Mortgage REITs in 2025

Kevin Kim: 

Hey everyone, I'm seeing everyone coming in here. We'll get started in a second while everyone gets into the webinar. So let's get started soon. A little housekeeping to start. We’re gonna be doing this webinar a little bit differently today, so we're not gonna have any slides. It's gonna be me presenting and discussing. Feel free to ask any question you want, but put it into the Q&A section so I can get to it in real time. This will also be recorded for you guys, so you guys wanna take a look later down the line. You can always access it later. Before we get started, I have a little bit of Geraci housekeeping and announcements to make. So, first things first, for our conference line. As you guys know, we have two conferences every year, and we're now offering bundle pricing if you'd like to attend both conferences, and that's gonna be available, right away.

And also Early Bird is already opened for our conference in May. We're swapping the conferences this year, so Captivate will now be in May. And so you'll be able to buy those tickets online for Early Bird, and those will be ending soon. Also reminder about an upcoming webinar that the firm's also putting on on bankruptcy and SB 1079 for our California lenders. Very important will be on December 11th, put on by our Esteemable Litigation team. So that's that. All right, so topic for today. We're gonna be talking about REITs going into 2025 mortgage REITs and why they're important and why they're no longer,  a relic of private lending. So let's get started. So the significance of REITs in private lending really kicked off in 2017. During the Trump administration, we saw the Tax Cut and Jobs Act get enacted, and that created what, that created Section 1099 A, which was a very big attractive tax deduction for pass through businesses.

Now, for your ordinary pass through business, this capped out based off of tax bracket. So for all of you, debt fund or would be debt fund managers out there, section 1099 A applies to you as a debt fund, but your investor may not be able to claim it if they're above a certain tax bracket. I believe the top tax bracket, however, 1099 A also authorized the same deduction for REIT dividends. So therefore, REITs became quite popular in private lending, and we've been doing them ever since. Now, what's important is that REITs are very complicated, right? REITs are structurally complicated. There are certain tax rules that come with them that may have to be dealt with. And so you can't just jump in and I say, oh, I'm a REIT now, right? And all of a sudden, just get all the benefits. So we're gonna go over a little bit of that today, but mostly also talk about where we're headed with this, right?

So first things first, I wanna talk about why we're doing this webinar today. First things first is the election just happened, right? As we know, the Republicans have won the house, the Senate, and the, and the White House. What does that mean for REITs? Well, as many of you guys have been following, the Trump tax bill was one of the parts of Trump's, I guess, campaign platform to make either make permanent. Now, whether he makes it permanent or not, we'll see. I don't believe that it's necessarily that easy to do that without offsets. However, it's pretty much a foregone conclusion that it will get extended. They'll probably do the same thing they did the first time, and they'll use budget reconciliation to pass through. Now, if it gets extended, that's a great thing for debt funds, because now for those of you who have not built your own debt fund already, you can think about adding the REIT and getting the benefits of being a REIT.

If you are already a debt fund with a REIT, well, now your benefits have extended for who knows how long. If the law gets extended, the likelihood is probably gonna be a five year extension, maybe even a seven year extension. Let's cross our fingers that it becomes permanent. I think if, if it does, it'd be a great thing for private lending and for investors that like this space. Let's kind of go into the benefits really quick. So I've done this webinar before, talking about the benefits, but we'll go over them for all the listeners in the audience. So the key benefit for mortgage REITs and private lending is that 20% pass through deduction to your taxable investors. Very attractive, right? It gets it down as much as possible. Ordinary income is the unfortunate result of these funds from a tax standpoint. So any deduction is quite beneficial.

On top of that, there are three ancillary benefits that are very meaningful, particularly for funds that are larger in size. The first benefit is REITs block, UBTI, unrelated business taxable income. So if you have leverage in your fund and you have non-taxable investors in your fund, a REIT will block that altogether. And this can become a very material issue for clients that are trying to raise capital from non-taxable organizations, such as endowments and charities, which look at fixed income as a very attractive option. It also eliminates or blocks the need for state withholding and state reporting, which can be a very big expense for the fund if it lends in multiple states, if it has in multiple states, be quite important for the sponsor to eliminate that obligation. Quite attractive. The last benefit is a lot less relevant, but still can be helpful, is that it blocks what's called effective connected income or active trader business treatment.

