Private Lending Insights

Rocky Butani (00:00)
Welcome to Private Lending Insights. I'm your host, Rocky Batani. This episode is all about Northern California and more specifically, the San Francisco Bay Area. I interviewed Alexis and Mark Rouda from Security Financial Services. This is one of the oldest professional private lending companies in the San Francisco area. We've had a relationship with them since 2015. So let's get into it and learn more about security financial services.

Rocky Butani (00:29)
All right, gentlemen, thanks for joining us to talk about security financial services and private lending in Northern California.

Alexis Rouda (00:37)
Thanks, Rocky. Thanks for having us.

Marc R (00:39)
Yeah, Rocky, it's really appreciate you having us on this interview.

Rocky Butani (00:46)
Absolutely. So let's just jump right into it and talk about your lending guidelines, your loan, your lending program. So you guys lend in Northern California, mostly in the San Francisco Bay area. Tell us about the types of loans and some of the general guidelines. Sure. Yeah.

Alexis Rouda (01:03)
Sure, yeah. We primarily lend in Northern California, but we actually lend throughout the entire state now. And, you know, the deals for us are primarily bridge loans. We're helping investors acquire property, we're helping investors pull cash out of property. And, you know, in terms of the property type, we like to talk about looking at income property which spans the gamut from residential to commercial property types. So we'll lend on single family as long as it's a spec build and not an owner user consumer type property. And you know, obviously we're lending on you know condos and we also have a niche product. We lend on TIC properties that specific to San Francisco only which I can get back into again a little bit later. The bulk of our business tends to be mixed use property or two to four unit in the single family category. So sort of multi-unit rental property, income property that are owned by, we like to call them mom and pop plus investors. So these are borrowers that have, maybe it's not their first rodeo buying a property, but they're going out there and acquiring a portfolio, management portfolio.

And you know some investors right now have positioned themselves to be in a place where they're going to be able to jump back into the market. The multifamily space has been a little quiet for the last 12 to 18 months, but you know and some are still working through. So there's opportunities to help both of those types of investors, depending on the circumstance and LTV and cashflow and overall profile. We do also lend on warehouse and industrial property types. Mixed use is also something we come across a lot of and some retail. We don't do any office. We don't do any specialty type property. In terms of structure, again, classic bridge loan for us.

You know, in terms of structure, you know, classic bridge loan for us. So we're lending from six months to 36 months. We've done some 60 month terms and we've done some three months terms. So it is possible to find changes and options within that space. But typically our loans are 12 to 18 months. And we're helping again with this window of time before a property is either being completed and sold or refinanced conventionally and held in a portfolio. So that is the structure there.

We charge, in terms of starting rates, we're at this point on a six month deal, we're in the low eights. We'll typically charge a point to a point in an eighth. So that's kind of where our starting pricing begins. And then, you know, kind of graduates to a higher cost through, you know, a longer duration. So we do price to maturity. That's the way we look at it. You know, how we're doing our deals. And part of that is because we are a direct lender and we're portfolioing all of our loans. And I'll let Mark get into that in a minute, but that's why that pricing structure works that way. So 12 month deals typically high eights low nines with a point and half to a point and three quarter. And something as long as a three year deal, 36 month deal would be closer to 10%, maybe just north of that with at least a couple points to a point, excuse me. Yeah, at least two points to two and a quarter points. So that's kind of the range within the most common window of ask for us right now.

Rocky Butani (04:53)
And how about loan amounts? What's the minimum and maximum?

Alexis Rouda (05:18)
Yeah. right now. you know, I think we have about a hundred, 150,000 is really be asked in terms of the minimum. typically that's a cash out request to be honest, right? In California, there's not many purchase loans at that time. but we, know, we do consider those, you know, cash out seconds are on a case by case basis considered. So that's the minimum. And then we'll go up to about four, four and a half mil in terms of a total dollar size and that's on one single asset. So there is the potential for us to consider, you know, loan or a loan with a cross that might be slightly larger. So, you know, that those are those are kind of the loan size dynamics. We typically within the structure are asking for a minimum interest guarantee. We have been waiving that on six months or less term, but anything longer than six month term, we're typically going to ask between three and six months of minimum interest, which, know, again, is not charged as a percentage of the loan amount like a prepay, but rather, you know, again, as it sounds, a minimum amount of, you know, earned interest over a period of time that we're seeing on the loan when it's approved. Okay. And in terms of fees, we charge the usual doc processing underwriting fees. I think it starts at about a grand and goes up to about three grand, depending on the complexity of the deal, multiple LLCs, cross collateral, or other kind of outside legal factors. 1031 exchange, for example, might incur some costs, et cetera.

