Originate Report - May 2018

May 2018

THE OFFICIAL MAGAZINE OF GERACI

Cities to Watch:

The

SEKOU EFFECT

Poetic Voice Sekou Andrews

Nashville

Also Inside May:

FAIL MORE Alternative

LENDING

Industry Spotlight: Romney Navarro © Mike Dunn

STAY AHEAD of the Real Estate Market Junior Loans www.originate.report 1

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ANTHONY GERACI CEO/Editor

RUBY KEYS Marketing/Editorial Director

JOHN PELACHE Account Executive

ALICIA CARTER Marketing Coordinator

DAVID BASEN • MAX BERGER Marketing Assistants

PAM HUBER Art Director

CONTRIBUTORS Max Berger • Edward Brown Anthony Geraci • Robert Greenberg Clay Malcom • Michael Miller Bobby Montagne JT Terrell • Cathleen Yates

FOUNDING UNDERWRITERS

Letter from the Editor Welcome to our May 2018 Edition of Originate Report!

I want to thank you for taking the time to read our magazine and see some of the great companies advertising with us. This edition in particular is one you won’t

want to miss. Originate Report is highlighting the award-winning pioneer of

poetic voice, Sekou Andrews, who specializes in leadership and entrepreneurship.

MARK HANF President, Pacific Private Money

In his story, he challenges leaders, coaches, and influencers to think harder about their message – “to laser-focus your language, your intention, your purpose, your

direction, your value and your brand.” Sekou will be the keynote speaker at the

Activate Conference, where professionals in the lending space will come to learn, network, and grow their business.

CEO, A List Partners

In this edition, you will learn to embrace the fear of failure and the positive

ORIGINATE ONLINE

of shooting for the stars. If you are interested in writing for our magazine or

DAVID OWEN

www.originate.report

GERACI ONLINE www.geracilawfirm.com

outcomes it can bring. It may be exactly what you need to reach the moon instead exploring advertising opportunities, please reach out!

Ruby Keys

Ruby Keys, Editorial Director

Interested in advertising in Originate Report? Please reach out to John Pelache at John@Originate.Report or (949) 379-2600 For Advertising Submissions, Article Submissions, and Inquiries contact Submissions@Originate.Report

ORIGINATE MAILING ADDRESS Geraci LLP 90 Discovery, Irvine, CA 92618 PHONE (949) 379-2600

GERACI CONFERENCES www.geracicon.com www.originate.report 3

contents MAY 2018

Features

6 Anthony’s Rules for Success You Need to Fail More

Embrace the power in failure

By Anthony Geraci, Geraci LLP

8 Cover Story

The Sekou Effect

6

Meet the “de-facto Poet Laureate of corporate America”

By Cathleen Yates, Originate Report Staff

12 Personal vs. Retirement: How Should You Originate?

By Clay Malcom, New Direction IRA

14 Get $#!& Done with JT Terrell

The Four Corners of a Role

12

By JT Terrell, Petra Coach

16 Industry Spotlight

Romney Navarro

Chief Marketing Officer, Noble Capital

19 The Growth of the Alternative Lending Industry

By Robert Greenberg, Patch of Land

20 Four Ways to Stay One Step Ahead of the Real Estate Market

By Michael Miller, 5 Arch 22 Why Banks Do Not Allow Junior Loans

By Edward Brown, Pacific Private Money

© Mike Dunn

8

26

24 Cheaper Isn’t Always Better: Low Interest Lenders May Cost More in the Long Run

By Bobby Montagne, Walnut Street Finance

26 Cities to Watch

Nashville, Tennesee

By Max Berger, Geraci LLP

28 Upcoming Events 30 Loan Home

4 Originate Report | May 2018

23

www.originate.report 5

ANTHONY’S RULES FOR SUCCESS

You Need TO FAIL MORE “T

here is only one thing that makes a dream impossible to achieve: the fear of failure.”

– Paulo Coelho

I know what you’re thinking. This is the time where I’ve finally lost you… this one, I’ve officially lost my mind.

But make sure you are hearing me. If I wish nothing for you, I wish you the following: I want you to fail. Now, before you call me an asshole, I do not want you to set fire to papers, call up clients and tell them you’re done, or just send clients sloppy work. That’s not failure – that’s laziness.

Merriam-Webster has several definitions for failure, but the best one I think fits is “a falling short.” Notice what it doesn’t define failure as. It doesn’t define it as “You’re a shitty person.” Nor does it say “Why did you even try?”

It simply means you fell short. Fell short of what? We’ll come back to that.

Michael Jordan

Ever heard of Michael Jordan? Even those who haven’t watched basketball have heard of Michael Jordan.

He has numerous NBA records, numerous Finals MVP trophies and Championship rings, and is considered the greatest in basketball. Even Today. Or, if you’re like a certain Patriots fan, he’s NBA’s Tom Brady. And yet, he also missed 9,000 shots in his career. He lost almost 300 games. 26 times he was trusted to take the game winning shot. And missed. “I failed over and over again in my life...” We’ll discuss what he said after that below.

So what did he do when he failed? Oh, he failed often.

He didn’t make his high school basketball team. He tried out and wasn’t on the list. He was asked instead to play

6 Originate Report | May 2018

By Anthony Geraci, Geraci LLP

for the junior varsity team. Imagine if he just quit right there? He almost did. Instead, he let his failure and disappointment drive him. “Whenever I was working out and got tired and figured I ought to stop, I’d close my eyes and see that list in the locker room without my name on it, and that usually got me going again.”

The rest is, well, history. We could go into more examples, but you get the idea here. Oh, and the last sentence? “I failed over and over again in my life, and that is why I succeed.”

Falling Short

What did you fall short of? Well, that very much depends on your goal. If you’re failing, then I hope that you are shooting for the moon. Everything you do should aim for the moon. What if you fall short? Well, then you land among the stars. Failing isn’t as negative as you think it is. It may be exactly what you need to succeed. But before we get all theory and no practicality, you DO need to do a few things when you fail: 1. Feel the failure. Embrace it. Feel the awfulness of failure. I know it sucks, but failure, and the heartache of it, it so important that you really need to feel and embrace its awfulness. It will propel you forward later.

2. Analyze what went wrong. So you failed. Don’t get stuck in grief. MOVE ON. Now understand WHY you failed – what didn’t you do? What did you do? What should or shouldn’t you have done? LEARN from the failure.

3. Fix the failure. If the project, goal or relationship is salvageable, fix what went wrong. Adjust and do what you didn’t do, or unwind what you did. If it isn’t salvageable, then you learned a valuable lesson and that in itself is the goal.

4. …but I didn’t learn anything? Well, either you didn’t analyze what went wrong long and hard enough, or you continue to do the same mistake and never learn from it, in which case STOP IT.

Failure is never a fun thing, but never be afraid of it.

Failure isn’t something that attaches to you, that sticks to you like a scarlet letter. Rather, failure is just falling short. If you feel, analyze and fix it, you landed among the stars, and it’s a lot easier to get to the moon from the stars than back on Earth.

Keep falling short. Keep aiming for the moon. You’re going to hit it.

ABOUT THE AUTHOR: Named a Super Lawyers® Rising Stars in the legal field, Anthony Geraci is the managing shareholder of Geraci in charge of firm strategy and development of Geraci’s team and culture. He is skilled in mortgage lending and securities law and has authored numerous articles on real estate finance and security subjects. Mr. Geraci is a leader in creating national mortgage pools and mortgage funds as well as sophisticated net branching arrangements among several mortgage companies. Mr. Geraci is also an active member and a member of the board of directors of EO (Entrepreneurs Organization).

CONTACT: (949) 379-2600 | a.geraci@geracillp.com | www.geracillp.com

You’re going places.

Don’t stop until that place is the top.

If you’re a loan originator looking to build your business and gain insight from the nation’s top mortgage brokers, bankers, lenders, and lawyers, Originate Report is for you. Distributed to 35,000 professionals in the private lending industry every month, this is where you come to see and be seen.

To discuss submitting original articles, or for general Originate Report questions, email us at submissions@originate.report.

behind you all the way. find us online at www.originate.report www.originate.report 7

COVER FEATURE

The Sekou Effect S

By Cathleen Yates, Originate Report Staff

ekou Andrews created his own industry – poetic voice – to blend his passions and turn his art into a commodity.

He’s been called the best-paid poet in America and the de-facto poet laureate of corporate America (Forbes). A master of the high art of storytelling. Spectacular, unique and really special (Ken Kragen). And he’s a two-time National Poetry Slam winner.