Unfortunately, these debt funds are considered to be active trader businesses because of the lending business that we're in. However, by adding a REIT to the calculus, you can eliminate the argument that it's an active trader business and get passive business treatment, and that'll help you raise money from overseas investors who cannot touch anything that has, active trader business treatment in the United States. So these are the benefits for it. Let's talk about kind of the concerns that we had, right? So going into 2024, we were very concerned because the Trump tax cuts were meant to sunset, especially 1099 A were meant to sunset at the end of 2025. And so we saw a big surge during kind of 2021, 2023, 2024. We didn't see as much activity because many folks were on the fence. Well, it it's gonna go away in a year. Why should I do it?

You know, I don't, and I'm not, I don't derive that much benefit from it, maybe a year or two at most. And so I, the trend, if you will, from a fund strategy standpoint, had kind of waned off, and everyone was waiting for the election because of what the election results went a certain way. The likelihood is that 1099 A  will get extended or made permanent, and I think it's a foregone conclusion that it'll get extended now that we know that Republicans have won the house, the Senate, and the White House. So that means we can, we can look forward to the continuance of 1099 A and and garner the benefits from it. So I think you'll all see a continuing continued trend of both, larger funds adding a REIT or converting to REIT status or new funds emerging with a REIT attached to it.

Now, let's go over kind of the, the eligibility criteria, right? So what, what funds should consider this? I have kind of two thoughts on this. First, I think that any fund that is primarily balance sheet strategy, not necessarily selling all of its paper at once, is a good fit for this, provided that they have enough investor diversity to meet what's called the five and 50 test. The, the closely held test, we'll go over that in a second, but also I believe that any new debt fund that's being formed should have what's called the, what I call the light switch, right? You should pre-install the strategy, as a subsidiary strategy underneath the fund, even if you don't, quote unquote, activate it as a reap. Because if you have the structure in place in advance, and you have the loans held in that subsidiary in advance of election, you can also get retroactive treatment for the fiscal year.

But also, you've saved a ton of money by adding it in advance as opposed to converting. It's much more expensive to convert your fund and add the REIT to it than it is to build it all out in advance, because it's just a few extra pieces of work. Now, beyond that, many people have this misconception that size of the fund vol, like the, the, the, you know, you have to be at $50 million or a hundred million dollars to add this as a strategy. It's not necessarily true. It actually, what matters most is can the fund, when it adds this and elects REIT status, can it meet the testing obligations of being a REIT? And there are a few of them that we're gonna go over today that are very important and some practical impacts of those tests on your business. That's what really matters, right?

And so I've been advocating for clients who wanna pursue this, that they should really build it in advance, and even if they're smaller, added as an option, so that when you're ready, you can turn it on. Now, there are some consequences to turning it on, and we'll go over that in a bit. Other things you might wanna consider in choosing this strategy for yourself as a sponsor that has a fund? Well, one of the things that you shouldn't do, you shouldn't be a REIT for, is if your business doesn't really meet the asset qualifications, in the REIT world, right? So one of the things is that if you sell all, all your loans to the secondary market, right? Your fund is really designed to be kind of a temp temporary, housing vehicle or a gestational fund that's designed to be funded, sell it, and all your volume is going to the secondary.

It's very challenging for a REIT to work with that, because once again, REITs need to be passive. And so actively selling loans, actively selling real estate will not work because those then the, the assets become what's called inventory, and we are treated as an active business. Now, the vast majority of lenders who set up a debt fund do not intend to sell all their paper to the secondaries. They intend to sell a portion. And in that circumstance, I believe the sub re strategy is quite useful because you can bifurcate the, the strategy between the fund, parent fund and the subsidiary REIT. I'll expand on that in a second. Another type of fund where this may not be ideal is that the entire fund strategy is pursuing loans that are not necessarily purely loans, right? A re a a mortgage reach should really be only receiving principal interest and, um, fees. One thing that's caused issues for REIT eligibility is what's called a shared depreciation mortgage. So these are more kind of blended hybrid strategies where you have a JV with a borrower alongside of the loan that you're making. And at the end of the transaction and sale the property, there's some kind of profit split. Now, granted, it's a completely fine loan to do outside of the context of a REIT, but in the world of REITs, it doesn't fit, right, it doesn't fit within the, the, the asset testing requirements.