LTVs right, wanted to mention LTVs. That's always an important one. excuse me. We are lending up to 75%, believe it or not, on single-family property type. I would say more often than not, you know, our sweet spot tends to be 65 to 70, but we will consider up to 75 %

Rocky Butani (07:18)
Yes, definitely I was gonna ask you about that We are lending up to 75 % single-family property type I would say more often than not You know our sweet spot tends to be 65 to 70, but we will consider up to 75 %

Alexis Rouda (07:39)
LTV on SFR or one to four single families that could be a small multi unit property, example in San Francisco or any other area. We're only up to 70 % on commercial properties. So anything that's multi-family, mixed use, industrial, et cetera, that's gonna be up to 70 % max. And then we scale that back by 5 % respectively. So 70 % on.

Alexis Rouda (07:43)
single family, could be a small multi unit property, for example, in San Francisco or in the Bay Area. We're only up to 70 % on commercial properties. So anything that's multifamily, mixed use, industrial, et cetera, that's gonna be up to 70 % max. And then, you know, we scale that back by 5 % respectively. So 70 % on single family and 65 % on commercial property when the loan is a cash out.

So that's how we are looking at our LTVs. We're also starting to see more opportunities in acquisition and rehab again. Again, it had been a very quiet space in the last 12 to 18 months, but we are seeing investors come back and ask for money there. And typically we are lending up to 75 or 80 % of cost. That's how we're looking at those deals.

Alexis Rouda (08:42)
We'll structure, for example, on a multifamily property, a 70 % first as a purchase money acquisition bridge. And then we'll look at what the total rehab budget looks like. We'll add the purchase price and the rehab, and we'll lend up to 75 % or 80 % of that, deducting the first and kind of netting what the second in a rehab structure might look like. So that's a product that's still out there that we're offering as well. And so in that case with a multifamily rehab essentially the the borrower the investors putting in about 30 % of the total project costs right 30 % on the purchase and 30 % of the rehab Well, 30 % of the purchase, maybe 20 to 25 % total on cost. There are some semantics because we don't typically cover our own financing costs, certain closing costs, insurance, and taxes. So there are going to be some costs that are excluded there in terms of that calculation. But for the most part. If you're looking at a very simple formula, purchase price plus fixed cost plus eligible soft costs, we'll actually finance up to 75 % or 80 % of that. So on You know, on the whole, would say 25 % is a likely total down payment on a project in that scenario, but 30 % upfront on the purchase price. So you're right about that.

Rocky Butani (10:13)
Okay, great. And then on a purchase of anything that doesn't include a rehab or renovation, you mentioned that you can go up to 75%. That's if it's a residential investment property, right? So anything from one to four units. you can do up to 75%. So that's obviously just for the purchase and that's not for a refinance, right? Correct, yeah.

Alexis Rouda (10:35)
Correct. Yep. So just 75 on the purchase, we would limit to 70 on a refi. And, you know, I should kind of go down the path of we do have a discretionary underwriting model when we're looking at borrowers. And it's somewhere between kind of looking at the same variables as what a bank would look at, but then opening up that box and saying, you know, what are the factors related to the property and its upside as well. And we look at both of those variables. So we look at liquidity and net worth and income and credit, obviously, and track record. It's not just number of deals done on a single family property that would matter to us, but this kind of overall global picture. And that's how we underwrite and assess whether we're go maxLTV, what our pricing looks like. So it is important to us to be able to access the pricing that we are putting out, which we feel is competitive relative to our peers, that we're also working with someone who has a financially strong position. It's not their first time doing a deal, and there is some liquidity to support them, the payment plus overruns or whatever it is and or income to do that. So it's important to recognize that while we see ourselves as a cheaper cost within our peer group, we also look at some of the criteria a might, but keep a very discretionary underwriting model in place.