He’s received so many accolades that his web site doesn’t list them all. Witnesses to his performances allude to the “Sekou effect” – the rapt attention of the listeners, the human connections shown on their faces, the passion relayed from performer to audience, the energy and motivation lingering in the room after he leaves.

What Sekou offers is not simply motivational speaking; it is poetic voice, a blend of inspiration and spoken word poetry with the goal of moving people’s hearts and minds in new ways. He’s in demand across the country, addressing industries from tech to medical to entertainment, then graduation ceremonies and non-profit groups. And at the Geraci Activate conference May 9-11 in Beverly Hills, Calif., attendees can witness his performance and discover their own inspiration.

Finding poetic voice and using it to inspire others was the end result of Sekou’s calculated educational and employment experiences over 20 years. And just as mortgage lenders or other entrepreneurs travel their career paths from experimental to thriving businesses, or entry-level positions to top managers, so too has the master of poetic voice driven the same road, gaining wisdom from each experience and rolling it into his multifaceted artistic performance. However, his ascent as an inspirational speaker and artist meant facing some formidable obstacles and creating a new industry to commoditize his art.

Earning his college degree in sociology and pre-law, Sekou planned on becoming an entertainment attorney and worked in three law firms after college. But this was simply a back-up to his real passion: entertainer. From middle school on, he acted in stage plays and wrote and performed music. “I realized I didn’t want to be an entertainment attorney bitterly negotiating record deals I wish I had,” he says. So he pulled back and decided to try entertainment first.

“I was pursuing hip hop and acting at the same time,” he says. “I had more opportunities in music so I pursued those more heavily. In pursuit of that, I started going

8 Originate Report | May 2018

to open mics to build a fan base for my music, and ended up at poetry open mics. I was doing something other hip hop artists at the time were not doing, which was reciting lyrics a cappella but not delivering them the same way as if they were over a beat. What happens is you lose some content by trying to stay on beat even if there is no beat. So I felt that if I’m free from that device, the structure of the music, why don’t I deliver that content in a different way?”

He delivered his words in spoken word style, and that caught on. His name on the poetry scene blew up quickly. He then tried traditional spoken word poetry, and that took off also. “I started getting popular on the scene,” he says. “And I really appreciated being appreciated for my words without worrying about the politics of hip hop and the production and the hook and is it commercial enough? And people thanked me for the words: ‘Your words saved me; they’re what I needed most in this moment.’ And that got to me, especially because on the hip-hop side, I was getting a message from the industry executives: ‘Love your words, the lyrics are so powerful, but it’s not…what is selling in hip hop right now. But I listen to your demo every morning on the way to work!’

“So we’ve got this disconnect and I’m bumping heads with the existing parameters of the hip hop industry.

‘We value you, but we don’t know what to do with you.’

So I decided to figure out what to do with myself. And the poetry industry embraced me. I was more excited about pioneering new trails in poetry than I was being tossed into a sea of demos and head shots out there fighting for the same crumbs in hip hop and acting.”

During that time (1997-2002), he also took a job as a substitute elementary school teacher in south-central Los Angeles. It was his “actor-waiter” job, he says – a way to earn a paycheck and still pursue auditions for acting and music. He vowed not to stick with teaching because it was ultimately not what he wanted to do, but within eight months, he became a full-time teacher.

It was an easy fit, as both his parents were college professors and entrepreneurs: His mother was a dancer and choreographer who started the first black dance stu-

© Mike Dunn

dio in Berkeley and is now a kinesiotherapist and yoga trainer, and his father was a kinesiologist and sports educator who also pursued art, painting and sculpting, and entrepreneurship as the founder of an athletic museum in Oakland. “The apple is leaning right up against the tree,” he says. “All of that was nurtured in me, and I appreciate that, because it allows me to do what I do: to stand in the business world and artistic world. But it also allows me to play in any room with any type of person.”

In the sink-or-swim environs of south-central Los Angeles, he was given every challenge possible in teaching: outdated materials, under-resourced classrooms, up to 43 kids in one classroom. “I make my living on the stage,” Sekou says. “and the classroom is an incredible training ground for the stage. It is one of the hardest stages to cut your teeth on. It’s like what they say about New York: If you can make it here, you can make it anywhere. You have an audience you have to impress every single day and do something new for them every single day. Their attention span is worse than any audience you can imagine. If you can learn how to captivate that audience, it teaches you creativity, the power of good content, that content is nothing without delivery, the power of story and human connection, diversity, inclusion, innovation, how to educate someone and educate yourself in creative ways. It was a powerful training ground for what I do now and I appreciate it for that.”

He loved teaching, but poetry came calling. “Then it was just a matter of being honest with myself about what I wanted to do and being brave enough to step out and do it,” he says. “Acting and music are both multi-billion dollar industries, and in the process of that pursuit, I discovered and fell in love with spoken word poetry, which has no industry, or at least no monetized prof-

itable industry that’s feeding thousands of poets across the nation. So I had to figure out if I was going to do spoken word poetry for a living, how would I make that work? It was a huge leap of faith. I needed to create my own income but also had to create an entire model for creating income. That was the biggest challenge and also the biggest reward.”

Then there was the matter of how to describe himself.

Show promoters announced him as the world’s greatest hip-hop poet or street poet, but those weren’t entirely accurate. Neither was just plain speaker, or motivator, or actor or entertainer. So Sekou created his own term: poetic voice, the combination of artist and speaker who seamlessly blends inspirational speaking and spoken word poetry. Used as a noun, poetic voice can be used in the same context as business coach or manager or keynote speaker.

Once Sekou arrived at his moniker, he felt he had to define himself further. There were more parameters and preconceived notions he encountered, such as people who just didn’t understand the term or his artistry. Since it wasn’t a recognized industry, with regulation or success model or media coverage, Sekou had to define and promote his value.

“Every time someone says I don’t get it, it becomes incumbent on you to help them get it,” he says. “Which means you have to laser-focus your language, your intention, your purpose, your direction, your value and your brand. The WIIFM (what’s in it for me) factor. I think I was able to do that successfully, more than other artists, because I’ve always been half artist, half entrepreneur. Artists live and bathe in that creative space. If you’re a construction worker by day, and in a band at night, it stays a hobby.

You book a few gigs and make a few dollars. For me, I was suddenly in a space few artists get to be in: How to make your art your commodity. How you make this your way of life. I had to make decisions and educate myself on how to do that. The poetry industry is different from other industries because we don’t have many models of success to follow. Shout out to the handful of full-time poets, many of whom are my friends, out there forging paths for our art form in media and music and stuff. But half of them weren’t even around yet when I started. Poetry is a bit of the Wild West. So every time someone said this is not possible or not valuable here, I had to constantly receive and input data, decide which parts of it may be true, which parts to purge. In doing that, the thing I ran up against most was being relegated to entertainment only. ‘Your value is at a company holiday party, not at our senior leadership meeting.’ That’s based on a preconceived notion of what spoken word is.

They see it as something they see at open mic night for $5 on Tuesday. And they get entertained, but not just entertained, they get inspired.

“One of the best and longest-running spoken word venues in the nation is Da Poetry Lounge, my home venue, one of my biggest starts in Los Angeles. When I bring people there, or to the Flypoet showcase—LA’s premiere spoken word and music showcase—they say, ‘How could I have not known about this?’ It’s more than entertainment; it’s inspiration. But my skeptics in the business world didn’t feel spoken word could deliver valuable, applicable business content that was relevant to their industry. I knew I could bring business value. Obviously, I’m not an expert in every industry. But I could bring thought leadership that could take your business to the next level.”

But even when he was booked as entertainment, the feedback he received was, “You gave us more value than

half our speakers,” and, “You captured our message better than we were able to.”

“Again, here’s this disconnect between what you are telling me I am and what I told you I could do. So I kept having to fill that void, and it was at that pivotal moment when I said I’m going to create poetic voice as a new speaking category because people only define spoken word poetry as form of artistic entertainment.

And that’s where they assign its value. I wanted to give it value in the speaking, but I had to rebrand it, reposition it and recontextualize it in the world’s mind as a form of speaking. So that was really what led to what I do now, to wow those audiences and industries that thought they were ‘unwowable’ by spoken word.”

What he is can be just as important as what he isn’t.