Okay? So let's kind of get into all the bar, all the various testing obligations. What's for, for your REIT and also the sub REIT strategy. So first things first, testing obligations. So there's a lot of tests that REITs have to meet, but the most important ones are these four. The first test is the a hundred investor test. What this test says is that a REIT must have a minimum of a hundred or more investors by January 30th of the following tax year after it elects REIT status. So you may wonder, how do I elect REIT status? Well, you follow a REIT, the tax return as a REIT, right? And so if I, for example, were to elect REIT status today on November 20th, 2024, then I would have to have met that a hundred investor test no later than January 30th, 2025, assuming that we're running a calendar fiscal year, right?

So now this may seem burdensome at first because, oh, well, that means I have to have a lot of investors. Well, the reality is, is that there's a very large industry that's designed purely to help people meet this test. The IRS came out with rules that allows preferred equity to count here. And so the common strategy is to pursue what's called shareholder accommodator services to provide a hundred plus investors to sit in the REIT as preferred equity, and they'll charge a stated return. And it's, it's all kind of programmatically done on behalf of, of REITs ordinarily for funds of a certain size or a certain caliber, usually above 30 to 50 million. It's a relatively painless process. For smaller funds, it can be a little bit more stressful in the sense that they, they, the, the counterparty may ask for certain accommodations or escrow agreements or, holding of funds because they're concerned about kind of the size or the risk of the fund. We've noticed this in the past year, and I think that we'll continue for some time.

The other important test is the asset test, right? And so an a REIT must make sure that it has at least 75% of its assets held in real estate related assets. And that's actually a very broad statement. It can include cash and it can include treasuries. But in our world, I don't think it's much of an issue because our portfolios comprised of either loans secure by real estate, which complies or real estate itself, because we have REO. So I don't think we have much of an issue with that test almost. I've never run into a problem with that one. The nest test you have to meet is what's called a 90% distribution test, right? So a REIT must dividend at least 90% of its taxable income every year. Right? Now, this is kind of a misnomer because everyone thinks that's the minimum standard that is true is the testing requirement.

But ideally, a REIT actually wants to distribute a hundred percent of his taxable income because the way REITs work, REITs are taxed as C corps. And so we do not want to retain income, if at all possible, right? Because with tax, it'll be taxed the corporate tax rate, right? So we wanna distribute, actually a hundred percent. This is where the sub reed strategy becomes a very attractive proposition, because many debt funds do not actually distribute 90% of its taxable income. Or even if they did, the retention of income would be viewed at the corporate tax rate, which is why in the market, you do not see many debt funds actually convert themselves to become a REIT, right? Choose to be tax as a REIT itself. They prefer to use, and we definitely push this strategy is the subsidiary REIT strategy, because the subsidiary REIT will hold all the assets, it will dividend all of its income up to the parent fund, thereby meeting the testing requirement, and also the parent fund can then distribute it out via its waterfall because the parent fund is still a pass through, right?

And so that allows us to have a lot of flexibility and for existing funds, the sub REIT allows us to avoid disruption to the fund's strategy, a material amendment, you know, going out for a vote. All those things allows us to avoid all that, because now we're just setting up a subsidiary right? Now, this last test is probably the most important test because there's no real workaround for it, okay? The closely held test, it's called the five and 50 test, amongst practitioners, right? What this test says is that the REIT must not be owned by five or fewer individuals that own 50% or more of the REIT on a fully diluted basis. Once again, five or fewer individuals cannot own 50% or more of the REIT on a fully diluted basis. This is extra screwy because the IRS's definition of an individual is quite broad in this circumstance.

It's not just, usually it's husband and wife, it's not, right? So it's not just you and your spouse, it's also up and down the family tree. So brothers, so parents, grandparents, children, grandchildren, but also brother, sister. This is one of the very rare circumstances where we see the IRS include brother, sister in the definition. Ultimately, you have to add up the family accounts. So for those of you who are existing fund managers, thinking about this strategy, you wanna look at your existing pool of investors and say, and ask, okay, well, let's get it all down to a warm body. Get through all the layers of entities and trusts and whatever. Get to a warm body first. Let's add up the family accounts, and C, how much do the largest accounts hold? What percent? And usually what happens is we have one or two guys, or maybe one or two families that own a chunk.

