Kevin Kim: You are listening to Lender Lounge with Kevin Kim, a podcast dedicated to helping those in the private lending industry grow, improve, and streamline their business. I’m Kevin Kim, partner at Geraci LLP, the nation’s largest private lending law firm. Join me as we chat with the best and brightest in private lending who are eager to share their years of wisdom and best practices with lenders, borrowers, brokers, investors, and more. Subscribe to Lender Lounge on your favorite podcast platform and learn more about Geraci and how we can work with you at Geraci Law Firm. Check out the episode summary for other valuable resources.
Hey guys, coming to you with another episode of Lender Lounge season 4. We are so proud of this past season. I have done so many great interviews and we wanted to take this opportunity to do a solo episode with just yours truly and I wanted to have an opportunity to kind of sum up and discuss some key takeaways from all the different interviews we had this season.
What a great season. We also have questions we got from the audience over time. We’ve extracted from different platforms, mostly from lenders that are getting started or private lenders that are interested in the business because. Our audience primarily is broad spectrum across the lending industry, but we want to make sure we address the core competency of the law firm as well, because our job here is to advise private lenders and primarily advising them on how to run their business compliantly.
So let’s get started. You know, some of the commonly asked questions, it’s probably the easiest part to get started with. So we pulled some of these questions from different forums and from different Facebook groups and stuff like that. So, bear with us. You know, one of the first questions we always get asked.
And this happens to me about once or twice a week is a question on licensing and private lending. You know, I get questions all the time. Oh, is it true that I don’t need a license to do private lending because it’s commercial or, or I have a license in this state. I don’t need a license in many states, right?
We get this question all the time. The opposite question will come up too, right? The question will come up like, oh, I need a license in this state, right? And this comes up a lot. And there’s a lot of misconceptions about licensing. In private lending, when we’re doing deals that are primarily business purpose loans secured by residential real estate but are not owner occupied, And to a business entity, not an individual.
There are about 10 States that require a mortgage license, right? Most of them on the West coast, California, definitely Arizona, Nevada, Idaho, Utah, Oregon. And then you have some Midwestern States like Minnesota that will require a license, the Dakotas. And then you also have Vermont. There are a multitude of States that you do not need a license and to do this kind of lending.
Now, if you. Take a variation to that business model. For example, you lend to an individual or you do a deal that’s owner occupied. Some States will now trigger licensing. So it very much depends on how you want to do it. Do not assume that you can just jump in to the state without evaluating licensing, or compliance, right? So for example, there are other issues in states like Tennessee, for example, that have strange usury laws that may need you to think about how you craft your transactions, how you do your loan documents, but it’s not something you just easily figure out. You know, there’s a lot of misinformation out there on the interwebs.
And unfortunately, even professionals out there don’t have all the information. So you may want to give us a call on this issue. I think that we have the best resource in the industry on this particular issue, particularly because we know for a fact that upstream of our clients and their legal representation, the big, you know, ivory tower, law firms, a big national, international, global law firms actually contact us when it comes to licensing inquiries, because this is not well understood.
We have dedicated our time and energy to the industry exclusively, and that allows us to have a depth of knowledge that. It’s usually not well understood throughout the country. Another good question we get is I am raising money from family and friends to fund my lending business. Do I really need to consider securities laws?
And the answer is yes. It’s a very. Interesting conversation to have, because I always ask, you know, family and friends, what does that really mean? Are you raising money from like your mom? Are you raising money from friend of a friend? And usually the conversation is typically front of a friend or a friend or extended family.
Now, the reasoning behind this is that the SEC doesn’t qualify this kind of stuff, right? The commission and state regulators don’t qualify this kind of stuff based on who, who in relation they are to you. Now, obviously if you’re raising money from your mom and your brother, maybe not as gonna be, not gonna be viewed in a certain light, but you still want to be careful.
