Private Lender by AAPL by American Association of Private Lenders

CROWDFUNDING'S MACROECONOMIC FUTURE

PRIVATE LENDER

THE OFFICIAL EZINE OF AAPL March/April 2016

THE POWER OF

LEVERAGE

QUITTING THE

BLAME GAME

ABHI GOLHAR OWNER-OCCUPIED BUSINESS LOANS

FINANCE YOUR RETIREMENT WITH SFR



Private Lender 2016 MARCH/APRIL

CONTENTS 5

Private Lender Contributors

Lender Limelight Abhi Golhar

Are you a Good Factoring Candidate By: Michael Ponomarew

Finace your Retirment with Single Family Rentals By: Nic Wallin

Whatâ&#x20AC;&#x2122;s Current News & Updates from Members of AAPL

23 Crowdfunding and its Macroeconomic Future Alternative Angle:by AdaPia d'Errico 28

You Really Can Make an Owner-Occupied Business Purpose Loan! By: Jaspreet Kaur, Esq. and Nema Daghbandan, Esq.

The Power of Leverage to Achieve Maximum Growth Real Deal Perspective by Abhi Golhar

SHUT UP! SHUT UP! SHUT UP! By: Chrissey Breault

Private Lender

•••CORNER OFFICE•••

Owning a house is a privilege we all earn. It’s an accomplishment I have been proud of for over eight years after purchasing my first home. As we look to move to our next home, I again feel privileged not because I am becoming a new home owner but because I live in a society and country that protects all people from being discriminated against when looking and buying a home. As we observe the anniversary of the Fair Housing Act, I think more and more about what that means to me as I am looking to move my family. I appreciate the idea that my community is open and welcoming, even protected from housing discrimination and hostility. Safe schools, neighborhoods and a healthy environment are important to my family and something we require to be comfortable and happy. As the new Executive Director of the AAPL, I am proud to renew our commitment to fair housing and lending is a living commitment, one that reflects the needs of America today and prepares us for a future of true integration.

PRIVATE LENDER March/April 2016 CEO Michael Wrenn AEG President Eddie Wilson Executive Director Linda Hyde Editor-in-Chief Chrissey Breault Production Manager/ Chrissey Breault Art & Design Advertising and Sales Dustin Thomas Private Lender is published semi-bi-monthly by the American Association of Private Lenders (AAPL). AAPL is not responsible for facts or opinions as presented by authors and advertisers For Subscriptions: Visit www.facebook.com/aaplonline or email PrivateLender@aaplonline.com. For Back Issues: Visit www.issuu.com/aapl, email PrivateLender@aaplonline.com, or call 913-888-1250. For Article Reprints or Permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail PrivateLender@aaplonline.com or call 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is expressly prohibited. Copyright © 2016 American Association of Private Lenders. All rights reserved.

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PRIVATE LENDER CONTRIBUTORS •••••MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE.•••••

CHRISSEY BREAULT A Pittsburgh native and Hospitality major; Chrissey started a part-time photography and design business in 2009, while working full-time in local government communications. She is currently the Director of Marketing and Education Services with the American Association of Private Lenders. Follow Chrissey @CBExpressions or join her on LInkedIn. Beware: She takes too many pictures of her dog and does not have a filter!

ADAPIA D’ERRICO AdaPia d’Errico is an entrepreneur, investor, and strategic business advisor. She worked in banking and finance in her early career, transitioning into entrepreneurial ventures in brand development and strategic marketing across the new media, consumer products and entertainment industries. Over the past three years, she has done a deep dive into the high-growth alternative finance space as Chief Marketing Officer at Patch of Land, where she is responsible for driving brand awareness, marketing and communications strategy, and partnerships and business development. She has positioned the company as a recognized leader in real estate crowdfunding, P2RE®, and marketplace lending. AdaPia is a frequent contributor and presenter on these topics, as well as on topics ranging from leadership and marketing, to real estate, economics and crowdfinance.

NEMA DAGHBANDAN, ESQ. Nema Daghbandan’s practice encompasses all facets of real estate transactions representing lenders and brokers, including loan documents for commercial, residential, construction, multi-family, servicing agreements, spread agreements, assignments (of all types), leases, lien releases, procurement agreements, intercreditor agreements and subordination agreements throughout the country. Mr. Daghbandan also leads the firm’s non-judicial foreclosure practice and advises clients on all default related matters. Mr. Daghbandan has closed hundreds of millions of dollars in loans throughout the country. Learn More

ABHI GOLHAR Abhi Golhar is Managing Partner at Summit & Crowne Partners, an Atlanta-based real estate investment firm. Since 2003, Abhi has utilized a “value-added” approach to capitalize on real estate renovation, new construction, and development opportunities in the Midwest and Southeast United States. He actively educates and works with seasoned debt and equity investors to employ market-driven investment strategies that yield success. Abhi holds a BS in Electrical Engineering from the University of Michigan. You may find him tweeting @AbhiGolhar, delivering massive value to investors at #RealEstateDealTalk, sending a market trends newsletter at abhi@summitandcrowne.com, or connecting on LinkedIn.

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PRIVATE LENDER CONTRIBUTORS •••••MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE.•••••

JASPREET KAUR, ESQ. Jaspreet Kaur is an Associate in the real estate finance section of the Geraci Law firm. Ms. Kaur’s experience includes representing lenders and brokers, preparing commercial, residential, and construction loan documents, assignments, and subordination agreements. Ms. Kaur also has experience with nonjudicial foreclosures and default related matters. Learn more.

MICHAEL PONOMAREW Michael Ponomarew joined the Factoring industry in 1999. He is the Founder and CEO of The Finance Institute. Managing Director of The InvoiceXchange. Factor member that managed $750+ Million in Factoring transactions. Acclaimed industry educator that has taught over 5,000 business professionals, consultants and business owners how to profit in the lucrative Factoring industry. Contributing author industry publications and blogs, guest and key note speaker. Established and vended three successful businesses prior to joining the alternative finance and private lender industry.

