Private Lending Insights

[00:00:00] Welcome to Private Lending Insights. I'm your host, Rocky Bati. This episode is mainly for private lenders or private lending companies. I interviewed Kevin Kim, who is an expert in private mortgage fund formation, or also known as debt funds or mortgage REITs. Kevin Kim is an attorney with Gisi Law Firm based in Southern California.

[00:00:24] He has. Uh, formed a ton of mortgage funds over the years. He's an expert in this matter, and I think you learn a lot from this episode. We talked about what he's seeing, uh, in the market, what are some of the trends he's seeing with, uh, new fund formation, with the secondary market, with raising capital and uh, with, uh, and dealing with banks as well, uh, for additional leverage.

[00:00:49] So I hope you enjoy this episode. Let's get started. Alright, Kevin, thanks for joining me for Private Lending Insights. Tell me what's happening in your world. How's everything going, uh, and the, uh, the world of Debt Fund. Mortgage REIT formation. Right. Well first of all, thanks for having us. Uh, thanks for having me as well.

[00:01:09] This is weird being on someone else's podcast for once. Um, yeah, I mean, it's a very interesting time. 2024 was a very interesting year on that side of the house. Uh, it was, you know, the activity was pretty much pretty flat. Um. It wasn't greater in volume than 23. Re reformation was down significantly until the end of the year, and I think the reasoning was because of the uncertainty of the election, which would lead to an extension of the tax Cut and Jobs Act.

[00:01:41] I think. I think the, the, the assumption was if. You know, if the Republicans win, they're gonna extend the, the tax cuts, which would make REITs viable for another, who knows, 5, 7, 8 years. And so a lot of lenders were contemplating a fund and they were, um, kind of holding off on the reit. Right. Which is makes sense, right?

[00:02:02] It's not, the 20% pass through savings is vital to that, that that decision making process. Uh. Another phenomenon we saw last year and continuing to see this year is that, uh, the vast majority are folks that are either, um, capital constrained on the balance sheet because of their, uh, you know, their, their loan sales or are, are a primary driver of the business.

[00:02:26] They're finding themselves having a lot of loans that can't go to sale, right? And so, uh, the other fact, the other kind of common use case for the debt fund strategy. Were lenders that knew that they had no market for those loans. And so, you know, commercial bridge lenders, obviously, um, a lot of the more esoteric residential lenders, legacy hard money lenders, uh, and even the folks in, in certain markets that there really isn't a, uh, secondary market for those loans.

[00:02:55] Right. Um. We thought there would be an uptick in, uh, distressed debt strategies. We didn't see it. So, uh, we saw, we saw a good amount of opportunistic, but not a big uptick in, um, NPL or RPL strategies as a fund concept. One big thing that we did see and we continue to see is we. A continued, uh, I guess you can call it attraction to raise money overseas.

[00:03:20] So last year and the year before, we did more overseas work than we've done before and continues to be the case. And it makes sense. I mean, the, you know, overseas markets are much more beaten up than the US market and so there seems to be a lot of attraction, um, for non-US investors. Coming into the US and so that requires a little more complex thinking and structure.

[00:03:40] But, uh, yeah, I mean that's kind of the state of the market. It's things are relatively, you know, kind of flat. It looks like formations are up a little bit going into Q1. And I think what's interesting is that there's a lot of interest now, um, from high net worth investors and family offices now that the election is over.

[00:03:57] Right. And, and they're feeling a little more bullish, feeling a little more confident to deploy capital. So, and what is it exactly that, that they're concerned about? Is that the QBI deduction? I think that's one factor, but not the only factor. Because, you know, the, the 20% tax deduction only applies to your investment in the reit.

[00:04:14] Right. So it. It, it is one factor, I think, overall uncertainty, right? So, you know, are we getting into a more business friendly environment, uh, deregulation, um, you know, are we looking into the next four years? Are we looking at something that's gonna be meaningfully beneficial for an investor as opposed to ne you know, the mortgage market is gonna suffer.

[00:04:35] We're still seeing a lot of complaints like investors, you know, sponsors come back and say, our investors are complaining about this. How do you address it? Right? And that's usually like. Kind of equating the local market woes to the national market. And so like, this is a common thread we heard last year, especially for lenders in Texas, particularly in the kind of the Austin market.

[00:04:53] It's like, oh, Austin's having, its having its headwinds. Isn't the entire mortgage market like that, or entire real estate market like that. And the answer couldn't be further from the truth, right? So that's was the concern. But now it seems to be, the sentiment is a lot more bullish and, hey look, things are looking up, you know, there's more opportunity coming our way.

[00:05:12] Um, you know, tax laws are gonna be. More beneficial. I think the, the, the sentiment is that the current administration is much more business friendly, which is probably why investors are to kind of open their ears up a little more. But sponsors are also opening their ears up a little more, and so they're, they're.

[00:05:28] They're finally executing on, you know, um, things they've been talking about for, you know, 6, 8, 10, 12 months. You know, so interesting. Uh, you know, private lending in general does well. It performs well through, through all sorts of markets. There's always a need for it. So I'm correct. I'm a little surprised that, I guess I never thought about how, um, an investor in a fund.

