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 geracilawfirm.com. Check out the episode summary for other valuable resources.
Kevin Kim: Hey guys, Kevin Kim coming to you with another special episode of Lender Lounge with yours truly, Kevin Kim. Today, we are recording online with various people that you know and love here at Geraci LLP. Uh, we’re doing a “predictions for 2024” video for you guys via the podcast. I have various department heads and, partners and people that you all know and love here. Talk about their predictions for 2024 as we go into another tumultuous year.
Kevin Kim: So I’m going to pick someone at random, guys, and I want you to introduce yourself, tell the world about what you do, and who you are, and give us your prediction for 2024. So, since no one volunteered for tribute, I’m going to volunteer someone, and his name is going to be Steve.
Steven Ernest: Okay, my name is Steve, and I’m the Director of Litigation and Bankruptcy here at Geraci. And I think every day of 2024 is going to be collectively the best day of any of our individual lives. I’ve been through four of these recessions as a practitioner, and every one of them has been great for litigation. So, if you’re thinking about getting to know your favorite litigator. 2024 is the year to do it. Uh, I wrote in my article that it’s going to be a little bit like a Python trying to digest a fully eaten pig. And I think that’s right. I think the snakes have been eating pigs for a couple of years now. And at some point, it’s going to have to; the digested pig is going to have to come out of the southbound end of the northbound snake. And when that does, it usually goes pretty well for litigators. So, um, you know, this is the year to seek to enforce the notes that you have. You inflict pain on your defaulted borrowers, and that’s true for a few reasons. They’re demoralized. They’re unhappy because of the bad economy, and so they’re also not going to put up as big a fight. They’re not going to spend a lot of money to defend themselves. So, there isn’t a cheaper or more cost-effective year to enforce your rights. And then, you know, once that pig comes out the back, right, it’s gonna be 2025 and 26, the economy’s gonna get better, values are gonna go up, rates are gonna go down, and you’ve already got all of your judgments, and at that point, all of those nickels that you spent enforcing your rights are gonna come back dressed up like dimes.
Kevin Kim: I love it. Lots of great metaphors and stories. I’m looking forward to this pig. All right. The next person who has not been, who did not volunteer, but we all want to hear, is going to be Nema. Nema, tell us about who you are and also give us what your thoughts are going to be for 2024.
Nema Daghbandan: Thanks, Kevin. So, Nema Daghbandan here with Geraci LLP. I run Lightning Docs here at the firm, which is our automated online software product. Um, where it lets our clients write attorney-graded loan documents, um, uh, with a few clicks of the keyboard. Um, and in terms of my thoughts about 2024, I think it’s basically 2023, just on repeat. So, you know, more or less Groundhog Day, I don’t see a significant change in the rate environment. I don’t see a significant change in the supply environment. And so those are the things that keep dragging our economy as they are today, particularly for real estate. I see that continuing to next year. So, um, and I could be very wrong. And if I’m very wrong, then things could dramatically change. So we could have a, you know, if the rates did go down, it’s probably not for great reasons, probably because we’re in a massive recession. So, who knows what happens then? I doubt there’s a magical way to get a bunch of supply, so I think I’m going to be right on that one. And, um, my last prediction, and I think last, I don’t know, I wouldn’t know if I call it a prediction, but what should you do with this information? This amazing information I’m supplying to you free of charge today is, uh, you should hire people. I know that sounds silly, but this is an incredibly opportune time to hire very, very talented people. Because guess what? So many of them are out of a job, particularly in real estate right now. And so the talent pool is greater than I’ve ever seen it. Um, you have wonderfully talented legal and non-legal minds all across the country right now, looking for jobs that have great legal skills or great skills in real estate. And you will find them. And if you treat them well, they’ll stick around with you, even when things do get better. Uh, and you will get them up for the cheap, and you will get incredibly talented people that will build your organization for the next uptick in the market.
Kevin Kim: Good stuff. Thank you very much, Nema. All right. Next on my list, who’s going to give us their thoughts for next year. Let’s get with Anthony Geraci. Anthony, please let us know who you are and tell us what you think is coming our way for 2024.