NIC WALLING Nic Walling is a Production Analyst at Colony American Finance, a leading financier for Real Estate Investors. Walling has spent his career in Commercial Real Estate. Prior to CAF, Walling was an Associate at Green Street Advisors, an equity REIT and commercial real estate research and advisory firm. He has also held positions at Turnstone Capital and Newport Coast Capital Management. Walling is a graduate of USC’s Marshall School of Business where he studied real estate finance. Reach Nic at nic.walling@ colonyamericanfinance.com.

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"An individual called me for $150,000 loan, and had gold dust in his bank vault for collateral. "

Private Lender

PL: ...and Private Lender, right!? AG: That’s a given!

Lender Limelight

PL: What kinds of mistakes have you seen professionals make when it comes to their investments? AG: Here’s what I’m seeing that’s concerning, first; little due diligence on the experience of the team; second, lack of oversight, and finally there is an issue with greed. PL: How would you describe your management style? AG: It’s difficult to say, but I think a good manager gives concise directions and has the ability to stay hands-off; but is ready, willing, and able to offer guidance, expertise, and assistance when it’s needed. I enjoy being proactive and ensure I’m aware of when my team needs help.

Abhi Golhar Summit & Crowne Partners This #RealEstateDealTalk Show host is the managing partner of Summit & Crowne Partners, a private equity real estate investment firm based in Atlanta. Outside of his day-to-day responsibilities of identifying investment opportunities and structuring capital for the firm, Abhi is a regular guest on Think Realty’s Podcast, biz1190, a local radio show in Atlanta. PL: We know a little about you and your partner, Walt Higgins III, from the American Association of Private Lenders’ Annual Conference. Can you tell us how you got your start in real estate? AG: In 2003, I purchased my first investment properties in Detroit. One was a flip, the other, a rental. I quickly realized I had no idea what I was doing and both projects failed. In hindsight, I wouldn’t have it any other way. PL: You’ve been around for a while! What types of things do you do to keep current? AG:I read the Financial Times, Wall Street Journal, Investor’s Business Daily, and The New Yorker. I also spend time connecting with local agents, builders, contractors, appraisers, and other professionals.

PL: Given your experience in the field, what are three hard-to-spot pitfalls for entrepreneurs that are critical to avoid? AG: Paralysis of analysis. This one is easy to mention, but a very difficult one to spot in real-time. If you are spending too much time researching, and not enough time executing, that’s a serious problem. Then, I would say you need to build a team. Real estate investing is a contact sport. A few high-quality people on your team can make all the difference, especially when you decide to scale your business. Take time for yourself. Entrepreneurs wear many hats, and in most cases, all of them. The more you take the World on your shoulders, the quicker you’ll burn out. Take some time and decompress, it’s good for you! PL: What advice would you give to investors to help them establish their credibility with lenders? AG: Find someone experienced to work with, stay humble, and have a blue collar work ethic. Learn from your mentor, do their grunt work, and eventually be a project manager on a deal with them. You may have to give up more profit than you would like, but

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•••LENDER LIMELIGHT•••

CONTACT

ABHI @AbhiGolhar

#RealEstateDealTalk

it can be well worth it; in both the eyes of your mentor and the lender. PL: What are three things you tell yourself when your chips are down? AG: Tomorrow is a new day. My thoughts become reality. Anything is possible. PL: Can you share a life memory or two that you recall most frequently? AG: When I was a kid, I was terrible at soccer. I was slow, didn’t know how to dribble the ball, or kick it properly. All I knew was I wanted to be the best, period. So every day after school before dinner, my father and I practiced on the front lawn and finished with a one mile run dribbling the ball around the neighborhood. I got better. The following season, I exceeded my expectations, and those of my coach and fellow teammates.

PL: Who would win the fight, Spiderman and Batman? AG: Spiderman. PL: Can you tell us about the weirdest deal you have ever been approached with? AG: An individual from Florida called, told me he needed a loan for $150,000, and as collateral, he had gold dust in a bank vault. I hung up the phone. PL: What’s the best advice you’ve ever received? From whom? AG: Take some time in the morning to breathe and meditate. The understanding of the behavior of one’s mind can help in making decisions throughout the day, especially in highly stressful environments where you need neutrality. This advice is courtesy of my father. PL: Tell us about something that you did in the past, what did you learn from it and what would you have done differently? AG: In 2014, we acquired an existing SFR in Old

10 Private Lender

Fourth Ward in East Atlanta for approx $200,000. Our intention was to demo and build a new home at a cost of $250,000 with an ARV of $625,000 - a great deal! We obtained a loan from a private investor who was testing the waters with new construction projects in Atlanta. Unfortunately for us, the City took an extra few months to issue demo and build permits (delay caused by increased permit requests.) Long story short, the investor became nervous and exceedingly hostile in communication. My team and I understood the nervousness, but the hostility and unwillingness to be solution-oriented became unnecessary, fast. We decided to sell the project to another builder, who gladly took it off of our hands. What we missed out on: $100,000+ in net profit. The lesson: thorough due diligence on our lenders. That’s why we love the American Association of Private Lenders! PL: (laughing) Thanks for the plug! Can you tell us about the first experience in your life when you realized you had the power to do something meaningful? AG: I had many experiences like that when I was a kid, but one of my favorites was visiting my fourth grade teacher’s farm. Ms. Kounelis had a wide variety of animals and a horse named Noodles. She talked about the importance of the environment and our responsibility to the earth along with other species who share it with us. For the rest of the school year, we picked up debris everywhere we went. Our little slice of the world in southwest Michigan got a little bit cleaner. PL: Was there a person in your career who really made a difference? AG: Other than my mother and father, my late mentor, Michael Burke. He was an interesting man with novel ideas; during the early part of my career, he taught me the art of influence and negotiation. PL: There’s no right wrong answer, but if you could be anywhere in the world right now, where would you be? AG: On the pier in South Haven, MI with my family and closest friends.

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•••BUSINESS STRATEGY•••

ARE YOU A GOOD FACTORING CANDIDATE? By: Michael Ponomarew

factor. The Factor then subtracts the discount fee from the invoice payment and credits the rest of the invoice amount not advanced in the beginning back to the company. Businesses that are less than three years old are inherently attracted to factoring because many banks have increased the minimum years a company must be established and show a profit from two years to three years. So any new start-up that sells products or renders services to another business (and issues invoices) can qualify for factoring.

he broad answer is any business that produces a product or renders a service to another business or the government can be a good factoring candidate.