[00:05:52] Would think that, oh, the market, uh, is, is, uh, you know, is uncertain, uh, or the mortgage market's uncertain. So they don't know that though, right? So that they, you're thinking about a relatively uneducated investor that thinks that this industry is correlated to the, the broader mortgage market. And so they kind of correlate, oh yeah, well, you know, conventional mortgage is not doing so well.

[00:06:12] You must not be doing well. But no, nothing could be further from the truth. It's, it's a. We're such a small market, you know, compared to the broader mortgage market. And so it's very hard for an investor to owe, you know, high net worth investor, family, office investor. Even the, you know, kind of like the more quasi institutional, you know, I will call like, you know, not insurance, but like endowments and charities, they don't, they don't really get it either.

[00:06:34] And so that's been the objection and, um. I think that that's getting better, right? Over time. But, you know, it's, it's still, still, we're still waiting to see kind of the fruits of this new administration. So, you know, it's not, we'll call it this rush to the door. Um, the, the rush to the door, the increase in volume, I think is more akin to, you have new market entries across the country 'cause it's an attractive market and you have a larger subset of loans.

[00:07:05] That don't fit the secondary market, um, or they don't qualify to work with the secondary market, and that's causing an increase in interest in balance sheet strategies. But for the lenders that don't look for the secondary market, they don't care about the secondary market. They just wanna balance sheet all of their loans.

[00:07:23] That's a pretty common fund. Strategy, right? Yeah. I mean, industrywide, if you look at the whole industry at its at, at its, you know, as, if you look at from a 30,000 foot view, it's a weird market, right? Because I think, I was talking to someone at SSA about this and he, to Sean over there, he's like saying the way that the concentration breaks down, if you look at all of the loans in, you can call it private lending.

[00:07:47] Um, and if you exclude DSCR because DSCR changes the calculus a little bit. The largest, like the largest market share is really like the largest hold of the market share. Total market share's only like 20%. 80% is held by the bottom 10. I'm bottom, bottom 80%. So the top 20% is held by the top 10 lenders, right?

[00:08:08] And then the 80% is held by the rest of the rest of the country. And if you look at the broad spectrum of guys who prefer to balance sheet, it's about half, right, half or more. Because I don't necessarily know if it's lack of knowledge about the secondary market, but. More common thread seems to be like lack of conformity, right?

[00:08:25] They, they don't want to conform to the secondary market book. They just don't, they, they, there's a lot of loans they want to do that just don't fit. I. And so whether it be bigger multi-family deals, like commercial stuff, or it's like, you know, they, the deal is just a little bit more complicated, you know, and, and doesn't fit the necessary buy box, you know, so that's, or they're not getting the service they want.

[00:08:48] That, that was, I've also heard that before. They're not getting the service they want. And so they say, you know what, I'm just gonna do it on my own, you know? Yeah. And it, it, it limits the creativity, uh, with, with their lending. Like, you know, they have a tight box. It's, you know, at, at, at some point I could see a fund manager saying, Hey, this is not enjoyable.

[00:09:05] I actually want to. Do this loan. 'cause I, I think it makes sense. I like it. Uh, I don't wanna be beholden to, uh, a secondary market that, that wouldn't see this loan the way I would see it. And, and even clients who do sell to secondary, they, they understand the reality of know Wall Street being fickle.

[00:09:25] Right. And that's okay. And so they understand that, hey, we need something to be able to put the loans that don't go over there. And because it's a borrower that's gonna come for both types of deals and they have the borrower comes first, the service comes first. The capital solutions are, are their problem, right?

[00:09:45] They owe their borrower a good experience if they're gonna keep 'em sticky. And so of course you're gonna have to have multiple product offerings that can fit the, fit the solutions. So yeah, even the bigger shops are con, are building bigger, you know? Balance sheets and the, you know, we talk about securitization all the time.

[00:10:02] The guys that are doing securitization are realizing, oh, maybe my balance sheet's not big enough. I'm not getting the better pricing that I want. Right. So they're focusing on building their balance sheets too. So, and is that the, the main reason why, uh, a lender that's primarily selling most of their loans to the secondary market, that they would, uh, that they would build a debt.

[00:10:23] I mean, they would form a debt fund and raise capital. Just because that's required by the, by the loan buyers? Or what is the main driver of that? I think it's a matter of a preference, right? So there's kind of some external factors that lead clients down the path of choosing a fund over any other strategy.

[00:10:41] The first thing is getting leverage, right? Banks tend to prefer to see a fund strategy because it's equity based investment. The investors that are coming, the LPs are coming in as LPs or members of an LLC, so they don't have to worry about, um. Inter accreditor issues with another lender, right? That's issue number one.

[00:11:00] Internal preferences is because the, the, you can do a lot more engineering with an e equity based waterfall than you can with a debt based investment. Um, and also, you know, it's equity, right? So you're not over levered if you're just all debt, right? So the conventional wisdom that you see in non-QM and conventional, uh, mortgage, where they just are debt laden, right?

[00:11:19] Because they're. Borrow, fund, sell, borrow, fund, sell. That's not what we're doing here. And so a lot of clients don't wanna be overlevered with, um, you know, either investor debt or, or subordinate debt plus senior financing. So, uh, uh, an equity based strategy is more attractive for that reason, but also because you can engineer returns in a much more creative manner, right?

