented end-to-end business process automation can process 30+ loans per employee per month.

IDENTIFY AUTOMATION OPPORTUNITIES: THE FIRST 20% The next step is to identify opportunities for automation. Highlight tasks that are repetitive, time-consuming, prone to errors, or consume a significant proportion of employees' time. This part of the process helps you find “better paths” to achieve the desired outcomes, including re-engineering the process, removing unnecessary steps, or even developing more efficient and effective workflows.

Opportunities for improvement and automation include: Opportunities for Streamlining.

Identify areas where you can combine tasks or eliminate irrelevant steps to streamline the process.

Automation Possibilities. Look for

repetitive, time-consuming tasks that do not require human judgment. These are prime candidates for automation.

Technology Update. Check whether any

processes can be improved with software.

Although you probably won’t be able to identify all automation opportunities yourself, you should

be able to find some you can easily implement internally without outside help. They are your lowest hanging fruit—your first and easiest 20%.

Implement these changes first.

IDENTIFY WHO CAN HELP YOU TACKLE YOUR NEXT 60% Identifying the next set of lowest hanging fruit/high ROI opportunities may require the eye of a specialist. A specialist can help determine those that are indeed low-hanging opportunities versus those that will take months of work.

Specialists who can help you with this step include: 1. Your current LOS support team (start here) 2. Business process consultants 3. IT consultants 4. Automation experts 5. Data analysts 6. Project management consultants Here’s a list of loan process automation opportunities we see most often: Loan origination. The loan origination

process, which includes everything from application intake to credit decisioning to loan disbursement, is time-consuming and complex. Automating the loan origination process can streamline the entire journey, making it faster and less prone to errors.

Most private lending software solutions can offer an online loan application that is embedded within your website. It can help you reduce the amount of time you spend on pre-qualification calls with prospective borrowers. Being able to review a loan request before getting on a call with WINTER 2024

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OPERATIONS

a prospect makes the phone call more productive and less time consuming.

1.

Billing Automation. Generate and

In terms of application input, an online application form can automatically pull information into the loan origination system, eliminating manual data entry. As for documentation, borrowers using an online solution know exactly what documents they need to provide Plus, you always have the latest and correct version of documents because each document is accessible from a central location. Documents can be approved/disapproved or commented on.

2.

Payment Processing. Allow

3.

Payment Tracking. With automation,

4.

Payment Portal. Providing

Underwriting. Automating the

5.

Scheduled Payments. Set up a

underwriting process in private lending can lessen the time and resources needed, effectively increasing both efficiency and profitability. Automating this aspect involves: 1.

2.

3.

Automated Data Analysis. Every

lender has their “special sauce” or set of guiding principles. When those principles are input to a software program, it can follow a predefined logic and provide a suggested outcome to automate decisioning.

Risk Assessment. Automated tools

can evaluate the risk associated with a loan based on predefined parameters, successfully helping you make informed underwriting decisions (e.g., preapproves a recurring borrower or assesses the validity of the project based on the input parameters for new borrowers).

Loan Servicing and Payment Pro-

cessing. Loan servicing encompass-

es tasks such as billing, collection, and reporting of loan payments.

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borrowers to make payments online. payments are tracked in real-time, ensuring accurate records. borrowers with easy access to loan information and payment history will decrease the number of questions you have to answer. scheduled payment plan, ensuring payments are made promptly.

Reporting and Analytics. Monitoring

performance, identifying trends, and informing decision-making can be achieved by: 1.

Automated Report Generation.

2.

Trend Identification. Software can

3.

Predictive Analytics: Use historical

4.

Regulatory compliance: Automate

Credit Decisioning. A credit score can

be automatically pulled in as soon as the application is submitted, helping you make quick credit decisions.

send bills to borrowers on auto pilot.

Automatically generate reports and dashboards on various metrics such as loan performance, default rates, and collection efficiency. identify patterns and trends in data that might be overlooked manually (e.g., whether the value of houses is going up or down in a given city/state/region).