Rocky Butani (11:59)
And how about the valuation? Do you require an appraisal for all of the deals or do you do your own in-house valuation?

Alexis Rouda (12:17)
Yeah, so does depend on the deal size. Typically anything over a million is going to require an appraisal. Anything that's commercial is going to require an appraisal. When we have, you know, a quick close scenario, we do sometimes do our in-house underwriting and get comfortable and get to a closing, but we will budget, for example, to get an appraisal for the file. So. We've been able to execute very quickly without having appraisal delays while still having an expectation of getting an appraisal for our file.

But there have been some instances where that's not possible. We've used in a recent appraisal provided by another lender, for example, and that's always an option. But for the most part, we do look to obtain appraisals as part of our file.

And the other thing, Rocky and I don't mean to interrupt the other component that I think is important to remember in our structure is we are a recourse lender. So we do require personal guarantees. And the only exception to that is if we're at 50 % LTV or less. So we will obviously be flexible with borrowers if they're putting 50 % down or the cash equity position, excuse me, the non non cash equity position in their property is at 50 % or greater will be flexible in terms of a personal guarantee. for the most part, again, we are requiring personal guarantees in terms of our.

Rocky Butani (13:53)
And do you get a lot of requests for that for non recourse?

Alexis Rouda (13:57)
I don't feel like we do, to be honest. Most of the deal sizes and the deals we're looking at, they understand that kind of given the pricing that we're offering and the dynamics of the deal that a guarantee is not the biggest issue or wild card in terms of what we're looking at in the deal. But there are some borrowers who fear strongly one way or another and if they're able to get that at a similar price elsewhere, we understand.

Rocky Butani (14:30)
So since you mentioned the borrowers, why don't we get into that? What are your requirements for borrowers? What are you looking for? Do you have any minimum financial requirements for them? Tell us more about what you're looking for in your borrowers.

Alexis Rouda (14:44)
Yeah, it is. Discretionary, we're not looking for a set formula in terms of our borrower. You know, mean, we want our borrower to have a FICO that's better than what 620 or 640. We want them to have some liquidity after the down payment again to cover.

Marc R (15:03)
We don't really have a FICO cutoff, so to speak. We just want to make sure no one has major derogatories or bankruptcies or NODs.

Alexis Rouda (15:13)
Yeah, you know, I think for us track record matters as much or more so, excuse me, less so than, you know, their financial position today or in the moment in which they're applying for the loan. you know, showing that they have liquidity, showing that they have net worth and equity and property and that are not over leveraged and or you know, in some trouble that they're still working through in their portfolio, for example, on existing properties, that's gonna matter relative to how much leverage we can provide and how we price a deal. But there's no specific requirement there that we're looking at, you know, and it's a decision that Mark and I make as we review a deal and talk about, you know, pros and cons, mitigators and the rest.

Rocky Butani (16:06)
And then whenever you do a deal, are you going out and physically looking at the property and meeting the borrower in person?

Alexis Rouda (16:13)
Yes, whenever possible. So we're always looking at the property, whether, you know, we can't force anyone to come meet us, but we welcome the opportunity to meet the borrowers. That's always our preference to go eye to eye with individual investors and their teams and talk about what they expect out of the property and how they're going to go about getting to a position where they're going to, again, sell the asset or get a conventional loan. So about what they expect out of the property and how they're going to go about getting to position where they're going to, again, sell the asset or get from the conventional loan.

That is definitely part of our diligence and we do always put boots on the ground. We are always out there, or I, or whoever we're engaging to put, to get out there and see the property directly. So that is definitely part of our process.

Rocky Butani (16:43)
Nice.

Marc R (16:58)
I mean, are a couple of exceptions there, Rocky. If it's a relatively low LTV deal and maybe it's a really super rushed deal, we'll just ask the appraiser to go out and take some extra photos and send them to us. And we know our appraisers pretty well that are... you know third party that we have a number of appraisals appraisers who we work with in the bay area who you know specialize by geography and property type in general we can get pretty good sense if we don't have our own boots on the ground but yeah but Alexis is absolutely right i mean that was one of the the first things we learned when we joined the business was you you have to go out there and absolutely see the property to get a feel not only for the quirks of the property but the street and the neighborhood and the demographics.