Banks typically make their credit decisions based on the financial strength, the financial wherewithal (assets) of the business and its owners. In an era when businesses are increasingly considering different methods of financing, factoring accounts receivable has become a viable and popular alternative for businesses across North American. It is the nature of the factoring model itself that is attracting business owners who are looking to quickly free up cash flow for their businesses. Factoring is an extremely useful tool to unlock working capital tied up in a company’s accounts receivable. In addition to being faster and having considerably less red tape than applying for a bank loan - Factors are not lenders but, rather purchasers of current or outstanding invoices. It can sometimes be confusing because Factors charge a discount fee based on the length of time it takes for a customer to pay for the invoice, once the invoice has been purchased by the Factor. Most business loans require regularly scheduled payments stretched over a specified period of time, such as monthly or bi-weekly. With factoring, a business can receive up to 95 percent of the invoice amount within 24 hours of selling the invoice to the factoring company. The customer now pays the invoice amount to the

12 Private Lender

Service companies are hot factoring candidates. Typically these companies don’t have any hard - or limited - assets to pledge as security to the bank to obtain traditional forms of financing. Companies like: temporary staffing, nurse staffing, security companies, contract cleaners, landscapers, janitorial, marketing and IT consulting, distribution, warehousing, property managers, importers/exporters, telecommunications or any equipment/repair service company, etc. Providing factoring facilities to government vendors (contractors) has become big business over the past few years. The government is the largest and best payer of invoices across the country but, in many cases pays really late. If the government vendor can't meet the delivery terms of the government contract (due to the lack of available working capital) the vendor stands the chance of losing the contract all together to the next competitor. The Notice of Assignment of Claims Act created the process by which a “financing institution” may collaborate with a government contractor to have the contractor’s payments under prime contracts paid by the government customer directly to the Financing Institution. This makes it quick and easy for Factors to implement the facility. Factoring is an alternative financing strategy that can suit many businesses in many sectors. For businesses that do not fall into traditional lending requirements, factoring can provide a very quick, viable and accessible alternative to create immediate debt free working capital to help a business grow and thrive.

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•••FINANCE•••

investment space poses an interesting opportunity for longhold investors looking to diversify their retirement portfolios. Whether through direct investment or via publicly-traded REITs (real estate investment trusts), the residential real estate investment arena provides opportunities and potential attractive returns.

FINANCE YOUR RETIREMENT WITH SINGLE FAMILY RENTALS By: Nic Walling

etirement is front of mind for many Americans. With a variety of investment options and strategies—running the gamut from the ol’ mattress savings account to a company-sponsored 401(k) plan or a self-directed diversified stock and bond portfolio—planning for retirement requires foresight. To ensure a comfortable retirement in your golden years, savvy pre-retirees are exploring a variety of cash flowing investments options outside traditional 401(k) or IRA accounts. Working professionals, entrepreneurs and retirees alike are looking to the residential real estate space as a land of untapped opportunity. Finding little comfort in the sustainability of the current Social Security system, the prospective retiree should be exploring an assortment of investment alternatives, seeking consistent cash flows to support a long and active retirement. With that, the Single Family Rental

14 Private Lender

For those not prepared, equipped or willing to build and manage of portfolio of residential property investment assets, the publiclytraded residential REIT space provides an attractive alternative to direct investment. REITs are companies that own or finance income-producing real estate and are required to disburse the majority of their revenue to investors. Modeled loosely after mutual funds, they facilitate a more tax-efficient form of real estate investment being that they are intended to act as passive real estate investment vehicles. REITs deliver many of the same benefits of direct real estate investment with limited risk. In recent years, residential REITs—such as Colony Starwood Homes— have amassed large portfolios of single family rentals. The REIT structure allows investors of all size and sophistication to participate in the returns of these large residential portfolios (often tens of thousands of homes). REIT investors hold equity interests in the company and its related portfolio, and collect dividends based on the portfolio’s performance and appreciation. REITs provide investors the opportunity to invest in diverse real estate portfolios with limited initial capital contributions (compared to direct investment). A REIT investment is generally regarded as less risky than direct investment, but the corresponding returns are understandably less. For those looking to delve into direct investment, Robert Berger of U.S. News and World Report recommends careful consideration when it comes to asset selection. Rental properties can provide a meaningful source of consistent income as part of your retirement planning and, according to Berger, “buying a rental property or two could provide enough income to allow you to retire sooner.” But, with that being said, investors need to think long-term and invest in assets that will provide steady, positive cash flow throughout their retired life. The last thing you want is your rental properties to become a

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•••FINANCE••• drain on your retirement resources. Here are some points to consider when diversifying your retirement portfolio with investment properties:

1. Explore your financing options. In a post-financial crisis world, those with good credit and a steady work history can finance rental properties through a variety of solutions. A new platform is a portfolio lender (such as Colony American Finance). These lenders have greater flexibility then traditional banks—working outside the terms imposed by Fannie Mae or Freddie Mac—and often can offer more attractive terms than local banks or traditional residential lenders. However, lending requirements are more stringent than they have been in the past. Lenders are now requiring increased down payments (25% or more) and stricter credit and liquidity profiles.

2. Get familiar with the tax implications. Rental

properties offer valuable tax benefits. For example, you can claim depreciation on rental properties

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16 Private Lender

(but not the land), reducing your tax burden. Depreciation, along with the interest expense on a mortgage, may enable you to save on taxes. However, keep in mind that you will have to deal with depreciation recapture down the line when you sell the property. In many cases, rental properties operate at a loss. One of the hidden benefits of being a landlord is that these "losses" can be deducted on your tax returns (up to $25,000 a year). There are some requirements that must be met, so be sure you understand the rules. The tax implications of owning rental properties can be beneficial, but they are also complex. Seek out the advice of a tax professional before you dive into the world of residential rental investments.