IDENTIFY AUTOMATION TOOLS For lenders just getting started, an LOS type of software will be of great help.

Then consider getting a Document Management System. Lenders with more than 50 investors should evaluate getting an investor portal system.

If an out-of-the-box loan software doesn't suit your unique processes and you've thought about building your own custom solution, then look into a no-code database builder platform. It will serve as your single source of truth, empowering your team to create custom internal systems without developer assistance.

In conclusion, workflow automation for private lenders is not just a luxury; it’s a necessity. The ability to adapt swiftly to unforeseen circumstances while efficiently handling routine tasks is crucial. Investing in BPA not only prepares your organization for scale but also equips you with the resilience to tackle any challenge. By automating workflows, private lenders can reduce operational costs, enhance customer experiences, and ensure compliance.

It's a strategic move that ensures your business remains agile and competitive, ready to thrive in any environment.

THIERRY TREMBLAY

data to predict future trends and potential issues, helping mitigate risks before they manifest. For example, identify project profitability potential. the preparation and submission of required regulatory reports to governing bodies. Having all the latest documentation readily available for auditors alone will be huge.

Thierry Tremblay is the CEO of Kohezion, a single loan operating system that

his team customizes to automate the

processes of private lending companies.

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ANNUAL CONFERENCE REVIEW

#

h t 14

THE NATION'S LARGEST PRIVATE LENDER EVENT Each year, the American Association of Private Lenders hosts the industry’s largest conference, lauded for its second-to-none “culture of collaboration” and ability to draw decisionmakers—all while covering key subjects impacting the profession both today and in the future.

But don’t just take our word for it. On the following pages, check out conference stats, photos, and testimonials.

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2 PACKED DAYS “The conference this year has been phenomenal. It’s by far the largest conference that I’ve been to, not

only this year but in the last several

years. There are tons of new people here that I’ve never met before. It’s MELISSA MARTORELL A , Geraci LLP

been such a nice experience getting to know them and seeing what

they’re doing—and at the same time, catching up with old friends; seeing how their businesses are going, the deals that they’re working on, just

seeing how the industry is changing over time. The panels had some

wonderful content, and I’ve learned some things today. The State of the Market panel was super insightful.”

Santa made a surprise visit to the AAPL Conference.

—Melissa Martorella, Geraci LLP

S A M K A D DA H Liquid Logics

“It’s the most-attended conference of the year… absolutely one of the best! It’s full

of activities and, more importantly, it’s full of sessions that are very informative. It’s not one session; it’s not the same thing again and again. It’s three or four at a

time, so you can decide which track and

what subject has really interested you and what’s important to you in the market to

see and understand. It’s probably one of the most packed AAPL conferences that

I’ve seen historically and definitely two and a half to three times bigger than any other conference I attended this year.”

Attendees and sponsors mingle during the VIP Networking Reception at the AAPL Conference.

— Sam Kaddah, Liquid Logics

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20+ SESSIONS & ROUNDTABLES “Every year, Bridge Loan Network looks

forward to attending the AAPL Conference because not only are we always meeting amazing potential clients, vendors, and

partners but we also get an unmatched level of education and a pulse of today’s industry, JACO B T H E R R I E N

Bridge Loan Network

which is crucial for making sure that our

business continues to evolve as the industry

evolves. We are extremely thankful for all the work AAPL does for our industry to keep it going forward in a strong manner.”

—Jacob Therrien, Bridge Loan Network More than 15 educational sessions and panels brought together top-of-their-field experts.

PA M H O E PF L

The VIP Networking Reception at the OMNIA Nightclub continues to be a runaway hit.

