Private Lender by AAPL by American Association of Private Lenders

The Official Magazine of AAPL July/August 2019

BUSINESS STRATEGY 4 Reasons to Get to Know Community Banks

LENDER LIMELIGHT

Spencer Bakst The Finance Industry’s MVP

LEGISLATION What the New HDMA Reporting Requirements Mean for You

SPECIAL FOCUS Technology’s Impact on Private Lending

JULY/AUGUST 2019

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CONTENTS

JULY/AUGUST 2019

06 BUSINESS S TR ATEGY

06 4 G oo d Rea s on s to G e t to K now C ommuni t y Bank s by J ef f Levin

10 B e s t Pr ac t ice s f or C r e di t Bid ding a t For ec los ur e by Edward B rown and Randy N ewman

14 LOAN SERVICING

St r a tegie s f or L os s Mi t ig a t ion and R EO Di s pos i t ion by Chr is Ragland

18 MARKET TRENDS

24 30

18 Under s t anding H ou s ing M ar ke t Shi f t s by Rober t Greenberg

22 M ak ing Sen s e o f C ur r en t Economic I ndic a tor s by Adam H odge

24 LENDER LIMELIGHT

T he Finance I ndu s t r y ’s M V P wi th Spencer Bak s t

30 TECHNOLOGY

30 A Dec a de o f I nnov a t ion in Real E s t a te by B ret t Crosby

34 H ow Tec hnolog y i s C hanging t he Real E s t a te I ndu s t r y

38 Tokenizing Real E s t a te by Alex Shvayet sk y

by B obby Mont agne

40 LEGAL

Is a Mor tgage REIT Right for You? by Kevin Kim

42 LEGISL ATION

42 Pr i v a te L ending E nemy N o. 1: A nony mi t y by K at Hunger ford

46 C os t- B ene f i t A nal y s i s o f H M DA by Cor t Chal f ant

50 L A S T C ALL G e t t ing St u f f Done, De s pi te Your s el f wi th Alex Si f ak is

JULY/AUGUST 2019

WEâ&#x20AC;&#x2122;RE TRUE TO EXCELLENCE...

JUST LIKE YOU JOIN TODAY! AAPLOnline.com

PRIVATE LENDER

FROM THE CORNER OFFICE

People often ask me why I’m so passionate about leading the American Association of Private Lenders. It’s because the association’s mandate is exactly what I strive to live for personally: bettering myself, my business and the people I support.

EDDIE WILSON CEO, AAPL

LINDA HYDE

Managing Director, AAPL

KELLY SCANLON Copy Editor

SPRINGBOARD CREATIVE Design

CONTRIBUTORS

Edward Brown, Cort Chalfant, Brett Crosby,

Robert Greenberg, Adam Hodge, Kat Hungerford, Kevin Kim, Jeff Levin, Bobby Montagne,

Randy Newman, Caleb Olsen, Chris Ragland, Alex Shvayetsky, Alex Sifakis

COVER PHOTOGRAPHY Elizabeth Trujillo, BlushPix

Private Lender is published bi-monthly by the

American Association of Private Lenders (AAPL).

AAPL is not responsible for opinions or information presented as fact by authors or advertisers.

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This is our 10th year as the nation’s only association dedicated to the betterment of the private lending industry, so it’s natural to look back on how we started and why we grew. Ten years ago was the height of the Great Recession, a recession rooted in outof-control practices in the financial and housing industries. Those circumstances were the impetus for the association and our continued efforts in education, ethics and legislative advocacy. Today, during these times of growing competition, we continue to stay true to who we are as an association, business and resource. As I reflect on progress made and challenges overcome, I know that what may seem like a failure at the time can be a springboard to future success. Many of the current industry operators were motivated by those same circumstances to improve the industry. For example, this issue’s Lender Limelight features Spencer Bakst, CPA, CFM. Bakst, an alternative investments senior audit associate at CohnReznick, said the work he does now is a direct response to the recession and widespread lack of financial knowledge fundamentals. As my staff and I continue our work building an association that supports, lifts and grows the private lending industry, I am comforted that we are not alone in our task. Each day, many like Spencer seek to do their part, working not just for personal profit and gain, but also as guardians for the future. At this midway point of 2019, I eagerly anticipate and am excited about planning the rest of our year and agenda, of course leaving room for the unexpected. Progress, success, challenges and failures—most likely, all of us have experienced these in some form. Let’s take a moment to reflect and see these for the teachers and gifts that they are. My hope is that we learn from every experience and let them propel us to even greater things. As always, thank you for reading and being an important part of our community.

photos, illustrations, logos, and video:

E-mail PrivateLender@aaplonline.com or call

913-888-1250. Use of Private Lender content

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

LINDA HYDE

Managing Director, American Association of Private Lenders

JULY/AUGUST 2019

BUSINESS STR ATEGY

4 Good Reasons to Get to Know Community Banks Working with community banks may help you grow deal flow and returns. by Jeff Levin

ince the bank-

have too. Many have sounded

2007, the land-

banks and fintech have taken

ing crisis of

scape for tradi-

tional lenders has changed

dramatically. The most obvi-

ous, and ironic, change is that big banks have become much bigger. For example, JPMorgan Chase, with $2.7 trillion assets under management, is so huge that if it were a country, it would be the eighth largest economy on the planet. It is not just bigger banks that have been undergoing significant change; smaller banks

PRIVATE LENDER

the death drum as global

up much of the ink. Although

smaller lenders certainly face adaptation challenges, more

than 5,000 community banks are still in operation today,

representing 95% of all bank

charters. Following the shakeout after 2008, where we saw

small lenders with under $100 million assets being acquired or shuttered, the community

banks that remain are generally thriving, some with assets of up to $100 billion.

These local and regional players are increasing market share in smaller commercial real estate (CRE) deals that no longer interest the “too big to fail” global banks. For private lenders, community banks can play an important role in helping grow your CRE business too. There is no time like the present to update your contacts and attend more networking events to get to know them better. Here are four reasons why it’s important to build a solid working relationship with community banks in your market.

COMMUNITY BANKS CAN BE A TERRIFIC SOURCE OF DEAL FLOW FOR PRIVATE LENDERS Since the Dodd-Frank legislation and Basel II requirements came into force, like all publiclychartered banks, community lenders are highly regulated. As a result, underwriters are cautious with new loans; they are now required to hold more capital against them than in the past. Underwriting is tough

for smaller commercial real estate projects, where loan-tovalue ratios require applicants to bring more equity than ever to get a deal done. Community banks will close CRE deals with well-known operators who have strong balance sheets, the “A-quality” applicants, but a lot of “B-quality” deals simply cannot get done at a bank.

worthy “B” projects get done. This is when the private lender comes in. A private lender that has a strong relationship with the loan officer of a community bank is going to get referrals, in many cases as often as once a month, of applicants who don’t

It is not as if the loan officer at a community bank takes pleasure in turning down an applicant. Community bankers usually have strong roots in the community and want to see

COMMUNITY BANKS CAN BE YOUR EXIT

pass muster with the bank.

The toughest time to get a CRE deal underwritten by a bank

is before ground has broken, or before a remodel project is underway. The risks are much higher at these beginning stages because labor is scarcer and more expensive today, and project delays will quickly eat into a developer’s cash flow and ability to service a loan. This is the case whether an applicant wants to develop a mixed-use project, construct multifamily housing or flip houses. Naturally, this is the sweet spot for private lending. A private lender does not need to stay in the deal until the project is finished and sold. For example, once construction is

substantially complete, encourage your borrower to refinance with a community bank to significantly lower their interest burden, and then introduce them to your contact. Why do that if you’re earning a good rate of return? First, because it’s better for your borrower, so you’ll build loyalty and repeat business. Second, because it keeps you top of mind with the loan officer at the bank, encouraging more quid pro quo referrals back to you. And third, because you can redeploy your capital into a new project.

JULY/AUGUST 2019

BUSINESS STR ATEGY

YOU’LL GAIN DEEPER INSIGHTS INTO DEFAULT CHARACTERISTICS FOR YOUR MARKET As a hard money lender, your collateral is the sell-off value of the real asset for each project. But how do you keep track of the prevailing market value for such land or structures? Are you 100% confident you can always sell off a foreclosed asset and recoup your principal in the case of a default? Here you can learn from traditional lenders who have adopted best practices with collateral management, because regulatory compliance has forced that discipline. A study by McKinsey consulting shows that under the new regulations from 2010 to 2015 bank impairment costs—lender losses from bad debts—dropped by more than 60%. Today mortgage default rates are at their lowest point in 11 years, due to tighter underwriting criteria combined with low interest and unemployment rates. But, when interest rates inevitably rise and/or the economy downshifts, default rates may start creeping up again. And, if particular classes of CRE fall out of favor, having a good relationship with a community lender will provide you additional insight into your local market.

PRIVATE LENDER

Banks have access to more tools than most private lenders, like syndicated third-party research, bulletins from the Federal Deposit Insurance Corp. and OCC, and large risk-management staff, so they’re a great source of market information. Even community banks are being forced to adopt new accounting standards where they must amortize expected loan losses at the point of origination, so you can count on them being very knowledgeable about measuring the risks in your market. Understanding your community bank’s perspective gives you valuable insight into whether a certain borrower or type of project represents a great opportunity to make margin or a big default risk.

COMMUNITY BANKS CAN BE A SOURCE OF CAPITAL FOR SOME PRIVATE LENDERS

ing on the size and history of your operation, bank debt can be in the form of a warehouse loan or a commercial line of credit. The interest rates on these are very low, but you’ll need an excellent credit score and stable history of revenues and completed exits to obtain them. Additionally, you can structure deals where a community bank participates in one portion of a deal while you underwrite another. For example, you extend a hard money loan for land acquisition while the bank provides the borrower a line of credit for construction. In structures like this, you’ll probably have to agree to a standstill clause allowing the bank to recoup its collateral first in the event of a default. However, where you can get those deals done, it’s a great way to reduce your risks while increasing the size of deals. It’s natural to think of commu-

nity banks as your competition for borrowers. But remember,

the economy is very, very large. There’s room for lenders of all

stripes to work together for comHard money loans are typically funded by individual accredited investors or by funds that aggregate capital from multiple limited partners. Of course, such investors are incredibly important, but hard money lenders can increase their return on equity by also adding a layer of bank debt capital to the mix. Depend-

mon objectives. While big banks are getting bigger, and fintech firms are getting more perva-

sive and nimbler, working with community banks may be just the ticket to help grow private

lenders’ deal flow and returns. ∞

ABOUT THE AUTHOR

JEFF LEVIN Jeffrey Levin is a bestselling author and the founder and

president of Specialty Lending Group (SLG), a boutique private real estate lending company servicing the

Washington, D.C., metro area. Prior to launching SLG, he

was the co-founder and CEO of iWantaLowRate.com and

Monument Mortgage. Levin

is a recognized authority on

real estate investing and a frequent lecturer and panelist.