3. Don’t be caught off guard by expenses.

Understandably, real assets require more care than a mutual fund investment or 401(k) account. If you own your own home, you are likely more than familiar with the costs associated with being a homeowner. Don’t let unexpected costs or repairs derail your retirement cash flows. It is essential that you have money in reserve before you buy or begin renting a property. If the water heater goes out or the roof starts leaking, you will need to spend the time and money to fix the issue. And if the house is rented, you can't get away with putting off major repairs for a few weeks or months while you scrape together the cash. As a rule of thumb, Berger recommends, “before you buy a rental, set aside at least six months' worth of rental expenses.” Other expenses to consider include routine maintenance, taxes, and insurance. Healthy reserves ensure you can take care of emergencies as they arise.

4. Purchase quality assets in sought-after markets.

As real estate investor, you are looking to maximize occupancy rate and minimize tenant turnover. If you are going to rely on rental income as part of your retirement plan, be sure that you have purchased well-built properties in popular neighborhoods. None of this will work if your property is not a profitable investment because it's in a weaker school district or in an area with increasing crime. When shopping for a rental property, consider consulting with an experienced local realtor. There is a lot to be said for someone who can guide you through the nuances of the market, identifying areas with higher demand for rentals. Berger recommends that first-time landlords focus on single-family or small multi-family properties in good school districts. Young families with children generally are less likely to break a

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•••FINANCE••• lease unexpectedly. Families tend to look for a home in a low-crime area with schools that help their children learn and grow. Rental properties can be a smart addition to your retirement portfolio. It can be even better if you consider yourself a “Do-it-Yourselfer” and are looking for a “part-time job” in retirement. That being said, there are plenty of caveats to becoming a landlord. Be sure you fully understand the intricacies of “landlordship” before investing in investment properties. Real estate investments, whether direct or via the REIT market, can provide meaningful returns as part of a diverse retirement portfolio. As members of an ever growing global economy; enthusiast, investors, and retirees alike are looking to the lucrative yields of the real estate market to subsidize their lifestyles and increase the value of their investment portfolios. There is something to be said for tangible investments. As many Americans approach retirement and as the demand for

18 Private Lender

rental housing expands, you should consider retiring from your professional vocation in favor of becoming a landlord. May your retirement be as golden as your real estate investments.

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WHAT’SCurrent NEWS & UPDATES

Gorilla Capital Receives Debt Financing to Facilitate Growth Gorilla Capital ("Gorilla"), headquartered in Eugene, OR, announced that it has secured a debt facility from Arena Investors, LP (“Arena”). Gorilla, one of the largest fix and flip real estate companies in the nation, will utilize the proceeds from the facility to continue expanding its business operations and acquisition strategy. Terms of the transaction have not been disclosed.

National Private Lending Association Calls for Annual Conference Topics The American Association of Private Lenders (AAPL) opened the Call for Topics and Session Participation. AAPLs’ Annual Conference, Nov. 13-15, Las Vegas, is a two-day long educational forum that brings together real estate professionals to share the latest trends and technologies, best practices, and learn from one another through exceptional networking opportunities. AAPL is looking for presentations to demonstrate how private lenders and other real estate based service providers achieved success, through innovative and effective strategies and tactics. The experiences that are shared should be the kind that others in the industry can learn from and subsequently leverage in their work. The deadline for presentation proposals is Friday, July 1. To learn more about the Call for Topics, visit www. aaplconference.com or call 913-888-1250.

First Rehab Lending, LLC to open new full-service Branch for Private Money Lending in Boca Raton, Florida First Rehab Lending, LLC. (www.FRLinvestors.com) is proud to announce the opening of a New Branch located: 327 Plaza Real Boulevard (Mizner Park) in Boca Raton, Florida effective March 1, 2016.

20 Private Lender

“Our ability to expand and enter new markets has been limited by the amount of capital available,” said Gorilla CEO John Helmick. “With this investment and the financial backing of Arena, Gorilla has the ability to expand its business nationwide and to increase the number of homes it buys in current markets.” Gorilla will expand its operations in the 23 states where it currently operates, and also expand into additional markets. “Our goal is to grow to $400 million of sales in three years,” Helmick said.

East Coast Credit Fund to Invest $250 Million Across Patch of Land Real Estate Platform Patch of Land, a leading online marketplace lender for real estate, today announced that an East Coast Credit Fund has signed an agreement to purchase loans in a forward flow arrangement. This marked a significant milestone for Patch of Land as this demand for loans supports the firm’s rapid origination growth. The credit fund extensively diligenced the landscape of lenders and ultimately decided to partner with Patch of Land in its first foray into the P2P - or marketplace lending - space. Submit your current news, updates, or job opportunities for possible inclusion in the next issue of Private Lender. Send details to PrivateLender@aaplonline.com

䌀愀氀椀昀漀爀渀椀愀ᤠ猀瀀爀攀洀椀攀爀瀀爀椀瘀愀琀攀氀攀渀搀攀爀昀漀爀愀氀氀礀漀甀爀搀攀瘀攀氀漀瀀洀攀渀琀渀攀攀搀猀⸀ 䄀挀焀甀椀猀椀椀漀渀ⴀ伀渀氀礀䰀漀愀渀猀䌀漀渀猀琀爀甀挀挀漀渀䰀漀愀渀猀䌀漀渀猀琀爀甀挀挀漀渀䌀漀洀瀀氀攀攀漀渀䰀漀愀渀猀䤀渀瘀攀渀琀漀爀礀ⴀ䘀椀渀愀渀挀椀渀最䰀漀愀渀猀

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21 Private Lender

SOMETIMES IT HELPS TO TAKE A STEP BACK and look at things from a different perspective. AdaPia d'Errico, CMO at Patch of Land, explores some of the most interesting topics affecting real estate, like technology, online finance and crowdfunding.

e v i t a n r e t l A an

E L G N A d'Errico ia P a d A h wit

22 Private Lender

#AltAngle

•••ALETRNATIVE ANGLE•••

Crowdfunding and its Macroeconomic Future By: AdaPia d'Errico

o better grasp the macro and microeconomics of crowdfunding, and in particular the effects of this new financial solution in real estate, it has become essential to consider two fundamental shifts in that space: First, that the institutionally driven consumption model is neither “fixed” nor “permanent” in its present form, and, second, alternative models, platforms or instruments can offer considerable benefit, prime among these: de-risking through collective participation, ultimately deriving value for the investor, and increasing stability in the overall economy.

high-saving East. While bankers and traders have sought elusive irrational yields, global interest rates have been suppressed, and markets deregulated. In retrospect, a combination of corporate myopia; liquidity hoarding and regulatory malaise stymied both recovery and reform. These are serious structural, economic problems, often with arcane workings of which the average person has little knowledge -- and even less ability to alleviate, or to indemnify themselves from, on their own.