Alexis Rouda (17:50)
But we're always focused on closing timelines and whatever the expectations the borrower has. So that's always our priority. And getting out there, making sure that we're making a decision quickly, that's the speed of execution is and the guarantee that we're going to fund that if you will. We pride ourselves exactly on making sure that we're there and committing to funding a deal and closing a deal, you know, when it needs to happen without delay. So that's important for us.

Rocky Butani (18:17)
Speaking of that, what's the typical closing time for most of your deals?

Alexis Rouda (18:32)
I would say anywhere between eight to twelve business days. know it's a, it's an odd window. mean, seven, seven to 12, something like that. Single family can happen very quickly. if we're getting a deal from a broker and they have a package and there's open title and it's recently been appraised by a bank, you know, we can close in three days. if it's a multifamily deal and it's in contract and we're hearing about it on the day that you know, the borrower buyer is gotten in contract. Typically that's going to be a 10 to 14 day close. And so we're meeting that timeline. so, you know, it's kind of this average of maybe call it's, you know, seven to 10 business days. but, know, we can basically meet whatever the expectation of the timeline is. when it's presented to us, you know, we'll know right away how we're quoting it and whether we can meet the expectation of that closing timeline. And that's always getting done when we're putting our letter of intent out and getting everyone to agree to terms. That's always been when we're putting our, you know, our letter of intent out and getting everyone through the times.

Marc R (19:40)
Yeah, know Rocky, it's interesting. I mean, I certainly don't want to, I guess, oversell this. know, most of our borrowers have a little more time to work with, but what we've seen in the last six, nine, 12 months is that a lot of loans have come to us where a borrower absolutely had to close and the bank they were working with just wasn't able to perform under the timeline. And so it's sort of a perfect world because we're given a full loan file, sometimes even with an appraisal that we can use. And we have a lot of flexibility there because obviously we're nowhere as stringent as a bank. And there's one deal that comes to mind that I think we closed in October where the file was presented to us and we literally, and escrow was already open, the prelim was totally clear. We had most of the underwriting done in a day and I think we closed in about three or four days.

Rocky Butani (20:40)
So tell us about your operation, you know, where you're located, how many people you have in the company, and a little bit about how things work at Security Financial Services.

Marc R (20:50)
Yeah, sure. Well, we're headquartered in San Francisco, in downtown San Francisco. I'm, Alexis is often in the office with the rest of our team. I occasionally go in, I'm working from home, as you guys probably can tell. We've been in San Francisco, we were actually founded in the 1940s by our grandfather. So we're actually third generation owned and operated.

And you know, there've been several iterations of the company. We've always been a finance company. We've always been a lending company, but we started off in the 1940s by offering consumer sort of what was considered big ticket financing. So cars, large appliances, you know, there were no captive financing companies when you went to a car dealership. So you'd have to go to a company like ours and get some retail financing. So we did that for a number of years. The 1980s we morphed into, it was actually the late 70s, take that back, late 70s and early 80s we were one of the pioneers in home equity lines of credit which back then the big banks were not doing and obviously there was a big market for that. We did that for about 10 years and then we And we stepped out of that effectively when the big banks caught on and decided to do HELOCs themselves. And these days, HELOCs are absolutely commonplace. Most people have a second position HELOC on their home, which segues into our private lending operation, which has been in place since probably in earnest since the early, late 80s, early 1980s.

Alexis, our father Byron, and I are co-principals, you know, I'm not going to rehash obviously the products that we offer, but the three of us approve each loan before it goes out. There's usually a lead, it's either Alexis, Byron, or myself. We have a small underwriting team. We have a small, I'm not going to call it. But finance and accounts payables team that's fantastic and we obviously couldn't do anything without them. And you know our underwriting to put it bluntly is our underwriting team is extremely lean and mean and obviously we you know we talked about this earlier but we can underwrite very quickly we can underwrite very efficiently.