He is a member of the American Association of Private Lenders and serves on its

Education Advisory Committee. He is the author of the

Amazon best seller “The Insid-

er’s Guide to Private Lending,” which details his experiences in private lending and advice for individuals looking to get into the business.

Levin earned a bachelor’s

degree from the American

University in Washington, D.C.

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BUSINESS STR ATEGYÂ

BEST PRACTICES FOR CREDIT BIDDING AT FORECLOSURE

by Edward Brown & Randy Newman

PRIVATE LENDER

You currently hold the first mortgage on a rental property in California. The borrower is behind in payments to you and has disregarded all your communications. You decide to file a notice of default to start the foreclosure process. Three months lapse, the sale has been set, the date of sale approaches and you want to be strategic in deciding how to proceed. You start asking yourself: How much do I bid at the foreclosure sale?

As the foreclosing party, you are allowed to “credit bid,” meaning that you are able to bid as high as your note—including accrued interest, late fees, costs of foreclosure, etc.—without having to come up with actual cash at the sale. In California, other bidders, including nonforeclosing junior liens, must pay 100% of their bid in cashier’s checks or the equivalent.

will exceed the lender’s credit bid of $100,000, and he bids $140,000 at sale, the trustee will not immediately give back the overpaid amount (in this case, $60,000); the trustee will return the overpayment in about seven to 10 days after the sale. For this reason, the bidder should obtain multiple cashier’s checks in various denominations so as not to overpay in the bidding process.

As a side note, this is the reason most bidders ask their banks for many cashier’s checks in varying increments, as the trustee handling the sale does not give back change at the sale. For example, if a bidder asks his bank for two $100,000 checks because he believes the bid

At first glance, the foreclosing party may think to fully credit bid what he is owed, especially if the property is worth considerably more than the amount owed to the lender; however, there are other factors to consider. What if the lender is way off in what he believes the property is worth? Sometimes, a property

that is a bit esoteric is much harder to value than one thinks. Does the lender want to keep the property if she is the high bidder? Does she want to sell it right away upon owning it (should she be the high bidder)? Was there a personal guarantee on the note that is being foreclosed on? What is the current condition of the property? Is there a recent appraisal on the property? Are there any IRS liens attached to the property? These and many other questions must be considered when you are the foreclosing party.

the foreclosing party may experience a potential loss.

Below are some general concepts to discuss with an experienced real estate attorney familiar with foreclosure laws.

O n Dec. 1, 2018, the

IRS/GOVERNMENT LIENS First, the only time to open with a full credit bid is if a federal tax lien exists in a junior position (check with your attorney as to other government or quasi government liens, if the same rules apply). The reason for this is that, although the IRS lien may not have priority to the bidder’s lien due to the IRS lien typically being recorded after the foreclosing lien was in place, the IRS has a post-sale 120-day right of redemption. If the end bid is less than what is owed and the IRS exercises its right of redemption,

Let’s assume the following: O n Feb. 1, 2018, a first-

position deed of trust is recorded in the principal amount of $500,000.

O n March 29, 2018, a

second-position deed of trust is recorded in the principal amount of $75,000.

O n June 29, 2018, the IRS

records a Notice of Federal Tax Lien in third position in the amount of $50,000. borrower misses the first interest payment and fails to make any subsequent payment to the lender.

O n Jan. 30, 2019, the

lender starts the foreclosure process.

T he foreclosure sale is set

for May 29, 2019.

T he foreclosing lender is

owed $560,000 (including principal, interest, late fee and foreclosure fees).

T he foreclosing lender

believes the property to be worth $700,000.

JULY/AUGUST 2019

BUSINESS STR ATEGYÂ

If the foreclosing lender opens the bidding at $400,000 (possibly to establish a low basis upon possession of the property if the property reverts), and no one else bids at the sale, the foreclosing lender now becomes the owner for $400,000. Typically, all junior liens are wiped out. However, with the post-sale right of redemption, the IRS has 120 days from the date of sale to redeem the property; that is, the IRS can pay the foreclosing lender only $400,000 and force the sale to the IRS. Now, where

PRIVATE LENDER

the foreclosing lender thought

advantages to credit bidding

tax on the interest owed to the

they were going to get a wind-

less than the total amount

lender even though the lender

fall, they will actually suffer a loss of $160,000 (the amount they were owed less the amount they received). When a junior IRS lien appears

owed. Letâ&#x20AC;&#x2122;s look at the same example, but without a federal tax lien on the property.

TAXES

on the public record and there is significant equity in the property, a full credit bid ($560,000 in the above example) should be made in order to protect the foreclosing lenderâ&#x20AC;&#x2122;s interests. What if there are no government liens on the property? There are some potential

did not receive any cash. By opening the bidding lower, the lender would not have to pay taxes on the unrealized interest and would have a valid argument that the property is

Without a federal tax lien on the public record, it makes sense from an income tax standpoint to open the bidding lower than the amount owed to the foreclosing lender. With a

worth less, resulting in a lower basis (remember, the property reverted to the foreclosing lender for the opening bid). If the lender were to then sell the property after holding it for at least one

full credit bid, the lender may

year, the lender may have a long-

be subject to paying income

term capital gain, which is usu-

ally taxed at a rate considerably lower than ordinary income.

INSURANCE PROCEEDS The foreclosing lender typically is unaware of the condition of the property when the foreclosure begins. There may very well be damage to the property. Well, you say, that is why I am listed on the certificate of insurance in the mortgagee section. And you would be right. As the mortgagee, you have an insurable interest in the property. The insurance is to ensure that the lender is made whole. Well, if the foreclosing lender uses a full credit bid, then the foreclosing lender has, essentially, been paid in full. If damage is found on the property after the foreclosing lender becomes owner of the property, the lender may very well be out of luck. The insurance company can deny the claim on the basis that the lender’s full credit bid made the lender whole and that the lender’s insurable interest terminated when the property reverted. Unless the lender can prove the damage was intentional, the lender may have no recourse. If the property

reverted to the lender for less than what was owed, the lender maintains an insurable interest in the property and can make an insurance claim.

PERSONAL GUARANTEE With entity borrowers (e.g., a corporation or limited liability company), lenders sometimes obtain a personal guaranty from the entity’s principals as a condition to making the loan. If the property reverts for the full credit bid, then nothing else is owed to the lender and they could not seek to collect additional monies from the guarantor. By underbidding, the lender may very well preserve the right to seek remuneration from the guarantor as the property was not worth what was owed. The lender may also be able to seek compensation from the guarantor for any damage done to the property, whether negligent or intentional.

In general, keep in mind that a lower opening bid may entice others to begin bidding and create a true auction. The foreclosing lender is not prevented from bidding over and above the opening bid. In fact, the foreclosing lender can continue to credit

bid up to the total amount it is owed. It does not have to accept anything less. Additionally, should the foreclosing lender desire to bid over what it is owed, the foreclosing lender can come to the sale with cashier’s checks in the same fashion as the thirdparty bidders. In summary, it appears that best practices dictate the only time the foreclosing lender should make a full credit bid is when an IRS lien appears on title in a junior position. Even then, the lender needs to investigate the value of the property, the IRS lien and the likelihood the IRS would exercise its right of redemption. Many times, the IRS will choose not to exercise its right and may possibly negotiate its claim, but only a thorough and thoughtful analysis should come to the correct conclusion as to the correct course of action. Other than potential government liens against the property, most foreclosing lenders would be prudent to start off credit bidding less than the entirety of what is owed. Remember, the credit bidder can always increase his bid—at least, up until the time the trustee says, “Sold!” ∞

ABOUT THE AUTHOR

EDWARD BROWN Edward Brown is in the

public relations department of Pacific Private Money, a private lending company

based in Novato, California.

RANDY NEWMAN Randy Newman has been

involved in real estate and

default servicing since 1982. As an attorney in New York

and New Jersey, he has rep-

resented hundreds of buyers, sellers, owners and lenders in connection with the sale,

purchase, finance, lease and

foreclosure of residential and commercial real property in

New York and throughout the United States.

JULY/AUGUST 2019

LOAN SERVICINGÂ

PRIVATE LENDER

PART 4 OF A 6-PART SERIES

STRATEGIES FOR LOSS MITIGATION AND REO DISPOSITION Time is money, so speed is key.

by Chris Ragland

THIS IS THE FOURTH ARTICLE IN A SIX-PART SERIES THAT COVERS ASSET MANAGEMENT AND THE DISPOSITION OF DISTRESSED LOANS.

As private investment in real estate becomes more widespread, the problem of loan defaults and the costs associated with foreclosed properties are bubbling to the surface. For many lenders, particularly those new to the industry, this is a problem they didn’t thoroughly anticipate. Now, they must figure out how to deal with it. The first three articles in this series discussed how to minimize foreclosures and mitigate their impact on your loan portfolio. Up to this point, we’ve focused mostly on loan default prevention through underwriting and collateral monitoring, as well as asset preservation and the pre-foreclosure process. But, the occasional foreclosure is inevitable, and eventually those REOs end up in your portfolio— and on your books. JULY/AUGUST 2019

LOAN SERVICING

TRY TO GET BACK ON TRACK The quicker you can dispose of those distressed assets, the less capital you will burn. The bestcase scenario for a lender facing potential defaults is to get those loans back on track. As soon as a troubled loan shows up on your radar, you need to work closely with the borrower to help navigate whatever challenges they’re facing. In many cases, the borrower may be struggling to make interest payments or to pay off the loan, but if they are already marketing the property or have it under contract, it might make sense to extend the loan until the property is sold. It might even be beneficial to offer the borrower the option of a discounted payoff to avoid foreclosure. Breaking even or taking a slight haircut may be preferable to the losses you could incur by holding on to the property. When a borrower has been unable to make timely interest payments or has struggled to keep construction progressing, it’s an indication they ran into unanticipated costs or delays that they didn’t have the experience or the capacity

PRIVATE LENDER

to overcome. These issues can result in insufficient cash flow or a protracted timeline, both of which put the project in jeopardy. As the lender, it’s now your job to decide if you should enter into a workout with the borrower or take control by foreclosure. Once a loan is posted for foreclosure, you need to act quickly. Again, time is money, so speed is key when it comes to the disposition of distressed assets.