Keep in mind that no consumer watchdog agency By now, in 2016, most people readily admit that the has yet successfully stopped banks and investment financial crisis that shook professionals from the world economy in 2007 expanding their wealth on "....no consumer watchdog agency was exacerbated -- and the backs of the average some would argue caused has yet successfully stopped banks taxpayer in the last ten -- by a lack of institutional years. and investment professionals from oversight and transparency. A recent LA Times Undoubtedly, the aptly expanding their wealth on the backs business column spoke to named, “Great Recession” of the average taxpayer in the last ten this gap, its fallout, saying and its aftermath left a that “among the ‘grave years." legacy of what might be moral consequences of termed “fear and loathing” widening inequality in an about economic stability, environment of modest growth’ identified by political and its future prospects, on a global scale. The ongoing economist Benjamin M. Friedman in 2009, for instance, lack of any true oversight or supervision, ethical or legal, are ‘racial and religious discrimination, antipathy toward continues to expose a massive underbelly of shadow immigrants, [and] lack of generosity toward the poor’--all banking, corporate corruption, and malfeasance. features of our current campaign landscape.” Intensified political cycles and wage inequity (which Such circumstances are reached when, one after continues to concentrate most global wealth to a tiny the other, under pressure from their boards and proportion of the world's population) not only threatens stockholders, strategists underpriced risk and left to permanently decimate the middle-class but to unleash the cleanup to governments rife with partisanship economic - and social - chaos. and overburdened borrowers. While various popular Wage inequity is just one of many symptoms of a movements have come and gone, no real change has massively imbalanced global economy. The West has been achieved in terms of opportunity for the lower to become a collection of debtor nations, with much of its middle income strata of the population to achieve robust burden sitting squarely in the hands of the historically -- or even steadily “modest” -- growth, to change their

aaplonline.com

•••ALETRNATIVE ANGLE•••

circumstances, both here and abroad. On the one hand, American capitalism needs consumers who are willing to cooperate fully and smoothly – who do not buck the trend. The “system” by definition requires large numbers of easily influenced people to consume, whose tastes can be standardized and easily fulfilled with a low level of sophistication. As a result of the ever-increasing concentration of capital in the hands of a few, the individual is “squeezed out” of the equation, not only by the prevailing social norms dictated by media, consumerism and peer influence, but because he or she can no longer afford to participate. Economic activism, meanwhile, has been relegated to either adhering to old models or creating minimal changes that can temporarily pacify lower income brackets and those juggling smaller inflows of consumer capital. Interestingly enough, at the same time, all of these factors have blasted the innovation valve wide open.

Social Trends: Empowerment in the Shared Economy Because of these innovations, the work of economic revitalization remains within the hands of the individual. At the same time, there is a growing collective ethos that aspires to guide global humanity and collateralize, and access, wealth in a more equitable manner. Crowd-sourcing investment opportunities touch on both “individual action” and “collective responsibility,” offering the potential for global, collective participation. Such modes of revitalization seek to join the natural and mutual interest of humans, and create a future roadmap for success for actual people - for a majority of people, and not just “corporate citizens”. While many share responsibility for financial imprudence during the crises, responsibility for reestablishing the stability of the system -- for making it truly thrive -- begins with the innovators themselves who are beginning to dethrone institutionalized capital entrenched in both institutions and governments. While we attribute some natural intelligence to the markets themselves, they are also comprised of people. That being said, economies can still survive overvalued property markets and overly indebted borrowers and all manner of asset bubbles. Today’s entrepreneurs and financial leaders must have real strategies not just to weather the losses and maintain the supply of credit, but to go beyond increasingly ossified supply/demand consumption models, and even investments. We must inspire innovation and true, scalable, systemic changes. With all this talk of a “roadmap,” then, how do we get there? The consumer, on average, is not interested nor liable to fight such entrenched economic interests, though this campaign season has proven a still-unarticulated collective anger at “special interests” who seem to getting all the goodies. Away from the campaign trail mob dynamics, people are beginning to see that the “old ways” are no longer the only viable model for doing business or for promoting growth, and they are searching for alternatives. Over the same period of time 2007-2016, technology has continued to "smarten up”, introducing us to talking thermostats, increased robots on the manufacturing floor, and drone delivery. These developments might seem trite in comparison to the global concentration of wealth, but they are not. Most, if not all, innovation that has revolutionized transportation, energy, logistics,

24 Private Lender

•••ALETRNATIVE ANGLE•••

and even data has originally come from smaller entrepreneurial enterprises.

operate as exchanges, they are also building their most valuable asset -- data. Their customer lists and their proprietary origination channels can be of enormous value. ‘Open platform business models,' also invite a new level of transparency -- a tacit demand made of the marketplace, by one of the largest demographics most at home in such platforms -- Millennials. No

