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PRIVATE LENDER THE OFFICIAL EZINE OF AAPL November/December 2015

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SMART PLAY FOR U.S. LENDERS

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NATURE OF PREFERRED RETURNS THE MISUNDERSTOOD

LATE CHARGE

YOU ARE BEING JUDGED!

POWER OF RELATIONSHIPS

BRENT TRUSCOTT

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FOR PRIVATE LENDERS Roc Lending is solely in the business of providing capital to Private Lenders. We have a dedicated team ready to handle your order flow, from origination to construction draws to payoffs. We’re not just a capital provider, we’re your dedicated back office. Less capital raising, more originating. Elevate your return on capital with Roc.

PROGRAM DETAILS:

• Eligible Borrowers: Private Lenders and Investment Funds

• Eligible Collateral: 1-4 Family Non-Owner Occupied Residential Investment Properties • Maximum Account Size: $50 Million • No Up-Front Fees

• Advance Rates Up to 90% • No Personal Recourse

• No Cross-Collateralization

“Roc has been paramount in helping us grow. They table fund our loans with a higher advance rate than any bank. They have a dedicated team on call to process and approve construction draws and payoffs.

With Roc, we can focus on making loans instead of raising money.”

—David Hansel, President, Alpha Funding Solutions

Contact us at info@roclending.com or call 212-607-8314 Learn more at www.roclending.com 40 West 57th Street New York, NY 10019 Roc Lending is a subsidiary of Roc Capital Holdings LLC.

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Private Lender

Elevate your return on capital with Roc

Private Lender November/December 2015

CONTENTS 4

Private Lender Contributors

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Lender Limelight Brent Truscott

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The Power of Relationship By: Elizabeth Morales

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The Smart Play for U.S. Private Mortgage Lenders By: Ian McSevney, B.A.

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What’s Current News & Updates from Members of AAPL

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The Misunderstood Late Charge- A Basic Guide for California Lender By: Nema Daghbandan and Melissa Martorella

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Trust goes Both Ways Investor’s Perspective by Abhi Golhar

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The Nature of Preferred Returns

By Kevin Kim

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Monitoring your most Valuable Asset

By Chrissey Breault

•••CORNER OFFICE•••

Matt Benson, Executive Director I wish you all a joyous holiday season and a happy New Year. I hope you plan to celebrate the start of 2016 in good spirits with family and friends. Now that we’re less than a month away from the new year, it’s good to look ahead and think about what this year may bring to us. But first, a small look back 2015 was quite a year for all of us at the American Association of Private Lenders and our Affinity Enterprise Group family. We’ve been through many developments, in sometimes less than favorable circumstances. But we’ve also managed to achieved so much - all with big smiles on our faces. Some of us more than others, you know who you are!

We’ve added many new faces to our team: Dustin Thomas, Erica Ruzicka, Jackie Grawe, Stephanie Gillespie, and Affinity’s new President, Eddie Wilson. We also lost a voice or face you would recognize from the years he worked with AAPL, David Lang. We’ve reorganized and are working with names you might recognize from REI Expo: John Hayes, Kurt Power, and every now-and-again you will see Carmen Fields among our crowds.

All these changes come for different circumstances but not matter what they were, we have done our best to never lose sight of our priority: YOU. We strive to be strong and financially sustainable companies that put YOU at the heart of everything we do.

I would like to thank you all for your significant support and dedication throughout the year. I’m sure we will discover new challenges in the coming year but I’m sure that when we work together and keep focused on our priorities we can all continue our successes together!

PRIVATE LENDER November/December2015 Production Manager/ Chrissey Breault CEO Michael Wrenn Art & Design Executive Director/ Matt Benson Advertising and Sales Linda Hyde Editor-in-Chief

Private Lender is published semi-bi-monthly by the American Association of Private Lenders (AAPL). AAPL is not responsible for facts or opinions as presented by authors and advertisers.

For Subscriptions: Visit www.facebook.com/aaplonline or email PrivateLender@aaplonline.com.

For Back Issues: Visit www.issuu.com/aapl, email PrivateLender@aaplonline.com, or call 913-888-1250.

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Copyright © 2015 American Association of Private Lenders. All rights reserved.

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PRIVATE LENDER CONTRIBUTORS •••••MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE.••••• CHRISSEY BREAULT A Pittsburgh native and Hospitality major; Chrissey started a part-time photography and design business in 2009, while working full-time in local government communications. She is currently the Director of Marketing and Education Services with the American Association of Private Lenders. Follow Chrissey @CBExpressions or join her on LInkedIn. Beware: She takes too many pictures of her dog and does not have a filter!

NEMA DAGHBANDAN Nema Daghbandan’s practice encompasses all facets of real estate transactions representing lenders and brokers, including loan documents for commercial, residential, construction, multi-family, servicing agreements, spread agreements, assignments (of all types), leases, lien releases, procurement agreements, intercreditor agreements and subordination agreements throughout the country. Mr. Daghbandan also leads the firm’s non-judicial foreclosure practice and advises clients on all default related matters. Mr. Daghbandan has closed hundreds of millions of dollars in loans throughout the country. Nema graduated magna cum laude from the University Of Miami School Of Law. During law school Mr. Daghbandan served as the Managing Editor of the University of Miami Inter-American Law Review where he received the Lillian R. Levi Award for Excellence and the Most Outstanding Third Year Student award. Mr. Daghbandan also received numerous honors including Book Awards in Immigration, Legal Research and Writing and the Center for Ethics and Professional Responsibility Program.