We, we don’t take a harsh hand at this, but we want to make sure we advise the client thinking through how you approach this is going to be wise if you’re doing a lower scale, you know, doing one or two transactions a year and it’s your mom, maybe not, right? Maybe, maybe worth considering understanding it because when you go to the next, the next level, you’re going to have to.
But even then, with your, with your parents or your children and your, and your brother, media family, sometimes the regulate, well, definitely regulations do apply, but some regulators might even go so aggressive on that front as well, especially in states that are, you know, very aggressive when it comes to enforcing securities regulations.
So it’s not worth the risk. Especially when you can do a quick consultation with an attorney that understands this stuff and kind of walk you through it. And the goal is to make sure that you understand the road ahead of you. So if you want to build this thing up and raise more money from different investor sources, that you’re thinking about the complexities of securities laws, understanding like most of the transactional structures that you’re going to pursue are probably going to trigger securities laws by virtue of the counterparty on the transaction being a passive high net worth investor.
So, really thinking through how you’re going to go about this is not that difficult, but it’s important that you talk to an expert. Another area we get questions about a lot is in the same vein of raising money, has to do with going out and raising money from international investors or foreign investors, right?
And, and, and what do I need to do about this? And we’ve seen this question come up a lot, and we’ve done quite a bit of content on it at Geraci, done a lot of webinars on it. It’s not the same as raising money domestically, right? You have tax concerns for the investor because they’re not a U.S. taxpayer.
So there are formalities associated with that. And there are exemptions associated with that. There are money laundering and know your customer concerns, right? Because this person is not a resident of the United States. They don’t live here. They don’t pay taxes here. There’s no way to verify their identity here.
So there might be some additional concerns there. And frankly, there are certain countries that have been red flags for money laundering. Right. And so you want to avoid that risk by doing your extra due diligence on the investor. And I’ve heard a lot of client, Oh, but they’re from Canada. They’re from Mexico.
It’s basically the same, right? I would say no. I would say it’s not worth the risk without doing a little extra homework. It’s not very hard to do the homework anymore, right? With, with the availability of different online databases and, and background check services, it’s not very difficult to do. One of the additional concerns that you’re going to run into is going to be the tax impact on the investor, right?
Because if you are a foreign investor investing in the United States, the United States still wants their tax income. So there’s conversations around withholding and, and, and what’s called active trader business treatment to the investor. So it’s very important that you talk to a CPA, talk to an attorney that understands this kind of stuff.
It’s definitely doable, there are very simple solutions, and there are very complex solutions, depending on what you’re trying to achieve in the same vein of raising money. Another question we get all the time is fractionalizing loans, right? It’s used, the terminology throughout the country is used, there’s a lot of different terminology used in the country, right?
You’ve got people that call it fractional, fractionalization of loans. You got client sponsors who call it co-lending people who call it multi-beneficiary, a lot of different terms for it, but the idea of taking one loan and allowing a high net-worth investor or a group of high-net-worth investors to own a portion of that loan.
And, and what are the compliance considerations with that? And one of the biggest concerns that you run into is it’s not a. Not just a federal conversation, right? You have to look at your state’s regulations associated with securities regulations. If you cross state lines, do you have to now look at federal?
And then also there are unique exemptions that may be available to you to do this, but there are also local restrictions. For example, the state of Colorado has this weird mortgage broker dealer regulation. So there are things to think about that. Complicate this kind of program, it can be done relatively easily, but you still need to have a discussion about understanding the complexities, especially nowadays, where what used to be the sponsor would raise money for a fractional deal in one particular state in California, which is still commonly done more and more people are doing this across state lines, and now we’re triggering federal securities laws.
We also want to think about any local regulations that are not associated with the issuance of the security, but maybe the means of sale at Colorado. And then of course you want to look at the licensing framework because some states have a licensing framework that allows us to be done on the mortgage side, right?
So for example, California has a baked-in exemption for a real estate broker to do this with very little restriction. Most states do not. So you want to think through all of these different issues. It’s always going to be a popular strategy, especially for emerging private lenders who want to get off the ground, especially on the West Coast.