ACT QUICKLY

and insurance, which can cannibalize any potential profits.

First, make sure all taxes and

insurance on the property

are up-to-date. Immediately following foreclosure, you should conduct some due

diligence to estimate the value of the property. This evalua-

any given investment property.

current market value of the

ASSESS YOUR OPTIONS

tion includes reassessing the property by reviewing the old appraisals and analyzing current market conditions.

You also need to determine the phase and quality of construction, so you know what else

If you’re a lender and you don’t have a loss-mitigation protocol, you may be setting yourself up for months or even years of carrying costs like property taxes

budget agreed upon during the underwriting phase, or their work is otherwise not up to par, you may have to devise a new budget for completion. This evaluation process should provide you with all the information you need to figure out what will be the best exit strategy for

needs to be done to complete the project. If the borrower

didn’t stick to the construction

Based on your assessment of the property, there are a few options available to you. First, you can sell the property “as is” to an investor outright.

“If you’re a lender and you don’t have a loss-mitigation protocol, you may be setting yourself up for months or even years of carrying costs like property taxes and insurance, which can cannibalize any potential profits.”

There’s no shortage of real estate investors who already have capital at their disposal and just need to find the deals. Selling it “as is” typically is the quickest and often the most favorable option for a lender. Second, if you can’t find an immediate buyer, take advantage of your borrower network and consider reoriginating a new loan on the property to another (more qualified) borrower. If you decide to do this, you can incentivize borrowers with better terms as compared to a typical loan, and you might agree to split profits or work out a profit waterfall with the

borrower based on the final

sale of the property. Whichever loss-mitigation strategy you

decide to follow, it’s crucial to

minimize the amount of money you spend on the property.

Sometimes, a foreclosed prop-

erty might actually present an opportunity to make a profit

instead of just mitigating

losses. So, a third option is

to have an experienced asset management team come in,

complete construction and sell the finished property. This is when it’s beneficial to have

asset management capabilities at your disposal.

In some cases, if the previous borrower adhered to the construction budget and scope of work but just couldn’t meet the timeline, you may be able to pick up where they left off and complete construction on the property according to the original plan while still achieving a profitable market value for the home. If the original plan doesn’t build the necessary value into the home, then you need to change course to ensure you can optimize what the home is worth. This strategy will usually involve rebudgeting the project or completely revising the scope of work and redeveloping the property appropriately.

until home sales and property values pick up again. Then once the property is right-side-up, you can sell it and cash out whenever it makes sense to do so. ∞

ABOUT THE AUTHOR

CHRIS RAGLAND

Finally, if the project has gone completely off a cliff and the initial investment can’t be recovered by completing construction and selling the home, you might be able to still make a profit off the investment by completing the project and renting it.

Chris Ragland is the chief

Renting the property allows you to generate the regular interest payments you would expect and recover principal over time. And in the event of a housing market downturn, it is wise for investors to keep a portfolio of rental properties to generate income

Noble Capital Radio Hour, a talk

operating officer of Noble Capital, a private invest-

ment firm specializing in real estate. He is responsible for

the day-to-day operations of Noble Capital, as well as for

spearheading the expansion of

existing and new business lines for the company. He hosts The

radio show produced by Noble Capital. Chris spent 15 years

building firms that specialize in loan servicing, loss mitigation, full service brokerage,

insurance, management,

maintenance, rehabilitation and REO disposition.

JULY/AUGUST 2019

MARKET TRENDSÂ

Understanding Housing Market Shifts Long-term rentals offer investors an attractive opportunity. by Robert Greenberg

ouse flippers

have had a long and profitable run during the

current real estate cycle.

But as home prices moder-

ate, real estate investors and private lenders are increas-

ingly turning their attention to long-term rentals, where

opportunities appear to be as strong as ever.

Rent prices for single-family rental properties increased 2.9% in March 2019 (year over year), driven by strong employment, according to CoreLogic. Home flipping returns, meanwhile, dropped to a seven-year low in

PRIVATE LENDER

2018. ATTOM Data Solutions reports the number of homes being flipped declined by 4% and the average gross profit dropped 3% from $66,900 to $65,000 in 2018. Although slowing house appreciation and affordability are challenging both end-buyers and investors, tight inventory and strong demand for singlefamily houses suggest the opportunity for flippers is by no means going away. However, there are other attractive investment opportunities for enterprising real estate investors. Nationally, home prices rose 3.7% annually in March, down

from a 3.9% rise in February, according to the S&P CoreLogic Case-Shiller home price index, with double-digit housing gains of recent years now gone from the market. Las Vegas had the largest gain among index cities at 8.2%. Some cities saw a sharp deceleration of pricing growth. Among them was Seattle, which gained only 1.6% compared to a 13% price gain one year ago. In an indication of a shifting housing market, there has been a spattering of media reports about home flippers getting more cautious about investing, especially in the luxury or high-end market.

One of the most dramatic anecdotes involved a Bloomberg report in which a flipper in the San Francisco area said he made $300,000 on his first flip two years ago but recently lost $400,000 on a property in Sunnyvale, California. It was located near Appleâ&#x20AC;&#x2122;s headquarters, where home sales have slumped and prices have flattened. And, a real estate investor from Austin, Texas, told the Wall Street Journal sheâ&#x20AC;&#x2122;d been flipping houses since 2009 but paused her activity in 2017 as she saw profit margins getting squeezed. Despite an enormous amount of attention being paid to

family rent in March at 7.4% compared to the year-ago period, followed by Las Vegas at 6.9% and Tucson, Arizona, at 6.3%, according to CoreLogic data. Rental gains are due, in part, to a strong economy that is attracting an influx of workers who need housing options. Phoenix had year-over-year job gains of 2.8% during that period, compared with national employment growth of 1.7%.

iBuyers entering the house flipping market, Zillow Offers reportedly made a meager average gross profit of 4.9% in the first quarter on the 414 homes it flipped—just $14,700 per flip, according to a recent report from Wolf Street. The report also says once Zillow’s expenses are factored in, it actually lost an average of $109,190 per flip for an average loss of 37% per flip. So far, there’s no indication that Zillow plans to back away from its fledging flipping business. The foreclosure crisis that helped to fuel the widespread conversion of previously owner-

occupied housing to rental properties is now showing clear evidence that most of the distress from the last housing crisis has been cleaned up. ATTOM Data reports that foreclosure filings in 2018 were down 8% from 2017 and down 78% from a peak of nearly 2.9 million in 2010 to the lowest level since 2005. The 624,753 properties with foreclosure filings in 2018 represented 0.47% of all U.S. housing units, down from 0.51% in 2017 and down from a peak of 2.23% in 2010, to the lowest level since 2005. The popularity of single-family rentals is not showing any

signs of slowing down, and the number of private money lenders offering financing for singlefamily rentals must certainly be nearing an all-time high.

WHY RENTALS ARE POPULAR NOW The country’s more challenging fix-and-flip marketplace is likely fueling demand for single-family rentals. Rentals remain in high demand in many metros with some upside rent growth still on the horizon. Among the 20 largest metros, Phoenix had the highest yearover-year increase in single-

Millennials who have delayed home buying due to student loan debt, the high cost of housing (especially in major urban areas), as well as delayed marriages, slow wage growth and other reasons have provided a ready market of renters across the country. Baby boomers who may be ready to downsize or to urbanize via a rental home, townhouse or apartment are also a potential client base creating demand for rental inventory. The average annual gross rental yield (annualized gross rent income divided by the median purchase price of single-family homes) among 432 counties analyzed by ATTOM Data Solutions is holding strong at 8.8% for the first quarter of 2019, up from an average of 8.7% a year ago. So far this year, profit margins are up in six out of every 10 counties analyzed by the real estate data company. Counties JULY/AUGUST 2019

MARKET TRENDS

with the highest potential annual gross rental yields so far this year are in Baltimore City, Maryland, (24.5%); Bibb County, Georgia, in the Macon metro area (21.9%); Cumberland, New Jersey, in the Vineland-Bridgeton metro area (21.2%); Winnebago, Illinois, in the Rockford metro area (17.1%); and Wayne County, Michigan, in the Detroit metro area (17.1%). Other large metros showing promise include Cuyahoga County in Cleveland, Ohio, (12%); Allegheny County, Pennsylvania, (10.9%); Cook County in Chicago (9.7%); and Philadelphia County in Pennsylvania (9.4%). Profits can vary widely. San Mateo County in the San Francisco metro area had some of the lowest annual gross rental yields at 3.4%.

LENDING OPPORTUNITIES Private lenders have led the way in the hard-money lending marketplace that drives the fix-and-flip market. Although lenders will certainly continue to offer financing options for investors looking to continue flipping, they are also seeking opportunities to offer innovative loan products that appeal to buy-and-hold real estate investors as well.

PRIVATE LENDER

Private lenders may have a ready base of customers in their lending platforms via their fix-and-flip clients who may increasingly see the wisdom in diversifying their flipping business with a buy-to-hold portfolio. This suggests that lenders will likely come up with new loan products and new marketing programs to provide longer terms and lower interest rates in order to appeal to buy-tohold investors. We already see five- and 10-year adjustable-rate mortgages—and 30-year fixedrate products—being offered by private money lenders at terms that are not substantially different from some conventional long-term financing. Lenders who have fix-and-flip clients challenged in selling their flips will want to offer a streamlined mechanism for converting a short-term fix-and-flip loan into a long-term rental loan. We expect innovation that will include financing that allows fix-and-flip investors to acquire a property, complete renovations, secure a tenant and then convert to a longer-term loan with a single-close program.

BUILD-TO-RENT COMMUNITIES It’s also a good idea to keep an eye on the growing trend in the long-term rental segment: build-to-rent.

Homebuilders, private equity groups, REITs and others have gotten involved in this segment, either individually or via joint ventures. They are developing single-family rental home communities built from the ground up, generally with around 100 to 200 homes. These new communities are appealing to sponsors, in part, because they provide a way to get around the challenges of managing a portfolio of rental properties spread out geographically. In one of the latest deals to be announced, New York private equity firm Lafayette Real Estate and real estate investment firm Guardian Residential formed an investment company, Lafayette Communities, to build homes that will be marketed as long-term rentals. Toll Bros., Clayton Homes, GTIS, AHV and some of the single-family REITs are also among those involved in this segment. A shift is underway in the nation’s housing market, and as the real estate cycle gets a bit long in the tooth, it is important for private lenders to be prepared with lending products and services that will meet the needs of a changing marketplace. ∞

ABOUT THE AUTHOR

ROBERT GREENBERG Robert Greenberg is chief mar-

keting officer for Patch of Land. His professional experience

includes over 25 years in marketing, working with familiar consumer brands such as

Pepsi-Cola, Anheuser-Busch and Sara Lee as well as B2B

experience in retail, technology, finance and real estate.