I think we've been over this, but we only operate in Northern California. And by Northern California, we mean pretty much from, you know, I'd say maybe Morrow Bay and up. You know, we go all the way to the Sierras. We do a fair amount of volume in Sacramento. We do a fair amount of volume all the way up to, I would say, Eureka, but really 90 plus percent of the portfolio is concentrated in You know, what is it eight or nine contiguous Bay Area counties? Let's talk about maybe capital structure a little bit

Rocky Butani (23:58)
Yes, definitely. Because a lot of people want to know, okay, you're a direct lender. What exactly are you in terms of direct lending? Is that a fund?

Marc R (24:21)
Yeah, right. And what does that mean to brokers and borrowers for sure? So we're a direct lender, meaning that we are using our own funds to fund and acquire real estate loans. We're not a mortgage fund or a mortgage pool. We're not brokers. We're direct lenders. In fact, we have a CFL. And I think the state of California notified me not too long ago that were one of the oldest existing CFL holders in in the in the state and I have to verify this but I think our CFL is back from the original CFL was issued in the 1960s I think we had to have a reissued again in that late 90s or late late 80s or the late 90s early 90s but we are a direct lender to just to be short. I was going to say there's a lot of advantages to being a direct lender. We obviously don't have to market for funds to originate. It obviously helps tremendously when we're underwriting. All of our underwriting is in-house, so we can make our own decisions with our own funds very quickly.

Rocky Butani (25:16)
How about servicing? Are you keeping all of your loans on your books through the end of the term?

Marc R (25:42)
Yes, we're a portfolio lender, so we hold our loans to maturity. And we obviously fund all our loans directly. We occasionally acquire loans when that happens. Not only individual loans, but pools as well. And when that happens, we usually take over servicing. I think there's a couple examples where we don't. But the important thing I wanted to tell you about our capital structure is that we do have our own funds, but we are also very thinly leveraged.

We do have a sinning kind of line of credit that's been in place for I think about as long as I've been alive. I guess I'm aging myself a little bit. I'm over, I'm nearly 50, I guess I'll put it that way. And it's a relationship with a number of local banks and one national bank that we're very proud of. And it obviously allows us to provide loans if you have a city kind of like credit system in place for, I think, but that is nearly 50, I guess I put it that way. And it's a relationship with a number of local banks and one national bank at a very, I would say, affordable price point to our borrowers. So our cost of money is very reasonable. We're able to pass that on to the borrower. And as Alexis mentioned, our advantages are not only having access to a fairly reasonable cost of money, but we also know the Bay Area very well, and we've been doing lending for... very long. Byron obviously has been doing lending for almost 60 years now. our team has lot of experience with that.

Rocky Butani (27:20)
And you've always been one of the lowest priced lenders that I've known in California and obviously in the Bay Area. that's, you know, that's obviously because of your, you know, your cost of capital that you can keep your interest rates and your pricing overall down quite a bit. But have you ever been tempted to increase it and, and maybe be a little bit more on par with, with some of your competitors?

Marc R (27:50)
You know, I think the reason, I think there's a couple reasons, I'll just be honest with you, that people come back to us. I mean, I think that obviously price, you know, to be blunt is, you know, the reason that people like coming back to us. But I think the second reason people come back to us is because of the relationship. I haven't looked at this in a little while, but I think in 2023 or maybe it was a 2022, I think our volume was like 60, maybe even close to 70 % repeat borrowers. So folks are coming back to us because they also like working with us. They like the process. They trust us. We do try to market ourselves as a lender that is, we're obviously a private lender, but we're not in the classic hard money only space, our underwriting is different. in fact, we often say that we're somewhere between a hard money lender or a private lender and a bank.

So I think that inherent in that is that we're always looking to provide the best value. And I don't think it's something where we would change the recipe and where we would want to be more aggressive. I mean, I will say, and I think Alexis sort of touched on this earlier, that we're certainly not going to do a deal that's high risk and price it exorbitantly high. It's probably just not a good fit. We're very confident in our decisions and in our underwriting. And I guess to answer your question, we feel strongly that pricing is a very big selling point to the folks who we service.