[00:11:41] Um, and you can align interests, right? When, when you win, they win. When they win, you win kind of arrangement as opposed to a debt-based investment, which is. I owe you 9% or 8% or whatever interest payment that you're making, right? So, uh, there's that aspect to it. Um, and also like kind of market sentiment, right?

[00:11:59] If you look at kind of across the industry and a lot of the more independent, non-institutionally owned successful outfits, uh, a lot of them have a fund, right? They with that fund structure. So that's another good reason, you know, there's wisdom to the historical choices of other lenders, right? So, um. So, yeah, I mean, there's a lot of good reasons to do it.

[00:12:19] Other clients have said, you know, we wanna do it because, um, you know, we're used to doing it on the real estate side. You know, they come over from real estate, right? And they, and they do it. They've been syndicating and do real estate funds and REITs in the real estate world, they translate that over to here.

[00:12:35] So that's another reason why we see a lot of this happening. Um, but yeah, all good reasons though, you know. But let's say there's a lender that's primarily. Their model is, Hey, I wanna fund a loan. Mm-hmm. And I wanna sell to the secondary market. Mm-hmm. It seems like a lot of those lenders have formed a fund mm-hmm.

[00:12:53] In the past few years. Yeah. You know, more, uh, more of a trend starting from 2020. Yes. Post Covid. Yes. Um, but, but is, are they just building up, uh, uh, their own balance sheet just so they could have a bigger balance sheet to fund more loans that they're gonna sell? Yes, yes. That's one factor. So there's kind of what I would say, there's three factors.

[00:13:13] I, I just interviewed, uh, Bri at Cardinal. We had discussed this at, at length. There's a lot of shops like this, right? So, you know, shout out to bre. There's a lot of these, they have a couple different reasons. So reason number one is that, right, they, they want to be able to sell their loans, not table fund, not broker, not correspond, because there's more economics to it.

[00:13:32] But that means that they need a larger form of cash. To fund their loans to close and then sell them. So it's a combination of investor debt, investor equity, investor investments, plus lines of credit, as much balance sheet capital as they can get to temporarily fund and sell. Uh, that's issue number one.

[00:13:50] Issue number two is it's a great backup plan in 2020. Right. So we saw. The ups and downs during 2020 into 2021. And then in 20 22, 20 23, we saw a lot of downward, downward activity because of the rate hikes. So everyone who is a active seller of loans knows that Wall Street is fickle. Um, the aggregators are starting to understand that it's a, it's widely understood, and they should communicate that to their counterparties and get their expectations to understand a lot of drama around that in 2020.

[00:14:22] And so that up and down nature. The fund becomes a really great backup plan, right? So if I can't sell the paper, at least I can get some loans closed and I can hold them on my balance sheet and I don't jeopardize my borrower relationships. Right? That's a very, all of this centers around the borrower relationship.

[00:14:38] You don't wanna jeopardize that. Because if they can't get done with you, they'll go somewhere else. Right? So, um. I think the third reason has more to do with the whole idea of doing the loans that don't fit the box. And you know, at A A PL this past year in November, we call them non-conforming strategies.

[00:14:53] Right? Non-conforming loans. I. We're kind of borrowing from our friends in, in conventional mortgage, right? The idea is that you have the loans that go to the secondary, and those are good loans, right? And, and you can do those loans and you can fund them and sell 'em, make a nice profit, but there's gonna be loans that, that don't fit.

[00:15:08] They just don't. Right? Whether it be five plus multifamily, whether it be, you know, a more complicated construction deal or something that you're gonna have to get creative on the structuring, you know, and, and it all deals, deals down to the borrower relationship. Right. And how much you want to keep the borrower sticky.

[00:15:24] That also is a big driving factor. Uh, I want to be able to close loans that I wanna do, but that they won't let me do. And so that's also a driving factor. All of these are good reasons. If you think about what our industry is really kinda modeled after, it's, this has been the argument, this has been the debate since the secondary market was created.

[00:15:46] Are we modeled after? The residential mortgage market, the broader, you know, consumer, conventional mortgage market or non QM market, or are we modeled after the commercial real estate market on the bridge side? Right. And the construction side. I would argue that we are kind of taking the best of both worlds, right?

[00:16:06] And more actually looking like commercial because these loans actually act like commercial loans and the borrowers are more commercially oriented as opposed to a. An individual homeowner, right? That's just looking for the best deal possible and is buying one home every, maybe at best, three or five years.

[00:16:23] So it's different, right? So in that regard, we're seeing a lot of ideas being borrowed from the commercial real estate world. So. And with, uh, the lenders that do sell their loans to the secondary market, and they do have a fund to have a balance sheet, uh, to fund them. Are you seeing any new trends as far as the, the secondary market goes?

[00:16:45] Mm-hmm. Yeah. I mean, so ta middle of last year, we saw an increase in attention. The secondary market in multifamily, right? I mean, two rec, you know, they did their, their, their multifamily deal, uh, last year and a few other shops are now actively looking for multifamily, which is, which makes sense, right?

[00:17:03] There's a lot more activity and a lot more deals happening in that sector. Um, even in the smaller stuff. Right. The challenging issue is there, there's, there's a limit to how big these loans can get, right? And so, you know, you can only, they can only really work with a small kind of, you know, I could call micro multifamily deals.