We see it more often than not than on the East Coast and it’s It’s fraught with complications and it can also result in very complex conversations with a securities regulator if they get wind of it. And so you want to make sure that you’re thinking through the complications of it. The best way to think about is, you know, think about how you’re going to raise the money from accredited investors only.
That’s going to be one of the big saving graces. And then you may have to stay away from certain states like Colorado. The last question I get all the time, especially from about the show is what do you think are some of the keys to success in private lending? And obviously, as an attorney, I will oftentimes say it depends on what your goals are.
If you are trying to create a going concern, a professional going concern, private lending business, this is your full-time job, this is going to be your company, that strategy, there is a blueprint that I believe that independent non-institutionally backed as private lenders should follow and relatively easy to find out, right?
If you look across the industry of both local, regional and national shops that have, that are independent from capital markets, they have some things in common, right? Number one, they’ve got a strong. focus on customer service and keeping their borrowers sticky. They don’t lend in all 50 states, right?
They lend in a concentrated select few states that are primed MSAs for them. They have their capital structures thought out, right? They have a balance sheet. They have leverage, they have a relationship with the secondary market to sell loans, they have a solution for their borrowers if they go to term and want permanent financing on a DSCR product.
They have all that thought out and they also have the bench for it internally, right? And a lot of that can be outsourced, but they have a bench for it. Typically they have their origination platform very well thought out. And they have their capital platform very well thought out. The program can’t, the platform can be simple.
It can be five people and multiple different vendors and software and solutions with maybe one principle or two principles that can be done. And those can go and grow and grow and grow and grow to a very significant volume of origination and, and assets under management. That seems to be the blueprint to me.
I think that that in the long term is going to be the path to success. You’ve seen it. It’s been proven companies like that have been scaled and sold to either other private lenders or institutional outfits. So I think it’s definitely worth looking at if your primary objective is just to kind of use this industry as a means to make money as a rank return. As an investor, it’s never been a better time to be a, an investor in private lending, but don’t have it in your mind that you’re gonna be doing private lending part-time, right? You’re not gonna scale it, it’s just not, you have to dedicate time. This is a full-time job. This requires a lot of work.
And so if you’re going to do this part-time, typically approach it as an investor, approach it as more of a passive investor, sometimes active, but not as someone that’s considered the holding this out to the market as a direct lender. I don’t believe that’s going to work. If you truly want to build a scalable going-concern business.
And that’s going to require you to allocate resources, right? If you stay small and you just want to act kind of as an investor and fund deals for other people, by all means, you can say that you’re a lender hot take a little bit controversial. I don’t really view it as such just because you fund loans doesn’t mean you’re a private lender.
And you may want to think about, well, what are my priorities in life, in business? And if this is a priority to you, then we want to build a going concern and really scale it by all means, right? There is a blueprint. If not, that’s okay. And we love and value our clients who are more kind of, they fund trustee opportunities, they invest.
And it’s never been a better time to be an investor in our sector. You can find a multitude of different debt funds, a multitude of different whole loan opportunities, even fractional loan opportunities, and even creative opportunities where you can do no financing. So I think that it’s a really great time, but you have to get out there and market as well.
All right. So I want to transition to another part of this solo cast episode. I want to kind of talk about what we took away from this really, really great season we just did. This year, we interviewed such a diverse audience, and we tried some new things. We tried group interviews, we tried one-on-one interviews, and we did the one-on-one interviews that we always do.
And then we also interviewed, it was a unique theme across the, uh, season was, we interviewed new CEOs, well-known companies, well-known personalities in the space, well-respected individuals, but they’re starting a new company or they’ve been recently appointed CEO of a household name. So, you know, we interviewed the new CEO of Anchor Loans, Ray.
We interviewed the new CEO of Kiavi. And we also interviewed Bill who’s starting up his new business after, after, after Civic and, and Beth after leaving her company. And so, the interview process this year was a lot different and we wanted to make sure that we presented some of the things that we took away from the different interviews and the value that was presented to myself.