“I’m not the guy that speaks on social media Monday through Friday to multiple companies. I’m not the guy that speaks on mortgage lending Monday through Friday to multiple companies. I’m diabetes on Monday, cloud computing on Tuesday, shoes on Wednesday, real estate on Thursday, and social justice on Friday. So when people are mystified on how I’m able to make such an

impact across industries, I’m never speaking to industries, I’m speaking to human beings. Under the suits and ties, we all share the same hopes, struggles, and dreams.”

Several years later, Sekou has wowed the employees of companies nationwide, from eBay to Financial Times to Google and Nike. He’s inspired graduates of the University of Michigan and Ashford University. He’s performed at private events for Barack Obama, Oprah Winfrey, Maya Angelou, Hillary Clinton and Quincy Jones. Which might lead one to think Sekou Andrews has arrived. “I don’t know about Forbes’ assessment of me being the best paid poet in America. I mean the late great Maya Angelou had, like, her tour bus, so I gotta keep it real,” Sekou says. “But I do alright for myself.

At its highest level, success is defined as doing what it is that feeds and fulfills and rewards you in the ways that you love most and are most purposeful for you.

I’m incredibly proud of being a successful full time poet for the past 15 years, and being a poetic voice and the trails I’ve been able to blaze for this art form that I love.

One of the missions of my company is to create a commercially viable industry for the art form of spoken word through which poets can earn a profitable and purposeful living off their art. True success is intrinsically tied to purpose, and the more aware of your purpose you are on the planet, the more aware of how successful you are based on how much you’re fulfilling that purpose.”

With his presentation for Geraci Activate, he plans to lead them to new ways of thinking about innovation and making it personal to activate their growth plans. Innovation, he says, is a state of © Mike Dunn mind, a lens through which we see the world. If you’re not viewing the world through that lens, you’ll never be the next industry leader. Learning how to see, think and communicate as an innovator.

And all of that learning can come from listening.

“We don’t put listening first sometimes,” he says. “The only reason I am successful is because I was forced to listen, forced to take that in and use that to innovate. So all that innovation came from listening to the data that was out there, but not letting it render my possibilities inert.”

For all his conferences, he wants listeners to feel they have access to greater possibilities than they had before, to be inspired educated, and have actionable takeaways.

But the one lesson from his experiences he’d like to impart: “When you get tired of trying to break into the industries of the world, it might be time to create your own industry and let the world break into you.”

CONTACT: N essa Valerii, Director of Relationshipsnessa@sekouandrews.com | sekouandrews.com

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FEATURE

Personal vs. Retirement-

How Should You Originate?

By Clay Malcom, New Direction IRA

A

s a professional in the lending space, you may have contemplated methods for incorporating your familiar practices into a retirement plan. When considering loan origination inside or outside of a tax-advantaged account, it’s helpful to review the tax effects of both types of investment.

You may find both sources of funds to be worth your while.

When building two pools of money with a virtually identical approach, identifying an edge from a taxation standpoint can help you achieve a lucrative balance.

Earning profits through private lending can manifest taxable events in a variety of ways depending on your chosen investment vehicle:

Personal Money

You pay income taxes every year. Any interest you earn must be reported on your Form 1040 and the IRS will come for their annual portion like clockwork.

Traditional IRA

You pay no taxes now and fewer taxes later. Your IRA contributions (deposits) can be deducted from your income for tax purposes. Distributions (withdrawals) will be taxed as income, but ideally when those funds have grown over time and you’ve reached a lower tax bracket in retirement age. SEP IRAs and Solo 401(k) s, which are designed for self-employed individuals and may therefore suit your lending enterprise, bear these same tax advantages but offer higher contribution limits.

Roth IRA

You pay full taxes now and no taxes later. Roth contributions may not be deducted from income and will be taxed as such. However, as those contributions grow, qualified distributions down the road can be completely tax-free. Annual earnings within the Roth will not be subject to annual taxes in the meantime. A Solo 401(k)

12 Originate Report | May 2018

can allow Roth contributions if provided by the plan document.

Although self-direction empowers you to use your expertise and take control of your retirement, there are several key distinctions worth keeping in mind.

It’s the end of the year and I did very well! How does this affect my personal taxes?

You must report earnings from personal investments on your Form 1040 and pay taxes accordingly, but as we discussed above, this won’t be the case with retirement income. Therein lies the beauty of self-directed investing: Your IRA can grow year after year without the government collecting a slice, allowing you to re-invest earnings and boost your earning potential over the long run.

My mom needs money for a new house. Can I help her out?

You can help your mom when investing your personal funds, but IRA investments are slightly more inhibitive in this regard. Per IRS regulations, your retirement plan may not derive direct benefit from you, linear family members like parents or children, their spouses, or any individual or entity with fiduciary responsibility over the account. Business partners, friends, and non-linear family members like cousins or siblings are all fair game, so your spectrum of potential borrowers is still fairly broad when lending with an IRA.

My brother just started a business and needs a loan to buy office space. Can I give him a leg up by charging 0% interest?

As in our previous scenario, you can essentially do whatever you want with your own money (though you may be subject to gift taxes depending on the amount).

Conversely, the IRS will not permit “sweetheart” loans with a self-directed IRA. This means an IRA-owned note would have to represent a genuine economic trans-

action. Your IRA can offer the best interest rate in town, but it would still have to make some semblance of money and your brother would have to make at least one payment per year.

My borrower just handed me a check.

What are my options for this money?

While an interest payment toward your personal investment can be allocated as you see fit, any income derived by your retirement plan must remain with the plan. You may personally collect payments from your borrowers, but any collected funds must be forwarded to your IRA provider for proper deposit. By this same token, any expenses incurred by the IRA or its investment (legal fees, document preparation, etc.) must be paid by the IRA. At the end of the day, the similarities between lending with funds in your pocket and with funds in your retirement plan greatly outnumber the differences. You can still qualify your potential borrowers and establish conditions like interest rates and loan durations, all while maintaining legally stipulated distance from your retirement dollars. Once you understand the minimal considerations that set retirement investments apart, you may find the process to be just as replicable and potentially more profitable as your tax savings add up.

ABOUT THE AUTHOR:

Clay Malcolm is Chief Business Development Officer at New Direction IRA, Inc., a provider of self-directed retirement plans that hold alternative investments. He provides preliminary and continuing education to anyone interested in promissory notes, real estate financing, and other loan structures as assets in IRAs, 401(k)s, and HSAs.

CONTACT: c malcolm@ndira.com | 877-742-1270 (Ext.113) | www.newdirectionira.com

www.originate.report 13

GET $#!& DONE with JT TERRELL

The Four Corners of a Role

By JT Terrell, Petra Coach

D

ear Originate Report Readers, I’ve mentioned before that I was born and raised JT Terrell, Monthly Columnist in Tennessee, so I always look for ways to cut through BS as much as possible. Complicated things just don’t feel right, and like my Mama said, “If it doesn’t feel right, it isn’t.” Simplicity works, quite simply, every time.

“Keep it simple, stupid” (the KISS principle) is a mantra that I love. Wikipedia states: “First coined by Kelly Johnson, lead engineer on the SR-71 Blackbird at Lockheed Martin, was quoted as using that phrase to describe the design of the fabled spy plane. It’s best illustrated by the story of Johnson handing a team of design engineers a handful of tools, with the challenge that the jet aircraft they were designing must be repairable by an average mechanic in the field under combat conditions with only these tools. Hence, the ‘stupid’ refers to the relationship between the way things break and the sophistication available to repair them.”

KISS has been a catchy and direct rallying cry ever since.

The words of the KISS principle ring in my ears as I listen to business leaders talk through internal issues, develop processes and analyze their employees’ performances for review. It also comes to mind when they are agonizing over finding and recruiting the best talent to fill a role at their company. At this time, I introduce a very similar and simple formula of my own.

At Petra Coach, a fellow coach and friend, Rob Simons, introduced me to the “Four Corners Grid” as a simple roadmap for determining the success of a person in a role. Did you notice how I wrote that? People are individuals with personalities, emotions, skills, experience and personal values. Roles only really require one thing: a specific list of results.

A very concise set of ultimate outcomes will tell you anything you need to know about a role, and what activities will be found inside that role for some person to act upon. It seems complicated, right? Like I’m already breaking the KISS principle? Not at all. In fact, the work to specify results in any role is the linchpin to simplicity in the Four Corners Grid. As you develop job descriptions, make sure that the specific results are concrete and the focus of the interview. Now, on with the exercise.

14 Originate Report | May 2018

The concept of the Four Corners Grid: When you are searching for anyone to do anything, you only really need to know four things about that person.