[00:17:21] Um. But an advent of, you know, kind of commercial real estate loans coming back to our sector. 'cause you know, Rocky, you remember back in the day, like our guys would do commercial, our guys would do resi. It was kind of a mixed bag. Right? Um, we only saw kind of doubling down in resi, probably starting in 20 19, 20 18.

[00:17:38] So, um, but yeah, I mean that multifamily mixed use coming back as an asset strategy, um. I guess you can call them forward flow agreements. We're starting to see a lot more of those come to our sector, which is great. Um, you know, kind of rate lock situations are great for the counterparty, much more predictability.

[00:17:57] And we saw a significant increase in one of these we're calling JVs, right? So, uh, a an originator is partnering with their counterparty on the secondary market as a JV partner as opposed to just traditional MLPA type selling arrangement. For preferable terms. And so that's been giving a lot of these people horsepower on the origination front, but they're still finding themselves like, Hey, we still need a balance sheet.

[00:18:18] Right? So, but that's been a very, um, what I've seen, like give, it's been very, very accretive to the originator and they've really grown significantly thanks to that relationship. Um, I think we'll see more of that going into next year. Uh, I mean, going into 2025, um. And other folks bringing in that kind of strategy.

[00:18:38] 'cause it's, it's a good one. I think so. Interesting. But if they have a JV partner, then they. Typically don't need a debt fund. Right. Because, well, you still do because the JV partner is their capital source. Yeah. And I think that's the interesting dynamic we're finding is that you still do, because I always tell clients this, right?

[00:18:56] Your, your deal flow is gonna outpace your capital no matter what you do. Right? The more deals you do, the more attractive you become, the more attention that you get and your deal flow just outpaces your capital. Everyone is capital constrained, right? Very rarely do we hear people that are deal constrained.

[00:19:10] So in that respect, so well then the deals aren't always gonna fit. They never do, right? So you need an outlet for it. And if you're a hundred percent relying on the secondary, you're just not gonna find it. So what's your option? You wanna broker it to another lender. You, if you're a direct lender, that's the last thing you want to do, right?

[00:19:28] And this competitive marketplace, you want to keep that borrower sticky. So the, that fund is definitely still necessary component to those strategies. Nice. And you said, uh, the, uh, you're seeing some, uh, fund managers go outside the country to raise capital. Oh, yeah. It is. Is there anything that needs to be done in order to, to make that possible?

[00:19:48] I, I figure mm-hmm. If, if I'm a fund manager, I have a fund, I. Someone from outside the country says, Hey, I wanna invest in your fund. You know, what else is there to it? Yeah, I mean, it's this additional legal considerations. It's not really like securities law issues, relatively easy on the security side.

[00:20:04] Regulation s local local compliance. It's, it's, uh, primarily tax driven and also treasury regulations on. Anti-money laundering, um, and bank accuracy act stuff, right? So you want to make sure that your underwr, you increase your underwriting steps on your A-M-L K-Y-C requirements on your investors because there's a higher likelihood of that going on and, and lack of visibility.

[00:20:30] So that's issue number one that you have to address which is relatively easy today. 'cause there's so many vendors for that. And then secondarily is this tax, tax is a big issue because the US has very strict tax laws when it comes to, uh, offshore investment into real estate related strategies. There's an automatic withholding, there's this concept called active trader business treatment.

[00:20:50] There's, um, issues associated with kind of trade regulations if you, if you lend from overseas to your, to, to your company here. So it just basically requires some additional. Layering and structuring. So we're typically gonna get creative with the client and, you know, lower budget clients will do something simple like an a, a, a offshore loan.

[00:21:10] Um, more sophisticated clients will do, a typically a feeder fund overseas, um, usually in Grand Cayman or BVI. Um, but that's usually the layering that we're doing it. It's a much more complicated structure, but if the client can raise the money overseas, it's definitely worth it. So, so if there's a fund manager who's just getting a lot of interest from international investors, then you think it makes more sense for them to just start a separate fund and, uh, and Grant Cayman.

[00:21:37] I would call it an affiliate fund. What what we're doing is we're creating a fund overseas, and that's gonna feed into our US master. So it's kind of an affiliate feeder fund. But yeah, I mean, it, it all boils down to how much money you can raise, right? Is it, is the juice worth the squeeze and the economics for the, and all the costs.

[00:21:52] And I say, you know, usually most clients are willing to get outta bed for a commitment of over $30 million up. You know, and that's when it becomes worth it because it's, you know, kind of expensive to do. So. And which countries, uh, are, are you seeing that, that there's investor interest in our space? Yeah, for a long time, south America, I.

[00:22:14] Was a very, very common call. Right. Clients are saying, and Central America, right? So all Latin America was a relative, a lot of interest. I mean, Argentina was an obvious, you know, reason. But Mexico as well, uh, for, especially for our clients down in Florida. Um, lately we've been seeing some interest out of Western Europe that creates more complications because of the eu.

[00:22:36] Um. And then there's always gonna be, uh, interest coming out of kind of the, um, the Middle East as well. We see a lot of that, you know, um, Dubai is always in the conversation. I mean, the funny thing is Dubai is a country where the investors aren't from there. They happen to live there now. Right. That's a common thread.