Rocky Butani (29:40)
Great can you tell us about a deal that you've done recently that's noteworthy that you can give a summary of?

Marc R (29:49)
Yeah, sure. Alexis, you want to go first or do you want me to talk about it?

Alexis Rouda (29:54)
Yeah, I can. That's fine. I would say the one that comes to mind, we recently closed last month on a bridge loan, a quick close. It was about 4.4 mil on a 16 unit mixed use property in San Francisco. It was on Telegraph Hill. So was actually a great property. It was stabilized in good condition. you know, just the situation in terms of some of the pricing dynamics right now out there in the market, when rates dipped, and I'm talking about long-term rates, along with kind of the expectation of short-term rates dropping back into the end of September, there was a lot of investors that came back online and went back out to market and, you know, looked at property and got in contract and obviously wanted to lock in the low financing rates. But I think some of the banks and agency lenders actually got a little overwhelmed. And so they got backlogged. And that was an opportunity for us. Could be a scenario we see again. Depends. We'll see. But in those situations, investors come to us and look to have us provide a quick bridge. In this case, you know, the loan's probably only going to be out for, you know, two, three months on what is effectively a six month term.

But you know we priced that with a zero MIG so they don't have you know the investor borrower doesn't have to feel concerned about when they're paying us off because there's no penalty to do so. And you know I think we were about 65 percent on you know what was a purchase price in the seven seven and a half range I think is what it was. And you know, we got that deal approved in about five days and we closed in about 10 days. Now, you know, that deal did have an appraisal already because in that case it was an agency lender. And so the agency lender had obtained an appraisal and was, you know, effectively two months out from being able to close still.

But a closing deadline was looming. And so the borrower decided to move forward with the bridge loan. you know, that's definitely worked out. think maintaining the property, making sure the borrower isn't going to fall out of contract, but also provide something short term. think from a pricing standpoint, you know, again, we were in the low eights, very low eights on that and probably a point, you know, to get that borrower the money he needed and we were able to get that done for them. And I think that was a win on, you know, what is a good property, seeing, seeing success, successful outcome for the investor with long-term permanent debt, you know, coming in place pretty quickly for them. So, we're out there looking for that type of opportunity for investors if they need it. And I think it's kind of a good example of we've done a number of deals like that in the last 60 to 90 days where there's just an opportunity to fill that void.

Rocky Butani (33:05)
And so the borrower put in 35 % cash to the deal and and they already had the exit Already lined up. So so it seems like a pretty straightforward deal and and in situations like that Is it you know, if let's say the agency financing is gonna take two months

Alexis Rouda (33:15)
Yep, that's correct. Exactly.

Rocky Butani (33:26)
Is the bridge loan happening just because a seller is not willing to wait and they're willing to just sell the property to someone else?

Alexis Rouda (33:35)
Yeah, and I think the perception is, you know, certainly in that environment with rates, you know, at the time they were expecting rates to continue to go, I think even further, the seller felt that they, you know, I think the property had already been in contract, right? For probably 60 days. I can't remember exactly. So, you know, they just didn't want to, they felt, I'm sure I can put it back out to market and get a better, better price. Right. And again, that seems to be, plus you have year end expectations, right? Sellers wanna close deals. So these are the variables that make it so that when there's this time crunch and there's a good opportunity, it was a good price, the buyer had long-term financing at a good rate locked in, even though the closing time horizon was delayed, there's an opportunity for us to come in and help them out and make sure they're not gonna fall out of escrow because they aren't able to get the deal financed.

Rocky Butani (34:40)
Excellent. All right, Mark, you have a scenario to share with us?