ABHI GOLHAR Abhi Golhar is Managing Partner at Summit & Crowne Partners, an Atlanta-based real estate investment firm. Since 2003, Abhi has utilized a “value-added” approach to capitalize on real estate renovation, new construction, and development opportunities in the Midwest and Southeast United States. He actively educates and works with seasoned debt and equity investors to employ market-driven investment strategies that yield success. Abhi holds a BS in Electrical Engineering from the University of Michigan.

You may find him tweeting @AbhiGolhar, delivering massive value to investors at #RealEstateDealTalk, sending a market trends newsletter at abhi@summitandcrowne.com, or connecting on LinkedIn.

KEVIN KIM Kevin Kim is an experienced corporate and securities law attorney with the Geraci Law Firm, a law firm dedicated to providing reliable and innovative legal solutions. Mr. Kim has an extensive background in complex corporate transactions, private placement, and cross border transactions. He has worked with major multi-national corporations, advising them on matters such as structuring strategic business acquisitions and private equity financing. Currently, Mr. Kim focuses his practice on real estate matters, specializing in private placements and other alternative investments for private lenders, real estate developers and other real estate entrepreneurs. His work includes ensuring clients are compliant with the applicable securities laws, structuring strategic partnerships and creating on innovative solutions.

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PRIVATE LENDER CONTRIBUTORS IAN R. MCSEVNEY, B.A. Ian R. McSvney B.A., AMP is president of Altmore Investment Corporation. He is currently practicing in both commercial and residential mortgage financing, as an MIC Manager, as well as the Principal Mortgage Broker of a boutique-style brokerage firm in Ontario that is steeped in the tradition of providing sound advice and professional service. For more information, contact McSevney at ian@altmoremic.com

MELISSA MARTORELLA Melissa is a 2015 graduate of the University of California, Irvine School of Law. She joined the Transactional Team in August, and is looking forward to learning more about Geraci’s clients and their needs. She is excited to provide peace of mind in every client interaction, and hopes to learn from the collaborative, passionate environment at the firm. While in law school, Melissa was a Lead Article Editor and later a Senior Research Editor for the UCI Law Review. She also participated in the Community and Economic Development Clinic as a team leader on a major complex litigation case. As a second year, she was a Research Assistant to Dean Erwin Chemerinsky, and later interned at the United States Attorney’s Office for the Southern District of California. Finally, she was involved with the UCI Law Mentorship and PreLaw Outreach Programs, where she mentored incoming law students and reviewed personal statements for potential law school applicants.

ELIZABETH MORALES Elizabeth Morales is the Business Development Director for Applied Business Software, creators of The Mortgage Office and The Loan Office, loan servicing software. She has a B.A in Spanish Literature and a Masters in Business Administration. She has extensive experience in leadership and a diverse background in public, corporate and creative fields. She can be reached at Elizabeth@absnetwork.com

PRIVATE LENDER

THE OFFICIAL EZINE OF AAPL JULY/AUGUST 2014

IVAN OBERON On Moving Forward & Giving Back Back To Basics: Business Planning 101 How To Avoid Being Blacklisted by Google JOBS Act Crowdfunding and SBRE Funds

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“When timing and certainty of execution are the key to success, Bloomfield Capital has become a go-to source for commercial real estate bridge debt funding.�

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Private Lender

Brent Truscott B

loomfield Capital is a private equity fund manager and a direct lender. The firm focuses on originating and servicing bridge loans in the commercial real estate space. The loans are typically between $1 million and $10 milion, and they lend nationwide.

Brent Truscott’s business partner, Nick Coburn, founded the firm in 2008. Brent joined the firm in early 2010 along with another partner, Jason Jarjosa. Since then, they have grown the business organically by adding top-notch staff and in-house loan servicing and origination.

As a partner of the firm, Brent’s role is to generate the $100 million in annual loan originations that Bloomfield is currently funding. In order to generate that kind of volume, they have to process and review over 200 opportunities per month, which is where Brent spends the majority of his time.

PL: Can you share what project(s) you are currently working on with our readers?

BT: Since I head our originations efforts, I’m always working on finding new loan opportunities and working with borrowers and sponsors to help them either purchase an asset, or work on refinancing an existing property.

Because we’re near the end of the calendar year, I’m trying to finish up my conference schedule for 2016.

I’m also working on finding a new analyst to add to our originations team. We are methodical when we bring on new team members; it takes a lot of phone calls and resume reviews to get the right set of potential candidates for any role that we are looking to fill.

PL: It appears that the commercial real estate financing market has made a strong comeback in the last 36 months, and there are a lot of new conventional and bridge lenders in the marketplace. Why is Bloomfield

Capital different than the rest of the crowd?

BT: Bloomfield Capital is unique in our niche because we are true direct lenders and we have an in-house credit committee. If my partners and I choose to fund a loan, we’re able to do so without any outside approval or influence.

That is extremely rare in today’s lending marketplace, and we continue to see other so-called “lenders” quoting loan terms and rates, taking large deposits, and then scrambling to find investors to fund the loan.

Because Bloomfield Capital is a true direct lender, we’re able to control the process much more tightly for our borrowers, and are able to deliver on our term sheets.

When timing and certainty of execution are the keys to success, Bloomfield Capital has become a go-to source for commercial real estate bridge debt funding.

PL: Why did you choose this industry to be in?