[00:22:53] Uh, so, you know, enhance your money laundering due diligence. But yeah, I mean, Dubai, UAE in general, and then also, um, for a solid, you know, kind of. Six to eight months, we saw a lot of activity out of Israel, and then the war happens. That kind of killed it. Um, but we had, we had a good amount of activity come out of Israel for a long time in our industry.

[00:23:11] Um, but that's kind of quieted down. I think once the, you know, ceasefires in place and all the, everything's kind of resolved, we'll start seeing more activity coming out of Israel. Okay. And for international investors, uh, are you, from what you're seeing through your clients, are, are international investors still finding the returns attractive?

[00:23:30] Where if, let's say they're, uh, you know, the, the lender can get them a, a 10%, uh, return, for example, um, yeah. Annual, and then they have to pay taxes, uh, on, on that income. Um, is that, is that still attractive to a lot of international investors? Yeah, so that's why you have all these different structures in place, right?

[00:23:48] So the goal here is to mitigate the withholding, right? So we wanna eliminate the withholding the best way possible. So if we didn't have all the structure we talked about earlier, it'd be like a 30 or 37% withholding, right? That kills your returns. So this eliminates that. For the offshore investor. Now there's a question of whether they have to report taxes at home, if they've invested into a Grand Cayman LP or A BVI lp.

[00:24:12] That's a question for the investor, right? Does their, does their home country have, like in the United States we have global reporting, right? I can make money in Zimbabwe and I still have to report it to the US government, whether the. Whether the investor's country, home country has that or not, it's a question for the investor and it's their responsibility to report their own income taxes.

[00:24:31] And so obviously we acknowledge, we tell all investors, Hey, speak to your tax advisor and you know, do all that stuff. But we're not in the business of giving tax advice to those investors, right? So, but they are responsible for their own income. Um, and the country of Grand Cayman or the, the, the jurisdiction does not have taxes.

[00:24:49] That's why a lot will choose them. Right. And friendly regulations, whether, and then from there, the income that they receive, let's say's 10%. Well then, you know, if their local government has income tax on it, then. That's their prerogative. Right. So are there other jurisdictions or countries that are popular with, uh, fund managers starting an international fund besides as Grant Cayman?

[00:25:10] I mean, they, you know, Luxembourg was always, it's always one of those countries. Um, there was some talk about Romania for a while, but I don't believe, I, I've never done anything in Romania. Ireland's always been in the conversation. I prefer to stay outta the eu. Um. In Europe in general, it's, the cost is higher for the client.

[00:25:27] You know, it, it's, it's a relatively simple structure if you really compare it to, you know, institutional models and, and, and the, you know, it's just the fact that they're in Europe, the cost significantly more and they're also less, I guess you'd call it, um, easy to work with, right? So we prefer to go to Cayman or BBI for that reason.

[00:25:48] So this whole raising capital from international investors is mainly for. For funds that get to a certain size and, and they're, you know, they're doing like 50 million, a hundred million under management. Mm-hmm. But, um, but let's go down to, uh, you know, some of the smaller guys. Are you seeing a lot of new small, local, regional lenders that are starting funds?

[00:26:11] Uh, and, and let's say the past year or so? Yeah, I mean, that's been the driving force, right? So what ends up happening is the local lender is going to be typically doing something that's kind of. Quasi compliant, you know, raising money to their friends and family through like a note or a trust deed investment or something like that.

[00:26:28] And they're just gonna be getting sick of it. And they're gonna explore the balance sheet strategy, or they're gonna be get rec. They're gonna go shop a line of credit and the line of credit bank will tell them, no, no, no, no. We wanna see a debt fund. Right? So that's typically how they come down the pipe.

[00:26:44] What's interesting is that. What used to be, Hey, I'm just gonna lend in my one state is no longer the case. Right? Very, very rare. I mean, it's, I'd say 75 plus percent of new emerging managers already lend in a handful of states, if not more than a handful of states. And that's been really great to see. Um, so yeah, I mean that's, it's no longer kinda local lenders, it's more, everyone's now a regional lender.

[00:27:08] Very rarely are there local lenders. Um, and. That also warrants a more diverse capital strategy. It's very hard to do trustee investments in multiple states and multiple jurisdictions and across state lines. And, you know, notes get a little messy because you can't get a lot of credit, or it makes it harder to get a line of credit.

[00:27:28] So, you know, the fund becomes a very attractive option for them. So, and when lenders, uh, that are regional and they, uh, and, and they manage a fund, are you finding that. The other states that they lend in are, are adjoining states or do you find There's some fund managers that are regional, but mm-hmm. But the regions are, are spread across multiple, uh, parts of the country.

[00:27:51] There are clients that are kind of like bicoastal a little bit. They kind of look at, I. They look at these kind of large MSAs and they have weird allocations of state, like probably 20, 30% of people out there that you still see a more regional concentration, right? Most folks that we meet these days are lending kind of in the small states.

[00:28:10] Um, you see a lot of southeastern concentration. That's where the opportunity seems to be. Um, you know, Southwestern's always gonna be popular for us because we're physically here in California, right? And so we see a lot of that still. Um. Yeah, it's still, you know, very rarely are you gonna run into a lender does California, Arizona, Texas, and all of a sudden does a deal, is doing deals in mass, right?