Recently, he led the marketing efforts for B2R Finance, where

he helped originate more than

$1 billion of real estate investor loans that led to the industry’s

first-ever multi-borrower singlefamily rental securitization. At B2R, he was responsible for

branding, corporate commu-

nications, lead generation and integrated marketing efforts.

He was responsible for leading the development and implementation of the marketing

automation and CRM platform that helped to deliver sales

management and operational efficiencies to enhance the

customer experience for real estate investors nationwide.

JULY/AUGUST 2019

MARKET TRENDS

MAKING SENSE OF CURRENT ECONOMIC INDICATORS What the mixed economic signals mean for commercial real estate by Adam Hodge

espite a couple of developments to

the contrary,

certain economic indicators suggest the U.S. may be at the later stage of an economic cycle.

How is that possible when there’s been a double-digit return in the U.S. stock market in first quarter 2019 and with the Federal Reserve taking a 180-degree turn from its stance in 2018 that helped to bolster market sentiments? 22

PRIVATE LENDER

According to research by Morgan Stanley in a segment labeled, “In Search of a Late-Cycle Safety Net,” earnings may start a downward drift of as much as 3% for the first quarter of 2019 year over year as a result of compressed margins, which in turn could cause pressures that could lead to an economic downturn. Further, in research published by Goldman Sachs, Chief Credit Strategist Lotfi Karoui suggests the corporate credit markets, specifically BBB issuance, making up 50% of the market share of

corporate investment grade debt, could be at risk for a downgrade if a substantial shock to earnings were to occur. That said, he seems to assign a low probability of that happening over a short time horizon or all at once given the current economic backdrop in the U.S. He also mentions that commercial real estate specifically has an overheated valuation across asset classes in the current economic cycle. It’s important to note that many of the concerns expressed by credit investors are related to events that are yet to take place or are happening at a pace that is not a cause for immediate concern. The message seems to be that 2019 should still be a relatively stable year for the U.S. economy, but it is important to heed some of the factors that could eventually impact the overall economy and the commercial real estate segment.

Recent trends in the commercial real estate space seem to indicate that both investors and developers are signaling an understanding of the late cycle nature of the U.S. economy.

APARTMENT PROJECTS AND CONDOS Among those trends have been the emergence of apartment projects coming online in many primary and secondary markets, despite there being a nationwide shortage of housing in many cities. According to an article published by Dean Jones of Realogics Sotheby’s International Realty, many developers with recent memories of the 2008-2009 real estate recession are taking the path of least resistance. Many of these projects were originally programmed as multifamily condo projects and later converted to apartment projects as a result.

responsible living versus the American Dream of home ownership. This may be further prompted by a generational reality of the negative effects of the last economic recession prompted by a housing bubble adversely altering the psyche of the newest generation of entrants into the real estate market.

E-COMMERCE TRENDS

Among the factors contributing to this shift are rising lending costs for condo developments, higher equity contribution requirements and higher insurance costs as compared to apartment projects, all factors pricing in higher risk premiums given the potential for defaults. In addition, the ability for income as an offset to market price volatility allows many developers to wait until the right moment to convert to condo projects and earn income and service debt more easily. According to the Urban Land Institute’s 2018 “Emerging Trends in the Real Estate Market,” apartment development projects are the best investment market in the commercial real estate space. This trend is further catalyzed by the “work and play” mentality driven by millennial demand to rent in urban markets. This reurbanization movement has prompted a focus on amenities and socially

An additional byproduct of this trend is the growth and reliance on e-commerce for everyday life, which has also had its own signature on retail and industrial asset classes. While brick and mortar is not obsolete, demand has helped morph the retail and industrial asset classes to be more sensitive to an ever-changing landscape. According to JP Morgan, “last mile” industrial repurposing of industrial sites in distribution-centric locations is occurring across the map. Retail is being converted across the nation to light industrial warehousing sites to accommodate e-commerce and digital purchasing platforms that act as delivery hubs for major centers. The idea is to maintain close proximities to major urban centers and act as a decentralized distribution channel for B-to-C consumption.

OPPORTUNITIES Though the cautionary tale is for developers and investors not to

repeat the mistakes of the past, many investors are still on the hunt for real estate opportunities. Some markets represent a good opportunity for investors with a longer time horizon. According to a report by GoBankingRates, several cities are likely to see delinquency and foreclosure rates go up in the next year. In the report, they ranked the top 40 cities likely to see declines, including Miami, Florida; and Chicago, Illinois. Not surprisingly, many investors and developers in both cities have made more recent shifts to core income assets like apartments, student housing, triple-net leased commercial and light industrial warehousing to diversify their portfolios and avoid the volatility that may be lurking around the corner. Developers in Miami were among some of the worst hit in the nation during the 20082009 crisis, and memories are still fresh for most of the folks on the Suncoast. Nevertheless, for the right type of investor, these cities can represent an opportunity to absorb inventory in the near future at distressed levels and repeat the cycle of 2009. An abundance of vacant inventory was snatched up by opportunistic investors, mainly Europeans and Latin American investors looking to diversify their portfolios to hedge against currency and in some cases political risk in their respective countries.

In conclusion, 2019 seems to be poised for a strong year for commercial real estate across most asset classes, but there are clouds on the horizon. Lenders, investors and developers alike are heeding the warning signs and making defensive shifts to reposition their portfolios to weather any potential storm and avoid repeating some of the mistakes of the last economic downturn. ∞

ABOUT THE AUTHOR

ADAM HODGE With more than a decade of experience in consulting, finance and real estate, Adam Hodge manages the commercial lending division at Holland & Hodge Capital Partners LLC, a family office specializing in CRE bridge financing and securities-based lending. He’s responsible for underwriting, originating and servicing non-recourse collateralized first- and second-lien loans against traditional asset classes, including office, mix use, retail, investment multifamily, and single family. He also works with specialty-asset classes, including light industrial, self-storage, hospitality and healthcare facilities.

JULY/AUGUST 2019

LENDER LIMELIGHT WITH SPENCER BAKST

THE FINANCE INDUSTRY’ S

MVP Spencer Bakst leads his team through education and care by Caleb Olsen

PRIVATE LENDER

JULY/AUGUST 2019

LENDER LIMELIGHT WITH SPENCER BAKST

FIRST AND TEN Since childhood, Spencer Bakst had set his sights on making a living in a role that would benefit others the most. The charitable calling became apparent to him in his teenage years, when he attained the highest rank offered by the Boy Scouts of America: the oft hoped for but seldom achieved Eagle Scout status. The Eagle project Bakst chose was a park beautification project for his community. “As a young kid, an Eagle Scout project teaches you that you can do it,” Bakst said. “You can take leadership and initiative. It also sets the trajectory for other projects you’ll do in your life.” Bakst completed the project and earned his Eagle Scout accreditation shortly before turning 18, but even before that, he began to understand the roles business and finances play in adulthood. “I knew life worked off of money, and it started to click at an early age, where I saw everything as a business,” he said. “When I looked at billboards, I didn’t see an advertisement. I saw rental real estate and the ROI.”

PRIVATE LENDER

He says people aren’t too surprised when they find out he is an Eagle Scout, despite how self-described “nerdy” he’s become. But they are taken aback when they learn he was his high school’s football team captain, another role that helped shape his communityoriented mindset. “In addition to the skills I learned in the Scouts, being in football helped too, because it taught me how to take one for the team,” he said. “I learned how to be in high-stress situations with my teammates and come out as better friends afterward, hopefully with a ‘W,’ but sometimes you learn more from the losses.”

CALLING THE PLAYS Today, Bakst still lives on the West Coast, working as a senior audit associate for CohnReznick, a professional services and accounting firm based in New York City with branches across the nation. CohnReznick provides top-tier institutional knowledge, a global perspective and comprehensive technical and financial skills to help companies succeed in the market and achieve a prosperous bottom line.

“I knew life worked off of money, and it started to click at an early age, where I saw everything as a business.” SPENCER BAKST

With Bakst on the team, CohnReznick has become one of the nation’s most innovative and acclaimed accounting firms in the industry. “CohnReznick has been making a name for itself in the financial services space, particularly in alternative investments,” Bakst said. “The firm has won several awards recently. Just in 2018, the firm won Accounting Firm of Year by ACG New York and Best Hedge Fund Accounting Firm by both Acquisitions International and Corporate USA Today.” The way Bakst sees it, there’s no need to stop the progress there. “As CohnReznick continues to build traction, I envision our firm as the leader in the alter-

native investment space within the middle market,” he said.

Bakst’s intuitive drive to empower others means he fits right in with a firm like CohnReznick—one that fosters success among companies in the marketplace. He’s also pleased to have found a role that’s so naturally in tune with his instinctive skill set, one in which he can take joy in helping his clients become more prosperous. “One of the things I love about my job is that I get to learn about my clients and their businesses every single day,” he said. “I enjoy advising them as they scale up, undergo REIT structuring, secure lines of credit, spin off new funds and more. It has been very rewarding, being able to work with them from the time they were newly incepted and advising them along the way as they evolve to achieve even larger goals.”

Talking with Bakst, it’s easy to tell that emboldening and strengthening his clients is more than just a nine-to-five desk job. He lives that philosophy every day and night. From his perspective, the skills he’s acquired are more than simply words on paper. “One of the reasons that I chose a profession such as public accounting is that your value is intangible,” he said. “You take it with you everywhere you go. It’s all human capital, the knowledge you have and the trust you build.” Now, Bakst finds himself in the position for which he was made, but it wasn’t until the 2008 financial crisis that it became clear how he should apply his talents.

LEARNING FROM THE LOSSES Recalling a lesson he picked up on the football team, Bakst learned from the catastrophic failures of 2008 and 2009. The disaster crystallized his focus as he entered the professional realm and made it clear that educating and advising people on financial matters was the right place for him.

JULY/AUGUST 2019

LENDER LIMELIGHT WITH SPENCER BAKST

WHAT MAKES SPENCER BAKS T TICK? THIS OR THAT

accounting after living through

the economic recession and see-

All of that is not just talk—

information is not understood

next steps to move forward.

an entire nation when financial

Bakst has ideas for taking the

or entirely vetted, particularly in

“One thing that’s still on

Bakst said. “I was fascinated at

how such economic busts could THE CO UCH.