BT: I’ve chosen to work in the commercial real estate bridge lending space because I continue to see opportunities to provide a service to the real estate community that banks and traditional capital sources have chosen to, or been forced to ignore. I like the pace of short-term bridge lending, and given the number of opportunities that I see every week, there’s never a dull moment in our office. It is also a lot of fun to find and close a great deal where our borrower is able to make money and we’re able to earn a nice return for our Fund.

PL: What kinds of mistakes have you seen professionals make when it comes to their investments?

BT: I think that the number one mistake people make while investing in the commercial real estate world is not taking a strong downside view to their potential investments. Investors should always stress-test their portfolio assuming a portion of their investments hit

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•••LENDER LIMELIGHT•••

heavy headwinds, and if they’re still happy with the end result, then they’ve probably got a good set of investment opportunities on their hands.

PL: What do you think are some of the biggest mistakes you made and how did you overcome them?

BT: I’d like to think that I’ve never made any really big professional mistakes, but over time I’ve realized that triple checking my work and not short-cutting any due diligence should ultimately result in the correct business decision. I can’t say that I always realized that, and earlier in my career, I didn’t know how to be as diligent about investing as I am today.

PL: What types of things do you do to stay current in this ever-changing real estate landscape?

BT: I stay current on the market by spending a large portion of my time on the road meeting borrowers, mortgage brokers, and other commercial real estate professional.

This is still very much a relationship driven business, and there’s no substitute for face-to-face meetings and actually putting boots on the ground in the cities where we are lending.

PL: What influences or motivates you?

BT: I realize how fortunate I am to do something that I love as a career, and that motivates me every day.

Additionally, I have great partners and a great team, and I think we all motivate one another.

PL: If you could change one thing on your resume, what would it be and why?

BT: Each piece of my resume got me to where I am, so I don’t think I’d change a thing.

PL: What you would do differently if you could do it again?

BT: I would have entered the real estate industry when I was younger, because that’s where my interest has always been.

PL: What do you complain about?

BT: I complain about people not being positive, and dragging others down with them. Which is why I can’t watch local news or read local newspapers with any degree of regularity. Someone told me that every morning you wake up, and you either choose to be positive or negative for the rest of the day.

SUBMITTED PHOTO BLOOMFIELD CAPITAL’S LEADERSHIP TEAM

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Not that I always do it, but I’d like to say I choose to be positive more days than I choose to be negative.

PL: What was the last thing you changed your mind about?

BT: What to have for lunch today (bring my lunch vs. go out).

PL: (Laughing) We can definitely relate that, here!

What’s your favorite website?

BT: Probably Ebay. I love looking at old cars, sporting equipment, and just random junk. It’s a guilty pleasure.

PL: What do you think the biggest misconception about you is and why?

BT: I think that because I still respond to almost all new investment opportunities, most people that I interact with on a daily basis think I’m a loan officer that reports to a chief credit officer. I’ve recently spent a lot of time explaining to brokers and borrowers that I’m on the credit committee and have direct influence over which deals we fund.

PL: What did you care about most when you were 10 years old?

BT: Growing up in metro Detroit Michigan, all I cared about were sports cars!

PL: What’s the best advice you’ve ever received?

From whom?

BT: I just read a book that said, to paraphrase, “pick people that you aspire to be more like, and surround yourself with them”. It’s so simple, but I think it just makes a lot of sense.

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•••BUSINESS STRATEGY•••

THE POWER OF RELATIONSHIPS By: Elizabeth Morales decade ago, who are now unable to find a job.

See what the market is asking in your field. Can your job be replaced by a machine, a teenager, or recent college graduate for a third of what you make? If you answered yes to any of those questions, it is time to reinvent yourself.

Do whatever it takes; go back to school, dig deep to find what you are passionate about and develop it. Chances are you will be great at it because it is your natural given talent.

I

f you attended the American Association of Private Lenders’ (AAPL) 6th Annual Conference in Las Vegas last month, you must have heard or seen all the commotion around the new speed networking session! If you attended the session, you came out with a stack of business cards and (hopefully) brand new relationships.

The beauty of a relationship and the wonders of networking.

The power of networking and building strong relationships will allow you to not only market yourself but create a unique brand. Today, it is about who you know but also who knows you. Consider the last two jobs you have had.

Did you get them through answering a job portal or did a friend, colleague, or relative recommend you? Chances are you did not go through a job portal.

When people know you and your great work ethic, opportunities will come knocking at your door.

Choose wisely! ‘Why network? I already have a job, I am happy and my employer is happy’. That is great. However, nothing is forever. Keep reinventing yourself. At the very least, start an account on LinkedIn if you haven’t already.

There are many great professionals who were excelling a

12 Private Lender

Maybe you don’t know what you are good at. Ask your friends, family, or find an aptitude test online. If you aren’t a fan of mingling with new people – small talk is excruciating to you, there are digital options that can help you open doors. A small piece of advice: in person is always better! People will not always accept requests if they do not know who you are. Keep a well presented profile and your chances of being accepted to connect are higher. Step out of your comfort zone and attend a speed networking event where the goal is to get you to meet others - eliminating most of the small talk!

Now think about the most important word related to a relationship. When you need someone to repair something in your home, do you Google it or do you first think of someone you know to call? If you don’t know anyone, do you think of someone you trust who might refer someone to you? That is the keyword. TRUST. In any relationship trust is the critical component to longevity. Once you have established those relationships, cultivate them.

Remember, it is all about nurturing the relationship.

The highlight for many of the attendees at AAPL’s Annual Conference was connecting to make new relationships and the ability to nurture long-term partnerships face-toface.