So this is the interesting part about this test. This test does not kick in automatically, like the a hundred investor test. The IRS gives you time, it gives you cushion time. The way this test works is you have to meet this test every second half of the tax year after you've elected. So if I elected today, November 20th, 2024, I have to meet this test from JU from June of 2025 to December, 2025. So I have some time. If I were to elect REIT status on January, 2025, then I have until June of 2026 and onwards, right? For that fiscal year and every second half there, but thereafter to meet that test. Now, how do we solve this issue, right? What do we do at this issue? First things first, we always want to, when we're looking at an existing fund, we want to ask the client current status quo, where are we at?

Many clients who are been around for a long time don't have this issue, but for the newer funds, they will have this issue. Then the second question is asked, if we elected today, are you confident that you can meet this obligation in a year and a half, let's to say, right? And by the time the testing obligation kicks in, many fund managers are uncertain about that. And so what we'll do is we'll build it in advance and the client will basically monitor things. And when they're confident they have enough incoming capital and they bought enough, and they, and they choose a good date to do this, they'll elect REIT status going, and then they'll make sure they meet the tasks come the obligation time, which is usually, you know, I would say roughly prepare for it in about a at means around around April or May, so that you have enough time.

Now, this is a lot of work, and this is where third party, third party vendors can be immensely valuable. I have been advocating for fund managers to utilize third party fund administration for a very long time now, and that's because of multiple reasons. First, third party fund administration has come down to the middle market and has become quite competitive. Even the institutional grade options have become quite competitive in price. Many of them can offer testing services to help you, do the math. Your CPA firm should also be able to offer this service. If you're doing a REIT, you should also making, make sure that you engage a CPA firm that knows this stuff and can walk you through the testing obligations so you can really make sure that you're meeting all these, all these requirements come time, right? Usually what'll happen is come March-ish, the, um, CPA firm or the admin will be knocking on the client's door to remind 'em, Hey, we gotta make sure we, we, we look at, look at the cap table to make sure we don't have a problem.

Now, what if we don't meet this obligation? What if we violate this obligation? This is a big one, right? Because there's no solution for this, right? When it comes to third party vendors, like, you know, like the a hundred am investor test, or, you know, the sub-REIT strategy, we have to meet this test on our own, right? So you, the sponsor has to meet this on your own. Where this becomes an issue for most sponsors is, is they didn't monitor correctly or they overestimated their capital raise, and they, they're at the, they're at the 11th hour and they aren't gonna meet it, right? There are solutions that to, to, to solve this. One of the things that we always install in the documents is to prevent liquidity or force liquidity to meet the obligations. There are other outside the box ideas we can talk about offline, but there are solutions to this if you need to.

But best practice is to make sure that you can meet this obligation, contesting time. This pri is the primary one that really everyone should be concentrating on. 'cause everything else is kind of a foregone conclusion. Let's also talk about some of the things that don't work in the portfolio. I'm kind of hinted at this before, right? So the first thing we know that does not work in REITs is REITs should not be active trader businesses, right? They should never trigger what's called dealer status, as defined by the IRS and what does this mean, right? So, well, you shouldn't be acting in a way where your assets become inventory. So in the real estate context, you can't sell real estate too frequently or too quickly because that will trigger what's called dealer status. With loans you can't sell, you can't originate a loan with the intent for resale, right?

And also, you shouldn't be selling them in high volume. REITs are not really in, are not designed for high volume loan sales, right? And so these are two things that we wanna monitor when it comes to portfolio activity. Other things that you wanna watch out for are gonna be the collateral type, right? It's not a prohibition or dealer or active trade or business issue. Well, actually it is, but it's not really a, um, you know, don't do these loans issue. It's used to think about some certain things. So for those of you who do commercial real estate, there are certain asset classes that can trigger operating income, which is also bad for a REIT. So for example, senior housing, hospitality, and actually applies in residential as well, in the context of short term rentals. If you were to continue down that path, if you own the real estate, these types of assets aren't prohibited.