Anthony Geraci: Well, I’m Anthony Geraci with Geraci LLP, and my thoughts for 2024 very similar to Nema’s. Although I do see us getting a correction pretty soon, if not the next six to nine months. And there’s a lot of data points you can see where our credit cards are at 15 year highs, all that money that everybody had, they’ve spent and is quickly going. They’re trying to put on credit cards. Pinching paintings where there can and a lack of, if you will, good saving habits, if you will, going to get us to, uh, a recession, uh, mortgages are high. You know, I think there’s a report I saw that came out just in the great state of California here to afford a median house. You need a salary of 222,000 a year. So to afford the current interest rates and the current payments, uh, pretty astronomical, and I don’t think that we’re alone here, take any state, it’s getting harder and harder to afford to buy a house. So, I see a recession coming. I see interest rates either stay the same, much like Nema, or you could even see them going down in a recession, but not by much; I honestly think the interest rates are here to stay until there’s enough pain to get us to double-digit unemployment. We’re still at a historic low of 4 percent unemployment right now. So when you start seeing those uptick, we’ll see some issues in the economy overall.
Kevin Kim: Thanks, Anthony. All right. Next on the list is the beard himself, Mr. Baranowski. Please let us know who you are and give us your thoughts for 2024.
Dennis Baranowski: I am Dennis Baranowski. I’m a partner here at Geraci. I work with the transactional team, as well as I write the lovely docs that you’re using on Lightning Docs. It’s kind of piggybacking off of what the three gentlemen before me mentioned. I really see a lot of 2023 continuing into 2024, including the current trend toward balance-sheet lending. And what that means is we’re going to see a lot more creative alternative strategies to making loans. That includes alternative capital strategies, multi-beneficiary loans to spread the risk or to raise capital that are necessary to make larger balance loans, loan hypothecations, which are basically note-on-note loan participations, which, for those of you who aren’t aware, it’s where the lender sells an interest in the loan, it’s really just an interest in the income stream, the investor is able to, to make money off the loan and it frees up income for you or, or capital for you so you can go out and make additional loans. We’re also going to see non-real estate collateral securing loans more often, including ownership pledges, blanket liens on business assets and borrower accounts of all kinds, deposit accounts, and retirement accounts. And then, finally, you’re going to see creative loan structures, shared appreciation loans, lockboxes with cash management controls on them, convertible debt, as well as combination debt and equity stacks. What all this really means is, for those of you who have been around and were present for the last time, we kind of saw conditions like this where it was a little more uncertain, and balance sheet lending ruled the roost back in 2010, it presents a great opportunity for those of you who are willing to get creative in the loans that you’re making. And then it’s just a matter of making sure that you’re doing it in the correct way and getting the proper advice as far as how you need to move forward with them.
Kevin Kim: All right. Thanks for that, Dennis.
Kevin Kim: And next up is Melissa. Please tell us your predictions for 2024.
Melissa Martorella: Awesome. Thank you, Kevin. Welcome everyone. My name is Melissa Martorella. I’m one of the partners here at Geraci, and I manage the banking and finance team along with Dennis. I help out a little bit on lightning docs and as well as some of the operations at our firm. I won’t harp on my first prediction too much because I think Dennis, Anthony, Nema, and Steve have already said it pretty well, but basically, I expect more of what we’ve seen, which is balance sheet lending, or multi-beneficiary loans, and kind of those old school kind of loan structures that I first saw when I started working back in the day. Another prediction that I have is, you know, I do think that defaults will rise, or continue on, you know, especially if we are heading into more of a recession, so I would, like, recommend to people now, I would say start underwriting your loans with that in mind. So, you know, those super risky high LTV loans might be a little bit dangerous if we do end up going into a recession; it might be harder to cover those costs. Also for borrowers, you know, we have, we do have higher-end interest rates right now, whether you know, you are a balance sheet lender, you do have a line of credit somewhere. So, all of those things combined could lead to factors where there’s not a lot of equity left in your property upon default. And you know, default timelines that can take a while. Either, you know, even in a state like California where you have non-judicial foreclosure options, it can still take quite a bit of time if borrowers are filing bankruptcies or taking other actions to stop them. So you need to be able to weather that time frame on making sure that you do have equity available through that default process. So I would say look into underwriting properly now. And then another thing that I would say is to take a step back, you know, if you are seeing deals out there that you’re really not interested in, take a moment and look inward. Nema has talked about hiring. I would say, you know, definitely look at that, you know, make sure you have the right people in the right seats work on training, that kind of thing. And then, look at your own policies and procedures your practices, and make sure your compliance is up to date. You know, get people trained up, that kind of thing. It’s a really good time to look in-house to make sure you’re doing everything properly so that when you are ready to get back out there, you have all of your ducks in a row.