Building and maintaining long-term relationships is the key behavior and skill of the top ten percent of the money earners in sales, in every field, selling every product and service.

For 2016, brush up on some of the basic principles of building long-lasting relationship and you will prosper.

Happy networking!

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•••FINANCE•••

THE SMART PLAY FOR U.S. PRIVATE MORTGAGE LENDERS By: Ian McSevney, B.A.

I

n the recent Economist article Sheikhs v Shale, there are some interesting facts put forward about the current shake up or shake down more like it regarding the price per barrel of oil.

job at getting wells up and running while driving costs down substantially. Still, it is not quick enough or likely even possible to catch up with the damage of the recent downward price slide.

The official charter of the Organization of Petroleum Exporting Countries (OPEC) states that the group’s goal is “the stabilization of prices in international oil markets.”

It has not been doing a very good job. In June, the price of a barrel of oil at almost $115 a barrel, began to slide; it now stands close to $70 a barrel.

What we will see is a sustained retraction in shale oil exploration and most certainly a thinning of the herd of producers. Many of these producers will face bankruptcy and investors will lose in the process making future capital raising efforts difficult for shale producers to get back on line when prices begin to rise again. OPEC producers win on both the downward price slide and on the inevitable return to higher prices, at least for now.

This near 40 percent plunge is thanks partly to the sluggish world economy, which is consuming less oil than markets had anticipated, and partly to OPEC itself, which has produced more than markets expected. However, the main culprits are the oilmen of North Dakota and Texas.

Over the past four years, as the price hovered around $110 a barrel, they have set about extracting oil from shale formations previously considered unviable. They have completed 20,000 new wells since 2010, more than ten times Saudi Arabia’s— boosting America’s oil production by a third, to nearly nine million barrels a day (b/d). That is just one million b/d short of Saudi Arabia’s out-put.

The contest between the shalemen and the Sheikhs has tipped the world from a shortage of oil to a surplus.

While the U.S. economy as a whole is making great strides and returning to sustained growth. They still have Canada as their friend and neighbor where under the North American Free Trade Agreement (NAFTA) they can get access to oil from and not have to send their hard earned dol-lars to the OPEC countries to make up the drop in their domestic shale oil production. The real factors on demand for oil and therefore the price of oil are cyclical and in the end oil is a limited resource. World population growth and economic growth of emerging economies along with the demand of India and China alone oil prices will return to record highs.

What does this all mean?

Capitalizing on the Smart Play

Basically what we have is a move by OPEC driven by the Saudi’s to drive down the price of oil to thin out the producers who cannot sustain production at these lower prices. The price has been pushed down well below the break-even point for most producers. Particularly for the U.S., shale producers who have been doing a phenomenal

As a mortgage investor your money is free to go where you send it. Why should you consider sending it to Canada? As indicated the Canadian economy is the 11th largest economy in the world. It is also one of the most diverse economies in the world with strong fundamentals along with a stable geo political environment. Despite the

WHY IS THE LOONIE AFFECTED BY OIL PRICES? Canada is the world’s 11th largest economy. Despite having a very diverse economy rich in natural resources such as of lumber, wheat, grain, and potash. Canada is also a large producer of gold, diamonds, and fisheries. Canada is a net exporter of energy, in particular oil and gas, and despite this sector only representing about 2.9% of GDP. Low oil prices affect the dollar. Somewhat artificially due to reactionary affect and somewhat legitimately due to the break-even point of domestic oil production.

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•••FINANCE•••

Loonie v. Greenback The decline in the price of oil has had a major impact on the Canadian dollar versus the U.S. dollar. The current exchange rate being:

1 Canadian Dollar equals

0.75 U.S. Dollar

End of day commodity futures price quotes for crude oil WTI (NYMEX) = $40.79 USD as of November 18, 2015.

current discount to the loonie.

The current exchange rate between the Canadian and U.S. dollar gives the U.S. investor an op-portunity to put money into a Canadian mortgage at a discount. Private mortgages are typically one-year terms in Canada and U.S. investors can watch while the value of their investment rises relative to the U.S. dollar. There exists a real opportunity for an added premium on a mortgage investment of five to seven percent as the Canadian dollar rises modestly along with the future increases in oil prices. U.S. investors can even use their Self-Directed IRA accounts for Canadian based mortgage opportunities.

Need Capital to Buy or Invest in Real Estate?

Learn how you can use a Self-Directed IRA or 401k plan to fund deals.

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The Smart Play Wondering what the smart play is and why all this business of up and down oil prices really means anything to a U.S. mortgage investor?

While the stock markets make the natural adjustments and various companies directly and indirectly related to the U.S. domestic oil industry take a hit, the Canadian dollar may be down as well in an almost mirror image to the decline in oil prices.

However, the artificial pressure on the price of oil will be relieved and so will the resulting pressure on the Canadian dollar.

Interested in writing for Private Lender and getting in front of thousands of real estate finance professionals?

Contact us today! PrivateLender@aaplonline.com

www.MidAtlanticIRA.com

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WHAT’SCurrent NEWS & UPDATES

CRESTAR GROUP ANNOUNCES THE NAME CHANGE OF IT’S PRIVATE REAL ESTATE LENDING BUSINESS Crestar Group of Companies announced today that it has changed the name of its private real estate lending business, Crestar Funding, to LendingOne. Bill Green, Chief Executive Officer, commented, “When we started Crestar Funding we set out to build a business that leveraged the knowledge, experience and infrastructure of our other Crestar real estate related businesses. It has become clear that this business is a greater opportunity than what we had initially envisioned.”