But if you were to own the real estate and operate the actual business activities that are being intended for the property, so for senior housing hospitality, you need to set up a layer between the operations and the ownership structure, because the font, the REIT cannot be in the business of operating a hotel, right? It cannot be in the business of operating a senior housing facility. Now, thankfully, most people in those industries have that layer already built. And so you should not have much trouble retaining that strategy, but I have seen REITs get in trouble for that. See, in the residential world, one thing that, and also in the commercial real estate world, particularly a multifamily, um, lease, I would say rental participation arrangements also don't really fit, in mortgage REITs. So loans that have either a, rental participation component or have that profit participation component are not going to fit in a REIT because for mortgages, a REIT should really be only retaining, principal interest in and, and, and fees.

Now, there are ways to make it work, but they're usually not palatable for most, fund sponsors. So we typically just tell clients, try to avoid those types of loans being held in the REIT. Now, this goes to something that we need to think about, right? So the sub re strategy, right? Every recall that I have, especially for existing fund fund sponsors, and we lay out the testing obligations, many of them say, well, why don't I just convert my fund into a REIT? I just do that, right? I don't recommend that strategy. And the reasoning is because once you elect REIT status, you really can't unring that bell, right? You can't go back to being a regular old fund, right? And then there's also the testing obligation for the 90% tax. We wanted to do that a hundred percent. So to meet that obligation, we may have to rejigger the structure, which will cause ma a large disruption to the fund's waterfall and fee arrangements.

And then also clients kind of comment on the, on the shareholder accommodator investors, oh, I can do that myself, right? Well, you can, right? But it, it's harder to manage two books than the manager manage one. So I, I tend to recommend the cyber strategy for many, many reasons for that reason. It also allows for what I call disposability. So let's say, for example, we were talking about this a lot, you know, kind of two, three years back with the sunset ahead of us, we were of the mine that we would need a disposability. Because if you wanted to go back to status quo, you, if you converted your fund into a REIT, you'd have to unwind your fund. But if you had a sub REIT, you could unwind the sub REIT and go back to status quo. And I think that's still very valuable today, right?

For whatever reason, you violate REIT rules or you don't, you don't meet compliance dissolution is a lot better, option than winding down your fund completely, right? So I think the cyber strategy is quite virtuous in that regard in the context of selling loans also and foreclosure properties. It also is quite attractive because you can also utilize the parent fund as a means to house assets that are, are gonna be earmarked for loan sale or whatever. It will lose the tax benefits from that income, but it also will not violate REIT status. So there's a give and take with it, but it's also better than blowing up your REIT status. One other interesting reason why Subres might be, um, beneficial for many lenders is the idea of retroactive treatment, right? And so, for example, we, we get this question a lot. Can I get it?

Retroactively, ordinarily the answer is no. Right? If you install the sub re it's usually forward looking. But there are certain circumstances where it's been proven to work, and that usually me, it usually exists when there's an existing subsidiary in place, right? So a lot of funds have a subsidiary underneath the fund to house assets for whatever reason. Whether it be borrow money from a bank or just to just to house assets. In that circumstance, if that entity or an entity layered in between it were to elect REIT status, you're actually able to get it for the entire fiscal year for as long as the entity existed, right? So if you've formed it in January of 2024, you'd be able to get it for the whole fiscal year. If you formed it in May of 2024, you would get it for the five, six months, you, it's existed, right?

But it, it does allow you to kind of go back in time, right? And that's also where sub breach strategy might be. Is it gonna be much more beneficial? 'cause it gives you that flexibility in the layers of entities. Beyond that, I just personally believe that the sub strategy is much more attractive because I don't have to mess with your fund documents at all, right? I can plan your fund however you like, and you don't have, and your and existing sponsor, we don't have to touch the fund's terms because we know the subsidiary REIT will meet all the testing requirements independent of the fund. So there's a lot of virtue to that. It it, and it also has become quite status quo. So many of the third party vendors are very used to the arrangement. Um, I want to kind of go back, talking about whether you should be considering this or not, right?