[00:28:31] You still don't see that very often. So now rather than national guys are, right, of course. So, alright. And then how about, uh, you mentioned, uh, you know, lenders that try to get a, a line of credit, but mm-hmm. If, let's say there's a fund manager who wants to, to get a, a credit line for just to have, uh, you know, some additional leverage mm-hmm.

[00:28:50] Uh, is, is it? Getting easier these days to to, to deal with banks? Um, you know, or is that, is that still a challenge after, uh, all of what happened in, um, yeah, in the, in the past? It's hard. It's very relative, right? Because, you know, I wanna say, what is it? I, you know, I, strangely enough, I've been doing this long enough to be able to remember how relatively easy it was back about five to six years ago.

[00:29:18] And the qualifications were relatively straightforward. You fit the box and then the only thing to deal was kind of the length of the underwrite because they're a bank. Right. Um, and even the non-bank, you know, kind of, um, master repurchase facilities were relatively quick and, you know, straightforward to qualify for.

[00:29:35] That's changed dramatically since all these, you know, uh, economic woes we've had the past two years and the banking crisis we had a year ago. So. For sure. It's still not where it used to be, but comparatively it, there have been a lot more banks jumping into the space. So, you know, there's probably what used to be kind of three or four is probably now five or six, seven, maybe it's small banks, local banks, um, the same players are still actively involved, but because qualification is so hard.

[00:30:07] Uh, for the small guys, um, that's where the little banks really help. And then you have, and there's, you know, there's some new non-bank lenders doing this stuff too in two forms, right? The short term kind of. Fund the sale, and then you have the long-term stuff, right? And so, uh, and both are doing, you know, quite well, we are getting more of those term sheets from clients than anything else.

[00:30:31] Uh, they're obviously able to move faster because they don't have the bureaucracy a bank does, but they're still relatively selective in their criteria. Um, so yeah, I mean, it's still not, you know, it's nowhere near where it was four or five years ago, but it's getting better slowly, slowly. So. And do you ever see lenders that, that use a, a bank credit line as their, as their primary business model?

[00:30:57] Yeah. And then they eventually start a fund. And if so, why, why would they make that switch? So it very much depends on the sponsor, right? So there are some sponsors out there. We see a lot of this in the Midwest and in this and, and in the south where they have, they're former bankers and so they have access to very, very flexible lines of credit.

[00:31:18] Um. From their local and regional banks, and it's their relationship. They used to own a bank. They used to be on the board of a bank. You know, that kind of stuff, right? The challenging issue is the PG issue, right? So, you know. Some do have pgs, some don't, right? A Personal guarantee. The other issue is, are they using it in a way where, like, how are they filling the balance, right?

[00:31:40] Because the, no matter what, the bank's only gonna advance a certain amount, right? So how are they filling the gap? And so that's where this problems come in and what, what leads them down the path to considering a fund because. Every bank in the country is gonna say, Hey, we gotta tighten up leverage or tighten up policy.

[00:31:58] And so what, what the lender finds himself in is, and then, and their deal flow is outpacing their capital. And so that 25% down part that they gotta fund, right, they're running outta capital of their own money. Right. So that's when I. Raising capital becomes a, a conversation. Uh, so yeah, it's, we have that kind of call probably, I don't know, maybe once a month.

[00:32:20] You know, we, we see a lot of this also is, is the guys who transition from non-QM into our sector. I. Because they're relying on their non-QM kind of repo lines, but there's limits of concentration in what they can do in this, in this world, right? And so they come over asking for Intel about a line, they go talk out to a line provider in our sector and they realize, oh, wait a minute.

[00:32:43] It's very different than what I'm used to in non-QM And then they go ahead and they build a fund, right? So you know, that's another reason why a lot of clients kind of. Join the two together, so. Great. And, uh, before we wrap up, I wanted to get your thoughts on, or your prediction for 2025. You know, when I ask people for predictions, you know, we're almost at the end of February, so Yeah.

[00:33:03] Starting, starting in March. I'm not gonna be asking people for predictions 'cause it seems like it's a little too late, but, um, but since it's early enough, uh, outside of the funds and, you know, yeah. Um, the REITs, what's your take on the market and, uh, what do you see happening in 2025? I think there's gonna be a pretty significant uptick of institutional strategies, right?

[00:33:27] And we're already seeing it. Um, more and more deals will be closed in the next two quarters on the securitization side rated and unrated than last year, right? It's guarantee, I already know how many people are in line for 'em, right? So that's definitely happening. So you're gonna see an increase in. What I would call institutional qualified or qualifying kind of RTL, um, hit the market, which is derived from an increase in, in.

[00:34:01] In what you would call institutional capital, right? That's a definite will happen. Not, it's not a question of when it's gonna happen, it's gonna happen this year. Uh, I, but that also has a side effect, right? A lot of people don't, don't discuss this part, right? It has a massive side effect because you have a.

[00:34:20] Large subset of borrowers that don't fit that box. So I think, and also to, to qualify for those things and to get the best deal possible on those securitizations The originator also has to have a pretty hefty balance sheet. So I think that's gonna lead to more balance sheet conversations. I think we're gonna see some pretty, I think we might see some interesting, not, I don't have a high profile, but like, um, interesting, uh, acquisitions that might happen this year.