Kevin Kim: All right, guys, thank you, Melissa. Next up, Jen. Please give us your predictions for 2024.
Jennifer Young: Thanks, Kevin. Hi, everybody. I’m Jennifer Young. I’m the newest partner here at Geraci, and I’m part of the corporate and securities team. We help our clients with fund formation and licensing. I think for next year, I think it’s very important that you shore up on your lending compliance. As Melissa said, a lot of companies are kind of taking it a little slower, and it’s a perfect opportunity to shore up compliance, make sure that you are licensed in the states that you need to be licensed in, take a step back, and really evaluate any new States that you’re going to be entering into, every state is different in what they require, and it also goes to the types of activities that you’re going to be conducting in that state. So, having a good understanding of all the licensing requirements, as well as other state requirements, when you’re going into the new. States like foreign registration if you have a fictitious business name, DBA. And then usury is always a very important topic and an area to understand because interest rates are governed state by state, and depending on the state or even sometimes the loan product or the borrower or the type of property secured loan, that rate will depend on that state. Having your disclosures, federal and state disclosures, have to be provided to borrowers at the application time or even at closing and, you know, sometimes in between, so making sure that you have all your disclosures in place and you are compliant, depending on that state is going to be very helpful. I think in general, you know, compliance is the key to a company’s long-term success. So putting some time into your lending compliance, um, and really evaluating how your company is going to be moving forward is going to be helpful.
Kevin Kim: And that leaves myself. So, first of all, I think that 2024 is not going to be exactly the same as 2023 in the sense that this was the first; 2023 was the first full year we felt this pain. We started feeling it in ‘22, but the first full year of pain was in 2023. But we weathered it, and we’re moving on. 2024 is going to be a continuation of that pain. Whether things will get better or not, it’s really a roll of the dice; no one really knows. And so, a continuation of pain is going to be a real challenge for everyone because that means we’ve got a full vintage of loans, a full year’s vintage of loans that will likely present a lot of problems. So, that’s going to be a very important point to think about internally. What I’m telling clients right now is the volatility that will come in 2024; it requires you to start thinking about making sure your back office is tight making sure policy procedures are built out. Do you have the necessary tools to manage crises and also manage an increased level of defaults and foreclosures? Many of our clients who call me are relatively new and started their business in 2020, 2021. They see a foreclosure. How are you going to manage that? Do you have the right procedures for that? But also, a lot of folks are not really thinking through the capital demands that are going to come in 2024. It’s going to be imperative, whenever a crisis comes, that you have your capital right. So, we talked about different types of capital structures, different types of lending, it’s going to require discretionary capital. Multi beneficiary loans are the first step in that toolkit, but as you advance beyond that level of lending, a debt fund Some type of balance sheet, a warehouse line of credit, something is going to be, need to be there so you can exercise that discretion to be creative in how you fund your loans because as the market shifts, we’re going to have to go back to the old ways of doing things creatively, but no institutional aggregator is going to recognize those types of transactions. Therefore, you’re going to need your own capital to fund those loans. And then lastly, risk management is going to be imperative next year. And risk management comes in two forms, in my opinion, for 2024. First, obviously, foreclosure borrower risk. You’re gonna have to deal with borrower risk; it’s gonna happen. You’re gonna have crappy borrowers, they’re gonna do really sketchy things. You’re gonna want to call Steve, you’re gonna want to call Melissa. But at the same time, it’s incumbent upon you to manage your business, not us. The second thing is going to be more capital-related. 2024 will be the first iteration of an attempted rated securitization in private lending. This will have downstream effects as it pertains to how we as operators manage risk, and you will be assessed on a whole new level of how you manage risk. So be prepared for a much deeper proctology exam as it pertains to being approved by an aggregator. It’s going to be a much more intense process in the longer term. That being said, I don’t think Doom is here for us. I don’t think the sky is falling. But I do think it’s going to be a really stressful time until things stabilize. And there’s no way of knowing. No one can tell you accurately whether things will get better or worse next year. We’re trying our best. But in all things being equal, we have a better insight into these things, but no one can know what’s going to happen. There’s global issues. There’s domestic issues. We’ve got financial issues. We’ve got political issues. We’ve got an election next year. A lot of things are going to happen. So it’s imperative for all of you guys listening to not only keep apprised of things at your local level but get involved as well. So, that’s why it’s important to tune into the AAPL webinars and get involved there as well. That’s my take for 2024. I do want to kind of sum up this episode. I want to ask you guys, don’t feel like you don’t have to answer, but one thing I want to kind of ask the group. We’ve had a lot of new market entries in the past year or two. You know, I deal with a lot of phone calls, a lot of brand-new guys coming in, you know, former real estate investors, who would have you. They’re going in, they’re stepping into, they’ve been in, but even more, I think, next year. What advice do you guys have for someone in that position? They’re small, they’re new, right? They’re local. Any advice for someone just getting their feet off the ground, getting started with their new private lending business for our audience? Anyone can go first.