For those of you who currently have a debt fund and have not gone in this direction, um, because of whatever reason that you didn't know about it or you were waiting on the election, I think it's pretty fair to say that this, this bill or this extension will be part of the early stage of the Trump administration's agenda. It seems that they're moving very fast, so I would expect the budget reconciliation to happen relatively quickly. Um, and so I am not really concerned about the viability of 1099 A. Some sponsor are saying, Hey, you know what? We're just gonna, we're not gonna do it until we're, until they're cer like certainly have extended it. So I fair, fair point. And that's okay, right? And you can, you can get retroactive treatment if you set it up in advance, right? So there's that option, and I think that's one of the reasons why I was asked to do this webinar, because for a while it became a question of, well, if the Democrats win, it's gonna be killed, it's gonna sunset.

And you know, this is no longer that attractive of a strategy. Well, the election went a different way. And so I think that it's very attractive considering where the legislation is headed. Beyond that, I think it's also considered it's important to consider the other benefits. Many of my clients who elected reach status, who are, you know, I would say 50 million and up, many, many of them have lines of credit, you know, and, and non-taxable investors, early stage in 2021, they had made the decision to keep the REIT regardless of the election results, because of the fact that it blocks U-B-T-I - UBTI is a very sensitive issue, right? Many, many, large quasi institutional investors that are either endowments or charities or, or even some types of insurance companies, they cannot touch an investment that creates UBTI. So they may like your strategy, but they can't touch it because they will literally blow up their charter, right?

And so that has been very accretive to many, many fund sponsors in raising money. Beyond that, the tax, the, the, I guess the administrative headache of reducing your K-1 load, and withholding load because of the, the state withholding benefits, blocking benefits is also quite attractive. And those two points were enough for a lot of our clients to say, well, even if the election were to go a certain way, and, and even if 1099 A were to sunset, it's worth pursuing and worth maintaining because of these two options. And now if you look at the marketplace today, I would say the vast majority of funds over 50 million, definitely over a hundred million have done this already. Now, you may ask, well, what, when is it not appropriate? Right? What, when is it not appropriate for me to look at this? I kind of touched on a few items earlier, right? If you're doing shared appreciation mortgages and that's all you're doing, probably not an ideal fit if you're selling all your paper, right? Probably not an ideal fit, right? If you are, if you are a fund that's a little bit like very, very early stage, and you have maybe two investors, probably not ideal to elect, it's probably smart to have it, but not smart to elect right away, right? So your fund has to have a good runway to raise the money and have and meet that five and 50 test.

Um, there are other types of situations where it might not be ideal, um, particularly if, like, you know, if you're, if you're lending on, um, this, if you're doing distressed strategies and your strategy is to sell the real estate relatively quickly after foreclosure, that may not be ideal as well. And that in those circumstances, we have to do a tax analysis because it still might be ideal depending on the ultimate strategy of a lender. So in distress, it, it doesn't necessarily play out the be in the, in the best circumstances for being a Reid. Um, but even if you're on the real estate side, if you're happening to happening to be in the world of buying, what I would say, you know, um, performing properties or investing in properties, developing properties that can work, it's really best in the context of holding properties that are performing and pr producing rental income, but can also work in circumstances where you'll, you'll, you'll be a developer and you'll hold onto it for some time.

That will also work quite well and be, be quite accretive to your investors because of the tax savings in general. Right? On the real estate side, there's almost no tax load of the investors. Overall, you know, this is kind of the lay of the land going in 2025. Now, if you were at, if you were at the American Association of Private Lenders Conference this past month, you may have heard me also speaking about the longevity of the fund strategy, considering where the SEC, where the market is as a whole. I firmly believe that a balance sheet strategy is gonna become much, much more necessary as the secondary market really starts to define their box based off of what the securitizations are doing. And so that will inherently create this conforming non-conforming type of bucket of loans. And you as lenders and originators will want to make sure that you can meet those obligations to your borrowers.

And the only means to do so will be to balance sheet the loans and fund them directly. So a direct lending strategy will warrant this in the long term. I do not sense that we're headed into the world of kind of non qm, where we're all gonna be a hundred percent reliant on, I would say the secondary market or the institutional strategies. So, you know, if you're building a debt fund, if you're building a fund, then then, um, a reach strategy would be wise, considering the tax benefits and longevity that will come with those tax benefits.. If you're still on the fence about this, I would encourage you to give us a call, we can walk you through it. It's not overly complicated. We've done a ton of these webinars as well. You can read, you can watch those. We have a white paper on this, you can read that as well.