INTEGRITY

INTENTION

RESULTS

CAPABILITY

1. Integrity

Does this person have integrity? And can they prove it? Webster’s defines integrity as “the quality of being honest and having strong moral principle” but also “the state of being whole and undivided.” Does this person have a track record of integrity? What have they done and who was there to see it? Ask them specifically for “integrity references” and see how forthcoming they are.

If they can immediately give you at least three references, call them and do your due diligence. Ask questions like, “Can you tell me about a time when candidate X displayed real integrity to you? ” If they can’t give you three off the top of their head, go no further. That’s a red flag.

Regarding “whole and undivided,” can the applicant prove they can be singularly focused on the role and the activities therein? Distracted can be as bad as incompetent.

Once they’ve passed the integrity box, move on to the next.

2. Intention

Does this person intend to produce stellar results in that role? Another way to ask it might be, “Do they agree with the plan?” It’s worth asking how they would approach this role, considering the current set of chal-

lenges. Or, “Our one-year plan is top-line growth of 35% in these new verticals; how realistic do you think that is?” Those kinds of questions can eliminate a lot of head nodding and tacit agreement.

3. Capability

Quite simply, are they qualified? Do they have the requisite education and experience, and does that experience mesh with the stated plan? When hiring from within, this is too often overlooked. Why? When someone is hired from within, you know they are a person of high integrity and intention. Which is a rare find, so you find yourself tempted to let them slide on capability. Don’t do it.

Too many times I’ve seen operations executives who were rock stars at $5 million in revenue be completely clueless years later at $25 million. Those are two completely different roles and rarely are filled by the same person.

Companies outgrow people, so make sure you get personnel that can grow into the plan, the way my three little boys grow into their next pair of shoes: quickly and surely.

4. Results

The fourth and final corner is results.

“Does this person get results consistently?” Check their references and ask this question bluntly. It will either be a yes or a no answer, and when references tell you who about the applicant, believe them. Do they overachieve or do just well enough to keep their gig? Don’t settle for the first person to get a pass from a former employer.

You will find that the Four Corners Grid is just as useful with current employees who are providing unacceptable results. Just ask questions, and follow the corners backward from results through capabilities, intentions and integrity, and you will find where the problem lies, even though it may not be a fun destination to reach.

Best of luck implementing this tool and remember, let the results be your guide.

JT Terrell is a big believer in earned trust and the power of planning, and he’s put both into action in his own life and career.

After 10 years as a professional musician, JT founded event rental company Music City Tents and Events LLC and grew it into an industry innovation leader. JT attributes his company’s success to his work with Petra Coach and the adoption of the Rockefeller Habits. JT is now thrilled to be on the other side, coaching and engaging businesses to help them uncover opportunities, create strategies, and get focused. Reach him at 888-330-1020 x705 or jt@petracoach.com.

www.originate.report 15

SPOTLIGHT

Industry Spotlight: Romney Navarro Chief Marketing Officer, Noble Capital

16 Originate Report | May 2018

R

omney is a partner at Noble Capital, a financial institution specializing in Private Lending, Retirement and Real Estate. Romney oversees all business development and marketing functions for the Company and is the co-host of the company’s popular podcast and radio show, the Noble Capital Radio Hour (formerly the Real Wealth Blueprint). In 2015, he founded the Investment Real Estate Roundtable which has more than 4,000 members in Texas.

Originate Report: What three words would you use to describe Noble Capital?

Romney Navarro: Guardians, Guides and Growth

OR: How have you seen Noble Capital grow and expand in the last few years?

RN: We, like many who are good at this business, have seen exponential growth since 2010. However, before that we saw our share of successes and setbacks. The firm was established back in 2002 as Streamline Funding, a private money lending company specializing in a simple discipline of residential fix and flip investment loans in Austin, TX. Streamline Funding still operates today as the Borrower interface of our private lending business and is one of the largest lenders in the state of Texas in terms market share. Years after the company’s formation, we began focusing on new ventures, in particular, commercial lending and development.

Those years (pre-recession) were good, maybe even great, but the asset classes we were dealing with were outside of our core discipline. As a result, the recession was not so kind.

If you currently don’t have raving fans, please try it sometime – there really is no better high for a business owner.

OR: How do the three different divisions of Noble Capital all work together for success?

RN: So our three different divisions are Retirement, Private Lending and Real Estate. Sounds weird, right?

Not really. The synergy between those three divisions is what keeps our business alive and growing as well as our customers serviced and happy well beyond the status quo. The retirement side of our business essentially provides financial advisory or wealth management services to people seeking capital preservation and income planning. Many of these clients choose to participate in the other side of our business, where this whole journey began back in 2002, Private Lending. Our Pri-

OR: What are some of the biggest challenges that Noble Capital faces?

RN: As I mentioned, we are no different than everyone else when it comes to the commodity that we sell. So what is challenging to us is what is challenging to everyone, really. We all know what those are since they are largely out of our control. Essentially, I am referring to the marketplace, the economy and regulations.

The marketplace can change on us overnight and, unless you have a solid plan in place, it could also crush your business. FYI – we have plans in place. Signs are pointing to a changing marketplace too, so get ready for our businesses to be very different soon. The economy is also one that is out of our control. Most lenders in our space were not in the industry before the Great Recession of 2008. Why do you think that is? Many of those in the game prior to 2008 were wiped out in that

However difficult those times may have been, I am eternally grateful to have gone through them as we are now bigger, better and stronger than ever before. One of my business partners always says, “never trust a man without a limp”... let me tell you something...its true and we are so proud of our limp. In fact, this story and the resulting simplified business model of sticking to our core discipline is one that I am always happy to share as it is really what has allowed our business to scale and helped so many others in our eco-system (staff, clients, vendors, etc.) achieve their dreams.

OR: What sets your company apart within the Private Lending industry?

RN: The technical answer is probably that we operate a little different than most. You see, in these times of very robust capital markets, we raise the vast majority of our money privately, through high net worth individuals – typically in or entering retirement. To date we manage somewhere in the vicinity of $175M in investor capital for about 400 families, with every bit of it invested in short term real estate investment loans in the State of Texas. Because we understand the retirement space so well, we set ourselves apart from the pack because our clients (borrowers and investors alike) are set up to succeed in something greater than just “the deal.” Ultimately, we all offer about the same thing – a commodity, if you will. That commodity is short term loans made to real estate investors at rates higher than the published bank rates. Our unique twist is that, in addition to the commodity, we also strive to set folks up with an income plan for life. So many real estate investors are cashing in big checks but simply aren’t planning and have little to show for it after a while. We help plan to make sure that doesn’t happen.

We have a solid track record in this space and I like to believe that this is what helps us create raving fans.

Photo Courtesy of Romney Navarro

vate Lending division serves many functions but ultimately it is responsible for identifying investment loan opportunities and financing them through our Private Lender Network which is made up of multiple funds as well as several direct investors. Then you have the Real Estate division. It should come as no surprise that here we perform your standard, run of the mill real estate services. However, the reason it exists is very simple and straightforward – to protect lenders! How, you ask? Well, if ever a deal goes bad, be that because of slowed construction, borrower cash flow issues or anything that can lead to foreclosure, it’s through the real estate division (aka – Seal Team Six) that we are able to execute on the remarketing of an REO. Though it is not a muscle that we need to flex every day, it is one that we always keep warmed in case we ever need to deploy the troops. Our core values at Noble Capital are Candor, Expertise, Stewardship and Growth. Building out our real estate division was meant to solidify our commitment to those values and today I am happy to say that it is one of the reasons investors rave about the company.

time. The same may happen during the next economic tsunami again, unless you have a plan. And of course, everyone’s favorite, government regulations. What if the government took a new interest in our industry – what do we do? Many will fold. That is not the right answer but simply the reality. You need to set yourself up (mostly through education, and I find Geraci a fantastic resource for that) to get ahead of the curve to make sure you are (again) planning accordingly. Funny thing about all of these (or any) challenges – they also represent opportunity. I don’t have time to expand on that too much but, can you imagine the opportunities that abound when the marketplace is reset, the economy is the only thing we are talking about and government regulations are adjusted? I can, and in short, the opportunities are endless.

OR: How did you transition into your role as CMO and how has it impacted your career?

RN: This is quite the funny story and one that I wasn’t originally very fond of telling. You see, I am a sales per-

Industry Spotlight: Romney Navarro continues on page 18

www.originate.report 17

Industry Spotlight: Romney Navarro cont. from page 17

or not, we cherish the journey for where it has led us.