I typically learn a lot doing this podcast and this season I learned a lot, and I gained a lot out of it, and I wanted to make sure we talk about that on the show. You know, one of the first things I want to talk about is really the entrepreneurial spirit that I took away from every single interview.
And we interviewed new fund managers. We interviewed new CEOs, new point CEOs. We interviewed version 3.0 CEOs. We interviewed market people who are who excel at the marketing game. We interviewed all types. And one of the things that I noticed was. What I came to define as the entrepreneurial spirit in starting up a business or on building your business and in this space, particularly, and in this space, like many others, it’s not necessarily just I’m going to create a company and just make a ton of money, you know, that you could do that in so many different unethical ways, so many different ways that take value away from others.
But what I noticed was, that everyone that we interviewed really wanted to build a company so that it could present value to the marketplace. It can add value to the marketplace, expand what they’re doing, which they believe in, they’re a true believer of, and also create a place where they can value and take care of their team, but also make money.
And that was something that I really took away as a different approach. And when I say value, I really do mean value, right? So, how they’re going to approach private lending, how they’re going to work with their borrowers, how they’re going to find value for their investors. These are things that are oftentimes like, well, you know, you see a lot of private lending businesses that are set up that are, the goal is purely just to make as much money as possible and sell the damn thing and, and not necessarily consider those issues.
One of the key things that I noticed was the idea of creating a place that your team members are incredibly proud to work with. CEOs that the team members, even the originators and staff are so proud to work for. That’s something that I really was impressed with throughout the season and so hard to achieve.
And I think that the companies that we interviewed, for example, when we did the customer service podcast with Kevin Werner and Greg Hebner, you know, from, you know, Renovo and Arixa, respectively, that, I mean, the amount of dedication that they had to customer service, both Internally, but externally, right?
And how they got their team to buy into the dedication of customer service as a value of theirs was impressive. And you heard similar types of mentalities from other interview interviews as well. And then also getting your team to really rally behind that cause and rally behind you as a leader is no easy feat and give them a lot of credit for doing that.
You know, one of the most impressive stories was Bill’s and having his team on the sidelines waiting for him to start the new company and really believe in what he’s trying to do. It was very impressive and the reasoning wasn’t, Oh, because I have to be the biggest and best in the space. It’s because I have to present as much value to the marketplace as possible marketplace, including your borrowers, but also including your investors, but also including your employees, and your executives.
Another really cool thing that I took away from the interviews this year was a sense of discipline. Focus and understanding what is your business. A common thread that we noticed in different interviews was, well, there are a lot of different ways we can make money in this space. I asked a lot of the national players like their take ongoing wholesale or, you know, creating a TPO program and the sense was that, yeah, it’s, we could do that, but that would, that isn’t our, that isn’t our core competency, that isn’t our primary thing that we do and we excel at, but also speaking to groups that identified what their core competency and what they excel at and taking the next step to expand the business and grow it.
That was taken away from the interview we did with Brock and, and Matt on, you know, starting your very first fund. Right. Another thing was. Not chasing the shiny objects, and this is a very common thread. You’re gonna hear it on all types of different podcasts, but in our sector what was really interesting was we heard the sentiment from folks that came from a very, you know, national, almost institutional background saying listen, that’s not what we do, right?
We could do it. We could easily build it. We could put resources behind it. And we could create this giant platform. But it’s not what we’re, what we’re known for. It’s not what we’re good for, what we’re good at. And it’s not the value we present to the marketplace. So for example, you know, when we interviewed Bill, like he had straight up said, in the new iteration of the company, They walked away from the idea of creating this massive platform, technology platform that could do everything they wanted it to do, because it’s a waste of resources when the market is full of different solutions that can be custom fitted to your needs.
And so, the technology conversation was very eye-opening, because at that level, It’s easy. And even, even the interview with Arvind, with Kiavi was interesting because, you know, they have the opportunity to do so many different things because of the technology that they’ve already built, but they are focused on what, what’s really kind of blocking and tackling for them, right?