I think that it's gonna continue to be a, a very valuable, strategy for our lenders. So I think it'll be, um, long term, very useful. We haven't got any questions in the, from the audience, but you know, we're kind of at the end of my, I guess you can call it spiel, and presentation. So if anyone has any questions, we can open it up for that. You can put them into the question and answer section. You see it below in the bar. We got one question about, is this thing available for, recording? Yes, this will be recorded. You can access it later. I believe it'll be on YouTube, on our web, on our YouTube channel, so you can find it there.

Thomas has asked, what's the minimum amount of money to start a fund or a REIT? There is no minimum. I would say I have it, it, it depends on what your volume looks like more than anything else. So I always tell lenders, I always want to evaluate a lender's business first, right? If you're a hobbyist lender, when I say hobbyist, like you're funding loans with your own money and you're doing loans here and there, but it's not your actual business, right? You have a, you have a nine to five, and this is not your business, right? This is just a kind of a, you know, kinda a side hustle for you. This is not a, a fund is probably not a good idea for you, right? Your volumes have to have to justify the strategy of a fund. The REIT is just an add-on component, right?

If your volumes don't justify the need for more independent lending decisions, right? Not relying on the secondary market and you know you really need to, you're really le leaving money on the table, or it's too, the current mat method you're using is too inefficient, then a fund makes sense. There are kind of objectives that I like to see clients hit. So for example, if you are kinda on the west, west of Texas, I would like to see about a $5 million raise within the first 12 months of the fund's lifecycle. If you're the Midwest, that number goes lower because the loan sizes are smaller, right? And so probably around ideally two, three millionish in the first 12 months east coast, similar to the West coast, at a minimum, 5 million bucks in the first year raised is kind of where you want to be. But that formula has changed a lot too.

A lot of clients have blown that expectation outta the water, um, and done, you know, 30, 50 million in, in the first year. But ultimately you have to ask your question is, does this support my business needs as a private lender? Gwendolyn's asked, do we have the compliance management with possibly purchasing NPLS that are - you're asking the wrong person. I don't know anything about,  I guess federal lending compliance associated with purchasing npls. I'm a securities and corporate attorney, so, sorry, I can't answer that question. You may be able to get that answered from our transactions team. Um, but I don't believe that they work in the arena of hud. So what's the name? And Thomas asked another question. What's the name of the, of that third party service that assists? It's not one. There's, there's several of them, right?

And so we work with many of them and they're what we call them as shareholder accommodator, right? And there's plenty of them, and you don't have to worry about finding them. We will handle that part of the project come when, when, when the deadline comes due. So the way our projects work is we'll build the fund with the REIT prebuilt. If you chose to elect that fiscal year, we'll notify, we'll will, we'll notify regardless, come around September and we'll make sure that you get onboarded with the right vendor. Sometimes the first vendor may reject you. These days they've been a little bit more picky. And so we have to, we have a couple, a couple different options and we'll get you onboarded and all that. Um, there's one group we use in Atlanta and one that we use in Philadelphia, but they're both quite good.

Alright, well, I don't think we're getting any more questions today. For those of you who are interested in either forming a fund for your business or adding this REIT component, please feel free to reach out to me. My information will be provided after the webinar. But you can also reach us on our website, geracilawfirm.com and send us a message. And this will also be - this webinar will also be available for review on our website. Another question, does your firm assist with setting up the REIT? Yes, we do. And we will form the REIT. We'll form the fund, we'll help you with the compliance, we'll help you with the structuring. What is the minimum number of investors needed for the REIT? I would encourage you to watch the recording because that will be available pretty soon. And we went over that already today. Okay, well, I don't think we're getting any more questions today. Once again, you guys can find me on, on our website, geracilawfirm.com - You can also email me at k.Kim@geracillp.com. And, this webinar will be available for, for review on our website and also on our YouTube page. So please, feel free to listen to that. Any questions, don't hesitate to reach out. Happy to talk to you.