Marc R (34:43)
Yeah, the deal I want to talk about I think has, you know, illustrates I think two unique sort of, you know, value points that we offer. The first is that In this case, the borrower was a repeat borrower, but he had options. He had a considerable amount of cash. He'd been speaking to another private lender who was willing to give him a higher LTV than what we were willing to offer him, but was very specific and told me, I want to work with you guys again and I want a local barrier based lender who...

can continue to work with me to finance effectively what he does is fix and flip. The second thing, the second value point I think that we're able to offer is that we're really obviously familiar with lending here in San Francisco in the Bay Area. And this is an apartment to TIC conversion project. So the property is a mixed use, two resi units above a corner store market on Knob Hill in San Francisco. Kind of closer to what's wrong with me, Columbus North Beach. Anyways. Again, repeat borrower, very savvy in terms of rehabbing and his specialty is finding opportunities, buildings that are apartment buildings and then remodeling or redoing one or not one, but usually 50 % or more of the units and reselling those units as TICs.

So usually on a property like this, a mixed use property will go up to 70%. But in this case, we were willing to make an exception, we a little bit higher on the purchase. Because we discovered that he was getting this property for an absolute steal. The appraisal we got was higher. I'm not gonna say how much higher, but... higher than we expected as is on the property but even more important the the top unit resi property alone. So we had, just to be clear, we had the property as a whole as an apartment building or as a mixed use building appraised as is, and then we also had each unit appraised as is as a TIC. So what we discovered is that the appraisal for the top unit alone as is was as much as the purchase price he was paying for the entire building.

So, you know, it was an absolute steal and we were very comfortable in buying this building. I realize these are unique circumstances. Not a lot of properties are going to pop up like this. But again, because of this, we were able to offer a higher LTV than we usually do. It was also a very short-term loan. Six months with very favorable pricing, again, a repeat borrower. The borrower believes that they should be able to redo and sell the top unit in the next four to six months and You know pay us off if not entirely then You know a good chunk of the loan What else is there that I can say about the about the property or that deal?

Rocky Butani (38:29)
And how did you structure it? Did you include any rehab funds or was this just a purchase bridge?

Marc R (38:36)
It was just a purchase bridge. He, like I said, he has enough liquidity to be able to finance the improvements himself. But we were open to that as well. And Alexis got into this a little bit, but generally we'll be able to provide a purchase money first, depending on the property type, usually between 70 and 75 % of the purchase price. And then we'll provide a rehab second, which closes simultaneous to the first. And what we're doing there is generally we're using a percentage of cost of loan to cost. In this case, you know, it's a little bit of an exception because the property was going to be worth so much more as three TICs.

I I think it was feasible for the property worth almost double what he paid for it as TICs, as renovated TICs. So we were pretty comfortable making a second rehab loan. I know that's sort of a convoluted answer, but I think the LTCs these days, I think, are about 70%. But he didn't need any rehab financing, so that didn't come up.

Alexis Rouda (39:53)
Mark, the other thing that's important to point out on that deal that is unique for the loans that we make on TIC, tenant in common properties in San Francisco. You can obviously do a tenant and common structure anywhere, but specifically in San Francisco, tenant in common units are sold to individuals for owner occupancy. And that's because of the fact that there are...

Marc R (40:04)
yeah, there were leases.

Alexis Rouda (40:19)
moratorium in place on condo conversions in the city of San Francisco. So while there's a lot of available inventory of older buildings that are multi-unit properties that could potentially have vacancy and be sold as condos, that's not allowed. So developers and investors use a tenement common structure. And there is conventional financing via certain local banks that provide consumer personal purpose loans to individuals who buy those units.

So we also have a program that's a niche product for us where we provide, you know, for example, Mark gave the debt on what is essentially a mixed use three unit building, within the structure of the deed of trust and the note, there are release clauses that allow fractional interest. So as a lender, when the first top unit on that property is sold, we will actually retain our position on a fractional interest of the two lower units. It may not be exactly two thirds, depending on how that agreement is set up. But the idea is similar to that of a condo as you're selling. But a lot of lenders, most lenders out there will not allow loan on a fractional interest of a property. And in San Francisco, we are comfortable with that. We understand how that structure and what the exit strategies for that look like. So that is a bit of a niche product and an opportunity.

We think both for investors as they're looking at property in the city again and acquiring property and thinking about TIC as an exit and obviously ourselves as lenders, you know, being familiar with it. So.

Rocky Butani (42:06)
And in that particular case that's there were two residential units and then one storefront on the ground floor So does that storefront on the ground floor also become a tenants in common unit that can be sold separately?