Precision Capital

LNH Capital

“As always, the conference is an exceptional

“I am so happy with this conference … I’ve

value add, I’m actually a big fan of the newer

met some of our really great, strong partners

components that have been added regarding

here at the AAPL Conference. Our docs are drawn by Geraci Law, and Geraci Law does

the different topics and the roundtables. I’m

We’ve gotten our CPA, we’ve gotten a couple

avenues being offered to the medium-size

really appreciative that there’s a lot more

all of our private lending attorney language. lender partners from here, we found some

really great investors from this conference,

More than 800 attendees and sponsors packed the vendor hall.

shops to the inspired and up-and-coming

organizations in the space. The evolution of

we’ve met some brokers that we are brokering

AAPL over the years has been a pleasure to

the breakout sessions really good—they are

focused, and all aspects and all peoples in the

watch. The organization has become more

loans back and forth to. So, not only are

usually very valuable—but you really meet

industry [are represented]. I would definitely

you’re looking for, and that’s why I love it so

attend. I just love the direction it’s going, and

recommend anyone who is in the space to

people that are looking for the same thing

I can’t say enough about the value that I get

much. We’ ll be back!”

— Pam Hoepfl, Precision Capital

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PRIVATE LENDER BY AAPL

coming to this conference.”

The Main Stage was better than ever this year. You can catch session replays in the official Annual Conference App.

— Adonis Lockett, LNH Capital

65+ SPONSORS

J E F F R E Y PE T E R S O N Alpen Inc.

“I’ve been coming to this conference for seven

years, and it’s the only conference that I come to every year because the networking is great and

it’s very informative, both from a macroeconomic standpoint all the way down to tactical best

practices. I also like the format, the scheduling, and the venue. It’s a very well-run event, and I get a lot of value out of it; therefore, I come every year!”

— Jeffrey Peterson, Alpen Inc.

Strike a pose! We love hosting our VIP Networking Reception on the OMNIA Terrace (Hint: We're coming back next year)!

ABBAS JESSA

Wentwood Capital

“I thought it was exceptionally well run. The

venue was phenomenal. I think the quality of

attendees was really impressive. I found that it

was a really good mix of vendors but also other

investors. The roundtables offered a really great opportunity to talk to other people and get a

sense of best practices. I found that people were very welcoming to conversation, sharing their

knowledge and experiences. So overall it was a phenomenal experience, and we will certainly

be back. In a world with more and more lending

events, this is one we will prioritize coming to. It was just a phenomenal experience.”

— Abbas Jessa, Wentwood Capital

The AAPL team and additional staff who made the 14th Annual Conference possible!

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800+ ATTENDEES

JA R E D M O R S E

Built Technologies

“It’s phenomenal! I’m exhausted—I’ve been talking to people all day. You’re constantly meeting new people, constantly seeing

sometimes new competition, sometimes new

lenders that are a perfect fit for your software and new connections. You walk around, you meet people, you have conversations, you network, you make introductions that you

didn’t know the person would even need your stuff or maybe you know someone they know.

It’s really cool to be able to have a collective

Is it just us, or was it CROWDED this year?

group of people who all want to succeed. " — Jared Morse, Built Technologies

JA M E S H U DS O N iVueit

“Conference has been great so far!

For iVueit, this is the second time that

we’ve come to this conference; for me

personally, this is the first time I’ve been here. It’s been good to learn about a lot

of the private lenders’ needs and how we can assist with our property inspections, condition reports, and photo services.”

Ali Wolf, chief economist at Zonda, during her keynote State of the Housing Market

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PRIVATE LENDER BY AAPL

— James Hudson, iVueit

22,720+ ATTENDEE PROFILE VIEWS IN THE APP

Check out all the 2023 Excellence Awards recipients on the next page!

“This conference has been an excellent way for us to network, both with

individual attendees and the other

sponsors and vendors that are here.

DAV I D JACO B S CIS Inspec ts

We’ve made some great connections

with people we haven’t seen for a long time and are looking forward to all the new people we’ve met.”

— David Jacobs, CIS Inspects

An overflowing vendor hall meant a lot more deals going down in the conference foyer.