In the case of my journey to (and as) Noble Capital’s CMO – boy has it been a fun ride.

“I look forward to challenges because I know that the discomfort caused by those challenges is what spearheads the breakthroughs that you need to grow. ”

OR: Who or what has been your greatest influence in business and why?

RN: This one is easy, and I am happy that it is not cliché – but without a doubt, it is my BFFs (aka my business partners) Jadon Newman, Chris Ragland and Grady Collins. These guys are the cream of the crop.

They come equipped with vision, stamina, brains and the ability to execute while still being exceptional human beings. Those are truly the virtues of high achievers and they each have an over-abundance of them. I like to think that I have benefited from that over-abundance by growing in those capacities both personally and professionally. Though sometimes keeping up with them is difficult, I yearn for it as that pushes me to grow and as a result, so does our company.

OR: What motivates you on a day to day basis?

RN: Before anything else I am motivated by my family. My wife Anne and my two children, Peyton (12 year-old girl) and Rylan (9 year-old boy). Seeing them succeed in their own right drives me to push harder, dream bigger and grow not only as a businessman but as a family man. If you have a family and they aren’t (at least partially) what motivates you – you are doing it wrong. That said, what motivates me professionally is the pursuit of mastery and pioneering new ideas that lead to growth. Each day I wake up wanting to be better at my craft than the day before and I don’t think that will ever escape me. By the same token, I look forward to challenges (as weird as that may sound) because I know that the discomfort caused by those challenges is what spearheads the breakthroughs that you need to grow. The world, including the world of business, is big and sometimes nasty – so striving to be the master of my craft while constantly growing is what truly motivates me.

son by trade. I am not (or I guess was not) a marketer.

I had a great deal of success in sales and sales leadership leading up to my role as “CMO” but never truly acted in the capacity of a “CMO” (certainly not of a company that manages hundreds of millions of dollars) until 2015. One day over one of our recurring partners’ lunch meetings, where we typically discuss the company, its direction and our respective roles, one of my partners said, “Romney, you should be the CMO. It’s better than Chief [fill in the blank] Officer. Besides, since you have been growing the lending side of the business, it’s fitting. Right?” After grabbing the bite of the iceberg wedge salad that I had just spit out when they suggested the new title I first stopped and thought to myself,

18 Originate Report | May 2018

Photo Courtesy of Romney Navarro

“WTF?” Then after a sip of water (beer by this point), I said, “Yeah, I can do this. I am an owner of this company and I trust nobody more than me to run the largest expense line item on our P&L (other than payroll).”

I immediately jumped into my role as CMO and have been obsessed with it ever since. The obsession is still very much alive and well today as I get daily inspiration from my pursuit for greater measurables, reporting and creative. All joking aside, my title as CMO can be synonymous with Chief Business Development Officer, Chief Revenue Officer and/or Chief Sales Officer. In business we embrace the difficult things and, successful

OR: What is one piece of advice you have learned and carried with you throughout your life?

RN: “If you want to change the world, start off by making your bed.” Though this quote was popularized in recent years by Admiral William McRaven’s 2014 commencement speech at the University of Texas, it is something that I learned at a young age – and I am all the better for having done so. The essence of this quote is to start the day with discipline. This discipline carries over to victories. In fact, just making the bed is a small victory unto itself. The concept doesn’t stop at making the bed, however. Starting the day off with discipline is a real part of my life, whether it’s by making the bed, putting in a hard workout or taking a cold shower.

These little things make a huge impact in my life and I am convinced that they allow me to impact others – from my children, my colleagues, and to the real estate investment marketplace – on my way to quietly leave this world better than how I found it.

OR: If you had to listen to one song, and one song only, for the rest of your life, what would it be?

RN: “Juicy” by Notorious B.I.G.

CONTACT ROMNEY NAVARRO: rnavarro@noblecapital.com | 512.249.2800 | noblecapital.com

FEATURE

The Growth of the Alternative Lending Industry

By Robert Greenberg, Patch of Land

S

ince making its first appearance in 2005, the alternative finance market in the United States has grown rapidly.

Prosper.com, founded in 2005, claims to be the first U.S. alternative online lending platform. Lending Club followed in 2006 and identifies itself as the nation’s largest online credit marketplace.

The U.S. alternative finance market accounted for $34.5 billion in origination volume in 2016. This is a 22% year-over-year increase but a considerable moderation from the triple-digit growth seen in previous years, according to a 2017 Cambridge Centre for Alternative Finance study, which provides one of the most recent statistics.

Now over 10 years old, the sector is starting to show some signs of maturity. Some have taken to calling this new phase Alternative Lending 2.0.

There’s plenty of variety in alternative lending products and services, but generally businesses in this sector are known for their end-to-end automated online lending platforms that provide speed, efficiency and financial inclusion beyond that of traditional banks and mortgage lenders.

To be sure, reaching this point of stability hasn’t been an entirely smooth ride. Alternative lenders in the United States have successfully raised millions of dollars from a variety of institutional investors. Some have merged or been acquired and a few have gone public. But some companies have seen declining valuations and a few companies have died on the vine. Just last year, there were eight mergers in the sector and two alternative lending deaths, according to CB Insights.

Companies in the sector that have gone public have had mixed success. Lending Club’s valuation (NYSE: LC) has declined by 68% to $1.75 billion, down from $5.42 billion at the time it went public in December 2014.

OnDeck Capital (NYSE: ONDK) also has seen its valuation decline by a similar percentage, but Elevate Credit (NYSE: ELVT), a nonprime lender, has seen its valuation rise 23% since its IPO in April 2017.

Still, many companies in the FinTech space have yet to become profitable, according to a Business Insider article that quotes the Cambridge Centre for Alternative Finance. SoFi, the highest valued alternative lender in the U.S. at $4 billion, explored a sale last year, but the deal ultimately didn’t make it to the finish line, and the alt lender is now considering an IPO in 2019, according

to pymnts.com. SoFi got its start by refinancing student loans for alumni of some of the nation’s top universities, and now its products include mortgages and consumer loans.

The evolving nature of the alternative lending sector and all that it offers, including challenges and opportunities, is something that mortgage originators will want to keep track of to best serve their customers.

The U.S. Department of the Treasury says marketplace lenders are poised to reach $90 billion in originations by 2020. Real estate crowdfunding, a subsector of alternative lending that has been growing rapidly, is one area to watch. Real estate crowdfunding sites typically make loans to real estate developers in the fix-and-flip or buyand-hold residential rental markets and then sell off the loans to individual investors: “the crowd.”

As alternative lending matures, mortgage originators should keep tabs on how the industry evolves to be familiar with the many advantages these lenders can potentially provide to their clients. Speed, transparency, efficiency and the willingness to reach borrowers who don’t fit the lending criteria of traditional banks are among those advantages.

ABOUT THE AUTHOR:

Robert Greenberg is Chief Marketing Officer at Patch of Land, a Peer-to-Real-Estate (P2RE ®) lending marketplace that matches accredited and institutional investors seeking high-yield, short-term, asset-collateralized investments to borrowers seeking more timely and consistent sources of funding for rehabbing properties across America. CONTACT: 888-959-1465 | Patchofland.com

www.originate.report 19

real estate industry to garner valuable advice and insight from general business books, including the classics and new releases.

FEATURE

“It is all too easy to focus your marketing online, neglecting resources available outside your front door. ” We may be in the digital age, but it also pays to flip through real estate magazines to catch content not available online. You may even find it relaxing to unplug and thumb through a trade magazine to read more in-depth articles.

Four Ways to Stay One Step Ahead of the Real Estate Market

By Michael Miller, 5 Arch

T

he most successful real estate professionals — from investors to loan originators — are those who stay one step ahead of the competition, who put themselves in the right place at the right time, and who can track trends before they hit their peak.

By leveraging technology, using all the resources at your disposal, and finding the right mentors, you can unearth new opportunities as a loan originator. The result: You will achieve and maintain a coveted spot as a leader in your region. Better yet, with practice, you will do it all intuitively.

1. Find Magic in Numbers

Becoming a leader in your field is more than doing the right research and showing up. It is a matter of cultivating your analytical skills and studying trends and patterns to determine where the market is going based on its performance in the recent past.

Lucky for you, valuable market information is a few keystrokes (or swipes on a touchscreen) away. Make it a daily habit to visit the most well-known real estate websites and analyze data on recently sold homes, selling prices, and time on the market to hone in on recent and emerging trends.