[00:34:43] Um, we haven't had that in a while. I think it's gonna happen this year. Uh, I think we'll see. Also some failures this year. Notable failures, not, not like, you know, this local shop shut down. I think we're gonna see the notable failures this year because when you have that much institutional capital in the sector, it is gonna be folks at chase and make bad decisions.

[00:35:02] Um, it kind of reminds me of what we saw in like, you know, I would say 19. Ish. Right? Even 2021. Lot of activity, a lot of energy. Right. Uh, I don't know if DSCR is going to, you know, fare as well as it did last year. I think the, the treasuries are not doing so hot right now, so it's gonna be kind of a bumpy ride.

[00:35:27] But, um, the nice part is infrastructure's been built, so now the industry's no longer kind of in a. Storming phase, it's now kind of stable, so that's a good sign. But I don't know if it's gonna be a big driver as compared to last year. Just 'cause the way the rates market, right. The, the treasuries are acting right now.

[00:35:45] Um, I. And then for, I would say a lot more new market entries, particularly from the conventional world, uh, that that trend will remain true. I think you had a lot of that happen last year and year before, and I think they can continue to find those folks make their way over here. There's no reason why they wouldn't, they just have to be able to figure it out.

[00:36:06] So, uh, hopefully the big shops don't because that's gonna make things look difficult for everybody. But, uh, we're definitely gonna see a lot of that happen too. With the, all the securitization activity that drives new capital into the space, that gives lenders the ability to fund more loans at some point.

[00:36:24] Do you think there just won't be as many loans to provide where, where there's not enough deals out there? Um, or, or, yeah. Or do you think there's, there's just an endless amount of real estate flipping activity or construction activity that could happen if there's, if there's just more capital in the space.

[00:36:43] That's a good point. Yeah. I mean we had this discussion on stage one time, and I think I also heard Eric talk about this, like, is there really an inventory issue? Right? Is there, do we actually have an inventory issue? On the flip side, I've also had the counter argument being made like, will all this influx of institutional capital lead to what I like to say, funny money times, right?

[00:37:04] Where people start chasing and you start seeing an increase in risk because there's less volume to be had. Right. So yeah, I mean, I think it's a very valid question. Uh, I don't know. It's, it's tough to see, but usually that's kind of what happens, right? You have a in sudden influx of capital and to, to become competitive.

[00:37:23] To be competitive, there's gonna have to be more flexible terms, which means increase in risk. So, and then if you talk to local originators, they actually comment on like, the securitization guys are actually taking way more risks than we are. And they make that argument all the time. And they're technically right.

[00:37:41] I mean, from an LTV standpoint, they kind of do. So yeah, they run fico. Yeah, they run credit, uh, appraisal, but they, the leverage ratios are significantly higher. And so, you know, there's that argument too. So I, I think that's the concern that I have. I don't know about the shortfall deal flow. Deal flow seems to be under pacing historical years, and it's just really the lack of the ability to sell the properties, um, which is.

[00:38:08] A product of the conventional market, right? I don't necessarily know if. We have a short, I don't know if we have a shortage of deals in our industry. I'm not, I'm not, I'm not as, that's a very data centric question. I'm not a data guy as much as I like to think I am so sure. Well, uh, it, it seems like this happens every once in a while where there is, uh, a ton of capital that comes into the space.

[00:38:30] And then, you know, I see it on in my business where lenders say, Hey, we can set, uh, we can go up to, uh, 90%. Of the purchase price and then a hundred percent of the rehab. And then when, when the capital pulls back, then they reduce it down to 85 80. Mm-hmm. Do you think that that just with all the securitization.

[00:38:50] Activity that, that they just loosen up on certain things and, and uh, and that's where the risk is. Yeah, I mean it's, the argument has been made, I tend to agree with it, that will it cause a race to the bottom? Kind of, you know, you saw the same phenomenon happen when the secondary market first came out in our industry back in 14, 16 ish.

[00:39:09] Like you saw suddenly an increase in risk and a, and decrease in rate. And so. Will that be another phenomenon that occurs? I mean, corollary, it's a, it's a corollary argument that can be made. Right. The, the question will be, you know, whether or not the bank, the investment banks that set these deals up will allow for it.

[00:39:29] Um, but that's where unrated deals tend to tend to find themselves. I have clients constantly complaining about, you know, x, y, z national shop, you know. Killing them on rate or killing them on leverage or both. And they can absorb the risk, right? They're, they're, they're big enough to absorb the risk. So that's their logic behind it.

[00:39:48] So, yeah, I mean, it's possible. I, I think it's, if the, if let's just say, if we see about, you know, maybe 1.5 to two X volume from last year to this year in accusation, I think it's a concern that we have to address. Yeah. And it seems like whenever there's, there's a a year like we had in 2024 where it seems like, oh, this is a record year for a ton of lenders.

[00:40:13] If the volume goes down a bit, then it's, it, you know, the sentiment is, oh, it's such a bad, you know, the times are so tough, we're not doing as much volume. But it, but the reality is it's still a ton of. Loans that they're funding. Um mm-hmm. Do you, do you think that 2024 was an anomaly? Or do you think that, um, do you think that's just, it's just, Hey, this is, this is how things are gonna be going?