The accelerating pace of digitalization has revolutionized value creation. The newest focus is on creating data-based platforms that enable stakeholders to partner with companies and third party contributors, to to create, and participate in, highly personalized and contextualized “solutions,” whether Millennials as the agent of change for transportation, lodging, finding restaurants, or purchasing goods. 33% believe they Popular examples Less than half won't need a bank are Apple’s App have a credit card in 5 years Store, Google 14% of Millenial Play, GE, Amazon, small business 50% are counting Alibaba, Kickstarter, owners use on tech startups AirBnB, or Ebay. alternative (nonto overhaul banks bank) financing The primary value 84% say user Only half expect of these open generated to use cash on a platform business content & reviews weekly basis by models is that they influence their 2020 are more customerdecisions centered -- meaning ownership, usage Goldman Sachs Global Investments Research and investment are “de-risked” to some degree, as they are matter how difficult it is to be fully transparent (since all distributed among the “crowd.” Individualized delivery businesses have some dirty laundry), it’s something that of services and solutions are leveraged across an entire the millenarian consumer believes is central to a new ecosystem. economic paradigm. It is not always practical or possible, The platform environment is often characterized by a tension between collaboration and competition between participating companies, often referred to as coopetition. IDC predicts that by 2018 more than 50 percent of large enterprises – and more than 80 percent of firms with advanced digital strategies – will create and/or partner with online platforms. Platform business models will continue to affect and often disrupt, numerous industries over time. Uber is a prime current example: they are attempting to expand into healthcare and travel. This is an example of how digital ecosystems are becoming increasingly cross-industry. The underlying business model logics and digital algorithms can often be transferred from a core industry to an adjacent one -- or sometimes a surprisingly disparate one. While platform or marketplace businesses usually

but it does constitute a new, and viable philosophy of businesses that counters the cronyism of old.

Nearly 20 years ago, the launch of online payments giant PayPal shook the financial services industry. Now, a new generation of financial technology, or “fintech,” companies is once again breaking down the oversized doors of the conservative banking business. From facilitating loans to wealth management to mobile payments to tax preparation, fintech companies are attacking traditional — and often inefficient — practices that shut out as many as two billion consumers (most outside the United States) from the most basic financial services. Increasingly, those institutions are hearing the loud, booming knocks. In a recent letter to shareholders of JP Morgan Chase, America’s largest bank, chief executive Jamie Dimon warned investors that “Silicon Valley is

aaplonline.com

•••ALETRNATIVE ANGLE•••

coming.” Goldman Sachs, according to Inc., “estimates that upstarts could steal up to $4.7 trillion in annual revenue” from incumbent banks, a potential payday that is driving venture capitalists to pour nearly $25 billion annually into the sector. One of the great benefits of fintech firms is that they can cross many traditional borders -- literal and otherwise -- to efficiently tap a global market of individuals willing and able to provide financial support to companies and persons who would otherwise be shut out of capital markets because of their small size or non-traditional risk profile. Traditional tools to rectify issues of economic imbalance no longer suffice: Corporate debarment, charter revocation, and civil litigation all require lawyers, paperwork and drawn out reliance on some of the very forces colluding against the individual, so, frankly put, they are a waste of time. There are also significant shifts in demographics related to homeownership. Specifically, the shared economy stimulates new millennial attitudes towards renting versus owning a home and owning things in general. Consider how developers in Manhattan now emphasize amenities over living space. Personalization, engagement and shareability of ideas are all now equal to, if not more paramount than, simple commercial value. Indeed, a recent Credit Suisse Report specifically about online financial trends found that of this same millennial group, a whopping 71% would “rather go to the dentist than listen to what banks are saying.” Humor aside, what that actual statistic means, practically speaking, is that fully a third of them don’t think “they’ll need a bank in 5 years.” And they are already taking steps away from that “banking:” 63% don’t have credit cards (though may have debit cards, Apple Pay, etc.), and nearly all -- 84% -- say peer content influences many of their online and purchasing decisions. In other words, the future is already here, and it’s happening right now thanks to financial technology. The only question for currently entrenched institutions is whether they can accommodate such changes, or, like many institutions, stand to simply be replaced? Something is bound to give way, since consumers are demanding more from institutions that purport to serve them, but also more from commercial entities that want their dollars. Just like irresponsible lending mechanisms for seemingly “easy capital” backfired, companies that do not engage the consumer at these levels will not succeed. Aside from the apparent ease with which the consumer has access to a vast number of things in the “app economy,” where higher value is placed on social

26 Private Lender

status via social media, as opposed to social status strictly via objects, there still exists a large and significant delineation of attitudes around purchase consideration when it comes to investment and homeownership.

Changing Demographics and Crowdfunding Innovation Ironically, the lax regulatory environment that originally allowed mainstream financial institutions to create the financial crisis-- by over-extending into areas where they had less expertise, expected unrealistic returns, and couldn’t manage risk, may lead to the very changes they dread. In demanding a non-regulatory environment in which to expand, banks may have hastened that moment where aging Millennials “won’t need a bank in five years.” That same Credit Suisse Reports talks about “unbundling the bank.” And each of those areas in which traditional finance is overextended becomes a separate area that can, and will, be spun off by new start-ups into more specific and more accessible platform-based financial instruments: Online payments, crowdfunding, loans, virtual wallets, and even traditional “banking services” themselves like savings accounts. There is an inherent tendency in analysis to focus on the disrepair of a system, and yet, such an analysis of economic systems can lead to new financial instruments and arrangements that can help the consumer achieve economic parity and social stability. The urgency of the times we live in accelerates market dynamics, widens and redefines demographics and quickens the pace of disruption across industries. The pervasiveness of new technologies leads to decreasing the viability of outdated, or rigidly traditional, business models. Disruption is no longer verbiage-- it’s an unavoidable aspect of doing business-- almost any kind of business. Companies must innovate their business models and revisit, and rework, structural inefficiencies in order to remain competitive. Other research also confirms that companies with a high performance culture have successfully pole-vaulted the innovation gap. They not only understand new opportunities in financial technology but embrace the responsibility -- and necessity -- to do it differently “this time around”. Crowdfunding in particular comprises a new movement, a collective, economic activism that can keep pace with changing consumer trends, address thorny socioeconomic problems, and set new standards across multiple industries, and ultimately the culture itself.

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•••LEGAL•••

YOU REALLY CAN MAKE AN OWNER-OCCUPIED BUSINESS PURPOSE LOAN! By: Jaspreet Kaur, Esq. and Nema Daghbandan, Esq.

his is a question that comes up frequently. Lenders and brokers are sometimes shocked that the answer is yes, so long as the proceeds of the loan will be used for a business purpose. Generally speaking, a business purpose loan is a loan in which the loan funds are used for a purpose other than a personal, family or household purpose. This applies even if the borrower lives in the property that is securing the loan. The distinction between a business purpose and consumer purpose loan is important as business purpose loans are explicitly exempt from the burdensome regulations imposed by the federal Truth in Lending Act (“TILA”) and Real Estate Settlement Procedures Act (“RESPA”).