For a deeper dive, it might make sense to invest in a fee-based service, which does some of the legwork for

20 Originate Report | May 2018

you by providing data-driven, predictive analytics. Paid sites like HouseCanary and RealQuest, along with many others, offer information tailored to fit your career trajectory, whether you are a lender, broker, appraiser or investor.

Whether you use free or paid tools (or a combination thereof) to conduct market research, you can keep tabs on rising sale prices in given areas, searching by zip code. When you find the most desirable areas, study trajectories in adjacent zip codes to see if you can find similar trends about to emerge. The goal is not necessarily to jump on the hottest zip codes now but to stay ahead of growth trends — and your competition.

2. Become a Voracious Consumer of

Content

Make it a point to bookmark your favorite industry blogs and online publications. And get your hands on as many real estate strategy books as you can, either print or digital editions. Also, branch out beyond the

Business people in general, and real estate professionals specifically, are often generous in sharing advice. Taking time to read books, web sites, and periodicals is a good way to find that information.

3. Find Mentors to Help You Maintain Momentum

Even more important than seeking out relevant resources, however, is the willingness to connect face-to-face with other successful professionals in your field. Whether you are talking to a more experienced originator to uncover the best marketing techniques, or staying in touch with local investors for tips on the latest trends, any time networking with other industry experts is time well spent. You are likely to gain inspiration as well as insight.

It is all too easy to focus your marketing online, neglecting resources available outside your front door. Attend local chamber of commerce meetings, volunteer for organizations in your community, and be open to opportunities to connect with peers and prospects alike.

4. Set Goals and Stay Focused

Your best success trajectory is one that is clear and targeted. Avoid a scattershot approach, which may provide moderate success in many areas instead of helping you become a leader in your market.

Find your niche, become the expert in it, and know how to analyze data to recognize opportunities that play to your strengths. Set goals that are specific, measurable, achievable, realistic, and timely. With clear and focused objectives, you will be able to maximize your time and efficiency to lead your region as a savvy, forward-thinking mortgage professional.

ABOUT THE AUTHOR: Michael Miller serves as the Chief Marketing Officer of

5 Arch and its parent company, 5 Arches, LLC. Prior to this, Michael was the CMO of Epsilon Agency Services and Managing Director of Catapult Marketing. He also co-founded Hyper Marketing, which was later acquired by Epsilon. Mr. Miller lead global strategic initiatives and marketing for MRM Worldwide and advised McCann Worldgroup, as well as other prominent advertising agencies. He has developed global marketing platforms across brands, including JPMorgan Chase, Union Bank, Wells Fargo, Google, Intel, GM, The Home Depot, Lennar, and Tishman Speyer.

CONTACT: mmiller@5archgroup.com

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FEATURE

Why Banks Do Not Allow Junior Liens

By Edward Brown, Pacific Private Money

E

ver wonder why a bank’s voluminous real estate loan documents usually include a covenant that prohibits junior or secondary financing?

Most of the time, these covenants don’t even have language that allows for secondary financing with lender approval. They merely state that no junior liens are allowed. The language is strong enough to imply that placing a junior lien behind the bank’s first mortgage constitutes a default, most likely a curable one (curable defaults are ones that can be remedied, such as placing insurance on the property if the current insurance expires or is cancelled, as compared to incurable defaults which cannot be remedied or undone, such as the borrower filing a Chapter 7 bankruptcy). Placing a junior lien behind the bank’s first mortgage is usually curable if the junior lien can be re-conveyed and the property is put back in the original condition (title wise, that is).

22 Originate Report | May 2018

One might ponder why banks are so strict about not allowing junior liens. After all, a junior lien is behind the first mortgage. In fact, some non-bank lenders prefer subordinate financing because of additional security – another party has an interest to protect; however, traditional banks do not view it in the same way. There are a few reasons for this. First, banks have strict underwriting guidelines in which they are required to look at the Debt Service Coverage Ratio (DSCR). The DSCR is a ratio that analyzes the cash flow after normal expenses compared to the monthly requirement for the loan in question (both principal and interest). Many banks have changed their DSCR ratio requirement, since The Great Recession, from 1.1 to 1.35. This can place a tremendous burden on the borrower to come up with a larger down payment, thereby requesting a lower loan request by the bank, which, in turn, produces a lower monthly loan payment. Many borrowers find that they

have to come up with a 35% down payment as compared to 25% (pre-Great Recession) to satisfy the 1.35 DSCR. Adding junior liens may place the borrower in default of the DSCR if the junior lien requires monthly payments.

Another point to consider is that the bank priced its loan based on original underwriting guidelines and being the only mortgage. The potential risk of negative changes in the DSCR or possibility that the borrower stripped equity by placing a second mortgage had not been considered, and the bank was not compensated accordingly. The more debt exists on a property, the more likely a chance of foreclosure. Although the bank may be protected in its first position (presuming that the property has not substantially declined), when a foreclosure is triggered, there is a strong likelihood that the bank may have to alter the asset class of the property from performing to non-performing, or it may be categorized as a troubled asset or put on the watch list by regulatory bodies even if the bank is not at risk for losing money. For example, if the borrower put 35% down on a $1 million building and borrowed $650,000 from the bank, the bank’s 65% LTV loan may be considered conservative. However, if the borrower obtained a second mortgage for 15% LTV, the property now is 80% leveraged. If the borrower defaults on paying on the second, he may or may not default on paying the

rower than they originally underwrote. This new borrower may or may not qualify under the bank’s lending guidelines.

What about the scenario wherein the borrower borrows on a separate property and cross-collateralizes against the bank’s subject property? In this situation, the borrower is not attempting to strip out equity from the original property. The borrower may just be faced with the reality that he cannot obtain a loan for the target property unless he is willing to allow the new lender (on property two) to place this same loan on property one for added security. Although this seems innocent enough, if the bank finds out that a junior lien was placed on the original property, they still may consider the loan in default. A lender who cross-collateralizes against other properties may trigger a foreclosure on all

first. If the borrower defaults on both the first and second, the bank’s loan clearly has turned non-performing.

Non-performing loans can have a devastating effect on a bank, as banks are required to set aside reserves, and defaults exacerbate this situation. The more reserves are set aside means the less money the bank can lend out and generate income. Since banks lend out in multiples of their deposits, any money that is set aside (cannot be lent out) has a negative multiplier effect.

The second may or may not cure the first and start its own foreclosure. Even if the second cures the first, the bank is still left with a possible foreclosing party (the second). When banks make loans, they are usually looking/hoping for those loans to continue until maturity.

Once a loan is made, there is less work the bank has to do. They collect the interest income and hope they do not have to use other resources to babysit a loan.

The cost of these resources taxes the bank’s bottom line.

Banks are not in the business of taking over borrower’s properties. They do not want Real Estate Owned (REO) properties. It is much better for them to carefully underwrite loans in the beginning and avoid problems. If the second ends up with the property because nobody outbid the second at the foreclosure, the bank is faced with a new borrower. The bank may have to underwrite the new borrower. In fact, if the second is outbid at foreclosure, the bank is still faced with a different bor-

properties they encumber to get the borrower to satisfy their loan in default.

Public policy may state that a bank is not allowed to interfere with a borrower’s business and prevent him from purchasing/borrowing on other property with which the bank has no involvement. There also may be a question about the validity of the “no junior liens allowed” policy, as this may technically interfere with the borrower’s business, especially if the bank’s first mortgage is extremely low. For example, if the first mortgage only has a balance of 20% (either because the borrower put a substantial amount down or the first loan is so seasoned, that it has been amortized down to a low balance), there is very little risk of the bank not getting paid in full. Even if a second is placed on the property, one has to question how the bank is impeded should the second start a foreclosure. In scenarios above where the DSCR was negatively altered due to a second mortgage, a 20% LTV on the first should still satisfy a 1.35 DSCR in most circumstances. After the second obtains the property (or a new owner should the property end up in a higher bidder’s hands), most new borrowers would

hopefully be qualified to service a low LTV. Of course, each circumstance is independent, and most banks will want to preserve their right to enforce the “no junior lien” clause.

Usually, only if the bank pulls a preliminary title report, are they aware of the junior lien. They are not usually automatically notified. Will the bank automatically declare a default if a second is placed on the property behind their first? When banks find out that a second exists, they may either ignore it or send a letter requesting/demanding that the junior lien be removed as per the terms of the loan. Whether a bank decides to pursue its demand that the junior lien be removed is up to the bank; however, they want to preserve their rights by notifying the borrower that they have requested removal, and thus, have written evidence that they contacted

the borrower, so the borrower cannot claim ignorance or non-notification of the break in the covenant of the bank terms. This notification protects the bank should the bank start its own foreclosure.