Matthew Neisser, LendingOne’s Chief Operating Officer, commented, “By using our proprietary technology, we’ve significantly improved the underwriting process, reduced closing times and enhanced the borrower experience.

This approach has led to the company’s rapid growth and need for its own identity separate from Crestar as it builds itself into a national platform.”

The company also announced today that Richard Vague and Stanley Middleman have joined LendingOne’s Board of Advisors. Mr. Vague is co-founder and CEO of two credit card companies: First USA, which grew to be the largest Visa issuer in the industry and was sold to BankOne in 1997, and Juniper Financial, the fastest growing credit card issuer of the past decade that was sold to Barclays PLC in 2004. Mr. Vague is also a minority investor in LendingOne. Additionally, Stanley Middleman, the Founder and CEO of Freedom Mortgage Corp, a top 10 mortgage originator in the nation, has joined LendingOne’s Board of Advisors.

REALTYMOGUL.COM FEATURED ON FORBES ”Real estate and crowdfunding may not seem like natural companions, but the real estate industry has jumped into crowdsourcing in a few small ways – such as the option to help fund commercial investments. But instead of the millions of dollars it’d take you to launch your own venture, today’s real estate investors just need a few thousand to begin with sites like RealtyMogul.com.” Read more here: http://www.forbes.com/sites/sujanpatel/2015/11/25/7ways-crowdfunding-is-the-way-of-the-future/

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AAPL HOSTING LAST FREE WEBINAR Join the American Association of Private Lenders and Abhi Golhar on Wednesday, December 9 for the last free webinar available to nonmembers.

Abhi will be providing you the investor’s perspective on lending, such as; what to watch out for when lending to a real estate investor, how to be competitive to gain visibility, and the best methods to analyze deals. He will also be sharing real case studies of a new construction flip in the Kirkwood area of Atlanta.

SIGN UP HERE COMMUNITY INVESTOR RADIO ANNOUNCES NEW WEEKLY HOSTS Affinity Enterprise Group announced the reformatting of Community Investor Radio on BlogTalkRadio. Community Investor radio has added three new hosts that will be rotating the weekly internet radio show.

Produces by Mary McKenna, the show now features Matt Benson, Chrissey Breault, and Tom Rubadue. The show offers listeners a fresh take on the world of residential real estate investing and delivers a national audience of private lenders and investors, real estate agents, brokers, landlords, service providers and others interested in investing back in their communities. Listeners discover the behind-the-scenes stories of successful investors, plus we provide tips from national business experts, updates on business events, and important news impacting the residential real estate industry.Tune in: Community Investor can be heard on Fridays at 12 p.m Central. For a complete schedule and to listen to archived shows, visit iThinkBigger.com/radio Submit your current news, updates, or job opportunities for possible inclusion in the next issue of Private Lender.

Send details to PrivateLender@aaplonline.com

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•••LEGAL•••

THE MISUNDERSTOOD LATE CHARGE

A BASIC GUIDE FOR CALIFORNIA LENDERS By: Nema Daghbandan, Esq. and Melissa Martorella

not always clear and ascertainable at the outset of the transaction, but there is necessarily an expense.

Under California law, the late charge must bear a reasonable relationship to the probable loss of the lender resulting from the late payment1. An unreasonable late charge is unenforceable as a penalty that punishes the borrower. California law prohibits punitive damages in contracts2. Since the purpose of a late charge is to compensate the lender for any damages suffered due to the late payment, a late charge that is out of line with that compensation is interpreted as existing to punish the borrower for nonperformance and is therefore unenforceable.

Statutory Limitations on Late Charges

O

ne of the most common misunderstood issues our firm comes across is the basic late charge.

Lenders will request that loan documents include a 15% percent late charge with a 5 day grace period, or a late charge on the entire principal balance when a maturity balloon payment is not paid. Lenders are often surprised to find out that there are restrictions on the amount of late charge and the minimum grace period required before a late charge can be assessed. This article addresses common misconceptions and limitations of late charges.

Are Late Charges Permissible?

This may appear to be a silly question. Most promissory notes include a late charge and late charges are the rule not the exception. Late charges are essentially a contract provision for liquidated damages. The concept behind a liquidated damages clause is that the potential damages to a lender are difficult to determine at the time of making the loan. For example, if a payment is not paid on time, the lender will need to pay a loan servicer or an employee to follow up with the borrower. The expense to do so is

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The type of license under which a lender originates a loan will determine whether the loan has a statutory restriction on the late charge. Below is a sampling of statutory restrictions of late charges: Default Statutory Limitation (non-licensed loans). When the loan is not originated through any type of license, California law prohibits a late charge in excess of the greater of 6% of the installment payment due, or $5.