JOGGING OR WEIGHTLIFTING? DADBODDING. I DON’T HAVE KIDS YET, SO I CAN’T OFFICIALLY HAVE A “DADBOD,” BU T IT BASICALLY MEANS I’M JUST CHILLIN.’

DOG OR CAT? BU T ONLY BECAUSE I'VE ONLY O W NED CATS AND EVERY SINGLE ONE WAS A SOCIOPATH.

RAIN OR SHINE? NIGHT OWL OR EARLY BIRD? NIGHT O WL IN THE PROCESS OF TRANSITIONING TO AN EARLY BIRD… WITH EXTREME DIFFICULT Y.

FAVORITES

MOVIE/TV SHOW? GRAN TORINO PLACE YOU’VE TRAVELED? FRANCE. WHEN I WAS AT ARC DE TRIOMPHE AS THE SUN WAS RISING AND THE FOG WAS CLEARING, IT WAS AS CLOSE TO HEAVEN AS I’VE EVER BEEN.

BOOK FOR PLEASURE? A MAN FOR ALL SEASONS

LOOKING DOWNFIELD

ing firsthand what can happen to

the financial services industry,”

TEXT OR CALL? MOUNTAINS OR BEACH?

“I felt drawn to a career in

occur in our advanced economy, and I wanted to understand it

better. In fact, I wanted to help make it better.”

The work Bakst does now can

be seen as a direct response to both the Great Recession and

the widespread lack of fundamental financial knowledge,

which he believes should begin at a young age.

“Young adults are hit with their first business class at 19 years

old,” Bakst said. “It’s not a good look for our society.”

my bucket list is to write a

business administration book

for children,” he said. “It’s also a sign that you’re a master at

the subject, to be able to teach it to others.”

Along with Bakst’s deeply intuitive understanding and com-

mitment to the craft, his caring demeanor makes him the ideal candidate for educating the

next generation of investors and professionals.

“During my life, I wondered

what’s the x-factor—the thing

essential to life—and these are the three that worked for me:

to be smart, hard-working and

So, while he loves helping estab-

nice,” he said. “These are the

he’s mentoring today’s youth

for success in building a life

them with the knowledge to

have the first two are the peo-

everything goes according to

the leaders and the trendset-

lished clients professionally,

most important traits needed

on fiscal matters and equipping

and a career. The people that

make their lives easier, and—if

ple who are going to become

plan—more successful.

ters, and the ones who are nice

are going to have an even more

SEASON? WINTER

“I think finances are one of

GUILTY PLEASURE? HOT CHEETOS AND SOUR CREAM.

young people’s literature. If

Maybe that’s why Bakst said

in how this world is run, it will

“And Deadpool,” he added.

THEY PAIR WELL TOGETHER! MY WIFE INTRODUCED ME TO IT. IT’S THE COMPLETE POLAR OPPOSITES THAT MATCH EACH OTHER PERFECTLY.

PRIVATE LENDER

the most overlooked things in

augmented positive impact.”

we had more of a foundation

Mr. Rogers is his spirit animal.

change for the better,” he said.

“Yes, I’m a conflicted person.”

Even so, it’s clear that Bakst

on an interested pupil because

proficient as possible in his

tion when it comes to taking on

“The best piece of professional

talents to help others, just as

doesn’t have an ounce of hesitaa mentorship role.

“I’m the co-founder and president of the Business Honors Alumni Chapter at Cal State University

Northridge,” he said. “One of my biggest missions in life is to help create opportunities for fellow

alumni to connect and maintain relationships with each other

as we grow in our careers. Just as important, I want to bridge

the gap between students and

alumni, in order to pave the way for a smoother transition for

aspiring business professionals following in our footsteps.”

Undoubtedly, Bakst knows the power a good mentor can have

he’s had a couple himself.

field and continuing to use his

advice I ever received came

he always has.

Rosenberg. He was the one who

cial industry eminence is my

from one of my partners, Maier gave me my start in the private lending space,” Bakst said.

“Maier once told me that when it comes to business develop-

ment, ‘We create our own luck.’ It was short and it was simple,

but I never forgot that state-

ment. Even further, I’ve seen

that advice play out countless

times in my career and others.

Putting yourself out there gives rise to many opportunities. Thank you, Maier!”

As Bakst looks ahead, he has his eyes set on becoming as

ABOUT THE AUTHOR

“Attaining accounting and finan-

biggest goal. I want to be known as the go-to adviser for my cli-

ents,” he said. This is why I didn’t stop at earning my CPA license, but continued pursuing profes-

sional certifications in my industry specialization of alternative

investments. Most recently, I had the opportunity of receiving the

Certified Fund Manager designation through AAPL. I’m looking forward to considering future certifications that AAPL and

other industry-specific institu-

CALEB OLSEN Caleb Olsen is a freelance

writer, master’s student and comedian living in Kansas City. His work has been

published in newspapers,

magazines, radio, TV and more. Find Caleb on social media,

calebolsen.com or by emailing calebwolsen@gmail.com.

tions provide.” ∞

JULY/AUGUST 2019

TECHNOLOGYÂ

PRIVATE LENDER

A Decade of Innovation in Real Estate The start of a technological renaissance in buying and selling, investing and lending by Brett Crosby

We can look back at the 2008 mortgage crisis and think of it as a wildfire. When flames rip through forests and vegetation, it leaves behind seemingly nothing but destruction. But, in Southern California, for example, fires can have a silver lining. They activate certain seeds that can grow unobstructed among the wasteland, bringing forth new plants, new life.

Although the 2008 mortgage crisis decimated many industries, it presented an opportunity for renewal in the real estate industry. During the past decade, real estate has shifted from being at the center of a crisis to an era of innovation, having undergone massive changes in how the industry functions.

Much of this innovation has sprung from a serendipitous convergence of finance, technology and entrepreneurship. This convergence has led to the creation of companies and products that redefine how the real estate industry has operated for the last 100 years. According to PitchBook, in 2008, venture capitalists did

around $41 million in real estate technology deals. In 2018, the number exploded to $1.3 billion. This unprecedented investment in real estate startups represents a vote of confidence that the industry is headed into a renaissance period of sorts. Every part of the industry has been affected. Processes are more efficient, timeframes are shortened and the different parties of a transaction are now connected through platforms in ways they havenâ&#x20AC;&#x2122;t been before. Three major areas of real estate have been transformed for the better by financial technology, big data and pure human creativity: buying and selling, investing and lending.

BUYING AND SELLING It used to be that it was nearly impossible to buy and sell property without an agent representing you. Although traditional agent relationships remain very important in certain communities, house hunters and sellers today have many more tools and data at their disposal. The tools empower them to manage everything themselves or, at the very least, to work with an agent more informed than theyâ&#x20AC;&#x2122;ve ever been. Most recently, weâ&#x20AC;&#x2122;ve seen a slew of tech-driven companies working to resolve a fundamental JULY/AUGUST 2019

TECHNOLOGY

issue of property transactions: uncertainty. Companies like OpenDoor make competitive offers on homes so that buyers looking to move out quickly have the assurance to do so. Others, like Knock, take it one step further by helping homeowners both sell their old home and find a new one. In the new era of buying and selling, homeowners are finally in control.

INVESTING Real estate investing has seen a dramatic transformation regarding access, convenience and optionality. There was once a time when investing in real estate meant locking up large amounts of money for a long time in a very illiquid asset class. Today, REITS and crowdfunding platforms have lowered the capital threshold necessary for investing in real estate, leading to greater flexibility and diversification for investors. Other companies are opening access to real estate asset classes, such as debt, that were extremely cumbersome and challenging for individuals to access previously. They have inherently different investment qualities that make it suitable for investors looking for fixed income without the chores

PRIVATE LENDER

associated with owning real estate. The landscape of real estate investing is vastly better and more open than at any time previously.

LENDING Historical lending has also been upended by new companies promising more efficient and transparent processes as well as more power and agency for the borrower. Once very much an offline process relying upon the judgment call of a loan officer, today online-native platforms like Rocket Mortgage offer immediacy and access to all different types of capital. At the same time, nonbank lenders such as Fidelity Bancorp Funding or Avatar Financial have taken over from traditional lenders, which exited the space and left a void following the crisis. These nonbank lenders often have closer ties and understanding of their own communities, leading to better loan decisions and operating in much more of a “grassroots” manner. Common to all three areas of transformation is the application of technology and big data to recreate opaque or inefficient systems. Consider it as the “ecosystem model of technology,” which describes the creation of platforms that benefit all the players involved.

The idea is that if we can empower local lenders to work with more local borrowers (real estate entrepreneurs), they will in turn involve other local businesses in building and construction. Together they will support the neighborhood economy and achieve positive change in communities. This is the model we’ve seen take root across many areas of real estate in the aftermath of the 2008 crisis.

ABOUT THE AUTHOR

Before 2008, the real estate industry had been stagnant for years, with little real innovation or impetus for change. Yet real estate debt represents one of the largest financial markets in the world. There is a big prize for getting it right. Housing—and access to better housing and improved communities across the country—should continue to be a top priority.

for investing in real estate

That’s why it’s been inspiring to see people willing to take a swing at things as our industry recovered and create new products. There is finally room to do so. These changes—focused on embracing technology and efficiency—have prioritized finding a way to improve this process for all. That is making the real estate industry much better than it was before. ∞

BRETT CROSBY Brett is the co-founder and

COO of PeerStreet, a platform backed loans. He crafts the

company’s strategy, product,

and messaging. Brett was pre-

viously the Director of Product

Marketing at Google, where his 10-year career spanned many of Google’s most prominent products. Most notably he

co-founded Google Analytics, helped start Google’s mobile advertising business, ran the founding product marketing

team that launched Google+ and more recently ran the

global marketing teams responsible for the dramatic growth of Chrome, Gmail, Docs, and Drive. Before Google, he

co-founded Urchin Software

Corporation, a web analytics

business acquired by Google in 2005. Brett advises and

invests in startups and is an active real estate investor.

FOCUS...

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www.RollinsConsultingGroupLLC.com or 386-562-3016 JULY/AUGUST 2019

TECHNOLOGY

HOW TECHNOLOGY IS CHANGING THE REAL ESTATE INDUSTRY by Bobby Montagne

Technology is disrupting the industry—and there’s no turning back.