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ANNUAL CONFERENCE REVIEW

2023 AAPL EXCELLENCE AWARDS Our Annual Excellence Awards are the gold standard among industry professionals. These association-backed honors carry the weight of our reputation for safeguarding the industry with education, ethics, and advocacy.

RISING STAR

Rising Stars are members who have accomplished outstanding growth in their companies during the past year.

Wade LaRouche, Housemax Funding “Wade is the epitome of hard work and the old school hustle culture. He’s one of the top originators in the country for a reason:

These awards showcase peernominated members who have leveraged their resources to solve problems, kick-start innovation, and improve their communities. The Member of the Year and Rising Star awardees are determined by popular vote, and Community Impact nominees are evaluated by AAPL. Read on for our 2023 Excellence Award recipients!

He outworks everyone.” —Doug Roberts, HouseMax Funding What LaRouche had to say about being our 2023 Rising Star: “I’m super excited to be here. I love the recognition and everything that comes along with it. … Like Doug will tell you, we’re here about gratitude.

MEMBER OF THE YEAR

This award goes to an AAPL member who demonstrates deep expertise, unique value, and strong commitment to clients and growing the industry.

Ben Fertig, Constructive Capital “Ben is an A+ leader who has demonstrated deep expertise, unique value, and strong commitment to clients and growing the industry.” —Benn Jackson, Constructive Capital What Fertig had to say about being our 2023 Member of the Year: “This is a great honor. I’m not sure that I deserve this honor, but the 120 employees at Constructive Loans probably do. Every day they face a historically difficult lending environment, and they treat it as an opportunity. As far as our AAPL affiliation, we love it. I think the way Eddie, Linda, and the team advocate for, promote, and support our industry—always with the highest level of integrity and professionalism and competence—is what makes this relationship so valuable to us, and it’s going to be for a long time going forward.”

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COMMUNITY IMPACT

This award honors professionals who improve their local communities or our industry through volunteering, development programs, or civic efforts.

Lisa Alberti, Ruby Boulanger, Karey Geddes, and Kristina Sawyer; Women in Private Lending “The Women in Private Lending Group has done an exceptional job at elevating female professionals to be seen, heard, and valued! WIPL has truly raised the bar, creating a platform for women to come together to network, inspire each other, collaborate, and solve issues. While the four founders hail from different companies and disciplines, together they built a much-needed and much-appreciated addition to the private lending industry.” —Lesley Boyd, Geraci LLP What the Women in Private Lending founders had to say about being the 2023 Community Impact Award recipient: “It was great to have the recognition and to honor all the women in our industry. I appreciate American Association of Private lenders; it’s our third annual event with you, and to see the number of women grow is absolutely incredible.”

—Kristina Sawyer, WIPL

FALL 2023

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VENDOR GUIDE

VENDOR GUIDE If you’re looking for a service provider who has real experience working with private lenders, the Private Lender Vendor Guide is your starting point.

In each issue, we publish a cross section of specialties. These providers do not pay for inclusion. Instead, we vet them by reviewing their product offerings and talking to private lender references.

AAPL members can access all vendors online at aaplonline.com/vendors.

WINTER THIS ISSUE!

SPRING

SUMMER

FALL

Accounting

Appraisers & Valuations

Brokers

Development Cost Estimates

Default & Loss Mitigation

Capital Providers

Funds Control

Education

Legal Services

Data & Metrics

Investor Reporting

Fund Administration

Warehouse Lenders

Environmental Services

Loan Origination Services

Insurance

Lead Generation

Loan Servicing

Marketing

Note Buying/Selling

Loan Underwriting

Indicates AAPL Membership ACCOUNTING

ACCOUNTING (CONT.)

DEFAULT & LOSS MITIGATION (CONT.)

Acquavella, Chiarelli, Shuster LLP www.acsaccounting.com CohnReznick www.cohnreznick.com

(732) 713-6305 Total Lender Solutions

(818) 205-2622

ATM Professional Services, CPA P.C.