Payments cannot be considered late until at least 10 days following the due date of the installment payment.3 Bureau of Real Estate License Originated Loans. If a licensed California broker arranges a loan to a private investor or directly makes a loan which loan is secured by a 1-4 family residential property, California code prohibits a late charge in excess of the greater of 10% of the installment payment due, or $5. Payments cannot be considered late until at least 10 days following the due date of the installment payment. The maximum late charge permitted on any balloon payment is the maximum of any installment due, and cannot be assessed on the balloon payment.4 Credit Union Loans. All loans, regardless of collateral type

•••LEGAL•••

originated by a credit union share the same limitations as broker originated loans, 10% on the installment due with a minimum 10 day grace period.5 FHA/VA Loans. For FHA/VA loans, the late charge cannot exceed 4% of the delinquent payment and cannot be collected unless a payment is more than 15 days late. 6

payment would be unenforceable as a penalty.10 Ridgley v. Topa Thrift & Loan. The California Supreme Court held that a late fee disguised as a prepayment penalty which was equal to six months’ interest, but only due if the borrower was late was an unenforceable penalty.11

National Banks. National banks may impose any late charge on California residents that is permitted by the law of the bank’s home state, even though the amount exceeds the legal limit in California.7 Out of State Loans. Most states regulate and limit late charges. For example, Colorado prohibits a late charge in excess of 5%, which may only be assessed after a 10 day grace period for certain consumer credit transactions. 8

What if your Transaction is not covered by a Statutory Limitation?

There may be instances in which a statutory restriction does not apply. For example, a loan which is arranged by a licensed BRE broker but secured by commercial real property or business purpose loans made by a licensed California Finance Lender.

When the late charges for a loan are not limited by statute, the Lender must still charge a fee that is reasonable in relation to the harms incurred by Lender. The courts in California have determined that the following late charges were unenforceable as penalties which bore no reasonable relationship to the harm incurred by Lender.

Garrett v. Coast & Southern Fed. Sav. & Loan Assn. The California Supreme Court held that a 2% late charge assessed on the principal balance of the loan when a Borrower failed to pay the loan off at maturity was punitive in character and not reasonably calculated to compensate the injured lender. The late charge provision was held to be void, and the Court remanded for an assessment of the actual damages sustained by the lender.9 Los Angeles City School Dist. v. Landier Inv. Co. The California Court of Appeals stated that a late charge provision providing for a double

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•••LEGAL•••

Poseidon Development, Inc. v. Woodland Lane Estates, LLC. The California Court of Appeals determined that a 10% late charge on any “installment” payments could not apply to the balloon payment, and only applied to monthly interest payments. Otherwise, it would have been an unenforceable penalty not rationally related to compensating the lender for the late payment. The Court reasoned that the administrative costs associated with collecting a late payment for a regular monthly late payment was $641.67, and the administrative costs to collect on a maturity default would not have been much greater yet resulted in a $77,641.67 penalty.12

Other Considerations Pyramiding of Late Charges California code prohibits the practice of pyramiding late charges13. For example, if a borrower fails to make a timely payment in January, but makes the regular installment payment due in February, a lender cannot charge a late charge for February even though the payment received in February would be applied towards the January payment and the February installment payment would still be due.

All late charges must be reasonably related to the costs incurred by a lender even when a loan is not covered by a statutory restriction. In transactions where statutory restrictions did not apply, the California courts prohibited (i) late charges as low as 2% assessed on balloon payments, (ii) multiple months interest charged upon a single late payment, and (iii) a double payment due when late. When determining a reasonable and enforceable late charge, lenders must be able to ultimately demonstrate the actual damages sustained by lenders, and not charge such a high late fee that could be interpreted as punishing the borrower.

Sources 1

California Civil Code § 1671

2

California Civil Code § 3294

3

California Civil Code § 2954.4

4

California Business and Professions Code § 10242.5

5

California Financial Code § 15001; California Civil Code 2954.5

12 U.S.C.A. §§ 1701 et. seq.; 38 U.S.C.A. §§3701 et seq..; 38 C.F.R. § 36.4311(c)

6

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7

12 U.S.C.A.§ 85

8

COLO. REV. STAT. ANN. § 5-2-203(1)

9

9 Cal. 3d 731, 511 (Cal. 1973)

10

177 Cal. App. 2d 744, (Cal. App. 2d Dist. 1960)

11

17 Cal. 4th 970, 953 (Cal. 1998)

12

152 Cal. App. 4th 1106, (Cal. App. 3d Dist. 2007)

13

California Civil Code § 2954.4

Abhi’s

REAL DEAL

PERSPECTIVE #RealEstateDealTalk

•••PERSPECTIVE•••

TRUST GOES BOTH WAYS

By Abhi Golhar and Pavielle Dortch, Esq.

I

am changing things up a little bit for my column. Usually, I write about a property that I find is a great case study in terms of situation, numbers, process, and education.

However, for this issue of Private Lender, I discuss the value of trust. Specifically, trust between an investor and his or her attorney. I have asked my attorney, Pavielle Dortch, Esq., to contribute her comments and insights.

AG: This year, my firm, Summit & Crowne Partners, experienced massive growth, at an unexpected and rapid pace. We expanded from Atlanta to Charlotte, and we are looking to capitalize on residential and commercial flip and hold opportunities in Jacksonville, Tampa, and St. Louis.

Through the ups, downs, tough mornings, and late

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nights, there is nothing better than knowing your legal counsel is ready, willing, and able to grind it out with you, side-by-side. Growing my team has been one of the most rewarding experiences I have had, including selecting an intelligent, capable, and experienced attorney.

PD: When building your investment team, it is very important to understand that each individual plays an integral part in making the transaction happen. As an attorney, I have had the opportunity to interact with teams of different calibers. Some teams are fluent in their system, while others are barely holding it together. The key difference between Team A, the more effective team, and Team B, the barely holding it together team, is that there is a breakdown in trust.