[00:40:36] It's, it's, it can only go up from here. Well, I mean, considering you compare, it's hard. 'cause our industry, the, our industry volumes have always gone up, generally speaking. That's really because you have markets that haven't been really attacked in our sector and are now being attacked. Right? Like Michigan, Ohio, Minnesota.

[00:41:00] These are markets that are never been paid attention to that much, but they're, we're starting to see activity. Kansas, Nebraska, Iowa, like, you know, they're markets that are actually starting to pay attention to, right? So that adds to the national volume. So, yes, they had a record year last year. A lot of folks had record years last year, but, but I also want 'em to qualify that because how much of that was DSER?

[00:41:19] Because it's a different calculation, right? Um, that's the kind of questions you gotta ask. Well, what was your record? What was your actual like RTL volume compared to your rec, your RTL volume in previous record years? And you also want to ask yourself a key question, how much of that was repeat borrower, right.

[00:41:36] That's, that's where most lenders tend to win. And so I, I don't necessarily know that we're gonna start seeing a, a downtick in volume, um, considering that a lot of borrowers are still on the sidelines. You still hear about it all the time, right? They're, they'd rather go all cash or, you know, than deal with the financing aspect of things, or the deals aren't, aren't penciling, so they can't get the financing.

[00:42:00] So. I think there'll still be, there's still a lot of like desire and still a lot of aging inventory, so yeah, I don't know. I, I don't, and then also like these natural disasters that keep happening, right, with the fires and hurricanes and so that creates interesting demand. So it's, it's hard to tell whether we're gonna see a downtick in volume anytime soon.

[00:42:20] And for the lenders that do a lot of DSCR volume, do any of those lenders use their fund to fund A-D-S-C-R loan and then sell it to the secondary market? Or do you find that? Most originators are, are just using, uh, um, a wholesale program. Yeah. From a, a much larger lender that specializes in DSCR. You know, until last year, a hundred percent of people were doing this kind of like correspondent table funding brokerage arrangement, because it's just easier.

[00:42:47] And frankly they didn't wanna hold onto the paper. Starting last year, we started getting a lot of inquiries of like, I'd rather sell this stuff. Can I do that, Kevin? I'm like, yeah, there's people there that'll buy it. You know, have to find the right buyers for it. You know, most of the programs in our sector are wholesale relationship arrangements, but there are people that'll buy it, so you have to find them.

[00:43:06] So, um. Uh, but yeah, I mean, it's, it's started to become a conversation last year. It was very out outside the norm because I was, it was coming from sources that I didn't expect that would want to sell this stuff, like actually hold it and sell it. So, you know, it's now a pretty common conversation where they prefer to sell it.

[00:43:24] So is that just 'cause they'd get a, they'd earn more money on, on the deal, better economics of a seller than it is for brokerage and then there, there's an, there's an avenue for it. So now there's an accessible avenue for it seems so. But the, the risk is, is, I mean, you could, you kind of lose your shirt on, on, on, you know, holding these loans on your balance sheet if anything significant happens in the market, right?

[00:43:48] Correct. That's the risk you're taking. Right. So that's the beauty of the wholesale program is, you know, this is 30 year paper. Our lenders are not, are not usually our clients who are kind of traditional RTL lenders. They're not built to be a long-term, you know, paper holder. So yeah, they really should think about that, you know?

[00:44:06] The nice part is there seems to be a growing demand to buy it. Which is, which is good. So Nice. Alright, I think that that, uh, that's all I had on my list. Anything else you wanted to, wanted to add to that? No, I mean, I think it is important for our industry to really, you know, stay actively en engaged and.

[00:44:27] Uh, sharing information as well. So I, I encouraged everyone to come out and go out to events, right? And one of the biggest things that, one of the best ways to learn is go out to events, go to APLs conference, go to come to our conferences, you know, go to, go to your local trade shows. That's very, very important.

[00:44:43] Um, do that and you'll gain a lot more than you know, than you'll just do. You'll, you will just for sitting in your local market. So, yeah. And then, uh, your next event is, uh, May 1st in Las Vegas. So mm-hmm. Uh, looking forward to that one. Uh, all conferences are, are, are stellar, you know, one of my favorites to attend, so thank you.

[00:45:06] Yeah, Ruby works really hard on that. Ruby and Sierra now working on very, very hard on that. So we fid around this year, so we're doing Captivate in May and we're doing Innovate in August, so we're gonna Vegas in May now. So it should be a good time, much better weather. Um. And a much more, uh, interesting time to have a conversation about capital, so Agreed.

[00:45:27] Alright. Looking forward to seeing you there. Absolutely. Alright, thanks for your time. Absolutely. Thank you very much for having me. And that's a wrap for this episode. I'll put a link to Jussi law firms profile in the description. And I'll put a link to Kevin Kim's LinkedIn profile as well. Reach out to Kevin if you are a fund manager or if you're trying to start a debt fund, and I'm sure he can help you with whatever your needs are.

[00:45:52] Reach out to Jussi Law Firm for all your legal needs related to private mortgage lending. They are experts in not only securities, but in compliance licensing. Transactions, loan docs, litigation and more. I put a link to their profile in the description. When you reach out, please tell 'em that you heard about 'em on Lender Links podcast, private Lending Insights.

[00:46:16] Thank you for tuning in and listening all the way to the end.