Steven Ernest: I would suggest that they figure out what their discipline is, and adhere to it. Because probably 90 percent of the losses they’re going to have are going to stem from the rare occasions when they don’t stick to their discipline. So whatever it is, figure out what they’re going to do and do that and stick to it.
Kevin Kim: Be disciplined. What is your discipline? What is your business, right? Anyone else? Any good feedback for our audience?
Anthony Geraci: I probably built my career off, if you will, the small balance sheet lenders or the ones who are just starting out.
Anthony Geraci: And it reminds me of a time back in, if you will, 2007, 2008, when you had a flood of smaller local lenders. This is before multi-state lending became a thing and things were happening. And my best advice is If they get some time, I would join some associations like the American Association of Private Lenders; I would go to our conferences or any lending conference, and isn’t just to promote conferences, but this is a time to build a network for a variety of reasons. One, you’re going to go to learn, right? So they have courses, of course, at AAPL and a few others. But also now you’re going to have a network of things that you’re going to learn what you want to do. Or when that deal comes, you’re going to have somebody who can give it to. So when you’re small, you’re going to kind of focus kind of what Steve was saying, but also now build that network of where you can send deals to, and then continue to learn. This is not a space to just show up, and I’ll just make a loan. Good luck. Um, there are a lot of laws; obviously we’ve built entire careers off these laws. And so it’s a time for everybody to learn and grow, uh, both from sending deals out, but also finding out what they want to do and then doubling down within their niche. And growing that way.
Kevin Kim: Anyone else got any feedback for our new market entries in private lending?
Jennifer Young: I think that it’s going to what Nema brought up. I think it’s really important to surround yourself with people who know what they’re doing or hire people who are experienced and that could provide you the guidance that you’ll need. Hiring is always a little bit difficult, especially right now, but having the right people in place, I think, helping you build that foundation is going to be really important, especially starting out.
Dennis Baranowski: Yeah. And then I’ll jump in, too, and continue on Jen’s point. And it’s not just hiring the right people. It’s really getting all of your ducks in a row is really important right now. Take the time and take the investment and put it into your business. It’s going to pay back for you. If you do that now it’s much better, and it’s going to be less costly if you do it right now and set things up correctly than trying to unwind a bad deal or unwind a bad structure that you’ve created. So, be willing to invest in yourself and in your business. Hopefully you all believe enough in what you’re doing that you can do so, and that will help you build for a better, brighter future. And also, you know, learn your business and understand what, what’s available out there and be willing to, to be a little creative, you know, you can be creative and think outside of the box and if you understand your own limitations, and the business and how things work. You can also structure things in such a way that you can actually increase your protection by being creative and not actually put yourself at greater risk.
Kevin Kim: And that’s about all the time we have for this episode of Lender Lounge with yours truly, Kevin Kim. Thank you, everyone, for joining us today and giving us your thoughts for the end of 2023 and going into 2024. This is Kevin Kim signing off.
Kevin Kim: 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 geracilawfirm.com that’s 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 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.