Most borrowers who have asked permission for a junior lien to be placed behind the bank’s first mortgage have usually been told no. That is why most borrowers ask for forgiveness rather than permission in hopes that the bank will not find out about the junior lien until the borrower either sells or refinances the property in question.

ABOUT THE AUTHOR: Edward

Brown is in the Investor Relations department at Pacific Private Money in Novato, Calif.

CONTACT:

(415) 883-2150 pacificprivatemoney.com

www.originate.report 23

FEATURE

Cheaper Isn’t Always Better:

Why Low-Interest Lenders May Cost More in the Long Run

By Bobby Montagne, Walnut Street Finance

R

eal estate investors often tout the importance

Interest Rate vs. Borrower Cash and ROI: Smart pri-

construction costs. This borrower liquidity also creates

points available in a metro area before in-

portant part of the equation is the borrower’s return on

remaining capital among additional projects, maximiz-

of finding the best interest rate and lowest

vesting, with the thought that the lowest rates are always the best deal. However, this can be a costly mis-

conception, and higher interest and points shouldn’t be

vate lenders will show their borrower that the most iminvestment. Real estate investors care about two things: 1. How much money will I have to bring to the deal?

leverage and provides lenders the ability to spread their ing their available cash.

2. How much money can I possibly make from the deal?

Financed Closing Costs and Construction: Many

the loan terms beyond the rate, and consider the down

The actual interest rate is secondary if the loan allows

all of the closing costs, points or construction costs. So,

ly payments. In fact, loans with a higher interest rate

from the project. There are several components of a

a borrower’s sole focus. It’s important to look at all of

payment, closing costs, construction budget and monthcould potentially cost less out-of-pocket and earn real

estate investors a higher return on their investment than lower-rate loans.

the borrower to contribute the least and make the most

transaction to consider when analyzing the best loan option: down payment, closing costs, points, improvements and renovations, and monthly interest payments.

lower-rate or commodity lenders don’t finance any or

at the closing table, and as the project progresses, the borrower has to contribute his own funds for construction expenses or find additional capital, often at mezzanine lending rates. These capital expenses and addition-

al borrower contributions cause the borrower’s monthly

expenses to vary and rise throughout the project and

This principle may seem counterintuitive, but a few key

A Developer Point of View: Value-added private lend-

lenders and commodity (lower-rate) lenders really offer

understand the constraints and possible pitfalls of con-

Construction and Interest Reserves: Value-add-

for developers. As a result, many offer loan programs

borrower doesn’t have to bring additional construction

differences between what value-added (higher-rate)

illustrate how and why looking at interest and points alone could actually cost real estate investors more over

the life of the project and prevent them from increasing their project portfolios.

24 Originate Report | May 2018

ers look at the deal from a developer standpoint. They

struction projects, as well as the available opportunities that limit the total amount of capital that real estate investors put into each project while funding all of the

add to the total borrower cash investment in the project.

ed lenders structure their deals in such a way that the funds to the project mid-way through and, in most cases,

the borrower doesn’t even have to make monthly pay-

ments. How? These loan programs finance up to 100% of construction costs, which are set aside in a construction reserve and drawn when construction milestones are met. And, with regard to monthly payments, the interest payments are set aside in an interest reserve that is drawn from each month to make the interest payments. The idea is that interest payments are wrapped into the loan during construction so the borrower is not making payments or contributing any additional funds while the property isn’t making money for them.

“Less out-of-pocket capital per deal provides greater flexibility to scale your business and do more projects at the same time.”

Leverage: To fully illustrate leverage, and why interest rates aren’t the only consideration when working with a finite amount of capital, imagine an investor has $200,000. With a commodity lender, the investor will get a better rate, but he can only do one deal, because that lender requires a $150,000 capital investment. So, if the net proceeds for the deal are $50,000, that’s all the investor can make with his $200,000.

Because a value-added lender may require only that the borrower put $100,000 down, the investor now has the opportunity to complete two deals at the same time and net $100,000 in proceeds for the same amount of money (assuming the same $50,000 net proceeds from each

deal). Not only is the investor getting a higher return, but he can do more transactions. Ultimately, this is what many investors are interested in: completing more deals by successfully leveraging their capital. The overall cost of the funds is not as important to them as expanding their project portfolio, and ultimately, their ROI on their capital.

Case Study: It’s important to look at the rate as well as all of the terms when deciding which lender to choose.

For example: Lender A (a commodity lender) quotes a rate of 8% and 1 point, but requires more money down and will not finance closing costs, points, all of the construction reserve or any interest reserve. Lender B (a value-added lender) quotes 12% and 3 points but will finance everything else: points, closing costs, construction reserve and interest reserve.

When the project is complete, the borrower calculates his net proceeds and evaluates them in relation to how much money he put into the project, using these two numbers to calculate the ROI. With Lender A, the borrower contributed $150,000 of his own money. With Lender B, the borrower contributed $100,000. If the net proceeds are the same, with Lender B the borrower would realize a 50% return on his investment; he contributed $100,000 and then made an additional $50,000. With the lower interest-rate

lender, the borrower contributed $150,000 and made $50,000 — a 33% return on investment, but a 17% loss of potential capital.

Bottom Line: Smart lenders want the borrower to have enough of their own capital in each deal to be committed to its success yet leave them with enough capital so they can invest in multiple deals and leverage available cash. Generally, the required borrower investment per deal is about 20% of the purchase price. If borrowers have at least that much invested, the value-added lender is often able to finance everything else, which increases borrower profitability and leverage. The industry is not that complicated. Real estate investor success hinges on managing time and budget, and a critical part of that budget is sorting through the true cost of capital.

ABOUT THE AUTHOR:

Bobby Montagne is the CEO of Walnut Street Finance, a private commercial lender serving Virginia, Maryland, Washington, D.C., Delaware, and North Carolina. He is a real estate entrepreneur with three decades of experience in commercial and residential property development, finance and sales. Having successfully overseen billions in career transactions, he is among an elite class of private real estate lenders that has consistently delivered high-quality returns to partners and investors.

CONTACT: walnutstreetfinance.com bobby@walnutstreetfinance.com | (703) 273-3500

We turn optically challenged loans into

COMMISSION. Nationwide commercial real estate lending.

(760) 607-5400 www.helveticagroup.com

Sometimes, it's about personality. $1.45M Jacksonville, FL Matured Balloon | 32% LTV

$2.7M Hinsdale, NH Unstabilized | 60% LTV

$1.9M Ramona, CA Low Occupancy | 60% LTV

$800K, Carlsbad CA Fix & Flip | 80% LTC www.originate.report 25

CITIES TO WATCH

Cities to Watch:

Nashville

By Max Berger, Geraci LLP

hat comes to mind when you think of Nashville, Tennessee? If you’re like most people, you said the music scene.

Nicknamed “Music City,” Nashville has one of the biggest music entertainment economies in the country behind New York and Los Angeles. Producing more than a billion dollars a year in record sales alone, the music industry has put Nashville on the map in a way that has never been replicated. This industry is responsible for the success of such artists as Pat Boone, Billy Ray Cyrus, Paramore, and even Kesha.

The strength of the entertainment economy (which includes television, film, and radio) has had a deeply positive impact on other industries in Nashville as well, including one of its largest economies, tourism. Millions of people visit the city each year, making it responsible for much of the traffic in the state. Health care, however, is also one of the city’s leading industries; it represents 25% of all jobs in the area, and the city is home to nearly 400 health care companies.

Must-visit locations

Grand Ole Opry: Also known as “The Show that Made Country Music Famous,” the Grand Ole Opry might just be Nashville’s top attraction. Featuring weekly live performances from some of country music’s most famous artists both new and old, this theater is a must-visit if

you’re staying in the city.

Musicians Hall of Fame and Museum: Don’t feel left out if you aren’t a fan of country music – this institution honors all genres of musician and has something for everyone to enjoy! Including exhibits from legends like Frank Sinatra, Elvis Presley, Bob Dylan, and the Red Hot Chili Peppers, this is an incredible place to get a taste of music history.

Nelson’s Green Brier Distillery: Had enough of Nashville’s music scene?

Maybe it’s time to take a tour of one of the city’s oldest and greatest distilleries. Find out about the history of the operation, learn how they produce their famous whiskey and bourbon, and best of all, stop by the Tasting Room to get first-hand experience with their products!