The capital markets and their securitizations and really making the borrower process, lending process to the platform as seamless as possible. They’re not doing other things that they could easily do, they could easily think that process, that technology and license it outwards. So, it’s a very, very interesting conversation because this marketplace is so dynamic.
Private lending is a, is very dynamic. You see folks jumping into new products, into new markets, into trying, you know, all types of different things. And sometimes it looks like they’re chasing a dragon. What this episode taught me was that is going to be a foolhardy approach when the market is doing what it’s doing.
Discipline is going to be important, right? Doubling down on what you view from a value standpoint is your core competency and saying no in the right circumstances. Now, it doesn’t necessarily mean you shouldn’t be entrepreneurial and pursue ventures that are going to add value to your business. But what I found was those are very well-thought-out ventures. Those are very, very intentionally pursued ventures, not just on a whim.
Another key piece as part of that was this idea of creating stickiness. Within the organization and attracting like-minded people to work with you, right, and to continue the mission that you set out as it pertains to the company culture, but also to the value that you’re presenting to the marketplace with your borrowers and your counterparties, and that is something that was very and that is very hard to achieve, especially considering labor market being what it is.
It’s a very tight labor market. It’s a pro. It’s a very much a pro-employee labor market and to create it. Value in that context, right? And to have people to be, to be bought into what you are doing both at the outward facing front, but on the inward facing front. And so one of the things that really struck me was, you know, how the CEOs were thinking about their business, you know, the interview with Adam Sbeih like he constantly works on the business right on the business He’s not in the business. He’s not you know, Adam is not out there finding new deals. He’s not out there raising a ton of capital. He’s working on the business and he’s and he’s making those 1 percent improvements and this is also why you know, a lot of our clients out there have never heard of Adam.
They are no slouch they’ve been in the game for 15 years and several successful stories and lots of great investors that back them and they’ve done it organically and they built a following of people that really believe in what they’re doing.
And lastly, in this kind of, this kind of vein of thought, the last most important thing obviously is don’t run out of money, right? As Bill Tessar was humble enough to say on the interview that we just, we did with him, don’t run out of money. And thinking through capital. And thinking through how you’re going to maintain your business and how you’re going to fund more loans and do it in the right way. And we learned, you know, capital is not just capital. Every capital solution has its sticks, and it has its carrots. And you have to make sure that you’re understanding that. But also, don’t run out, right? One of the key things is don’t run out.
The last thing I really wanted to talk about was we had a lot of headwinds in this past year. It was a volatile time in the market the year before as well with the volatility in both the banking crisis and the rate hikes, and overall just a tough time to be a private lender from a capital market solution.
You had a lot of exits from the capital markets. You had a reduction in volume, in securitization. At the end of the day, all these interviews, we came away with a sense that there’s still so much opportunity to grow if you do things the right way, the private lending industry continues to grow primarily because it’s a relatively young industry and there’s still so much room and whether you’re a local lender or a national lender or institutional outfit, there seems to be a lot of positivity, not necessarily, I would say, a bullish abundance of optimism, it’s cautious, but the thought process seems to be that because the market is so young, it’s still in its infancy because capital markets have figured it out. And also because there’s so little inventory and so many older homes that need to be turned over. I was blown away by some of the data that was presented to us on the show. And so I still think that the industry is primed to continue to grow, but there are, there’s going to be, not consolidation in companies, but consolidation in best practice. Consolidation in how one goes out the, I guess the product type as well. Some consistency there. But also some consolidation as it pertains to kind of capital strategy. I don’t think Wall Street’s going anywhere. I think institutional investors are here to stay.
But, different types for different products. That was one of the key things that we took away from the interview with Beth. So I really want everyone to think that. I think about the industry as having an abundance mindset, rising tide and all, and the reason why I kind of concluded that was when we had that interview with Ray, the new CEO of Anchor, you know, the way she put it was very interesting. There’s kind of two areas that really kind of opened my eyes to it. And as, as, and she’s not, you know, someone who’s been entrenched in the sector. She has a unique perspective. And so the two things that really stuck out to me was her view on the lack of inventory; how short we are in the number of units, and This is supported by the increased volume of construction lending across the country.