Worldwide, the real estate industry is valued at more than $210 trillion and more than $30 trillion in the U.S. when it comes to just housing. It is a massive industry but one that for decades has done little to evolve and adopt new technologies.

with the real estate industry.

more than 120,000 employees

in 80 countries and territories, with annual revenue of around

Since its birth just six years ago

$6 billion. Although the legacy

based flipping company, has

hold on the market, history sug-

$4 billion. Zillow, which started

tend to disrupt the model.

in 2013, Opendoor, an online-

firms continue to have a strong-

seen its valuation climb to nearly

gests that tech-based companies

as an online home database,

Companies like Uber and Lyft

While the legacy firms continue new and innovative businesses

public in 2017, it had a market

are breaking into the mix with

Granted, legacy firms, like New

industry. Even in commercial

still worth far more than newer

and Flipkey have revolutionized

2006 and Redfin in 2004. Cen-

or house while sharing those

to largely operate as usual,

revenue. And when Redfin went

backed by venture capitalists

capitalization of $1.73 billion.

Companies like Zillow, Redfin and Opendoor are connecting potential homebuyers with

properties in new ways that

PRIVATE LENDER

old-school mentality associated

generates more than $1 billion in

their tech-based philosophies.

are beginning to disrupt the

have changed the way people

hail for a car, even to the point that states and cities are looking to pass laws to regulate the

Jersey-based Century21, are

real estate, startups like Airbnb

entrants. Zillow launched in

how consumers can rent a room

tury21 started in 1971 and has

profits with its registered clients.

Technology is fueling these changes, and when it comes to real estate, there are signs the industry is no longer immune.

iBUYING DRIVING CHANGE

iBuying removes the burden of

selling a home on the real estate market, meaning traditional companies like Century21

associates are losing potential clients and commissions. Through the iBuying model, a seller seeks an offer from

Since its founding in 2013, Opendoor has risen from a little-known company outside of the real estate industry to shaping the way its competitors— new and old—conduct business. The home-flipping company works in a market called iBuying, along with competitors such as Offerpad and Zillow.

an iBuying company, which

returns a price in a couple of days. The price is determined on exclusive valuation models to the specific company.

If a deal is reached, the seller avoids the need to list the property, or work with a real estate agency, while completing the transaction in a matter of days, not months.

In return, the iBuying company now owns the home. In Opendoor’s case, the company seeks to buy low and sell high when it

aren’t using bitcoin, the tech-

nology protects sensitive information, such as transactions,

in such a manner that makes it

flips the property.

difficult to steal.

Although the iBuying process

In the real estate industry,

wants to reduce the headaches that come with selling a house, the downside is the homeowner may not get full value for their property.

BLOCKCHAIN MAKING INROADS Blockchain is the record-keeping system behind bitcoin. Even though real estate transactions

blockchain has many applica-

tions. Perhaps the biggest benefit is its ability to limit the need for intermediaries, like brokers and escrow companies.

A 2019 report from CB Insights says, “Many intermediaries— from brokers to escrow companies—could be rendered

obsolete by blockchain-based

approaches, as records could be stored, verified and transferred using blockchain technology.”

JULY/AUGUST 2019

TECHNOLOGY

“Rapid advancement in technologies that can enhance and streamline the buying process is here to stay. Companies old and new are finding ways to leverage these new tools to grow their businesses.” The result is reduced costs and time savings, making those companies more vulnerable should the technology become more widespread. The CB Insights report also noted: T he technology can

improve transparency and trust since blockchain “offers a verifiable and censorship-resistant option for sharing information, such as valuation details.”

Real estate operations

“would benefit from secure and tamperresistant shared databases that compile data and documents from various different stakeholders.”

Though blockchain’s decentralized digital method is not

PRIVATE LENDER

going to reshape the industry tomorrow, real estate techbased companies are looking at its application as a future means to conduct business and secure data.

PICTURE THIS: AUGMENTED REALITY Real estate photography is key to helping agencies and agents get the attention of homebuyers. When print media was the main avenue to showcase a home to a buyer, photos were usually limited to one small photo of the house. The internet, however, makes it possible to upload more photos of a home, showcasing properties in a way that piques buyers’ interest. Augmented reality takes photography one step further. The full capabilities of this new technology are still unknown, but some companies are experimenting with it. In real estate,

AR is being used to create an interactive and visual experience to view a home from the convenience of a smartphone or desktop application in greater detail that is not conveyable through photographs or text. Users have greater control of an experience that practically puts them inside the house to help determine if it is the right home. AR’s capabilities can even allow individuals to design the home to their personal style. This increased engagement improves the chances of selling the home, benefiting both the owner and the agency.

is a younger, digital-savvy group. Agencies and agents that decide not to incorporate newer technologies that provide secure transactions or enhance the homebuyers’ experience will likely find it difficult to compete. ∞

ABOUT THE AUTHOR

THERE’S NO TURNING BACK Rapid advancement in technologies that can enhance and streamline the buying process is here to stay. Companies old and new are finding ways to leverage these new tools to grow their businesses. Some new technologies, like AR and blockchain, still need more testing to find appropriate uses, which is already underway at several companies. Perhaps, the most important message for an industry dealing with newer technologies is that the main customer base

BOBBY MONTAGNE Bobby Montagne is the founder of Walnut Street Finance, a

leading private lender in the mid-Atlantic and member of

the American Association of Private Lender’s Education

Advisory Committee. Walnut

Street Finance is the sponsor of the Walnut Street Finance Fund II LLC, a $30 million

private lending fund offered

under SEC Rule 506. It allows

investments as low as $50,000 and provides a preferred

dividend of 8% with no fees.

JULY/AUGUST 2019

TECHNOLOGY

Tokenizing Real Estate T

he real estate industry has been long

overdue for a

technological overhaul.

This overhaul is taking place right now through the “tokenization” of real estate. Tokenization is the process of representing fractional ownership interest in an asset through a blockchain-based token. Traditionally, the real estate industry has had a reputation for being slow-moving and paper-

PRIVATE LENDER

dependent, but tokenization will bring a new speed and ease of access. At present, the completion of an average real estate listing contract can range from three months to a year or longer. These drawn out processes significantly impact a global industry with a value of over $217 trillion.

EXAMINING THE DATA

The promise in tokenization

A modern industry overhaul b y Alex Shvayetsky

smart contracts that would also

lies in the liquidity—even

handle potential payouts.

assets that are typically illiquid

Since tokenization takes place

such as real estate can easily be transferred to cash. Tokenization also lowers barriers for investment. Anyone with an internet connection who meets the capital requirements can invest, or invest

using blockchain technology, all transactions are recorded and verified, making fraud more difficult.

WHAT ARE SMART CONTRACTS?

through fractional ownership. Tokenization is the representation of a stake in an asset, similar to having shares in a business.

Tokens would also be digitized, meaning they’ll be digitally allocated with auto-enacting

Smart contracts are computer

protocols that can facilitate and enact contracts that are also

logged on to a publicly verifi-

able digital ledger. Smart contracts can be of huge value to

the real estate industry because they enact transfers in a more

transparent and efficient way. Smart contract technology, when implemented in real

estate, could enable investments across borders, creating new international opportunities.

Smart contracts could change

various aspects of the industry, such as home searches, rental agreements and more, with

less risk of fraud or reneging

which can be traded at all hours from nearly anywhere in the world.

THE REAL WORLD EXAMPLES

Liquidity can positively affect the value of assets by removing intermediaries and helping investors maintain current costs and prices.

Examples of successful tokenization can be found around the globe, from the U.S. to Europe to Australia.

As another application, tokenization could help hard money lenders achieve liquidity and gain access to capital much faster.

FRACTIONAL OWNERSHIP

on agreements.

Using smart contracts can dras-

tically reduce costs, by removing expensive and slow intermediar-

ies from real estate processes.

GAINING LIQUIDITY Real estate has been a safe

but relatively illiquid asset, locking away the investor’s

money for extended periods of time. An asset with high

liquidity differs as it can be

changed into cash quickly and with relative ease. While real

estate assets can become liquid, the costs and processing times associated with this process remains high. Tokenization

creates this liquidity in a more efficient and cost-effective manner through tokens,

Fractional ownership is one of the most promising innovations in tokenizing real estate. Through blockchain technology, tokens are divisible when representing an illiquid asset such as real estate—so investors can own a portion of a token. Fractional ownership allows multiple possessors to have access to profits with lower general exposure to risk. Fractional ownership is also applicable to rental agreements. Rental payments can automatically be enacted via smart contracts and investors can own “fractions” of these rental properties and collect payments of passive income. For less experienced investors, or investors with little seed capital, this method of investing is more accessible.

In Manhattan, a multistory property in the East Village became the first property to be tokenized on the Ethereum blockchain. Similarly in Italy, a 1,613-square-meters mansion designed by Giacomo Della Porta was auctioned by Propy using blockchain technology. The most successful tokenization example can be found in Aspen, Colorado, where the St. Regis Aspen Resort was sold for Aspen Coins.

Tokenization is due to renovate the real estate industry. Traditional real estate processes are slow, costly and inefficient, fueling interest in new technologies. The use of smart contracts, the benefits of liquidity and fractional ownership and successful existing examples of blockchain in real estate are ensuring the future of the technology in the real estate sector. ∞

ABOUT THE AUTHOR

Beyond traditional properties, examples of real estate tokenization can even be found in virtual reality. ALEX SHVAYETSKY

TOKENIZING INVESTMENT PLATFORMS AROUND REAL ESTATE

Alex Shvayetsky has a 25 year track record in real estate

management, property devel-

opment, and investment, all of

which he applies to his work as

New solutions are being created by innovators to meet the demand of the industry. As one example, OpenLTV, is an open, tokenized passive investment platform where investors can invest in loans backed by U.S. real estate debt, get a token, earn passive income and, in some cases, sell the token on an exchange.

part of the New Silver private money lending team. Alex’s successful fintech and real

estate experience in property management now benefits

New Silver borrowers across

Massachusetts, Rhode Island and Connecticut. Alex holds

qualifications in finance, mathematics and economics from

the University of Connecticut and Brandeis University.

JULY/AUGUST 2019

LEGAL

IS A MORTGAGE REIT RIGHT FOR YOU? by Kevin Kim

03 75% of its assets must be in real estate, cash or U.S. Treasurys.

04 75% of its gross

income must come from real-estate related assets.

05 I t must not be “closely

held,” meaning no five investors may own more than 50% of the REIT.