Products and Services: Advisory, accounting, and tax services for private lenders.

(301) 947-2860

www.atmcpas.com

DEFAULT & LOSS MITIGATION Spiegel Accountancy Corp www.spiegelcorp.com (925) 949-5687 Products and Services: Accounting, tax, fund administration, consulting services for mortgage lenders, small businesses, and individuals.

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S.B.S. Trust Deed Network https://sbstrustdeed.com (818) 991-4600 Products and Services: Non-judicial foreclosures, bankruptcy, post foreclosure options for lenders, deed in lieu of foreclosure.

www.TotalLenderSolutions.com (866) 535-3736 Products and Services: Non-judicial foreclosures, UCC Sales, reconveyances, education.

Auction.com Data & Metrics www.auction.com (949) 672-3668 Axylyum Charter LLC axylyum.com (212) 983-0262

Indicates AAPL Membership

DEFAULT & LOSS MITIGATION (CONT.)

Activist Legal https://activistlegal.com (202) 869-0804

DSI Inc. http://defaultservicesinc.com/ (512) 382-0366

Geraci LLP

iServe

https://geracilawfirm.com

https://iserverealestate.com

(949) 379-2600

(858) 486-4213

Products & Services: Foreclosures, real estate, corporate,securities, litigation, banking and finance, bankruptcy, consulting, asset protection.

Noble Capital Loan Servicing,Note Buyer/Seller https://noblecapital.com (512) 492-3818 Service Link https://www.svclnk.com (800) 777-8759

LEGAL SERVICES

Law Office of Marc Weitz www.weitzlegal.com (323) 600-4805 California attorney helping private lenders recover investments from borrowers in bankruptcy.

https://caballerolenderservices.com (225) 328-1071

Cohn & Dussi, LLC www.cohnanddussi.com (781) 494-0200 Hajjar Peters LLP https://legalstrategy.com (512) 637-4956 Hartmann Doherty Rosa Berman Bulbulia LLC hdrbb.com (917) 902-9617 Private Lender Law/LaRocca Hornik Rosen & Greenberg www.privatelenderlaw.com (212) 536-3529 Scheer Law Group, LLP https://www.scheerlawgroup.com (949) 263-8757

Law Offices of Lawrence Andelsman PC Caballero Lender Services

LEGAL SERVICES (CONT.)

LEGAL SERVICES (CONT.)

http://andelsmanlaw.com (516) 625-9200

Syndication Attorneys, PLLC Legal Services, Education www.SyndicationAttorneys.com (904) 504-4055

Products & Services: Real estate transactions for lenders, developers, and individuals.

WAREHOUSE LENDERS

Products & Services: Foreclosures, bankruptcies, and real estate closing representation for lenders and investors.

Western Alliance Bank

Eric Feldman & Associates, P.C. Secondary Services: Default & Loss Mitigation www.efalaw.com (312) 344-3529 Products and Services: EFA provides legal services in the following areas: commercial/residential real estate and note transactions; closing/escrow/title services; initiate foreclosures and evictions; protect creditor rights in bankruptcy; litigation oversight nationwide; property violations, property tax appeal; due diligence, clerking, recording, document preparation.

Nemovi Law Group APC

www.westernalliancebank.com

http://www.nemovilawgroup.com

(602) 952-5462

(760) 585-7077

Products & Services: Providing committed revolving lines of credit to established private lenders specializing in residential fix-and-flip, commercial bridge, or NPL/RPL note purchases. Loan sizes typically range from $10 million to $100 million.

Products and Services: (AK, AZ, CA, NV, OR, TX, WA) residential real estate, commercial transactional real estate, mortgage default, foreclosure, bankruptcy, litigation, title resolution, compliance, mediation, eviction, due diligence, reverse mortgage.

Want in? Nominate yourself or a company you’ve worked with at aaplonline.com/vendor-guide-nominations/.