In addition to that, her view on the influx of capital and the way she viewed it was yeah, it’s going, this rate of securitization and reduction in rates will open up the floodgates to more capital coming into the space primarily from the institutional types. But because the market has so much opportunity and there are so many deals to be done, it’s not necessarily a bad thing at its outset.
Now to measure that though. You know, the interview we did with Beth was it presented a countervailing argument to some degree. And one of the things that I really appreciated was it’s not going to be like an overnight thing. And I think that’s really true. If our audience is expecting, okay, well, sounds like once the rates come down, floodgates are going to open.
Sounds like once the first rate of securitization is done, floodgates are going to open. That’s not true, right? But the market can sustain an influx of capital. Especially now, considering that now is not what things were like back in 2016 when, you know, institutional investors first started jumping into the market en masse, right? 2014, 2016. And so there’s more discipline in the market and there’s more depth of understanding in the asset class. And so I think that it’ll be a good time, but it will require a significant level of discipline and consolidation in practice, uh, standardization in practice as it pertains to product type, underwriting guidelines, and how one runs their operations.
So it’s a really interesting time to be in private lending. It’s a very exciting time considering that we haven’t seen too many businesses shudder, even though things were tough this past year. And things are still growing and the data bears it out. And I think that, you know, our audience should be excited and I think that they’re not, they’re not looking at all the new market entries.
And that’s an indication too. One of the things that we’ve really viewed with great interest in the past kind of two years, maybe three, is the significant level of new entry from the conventional and non-QM markets and not at the institutional level. That’s been happening for years, but at the retail level And yeah, some people can say that’s just because they have no deals to be done on their side of the house Which is true, but I also think that they’re opening their eyes to the opportunity here, but they’re not going to just jump in head first without standardization of practice, because they’re going to follow the business model they built over on their side of the business, and that requires significant standardization.
And so I think we’ll continue to see more opportunity flow into the sector. Much more standardization of how we operate our businesses. The blueprint will definitely, I think be echoed throughout the industry and I think that, you know, we’re primed for an opportunity season, but it will require discipline and it will require a significant amount of strategy.
Within your business of choosing the right move for yourself for the next step and sometimes it might be just say hey you know what? We’re gonna stick to this. This is good for us It’s not broken. Don’t fix it and the other clients are gonna other sponsors are gonna say hey we’re kind of hitting the brick wall.
We have to make the next move to make our business more efficient, and more productive. Whatever it is. So, you know, I encourage all of our listeners to continue to listen to the show We’ve got a great next season lined up We’re gonna be interviewing many more household names, but also with topics that we’re really excited to talk about.
So, I’m really excited for next year. Or this coming year, I guess. 2024. And following after that. I’m excited to see what it’ll bring. I’m also excited to see where we’re gonna go. I think there’s gonna be a lot of interesting events happening. So, please keep listening to the show, and hopefully, we’ll present as much value to you, the listener, as possible.
This is Kevin Kim. Thank you very much for listening to this episode. Signing off.
You’ve been listening to Lender Lounge with Kevin Kim, brought to you by Geraci LLP, the nation’s largest private lending law firm. Geraci is the leading legal resource for specialty lenders, asset-based lenders, private lenders and non-bank institutions. Learn more about the firm at www.geracilawfirm.com. Check out our episode summary to subscribe to our Lender Lounge newsletter and our law firm newsletter, where you can get notified about new episodes and recent content directly from our expert attorneys. In addition, we’d love it if you follow Lender Lounge with Kevin Kim on YouTube, your favorite podcast platform, and on LinkedIn, where you can also check out updates from Geraci LLP. Thanks for listening, and we’ll see you next time on Lender Lounge with Kevin Kim. This is Kevin Kim signing off.