Dining

One of the newer restaurants in the area, Geist is built into an historic blacksmith shop from the end of the

Nashville, TN Economy:

• Major industries: tourism, health care, education • Minimum wage: $7.25 per hour • Cost of Living: 5% above national average

Housing:

• Median Household Income: $61,577 • Median Home Price: $254,619 – 12% increase from last year • Median Rent Price: $1,600

Job Market:

• Forbes List - #12 Best Places for Businesses and Careers • Unemployment: 3.6% • Job Growth from 2016: 4%

19th century and serves internationally-inspired dishes and great cocktails. Check out Von Elrod’s Beer Garden & Sausage House for – you guessed it – excellent beer on tap and fresh, flavorful sausage-based entrees.

Lastly, check out Kuchnia + Keller for eclectic Eastern European-inspired cuisine like beef goulash and charcoal octopus. Their unique beers and cocktails alone are worth the trip.

Nightlife

The nightlife in Nashville is characterized by the lively music scene – one of the most famous spots is Tootsie’s Orchid Lounge. Known for hosting some of country music’s most famous stars, this is a must-visit. Just a short walk away is The Stage On Broadway, the perfect place to get your dance on and enjoy great live music. Finally, check out Paradise Park Trailer Resort to get in touch with your “inner redneck” – the whole venue is designed to look and feel like a trailer park!

Max Berger is a Marketing Assistant at Geraci LLP and supports all marketing campaigns, projects, and events throughout the corporation and contributes to the execution of the firm’s growth.

CONTACT: (949) 379-2600 m.berger@geracillp.com

26 Originate Report | May 2018

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Let us showcase your voice.

Currently we’re looking for articles showcasing: Business Development • Fintech/Newest Loan Programs • Automation in Today’s Evolving Society • Upcoming Trends & Changes • Marketing & Outreach Essential Tools & Technologies • New Legal Issues and Regulations.

Another idea? We’d love to hear that, too.

Write for us. Email submissions@Originate.Report for more information.

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UPCOMING EVENTS

Upcoming Events

Don’t be left out! Showcase your upcoming event here!

Contact Ruby@originate.report for more information.

28 Originate Report | May 2018

All event dates subject to change. Please visit conference websites for agendas and details.

Activate 2018 May 9-11 • Los Angeles, CA www.geracicon.com

California Mortgage Association Summer Seminar July 12-13 • San Diego, CA californiamortgageassociation.org/events/

2018 Los Angeles EB-5 & Global Programs Convention July 24 • Los Angeles, CA www.eb5investors.com/conferences

Captivate West 2018 August 26-28 • Las Vegas, NV www.geracicon.com

California Mortgage Association Fall Seminar October 11-12 • Las Vegas, NV californiamortgageassociation.org/events/

Captivate East 2018 October 16-18 • Miami, FL www.geracicon.com

AAPL Annual Conference & Exhibition November 4-6 • Las Vegas, NV www.aaplconference.com

www.originate.report 29

LOAN HOME

Help Make Dreams Come True

Let Lenders know you found them in Originate Report!

Are you a lender? Advertise with Originate Report’s LoanHome and be seen by 35,000 industry professionals each month.

Contact our Loan Home director at j.pelache@geracillp.com or (303)546-7930.

30 Originate Originate Report Report || May May 2018 2018

LENDER

www.cubg.org dkroshkin@cubg.org (971) 244-6352

1M N/A √

√

√

√

√

80/30 √

√

√

√

√

√

√

√

Credit Union Lender

Helvetica Group

www.helveticagroup.com loans@helveticagroup.com (310) 575-3301

100K 10M √

√

√

√

√

√

√

√

75/30 √

√

√

√

√

√

√

√

idg e Co rpo ra Ac t ion s/ T qu is ru No ition sts/ s tes an Leg d D al Pu ev Enti rch elo ti as pm es en Re ed ts ha b Bla / Re nk mo de et Se Loa led/ co ns Re nd no Mo va Jo ted int rt g Ve ag Fo ntu es rei r gn es N Ot he at io na r ls MA XL o Ch an-to urc -Va he lue s/ ( La T em %) / nd MA ple (B X a s Au r / tom e/ Co Syn Term ag m (yr o me o Re tive s rci gues ) tai al/ l( Lo En Shop t) ter ta s/ S Ga inm trip Ma s S en lls tat t ) ion Le s isu re Ho (Go sp ita lf Co Mi lity ( urse xe d- Hote s/ M ari ls) Re use sid Pro Indu na) en s p Ra tial er t ie trial Inv nc s e h stm Se es a en lf-s nd tP F tor a rm rope a Re rtie s sta ge s u Of rant s f ic e

um

NI M www.weapproveloans.com robert@accmortgage.com (877) 349-0501

TYPES OF PROPERTIES WE LEND TO

er

U MA M L O XI MU AN $ Co M mm LO A e r N Co c $ ns ial

TYPES OF LOANS

Br

100K 3M

√

√

√

√

80/30

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Direct Lender

www.jcap.net info@jcap.net (949) 622-6199

250K 5M

√

√

Direct Lender

Pacific Private Money

www.pacificprivatemoney.com loans@pacificprivatemoney.com (415) 883-2150

150K 5M

√

√

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70/2

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California Properties, 1st & 2nd TD’s

√

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70/30

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Direct Lender

Patch of Land

originations@patchofland.com (888) 250-2216 15000 Ventura Blvd. Suite 202 Sherman Oaks, CA 91403

Sunset Equity Funding

√

* CA

√

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√

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√

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AL, AK, AR, CA, CO, CT, DE, FL, GA, HI, IL, IN, AI, KS, KY, LA, ME, MD, MA, MI, MS, MO, MT, NE, NH, NJ, NM, NY, NC, ND, OH, OK, OR, PA, RI, SC, TN, TX, VT, VA, WA, WV, WI, WY

Direct Lender

50K 50M √

85/2

√

√

√

√

√

√

√

√

√

√

90/2

√ 2018

lending@sunsetequitygroup.com 3435 Wilshire Blvd. #1840 Los Angeles, CA 90010

50K 3M

√

* CA

SFR

JCAP Financial Group

* AZ, CA, CO, CT, DE, FL, GA, IL, MD, NV, NJ, NC, PA, SC, TX, VA, WA

* = states lending in

ACC Mortgage

√

*All 50 States

MI

LENDER

√

2018

Do you want to find your loan a home?

That home can be found here, in these lenders.

√

*All 50 States

Direct Lender

PRIVATE MONEY LOAN HOME

√

* = states lending in

CU Business Group

MI NI MU MA M L O XI M U AN $ Co M mm LO A e r N Co c $ ns ial

COMMERCIAL LOAN HOME Do you want to find your loan a home?

That home can be found here, in these lenders.

TYPES OF PROPERTIES WE LEND TO

um e Br idg r e Co rpo ra Ac t ion s/ T qu is ru No ition sts/ s tes an Leg d D al Pu ev Enti rch elo ti as pm es en Re ed ts ha b Bla / Re nk mo de et Se Loa led/ co ns Re nd no Mo va Jo ted int rt g Ve ag Fo ntu es rei res gn N Ot he at io na r ls MA XL o Ch an-to urc -Va he lue s/ ( La T em %) / nd MA ple (B X s/ Au are tom / Co Syn Term ag m (yr o me o Re tive s rci gues ) tai al/ l (S Lo h En t) ter ops/ tai St rip Ga nm Ma s S en lls tat t ) ion Le s isu re Ho (Go sp ita lf Co Mi lity ( urse xe d- Hote s/ M ari ls) Re use sid Pro Indu na) en s p Ra tial er t ie trial Inv nc s e h stm Se es a en lf-s nd tor Fa t Pro pe rm a Re rtie s sta ge s ura Of nts f ic e

TYPES OF LOANS

Direct Lender

NATIONWIDE EXCEPT ALASKA, SOUTH DAKOTA, NORTH DAKOTA

Look for this Lender’s Ad in this issue of Originate Report

www.originate.report www.originate.report31 31

PROVIDING PEACE OF MIND As a full service law firm that caters to the private lending industry, Geraci’s team of bankruptcy, banking and finance, litigation, securities, corporate, and real estate attorneys has provided our clients with peace of mind for over a decade.

Let us deal with the legal side of your business—so you can stay focused on what’s really important.

32 Originate Report | May 2018

Geraci Law Firm | 949.298.8050 | www.geracilawfirm.com