Consumer loans are subject to enhanced licensing requirements, additional disclosure requirements, in addition to cumbersome substantive protections. For example, in California, to make a consumer purpose loan, a lender must be licensed by the Bureau of Real Estate (“BRE”) or by the Department of Business oversight (“DBO”), and also have a Nationwide Mortgage Licensing System (“NMLS”) endorsement. However, to make a business purpose loan, a license from the BRE or DBO is required, but the NMLS endorsement is not. Business Purpose loans are subject to fewer regulations, as they are specifically exempt from TILA and RESPA. To figure out if a loan is a business purpose loan, ask the following question at the time of originating the loan: “what is the primary purpose of the loan?” The good news is that TILA provides some guidelines for determining if a loan is business purpose:

1. the more closely related the borrower’s primary

occupation is to the acquisition, the more likely it is to be business purpose;

2. the more personal involvement there is in

managing the acquisition, the more likely it is to be business purpose; and

the higher the ratio of income from the acquisition to borrower’s income, the more likely it is to be business purpose; and,

4. the borrower's statement of purpose for the loan, in which the borrower describes the intended use of the loan funds. Moreover, TILA provides explicit examples of business purpose loans, and actually uses owner-occupied properties in its examples. A business purpose loan could be a loan to expand an existing

28 Private Lender

•••LEGAL•••

business, even if it is secured by the borrower’s primary residence. It could even be a loan in which the borrower is using the loan proceeds to build a home office and is securing the loan with his principal residence. So long as the loan funds are used for a business need, and not for a personal, family or household use, then it is still considered a business purpose loan that is exempt from TILA and RESPA even though the borrower resides in the property. A multi-unit owner-occupied rental property can also be considered a business purpose loan under certain circumstances. If the purpose of the loan is to acquire the rental property and it contains more than two housing units, then it is considered a business purpose loan. If the purpose of the loan is to improve or maintain the rental property and it contains more than 4 housing units, then it can be categorized as a business purpose loan. For example, if a borrower was purchasing a duplex to live in one unit, and rent out the other unit, it would not be considered business purpose, because there must be more than two units. What if the borrower applies for a loan to remodel the kitchens in all the units, and he lives in one of the units? So long as there are at least five units, it would be considered a business purpose loan. There are also instances in which a loan has both a consumer purpose and a business purpose. In these circumstances, the deciding factor is the primary purpose of the loan funds. Generally if more than half of the funds are used for a business purpose, with the remainder used for a consumer purpose, the loan will be considered a business purpose loan and will be exempt from TILA and RESPA, subject to the four factors identified above. It is possible to make a business purpose loan that is owner-occupied so long as the proceeds are to be used for a purpose other than a personal, family or household purpose. As discussed above, TILA even provides examples of business purpose loans in which the borrower lives in the subject property. The correct question to ask is what the funds are to be used for. If after asking this question, the answer is definitively yes, and if the property is also owner occupied, then there are safeguards that the lender can take to protect itself. The lender should obtain a handwritten, signed and dated statement from the borrower at time of application in which the borrower explains the purpose of the loan funds. At loan closing, the lender should also include a Business Purpose of Loan form in the loan document package, which includes blank lines

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CCGCAPITALGROUP.COM the borrower fills in stating the purposes of the loan proceeds and the amount allocated to each purpose which is signed under penalty of perjury. Additionally, if possible, the loan proceeds should be disbursed to the borrower’s business account at closing, rather than to a personal account. Taking these measures and correctly documenting the business purpose of the loan could ultimately protect the lender should the borrower file suit later down the line and claim that the loan was for a consumer purpose.

Interested in writing for Private Lender and getting in front of thousands of real estate finance professionals? Contact us today! PrivateLender@aaplonline.com

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Abhi’s

REAL DEAL

PERSPECTIVE #RealEstateDealTalk

•••PERSPECTIVE•••

THE POWER OF LEVERAGE TO ACHIEVE MAXIMUM GROWTH By: Abhi Golhar

hen I speak at conferences nationally, I meet new real estate investors who have yet to grasp the power of using leverage and its impact to the asset and resulting cashflow, in the case of multifamily. In this article, I want to demonstrate how leverage can be beneficial for growth of your portfolio, if used correctly. For most multi-unit housing investors, the goal is to grow the portfolio – to add equity. There are ultimately two ways to add equity—reducing debt or adding units with growth potential. Reducing debt decreases monthly outflow for debt services, allowing the cautious owner to weather tough times. A larger portfolio offers greater economies of scale, supports more management assistance and, ultimately, generates more income for the owner in all markets. We are in a market which is one of the healthiest for apartment owners in recent history.

• Construction and land costs remain high while rents remain low, limiting developer’s ability to add new competition to the market.

With such strong market fundamentals, the time is right to expand portfolios and benefit from strong occupancy and rents with room to grow. To grow your portfolio seems simple – if you can buy at $50,000 a unit and sell at $60,000 a unit, you have made a 20% return, on top of the cashflow generated. Not such a bad deal, right? Before you jump to a conclusion, be aware that many investors do the same transaction and achieve returns in the neighborhood of 100%, on top of the cashflow generated. That represents an amazing deal! The difference is leverage. By using “other people’s money,” you can maximize your ability to benefit from the gains in the market. Let’s use the example of three investors, all of whom are buying buildings at a 7% cap rate and initial price of $50,000 per unit, and some of whom are using a 6.5% loan: “Cautious Charlie” has $500,000 and uses it to buy a 10 unit building. Over a four year period, he increases the NOI (Net Operating Income) by 20% - from $35,000 to $42,000 - making the building worth $600,000.

• The reduced availability of low-down mortgage

“Stable Sally” has $500,000 and uses it, and a $500,000 loan, to buy a 20 unit building. Over a four year period, she increases the NOI by 20% - from $70,000 to $84,000, making the building worth $1,200,000.