06 I t must have a minimum of 100 shareholders.

A mortgage REIT is a real estate investment trust with a portfolio comprised of primarily real-estate secured loans. REITs, REMICs (real estate mortgage investment conduit) and similar vehicles were a mainstay in private lending during the last cycle prior to Dodd Frank. Recently REITs have returned. But why?

Thanks to the Tax Cuts and Jobs Act of 2017, REITs investors were granted the fabled 20% qualified business income deduction regardless of their tax bracket. Further, REITs are

Let’s look at the core qualifications to become a REIT and whether the time is right for

forth in the tax code. Most

your fund.

The key requirements to

KEY REQUIREMENTS

exempt from unrelated business taxable income (UBTI), which can be significant for funds with IRA investors. Since 2018, mortgage fund managers have been pursuing this strategy aggressively.

PRIVATE LENDER

A REIT is a company that owns real estate or real-estate related assets, including mortgages, and is able to qualify for passthrough taxation by meeting certain key requirements set

REITs are designed as pooled funds with real estate assets. qualify as a REIT:

01 I t must be an entity

taxed as a corporation.

02 9 0% of its taxable

REITs can be publicly traded or privately held, including exempt under Regulation D. Since REIT dividends are taxed at the individual shareholder’s rate, and REITS always qualify for the new pass-through deduction, REIT shareholders are able to reduce their dividends from 39.6% to 29.6% at the highest tax bracket. Another added benefit of REITs are they are not subject to UBTI. So, for those funds that have IRAs or other qualified plans, this is an additional added benefit to pursue a REIT structure. However, REITs are not for everyone.

IS ADDING A REIT RIGHT FOR MY FUND?

income must be

distributed to share-

holders in the form of dividends each year.

Converting or adding a REIT component to a mortgage fund is a very sensible decision when

grants them the ability to lend nationwide without a license. This is completely false. Some states like Nevada grant REITs the ability to lend without a license, but it is subject to significant qualification for exemption.

a fund reaches approximately $40 million in assets under management. Any less than that, it cannot sustain the initial and ongoing maintenance expenses. For those funds that exceed $40 million in assets under management, it can be a significant windfall for investors.

HOW DO I ADD A REIT TO MY BUSINESS MODEL? There are two options for adding a REIT to your business model:

01 C onvert your existing fund to a REIT.

Although Option 1 may seem like the most logical choice, it is not as popular for two reasons. First, it requires the fund to elect a change to a tax election. This typically requires a vote or written consent from the majority of the fund.

account for the legal issues surrounding transferring the portfolio from the parent fund to the SUBREIT. In states like California, transferring loans from one entity to another can be restricted, depending on the lending license.

Second, converting the fund to a REIT does not give as much flexibility to unwind this should the tax code change in the future or if the SUBREIT were to lose REIT status (which is a permanent). A vast majority of mortgage funds are pursuing a SUBREIT because of this flexibility.

Another common concern is losing REIT status due to foreclosures. This is a very real concern. Income associated with foreclosed properties can cause REITS to lose status. There are two solutions to this. If the fund has created a SUBREIT, it can either create a taxable REIT subsidiary to transfer these assets to and be taxed at the normal rate, or it can move the assets to the parent where it would be taxed as part of the fund.

WHAT PITFALLS SHOULD I AVOID?

02 A dd a subsidiary REIT

or “SUBREIT” as a majority-owned subsidiary to the fund.

The primary pitfall we’ve discovered in forming a SUBREIT is that many do not

Finally, one additional pitfall is that many believe REIT status

Yes, privately held REITs are back in a big way. With the new tax code, funds can introduce a simple, cost-effective way to increase investor yields by saving taxes. This, combined with a UBTI waiver, can be a significant win for many funds in an increasingly competitive marketplace. ∞

ABOUT THE AUTHOR

KEVIN KIM Kevin Kim is an experienced

corporate and securities law

attorney with Geraci Law Firm. Kevin focuses his practice on

real estate matters, including private placements and

alternative investments for

private lenders, real estate developers and other real estate entrepreneurs.

JULY/AUGUST 2019

LEGISL ATIONÂ

PRIVATE LENDER

Private Lending Enemy No. 1: Anonymity You have a voice, but are you using it? by Kat Hungerford

rivate lenders are in a tough

spot after years of intentionally

flying under legislators’

radars. Many private lend-

ers have said they feel their business exists due to

regulatory loopholes that could at any moment be found and closed.

There is underlying concern that your anonymity allows you to transact business without a significant regulatory compliance burden, and that any contact with legislators puts that anonymity—and the future of your business—at risk. The strategy goes that you should speak up

only when legislators propose specific, business-killing bills. That kind of fear-based thinking is flawed from both sides of the argument. Your private lending business is not a loophole, and anonymity will not save it. Back up. What’s this about private lending not being a regulatory loophole? Legislators create legislation where they feel oversight is needed for the protection of one party—nearly always a natural person or private citizen—against the interests or actions of another. By intention, this leaves businesses free

to transact with one another unhampered by significant regulatory burden. This is not a bug. It is a feature of the society in which we live, and it’s why regulation that has significantly impacted how private lenders do business doesn’t really make sense upon closer examination.

ECOA AND HMDA When private lenders transact applications for credit secured by a first lien on a dwelling, the Equal Credit Opportunity Act (ECOA)—a consumer regulation—requires them to provide the borrower with a property valuation and wait three days. This makes sense when the borrower is a consumer. For a business borrower, this “protection” works in detriment to their purpose, adding costs and delays while implying that it does not have the savvy to adequately see to its own interests. Then there’s the recent modification to the Home Mortgage Disclosure Act (HMDA)— also a consumer regulation— which now requires private lenders to provide Loan Activity Registers (LAR) to the Consumer Financial Protection Bureau (CFPB) when extending credit secured by a lien on a dwelling. It also expanded the definition of a dwelling to include multifamily property.

Complying with this regulation results in a series of “Not Applicable” and “Other” responses, wasting private lenders’ time, driving up their costs and ultimately providing skewed data to the CFPB since the LAR is clearly not intended to measure business-purpose loans. Although by all appearances, these acts did not specifically intend to regulate businesspurpose credit, they are excellent examples of why federal, state and local governments typically do not interfere in business-to-business transactions where the transactions do not directly impact consumers. It is not their job, and it goes against the one part of free-market philosophy that actually has bipartisan support: It’s up to businesses to make or break themselves. If private lending is not a loophole and, in fact, is rooted in the concept of a free economy, then why should lenders fear talking to legislators and potentially gaining their regulatory-happy focus? They shouldn’t. Especially since continued anonymity could lead to a private lender doomsday scenario.

PRIVATE LENDER DOOMSDAY? Uhhh…riiiiight. This is based on experience. For three years now, the American Association JULY/AUGUST 2019

LEGISL ATION

of Private Lenders has been battling Florida bills that would require private lenders to be mortgage lender licensed when transacting any loan, for any purpose, that is secured by a dwelling. In 2017 and 2018, a relationship with Governor Scott led to the bills’ veto and modification to remove the language, respectively. This year, with a new governor, that relationship didn’t exist. Instead, AAPL’s delegation had to fight to gain time with individual legislators and battle the same language in two

different bills (Florida Senate Bills 1632 and 1730) seen by two different committees. None of the legislators on those committees understood the impacts the bills would have on local private lenders’ businesses and foreign capital into the state. They also didn’t see it would drive up borrower costs and kill private lender competition. It’s a rough time to try to build trusted relationships from scratch, on multiple fronts, while also trying to educate legislators about the private

lending industry. Relationships and trust in politics are king. The private lending industry cannot cultivate them while also remaining anonymous. Efforts become too little, too late, when other groups who are in opposition to private lenders’ continued autonomy have nurtured relationships for years.

House companion bill, HB 7103, which was the bill both cham-

bers adopted and passed. AAPL’s feedback from legislators points to the association’s contact and member-led phone and letter

campaign as the keys to keeping mortgage licensing language at bay for another year.

Beyond that, these legislators now have a better handle on what the

WHAT HAPPENED?

industry is and does and won’t be

as quick to assume similar legislaAAPL won, successfully killing SB 1632 in committee and keeping the language out of SB 1730’s

tion is without impact. AAPL has forged relationships that it can continue to build upon.

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PRIVATE LENDER

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“If private lenders don’t speak up, they let others set the narrative for them.” Aside from the Florida example, today anonymity just looks bad. No one is truly anonymous anymore. So, an entire industry that legislators and the public haven’t heard of and largely don’t understand is not a good look. Meanwhile, a case could be made—and has been by traditional mortgage brokers looking to hobble their perceived competition—that private lenders operate in a gray area with a Wild West “anything goes” mindset. According to them, private lenders support money laundering, finance loans with predatory terms expressly to foreclose and obtain cheap title to the property, and practice numerous bait-and-switchtype practices. That is not an image lenders can allow to find fertile ground in legislators’ minds. The only way to combat it is to leave behind the mindset that anonymity is necessary or a good strategy. That is no longer the world private lenders live in. If private lenders don’t speak up, they let others set the narrative for them.

WHAT DO YOU DO? Organizations like the American Association of Private Lenders rely on stakeholders to help advocate for advantageous policy. Here’s how to get started.

01 F ollow your local and

state officials // What topics do they care about? How do they vote on the issues you care about? Which legislators are more likely to be potential allies on private lender issues?

02 S upport organizations

that are allied with your cause // This might be AAPL, local real estate investor associations and others. Sign up for their legislative alerts if they have them (AAPL does).

03 N ail down your talking

points // If there’s a bill you want to address, work from a short list of elevator-speech bullets. Your talking points should summarize what the bill does, what your stance is and the impacts the bill will have. Your support orga-

nizations may have these already, so be sure to check in with them.

04 S pread the word // Share both your own and other’s opinions on an issue or bill through email, social media, and word-of-mouth. (Legislators often monitor social activity too, so your posts might be seen by more than just your followers!)

05 G et in touch with

elected officials on the topics you care about // Legislators want to know about public support or opposition to bills—they don’t always know that a topic is controversial to an industry until they hear about it. Phone calls and emails work best.

07 P ut your money where

your mouth is // Even small donations to a legislator’s re-election campaign help show your support for their actions. Most legislators have a personal website (not hosted on a .gov) where you can donate online.

Find out more about AAPL’s legislative efforts at https://aaplonline.com/ government-relations/. ∞

ABOUT THE AUTHOR

06 S how up // Schedule

meetings and go to committee hearings. Your meetings may be with staff members, but they will pass your views on to the legislator. Committee hearings offer a chance to express your views about a bill on that meeting’s agenda to multiple legislators at once. When attending meetings and committee hearings, bring printed opinion letters or other informational materials that the legislator and staff can use as reference.