AG: Additionally, great attorneys unknowingly assist in identifying holes in a business operation to encourage Team B to become Team A. This is fantastic for an operator like me who constantly needs to sharpen the process and model, in hopes to yield a favorable outcome at the year’s end. There’s nothing worse than not performing on a contract and allowing the mistake to perpetuate through your business model; making your attorney doubt your abilities as an investor. This was a frequent occurrence in the beginning of my real estate career, until I realized I was the problem, not the solution.

I let myself become fearful of outcomes beyond my control, and did not rely on my attorney to make up for the strength I lacked.

•••PERSPECTIVE•••

PD: As with any relationship, when trust is missing, the relationship becomes unproductive and ineffective. This is simply because neither party feels as though they can rely on the other. Recently, an investor abruptly moved his closing from another firm to my firm. According to the investor, the attorney failed to provide competent service in the time allotted. In this situation, the investor’s trust was broken.

With that in mind, please remember that each party places an important role in the process. Thus, you should build your team on a solid foundation of trust. Because, once trust is lost, it is hard to get back.

AG: This is an interesting situation when it occurs; one I encountered myself, and one that can cause challenges during any point of a real estate transaction, including closing. When investors feel their attorney is lackadaisical in their efforts in communication, transaction-specific structure/ knowledge, and execution in getting deals done, we are hunting for another one. However, the success or failure of any relationship starts from the initial due diligence performed by the investor. Like any property investment, I look at 100, interview 3, and pick 1.

Relevant training and information in an ever-changing industry.

PD: One mistake I have noticed in the team building process is many investors happen upon their attorneys. Investors pick attorneys because the attorney closed the investor’s first deal, the attorney has the lowest fees, or the attorney can complete a certain type of closing. The problem with this selection process is that the relationship is not built on the investor’s confidence in the attorney’s ability, but is based on necessity and/or convenience.

Instead of selecting your attorney based on necessity and/or convenience, pick your attorney like you picked your contractor, your financer, and your business partner. Take the time to cultivate a relationship with your attorney. Attorneys are people too. And, we will move mountains for clients we trust. So, what does that mean?

As much as you rely on your attorney, your attorney relies on you. We do not rely on investors solely for financial gain. We look to our investors to maintain their credibility, provide support/information when needed, and to be honest with us. For example, as an attorney, I am not likely to make an investor’s file my top priority if the investor has a history of not completing their transitions. Further, it makes my job extremely difficult if I am operating on half-truths or no information at all.

So, as you can see, trust goes both ways. And, it will, always, affect the type of service you receive.

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•••LEGAL•••

THE NATURE OF PREFERRED RETURNS By: Kevin Kim, ESQ.

P

referred returns are a commonly used form of return in private equity investment. Generally, a preferred return is a hurdle rate, usually set between six to ten percent annual return before any carried interest or income distributions are paid to investors. Preferred returns can be structured in a variety of ways, but they are commonly used as a means to provide investors compensation in exchange for the longer term investment and lack of liquidity associated with private equity investment.

The most common structure for mortgage funds is to offer a preferred return between six and ten percent at an annualized rate, payable on a monthly basis. This coincides with the fund’s monthly interest income, and

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provides investors a consistent rate of return, as long as the fund is performing well and meets or exceeds the hurdle rate. Preferred returns are often paid after expenses, fees and operating costs, including fees to the management company. Although the structure of a preferred return is relatively straightforward, they are often a source of confusion in practice.

One common source of confusion is the following: what happens when the fund exceeds the hurdle rate one month but falls short the next? What is the fund’s obligation if this happens?

Absent any claw forward or claw back provisions in the offering documents, the mortgage fund would simply pay

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•••LEGAL•••

the established preferred return the month it exceeds the hurdle rate, and pay whatever it can in the following month it falls short. In addition, if the fund had posted a substantial loss in the second month, the loss may be large enough such that Members may have received too large a distribution of preferred return during the first month; in such a case, there is no mechanism for the fund to necessarily claw-back or recall excess distributions already made to investors during the earlier part of the fiscal year.

For these reasons, fund managers must carefully model their fund’s preferred returns to fit their income structure.

For funds whose business models are designed for consistent periodic income, such as mortgage funds, the preferred return must be carefully modeled to fit their financial projections.

Another source of confusion for some fund managers is the obligation tied to the preferred return. A preferred return is fundamentally a priority payment prior to any income distributions to the fund’s investors and/or the

management company. It is not a guarantee or any type of fixed obligation on the fund manager’s part. However, if a mortgage fund’s offering documents are not drafted in a way to ensure that the fund is adequately insulated from issuing a preferred return when it lacks the proceeds, investors may misunderstand this preferred return to be an obligatory periodic payment, causing investor dissension and disputes.

For these reasons, fund managers must ensure that their offering documents clearly and explicitly explain the nature of the preferred return to its investors, particularly if they are admitting non-accredited investors.

Interested in writing for Private Lender and getting in front of thousands of real estate finance professionals?

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•••MANAGE & LEAD•••

MONITORING YOUR MOST VALUABLE ASSET By: Chrissey Breault

The best way to manage brand reputation is to make sure you’re telling a consistent story – and the right story. While completely controlling the message is no longer an option for public relations (PR) and marketing professionals- thanks to social media, you can still stay on top of the conversation.

Y

our reputation is what people judge you by. It helps them decide whether they will use you, buy from you, or even associate with you. Just because you have a good reputation you can’t just assume that it will always be that way. There are two enemies who can destroy or damage your reputation. The first is you. The second is others.

You already know that your reputation is one of your most valuable assets. So how come so many reputations get damaged, battered, or faded?