• The quantity of housing and condominium stock

“Growth George” has $500,000 and uses it, and a $1,500,000 loan, to buy a 40 unit building. Over a four year period, he increases the NOI by 20% from $140,000 to $168,000, making the building worth $2,400.000.

dollars is keeping people in rental properties at the same time that increased foreclosures are turning some homeowners back into tenants. being placed on the rental market, although meaningful, is running below many overly pessimistic projections.

• Rent relative to income remains reasonable in this market.

• The population of the metro continues to

grow – predominantly through the addition of individuals who are likely to be renters, rather than homeowners.

All three investors have the same initial investment and receive the same percentage growth in the income

aaplonline.com

•••PERSPECTIVE•••

Cautious Charlie

Stable Sally

Growth George

$500,000

$1,000,000

$2,000,000

($500,000)

$154,000

$308,000

$616,000

($151,696)

($455,089)

$600,000

$1,200,000

$2,400,00

($475,298)

($1,425,894)

Equity Created

$100,000

$224, 702

$474,106

Total Income Realized

$254,000

$381,006

$635,017

11.8%

15.8%

22.5%

Purchase Price Original Investment 4 YR. NOI 4 YR. Loan Payment Sale Price Loan Repayment

Annualized Return (IRR)

and value of their properties, but let’s see how things work out for them at the end of the deal: George’s percentage return was almost double that of the unleveraged buyer, and 40% higher than that of the 50% leveraged buyer. Why does this happen? Charlie’s property generated 20% appreciation – going from $500,000 to $600,000. With the other two buyers, the property also generated 20% appreciation – but a large piece of the capital invested came from the lender – who does not demand a piece of the appreciation. The leveraged investors got the appreciation on their investment, plus they got to keep the appreciation on the bank’s investment which got added to their bottom line. In addition to this, their income grew faster. Every year, as your income grows, your loan stays the same. Would you rather increase rents by $10/unit over 10 units or $10/unit over 40 units? Generating $400/month in additional income is, of course, preferable to generating $100/month in additional income. What can these investors do in the future? At a new market value of $60,000 per unit, Charlie has enough to trade into another 10 unit building. Sally’s $724,702 would allow her to trade her 20 units for 24 units (with a loan for half of the investment), and George’s $974,106 would allow him to trade his 40 units for a 64 unit building (with a loan for three quarters of the investment.) The primary downside to using leverage is that it can introduce a certain degree of risk. Using the above example, Charlie could easily lose half of his tenants and still be able to meet his fixed expenses. George, on the other hand, would approach breakeven at 87.5% occupancy in his first year (in his second year, breakeven would occur at 82.5% because his rents went

32 Private Lender

up.) In a market such as this one, with stable occupancies and rising rents, this risk is easily managed—in a 95% occupied market with increasing rents, maintaining 88% or better occupancy at stable rents should be easy to accomplish. In addition, the discipline created by the presence of the debt provides the owner with strong incentive to maximize rents while reasonably minimizing expenses. This will provide more income growth, faster, making it even easier for an owner to grow their portfolio. From the single family residential flipping perspective, it makes sense to use private money or hard money lenders to complete multiple projects instead of investing hard-earned capital into only one project. For example, my team and I have SFR expansion and new construction projects in two cities: Atlanta and Charlotte. We have the ability to move capital where the market conditions benefit us the most and where lenders have the ability to offer competitive rates. Most importantly, we will typically bring 10-15% down with our lenders financing the balance up to 65-70% of ARV. Simply put, leverage makes sense, given the due diligence is completed accurately. When reviewing your rental portfolio or flipping strategy, you may consider thinking twice about the traditional goal of paying down your loan. Instead, ask yourself two questions:

1. Is my money working as hard for me as it can? 2. Is my lender’s money working as hard for me as it

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•••MANAGE & LEAD•••

SHUT UP! SHUT UP! SHUT UP! By: Chrissey Breault

atching someone pawn their failures off or blame others for their mistakes is contagious and detrimental, particularly in the workplace.

It may seem inconsequential but in an organization where blame is the norm, people are likely to be less creative, perform poorly, and mirror damaging behaviors to protect their own self-image. When someone is always pointing the finger for their mistakes they can’t learn from those mistakes and hinders their own ability to learn to become more effective. Ever hear of the “kick-the-dog effect?” It is where someone high in the organizational hierarchy makes a mistake and blames the person below them for that mistake, that person blames the person below them, and so on. Eventually the last person goes home to kick the dog. Awful metaphor, right? Being surrounded by people who blame others for their failures, whether at work or at home, can leave you prone to do the same. According to a study published in the Journal of Experimental Social Psychology, odds are the reason those people pass the buck isn’t to evade responsibility, but to protect their own self-image. You can stay above the fray by keeping your self-esteem in top form. Once you start to recognize finger-pointing in your organization, you need to move quickly to counteract it. A culture of blame quickly creates unhappy employees and productivity slips. Even if you’re not in charge, you can suppress the blame game in yourself and other with

34 Private Lender

these tactics:

• Maintain a healthy self-esteem • Talk it out • Learn from your mistakes If this is leading to an epiphany and you are just now realizing that you are a finger-pointer, it’s not too late! Using your mistakes as a learning experience, regardless of who was ultimately at fault can keep you from spreading blame. Some companies have a corporate culture that regularly includes finger-pointing. Ben Dattner, the author of "The Blame Game: How Hidden Rules of Credit and Blame Determine Our Success or Failure" told the Wall Street Journal that such companies should replace that culture of blaming with problem solving. "... Instead of focusing on what went wrong, companies should focus on how to make it work next time. Focus on the future," Dattner said. "Companies that focus on blame make their employees afraid to take risks and try new techniques. This can result in missed opportunities for growth because people hide behind corporate rules and regulations. It’s important for leaders and organization managers who are trying to shape their culture in a way to improve performance and creativity. If you’re a leader (with or without the title,) don’t blame other people, at least not publicly. You might want to offer praise in public, but if you blame someone then do it in private and make sure that you discuss goals, stick to using factual statements, are constructive and helping overall efficiency. If you are a leader, consider taking responsibility for your own mistakes in public in order to be a model for better behavior and boosted performances.

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