KAT HUNGERFORD Kat Hungerford is project development manager at

the American Association of Private Lenders. She

specializes in operations,

project management and marketing. Hungerford

acts as secretary for the

association’s Government Relations Committee,

which serves as AAPL’s

advocacy arm in state and federal legislatures.

JULY/AUGUST 2019

LEGISL ATION

COST– BENEFIT ANALYSIS OF HMDA A practical look at new HMDA reporting requirements and what they mean for private lenders b y Cort Chalfant

If you are a lender engaged in consumer mortgages, then you are certainly familiar with the Home Mortgage Disclosure Act, or HMDA. On the other hand, if you are a private lender engaged in businesspurpose loans, then hopefully you have heard of HMDA and figured out that it now applies to you.

PRIVATE LENDER

Let’s look at the latest reporting requirements and what they mean for private lenders.

BACKGROUND In 1975, the U.S. Congress determined that some depository institutions sometimes contributed to the decline of certain geographic areas by failing to provide adequate home financing to qualified applicants on reasonable terms and conditions. As a result, it adopted the Home Mortgage Disclosure Act, which requires certain banks, savings associations, credit unions and for-profit nondepository institutions to collect, report and disclose 22 pieces of mostly economic and locational data about originations as well as mortgage loan applications that are denied or withdrawn. As originally enacted, the law mostly applied to owneroccupied home mortgage applications but not to business purpose loans. In 1989, Congress expanded HMDA to assist in identifying possible discriminatory lending patterns. Financial institutions were required to report racial characteristics, gender and income information

“Under the new rule, most of which took effect Jan. 1, 2018, the distinction between consumer and business-purpose mortgages was erased.”

result from adoption of any rule. The analysis must include:

01 T he potential reduction of access by consumers to financial products or services.

02 T he impact on

depository institutions and credit unions with

$10 billion or less in total assets.

to help enforce antidiscrimination statutes. After the mortgage meltdown in 2008 and the adoption of the Dodd-Frank Act in 2010, HMDA administration was transferred to the newly-formed Consumer Finance Protection Bureau (CFPB) together with the authority to mandate reporting of “such other information as the Bureau may require.” Predictably, more data points were added to HMDA, including a litany of specific loan terms, credit scores and the value of real estate pledged, to name a few. Finally, in 2015, the CFPB issued a new rule that established new standards for who had to collect and report HMDA data. It also expanded the number of data fields to 110 items. Under the new rule, most of which took effect Jan. 1, 2018, the distinction between consumer and business-purpose mortgages was erased. Instead, all lenders meeting minimum

transactional volumes of 25 closed-end loans or 100 openend lines of credit in each of the two preceding calendar years are required to report, regardless of the consumer or business-purpose nature of their loans. Under pressure from small banks and credit unions that successfully argued a hardship case, the open-end loan threshold was subsequently increased from 100 to 500.

CFPB COST BENEFIT ANALYSIS FLAWED One area of the Dodd-Frank regulatory gymnastics that seems rational is Section

1022(b). This section requires the CFPB to conduct a cost-

benefit analysis for consumers

03 T he impact on consumers in rural areas.

To measure projected costs and benefits of the proposed HMDA changes, the CFPB compared projected outcomes to a baseline consisting of “the state of the world before implementation” of the new rule. However, the bureau also acknowledged that it does not have a reliable basis from which to estimate costs. The CFPB concluded that “onetime costs to begin reporting could be substantial (as high as $100,000 for small, low complexity institutions) and ongoing annual reporting costs would be under $10,000 per year.” For this reason, the bureau decided to avoid imposing the new reporting requirements

and covered persons that would

JULY/AUGUST 2019

LEGISL ATION

on financial institutions that originate fewer than 100 openend loans. By their calculus, this would eliminate reporting requirements for about 3,000 smaller-sized institutions with low volume and would require reporting by only about 749 financial institutions, all but 24 of which would also report on their closed-end mortgage lending. Of course, their analysis focused on depository institutions and appears silent on the subject of nondepository institutions, which is the domain of hard money lenders. The bureau’s analysis is what led to a final rule with the 25 closed-end or 100 open-end (subsequently amended to 500 open-end) threshold. Amazingly, the bureau also somehow concluded: “In no event does the Bureau anticipate that consumers will experience reduced access to credit as a result of these changes” and “the Bureau believes that none of the changes is likely to have an adverse impact on consumers in rural areas.”

COST-BENEFIT FROM A HARD MONEY LENDER’S PERSPECTIVE In retrospect, it is mystifying how hard money lenders got

grouped into 40 years of HMDA, or consumer, regulation. While the CFPB advertised the proposed rule changes and received 51 comments, none of them appear to have been submitted by hard money lenders. In fact, it appears this entire class of “nondepository financial institution” was left out of the HMDA rule-changing process. If there were to be benefits for hard money borrowers, then presumably they would have been reported. But nowhere in the U.S. Federal Register will you find a single reference to benefits for hard money borrowers. Frankly, you won’t find cited sources of abuse in the business-purpose loan category either. Conversely, you will find the bureau’s conclusion that it costs small financial institutions about $100,000 to set up HMDA reporting systems plus about $8,400 annually. Since the hard money industry consists of thousands of micro lenders that predominantly originate more than 25 closedend loans annually, most are subject to all the expense of adoption, but none are afforded the 500 open-end loan threshold relief granted to multibilliondollar depository institutions and credit unions. It’s one thing to highlight an apparent lack of equity in how

PRIVATE LENDER

the new rules are applied, but the more absurd observation is that no one apparently benefits. More likely, it’s just a giant data crunch and part of a never-ending, escalating regulatory cycle. Moreover, standard economic theory, which is quoted liberally in the bureau’s cost-benefit analysis, predicts that in a market where financial institutions are profit maximizers, lenders will pass on to consumers the increased costs imposed by added HMDA regulation. If hard money lenders can pass on over $100,000 in costs, then the bureau’s conclusion that “none of the changes is likely to have an adverse impact on consumers in rural areas” is deeply flawed. And if they can’t pass on the costs, then some lenders will pull up stakes and quit the business, in which case the bureau’s other conclusion that “consumers will not experience reduced access to credit” is also deeply flawed. Beyond the technical, there is the obvious. There doesn’t appear to be any regulatory fire, but this is a case where the hard money lending industry nevertheless got hosed. ∞

ABOUT THE AUTHOR

CORT CHALFANT Cort Chalfant is the manager of Nexus Private Capital, an asset-

based lender headquartered in Austin, Texas. He is a seasoned executive in multistate real

estate acquisitions, asset man-

agement, leasing, development and commercial debt transactions. He has a demonstrated

track record of excellence managing and directing a diverse

range of real estate projects and affiliate operating companies. Chalfant’s core competencies are synthesizing complex

business opportunities, threats, resources and conditions into

winning strategic plans; financial underwriting; and mentoring high-performing teams.

Chalfant is a skilled negotia-

tor of legal contracts, leases, ordinances and agreements

and has a solid understanding of mortgage and capital mar-

kets, syndications and capital

formation. Chalfant has an MBA from the University of Arizona and a BBA in finance from the University of Delaware.

Chalfant is also a founding

member of AAPL’s Government Relations Committee. You can

contact him regarding the content in this article—or your own government relations issue–at cort@nexuslending.net.

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L AST CALL WITH ALEX SIFAKIS

GETTING STUFF DONE, DESPITE YOURSELF b y Alex Sifakis

03 G row // In 2010, I was running our

construction company. My right-hand man told me he would quit if he had to work with me anymore. I listened to his concerns, and we came to the mutual decision that running the dayto-day operations of the construction company was not a great fit for me. Long-term success and survival means

am incapable of managing people. My focus shifts so

quickly that people end up with workflow whiplash. I

cannot evaluate anyone’s performance or character because I like everyone.

I have the memory of a fruit fly and have not invested the time or energy into creating systems to overcome it. Rules and structure imposed by others make me rebellious and uncooperative. More severe procrastination has yet to be documented this side of the Mississippi. And even though I mean well, I frequently commit to projects or follow-up that never happens. From the outside, it seems like I have it all together. I am the founder and president of JWB, the largest homebuyer, infill builder and single-family property management company in Northeast Florida. We have over $60 million in private capital from approximately 300 different individuals, having cumulatively been lent more than $400 million in the last 13 years. We have paid 100% of our lenders back in full. My business partner, Gregg, and I founded the company with neither of us having any real estate experience or background. And we founded that real estate business in 2006, of all times! We not only survived, but thrived and grew. I have been named to the

PRIVATE LENDER

local 40 under 40, Leadership Jacksonville and Leadership Florida. JWB has been on the cover of the Wall Street Journal, multiple evaluators have named it a best place to work and multiple publications have named it a fastest-growing company. So how does someone as flawed as myself grow a highly successful business and personal life? In addition to luck and great timing, I can point to five principles that have been instrumental in getting stuff done.

01 Work Hard // Putting in the hours

makes up for a lot of personal shortcomings. For the first 10 years, my business partners and I worked 70-90 hours a week. These days, I have an amazing wife and two young sons. I am down to 50 to 55 hours a week, which I consider part-time! In the early days of the company, even though I was bad at a lot of things, I was willing to put in the time to ensure the work was done, and the company could move forward.

02 B e Authentic // People are very forgiving if you don’t pretend to be something you are not. Own your shortcomings, own your failures, but also own your strengths. Know your core values and stand by them, no matter what.

adaptability and flexibility, and that starts at the top with a leader who hears feedback and evolves with it.

04 F ind Your Niche // Develop a role

that plays to your strengths. There are ways you can contribute to your com-

pany’s success and ways you hinder it. At various points, I have overseen or participated in basically every part of the company except property management—to contribute my skills to the team in the most powerful way.

05 B uild Your Team // Surround yourself with top talent who complement

your weaknesses. The reason JWB has been successful is because we have an amazing team. We try to stay out of each other’s way, trusting each other to run the parts of the business to which we are best suited. We still connect with each other on major decisions, but we each have responsibilities and teams that we trust to excel in ways we cannot even imagine. These principles are not a magic bullet to success. One of the JWB core values is “empower people to make mistakes and fail forward.” Use the opportunity to do better, to be better and to keep moving forward.

∞

IT’S NOT JUST ABOUT IDEAS. IT’S ABOUT THE EXECUTION. WE PROVIDE PEACE OF MIND

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