Every brand should prepare for the moment something goes wrong. Bad news can spread very quickly. A dissatisfied customer, service issue, product flop, unexpected loss of an executive, or even just a tweet taken out of context. Any one of those factors, plus so many more, could adversely affect you or your organization no matter how careful you have been. In severe cases, consequences for poor reputation can include: losing market shares, rise of investor activists on your Board, investors closing their positions, or suppliers pulling out of contracts.

Start by making a good first impression. It takes less than 50 milliseconds to form a first impression. First impressions are so important because they give way to the “halo effect.” A great example is if your website looks good, the user will transfer that assessment to its functionality. Actually, an even better example for this audience is to talk about curb appeal. Various studies have proven that buyers won’t even get out of their cars if they don’t find a property’s curb appeal attractive.

Buyers associate the condition of the exterior, including landscape, with the condition of the interior. If you want a great return, you want to make sure your investor has phenomenal design plans for the exterior as well as the interior of the investment property.

It’s important to embrace who you are and have buy-in from your employees and partners. Your brand is derived from a mix of who you are, who you want to be, and who people perceive you to be. Small things along the way help present your brand across customer touchpoints: how you answer the phone, what you or your salespeople wear and say, screening calls, even your e-mail signature.

It’s not just marketing or PR’s responsibility – branding is the responsibility of every employee. Your marketing or PR team can get you back to basics and should be helping to ensure that the whole company understands the corporate mission, vision, values and goals so you can all believe, live, and breathe them.

The more than 3.2 billion internet users are congregating over multiple online channels. It’s important to streamline and manage your brand consistently for every online channel you use. Start by reviewing different aspects of each online channel for things such as reach, interactions, popularity, levels of engagement, audience demographics, and effective messaging. Don’t use all online channels

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•••MANAGE & LEAD•••

PEOPLE WHO DON’T LIKE YOU CAN ANONYMOUSLY POST NEGATIVE CONTENT ONLINE AND HAVE IT SHOW UP WHEN PEOPLE GOOGLE YOUR NAME. 

GRIPE SITES



FORUM POSTS



WEBSITES

THANKS TO THE COMMUNICATIONS DECENCY ACT OF 1996, THE ONLY THING YOU CAN DO IS PUMP OUT CONENT IN THE SEARCH ENGINE TO DROWN OUT THE EFFECTS.

just for the sake of it – be strategic and decide where your brand really needs to be seen regularly, what messages work, and who your influencers are.

Remember, you can’t be all things to all people. If you need to just take a step back and refocus your channels it is ok to do so. Over-committing and not following through won’t help you maintain a stellar reputation. Unused or abandoned channels will make it appear that you believe it is ok to let things slip.

Building a circle of influence online can have a positive impact. The power of influence travels faster than ever in a socially-networked world. As every PR person knows, message virality is a double-edged sword. The good news is that your followers most likely already like you, so it’s important to craft a strategy to speak to fans as people.

Make sure your engage with them in a timely manner and always be professional and courteous (no matter what was said.) Partake in discussions, offer your professional opinions on topics and avoid being to “salesy” – only to recommend your product or service when you feel it can solve a problem or encourage the discussion to move forward. You want to avoid bragging and asserting claim.

You should demonstrate and illustrate. You may be thinking, “It aint bragging if I’ve done it!” It’s important to realize that people will resent you or your brand if you full of over-enthusiastic self-appreciation. Be sure you are acknowledging positive comments, and respond to complaints and issues quickly. Build and support your “brand ambassadors” and let them spread the good word of your brand.

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It’s important to keep track of conversations, interactions, and positive and negative comments online so you can join in, answer questions, dispel myths, and see if your strategy is actually working. You can keep on top of your reputation by constantly seeking feedback and opinions form people you admire and trust. Look at your marketing materials regularly.

An online snafu can happen in a flash; you may not even realize that it happened until it’s “too late.” Maybe one of your employees posts something on your social channel that was meant for a personal page. Maybe you have disgruntled ex-employees who just can’t seem to let go.

Those are just two of many moment where you need to be prepared to prevent, respond, and fix mistakes.

Provide your team with the tools they will need to monitor both what is being said about you or your brand on social channels and also within SERPs (Search Engine Result Pages.) Responding quickly to an accident or negative situation is important. Listening to what your audience has to say in a calm manner. Don’t take things too personally

•••MANAGE & LEAD•••

when you are preparing your responses. Your followers will only feel attacked. There are a few cases where you don’t need to respond to negative comments – your influencers will “police” comments and negative feedback for you.

To manage social blunders you want to be as honest and open as you can be about situations. Obviously, if law enforcement or investigations are involved, you need to be careful about how much you put out there, but you want to have as much transparency as you can. Your users want transparency, and will respect you for it. Not everyone will listen to your replies – some users are just trolls. That’s when you need to just walk away from the situation. If you tried to address an issue, people will see that you have attempted to resolve the situation.

The digital world adds a new dimension to you, your business, and brand – and ultimately your reputation – because the same brand can be perceived differently by different audiences. With the 3.2 billion active users of the internet worldwide, it’s unquestionably worth adding brand reputation management to your 2016 plans.

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The American Association of Private Lenders reaches the most tightly targeted audience of Lenders, Fund Managers, Brokers, Investors, Property Managers, and Service Providers in the peer-to-peer lending community. It is the voice of the private lending industry. As such, advertising with the American Association of Private Lenders is an excellent investment and the ideal medium to reach anyone in the private lending industry. Contact us today for more information!

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