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LAST CALL

Entrepreneurship: My Path into Private Lending KYLE SHEA

F

rom an early age, I was interested in entrepreneurship. I spent my free time brainstorming new ways to make money and stumbled into starting an eBay store when I was in middle school.

I sold my friends’ unwanted holiday and birthday gifts on the site for a commission.

In college, I operated a drop-shipping company, trading the volatility of bitcoin on an international exchange for electronics I would then sell on eBay for a small profit. As I neared graduation, I realized the benefits of aligning myself with other entrepreneurs, particularly learning from their challenges and achievements.

At about that time, I met Wes Carpenter through a two-week marketing internship with newly formed Stormfield Capital.

Stormfield consisted of the two founders (Carpenter and Tim Jackson), three computers, a printer, and a small office in Connecticut. The energy, creativity, and roll-up-your-sleaves attitude of working at an entrepreneurial investment management firm drew me in.

Stormfield was founded in 2015 to introduce an institutional-quality asset manager into a market where only a limited number of sophisticated players existed—real estate secured direct lending.

In summer 2016, I joined Stormfield as its first employee—before we launched our 98

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first fund. Joining a startup was certainly a risk to take early in my career, but the founders’ zealous commitment to success was infectious. It’s a risk I’m glad I took.

As the months turned into years, Stormfield evolved from a startup into a proper organization. Throughout my time here, I've gained exposure to all aspects of the business and been able to contribute to the company's success. Alongside my direct responsibility to originate investment property loans, I’ve had the opportunity to work on launching new funds, develop new loan products, launch new websites, and transact with some of the most active mortgage advisors in the country. It has been a remarkable experience to witness the growth and transformation of Stormfield, and I am excited about the company as we continue to adapt, innovate, and thrive in the ever-changing private lending landscape.

Stormfield recently celebrated $1 billion of loan originations, and I can still remember the first loan I originated like it was yesterday. Our reputation has become our greatest asset, and it has been fueled by the trust we've earned from our clients, partners, and the community. Our journey has certainly not been without challenges, but the continued focus on fostering an entrepreneurial spirit has and will continue to serve me and the firm for many years.

OUR SERVICES CORPORATE & SECURITIES LAW FIRM & CONFERENCES

WE PROVIDE PEACE OF MIND Geraci LLP is a full-service law firm and conference line specializing in representing non-conventional lenders.

CONNECT WITH US (949) 379-2600 90 Discovery Irvine, CA 92618 https://geracilawfirm.com/ https://lightningdocs.com/ https://geracicon.com/ https://geracilawfirm.com/originate-report/

• Securities Offerings and Compliance • Entity Formation • Corporate (Governance, M&A, Capital Markets) • Mortgage Licensing

LITIGATION & BANKRUPTCY • Judicial Foreclosure • General Business Litigation (Partnership, Investor, and Vendor Disputes) • Creditor Representation in Bankruptcy • Other Mortgage Loan Litigation

BANKING & FINANCE • Foreclosure/Loss Mitigation • Nationwide Loan Documents • Nationwide Lending Compliance

LIGHTNING DOCS • Fully Automated, Customizable Loan Documents • Documents are Constantly Updated and are Capital Market Approved • Covers All 50 States • No Redraw Fees or Contract Period

OTHER SERVICES • Conference Line • Originate Report Magazine • Lender Lounge Podcast WINTER 2024

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FUND MANAGEMENT

2 DAYS

50+ SPEAKERS

70+ VENDORS

700+ ATTENDEES

Join us for the 15th year as we bring together owner-operators, executives, and decision-makers for the industry’s premier education and networking conference.

AAPL Certification Courses | VIP Nightclub Reception Networking Breakfasts | 15+ Sessions & Panels | Private Lender Roundtables Packed Vendor Hall | Networking Reception | After Party

NOV. 10-11 2024 | LAS VEGAS | AAPLCONFERENCE.COM

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