Marc R (42:17)
It does. That's a good question. It's really unique, but yeah, it becomes its own TIC unit. And just to add to Alexis's point, I mean, I think what's really important is about releases. What's really important is that we're not aware of any banks, regionally or even locally in San Francisco that are willing to have release clauses on their purchase money loan.

So what this means is there's a lot of folks who go into similar situations where they want to buy an apartment building. And sometimes they plan to sell, know, redo the entire apartment building and then resell it as an apartment building. But in some cases, further down the road, after doing some renovations and doing the math, they realize it makes more economic sense to sell each unit piecemeal as a TIC. But the problem is, is to is at the bank, if there's a first position apartment building loan, the bank needs to be paid off in full. So you have to sell your TIC.

TIC units enough TIC units simultaneously to clear the bank So in a sense you're handcuffed if you're that property owner by your loan It doesn't give you as much flexibility. You might have to concede on price or even timing You know, it's like gosh, you know, I know these TIC three these three TIC units are worth eight hundred thousand dollars a piece But you know to make this go through I have to sell them at a 10 % discount each so that that's something we've seen that we've happened that has happened

And so, know our product again allows people our our loan product that allows for releases allows people to go in and purchase the property as an apartment building and then sell each unit as a TIC and then we can release on any of those units as they're sold so it gives them a lot more flexibility. I know it's kind of a long answer but I wanted to

Rocky Butani (44:16)
No, that's great. It's good to get into this conversation about TIC since they're so unique to San Francisco, especially. But there is long term financing for the buyer of that individual unit, right? You're saying that there's just not there's no banks that will buy

Marc R (44:22)
Yeah. Yes.

Rocky Butani (44:34)
or they'll help with the acquisition of the whole building and then do partial releases. But if someone wanted to buy one single unit in that building, there are financing options for that long term.

Marc R (44:39)
Right. That's right. That's right. And TIC units are very, very attractive entry points for a lot of folks who live in San Francisco. And, you know, they're very close to in terms of asset class to condos, you know, in terms of size and obviously location. so, yes, there are several banks that provide consumer, long term consumer loans to those buyers who want to buy an individual TIC unit.

Rocky Butani (45:15)
And for those who don't know much about tenants in common, can you just give a brief overview of what the difference is between a condominium versus a tenants in common structure?

Marc R (45:25)
Yeah, so a condominium is a, you know, it's one physical unit that as an owner, you own 100 % off, 100 % of. You usually also have your own APN. That's a very important distinction. With tenants in common, you're actually entering into a written agreement, something called the TIC agreement, that's very common and it's written by, you know, usually one of three lawyers who are based here in San Francisco who specialize in this sort of thing. And you actually don't, you don't own the physical unit you operate or you live in, you own a percentage of the entire building. So if you have six units, roughly you own one sixth. It doesn't always come out to exactly one sixth. Some units have 17%, some units have 18%, others have 14. Sometimes there's also exclusive use of a parking space or there's exclusive use of a deck above. So again, the main difference is that with the TIC, you only own a percentage of the building with exclusive rights to the unit that you intend to occupy. that, does that sort of...

Rocky Butani (46:43)
Absolutely.

Alexis Rouda (46:43)
Yeah. And the main difference and impact relates in how those units can be financed. TIC financing is available, but again, by local lenders who portfolio that versus condos, which is obviously something that a big bank would offer and sell in the open market or in the secondary market. So the financing costs are different. The insurance is different. An insurance policy provided to a TIC is going to be a little bit more expensive and everyone is insured collectively jointly on the policy as opposed to having an individual condo policy and taxes. The government is only going to tax the property. It's still one APN and one building. So everyone has to cough up and come up with their share of the tax property tax amount and pay that together as opposed to, you know, have a separate tax notice and invoice. So you can imagine also by consequence minus the insurance, but on the loan side and the tax side, liens against the property end up collectively and jointly on the property. And that, you know, something that is spelled out in a TIC agreement and how it's handled, there are typically slightly greater reserves, you know, so there are pros and cons, but TICs are

The benefit of the TIC, particularly in San Francisco, is it's always an older product. They are talking about changing the law if they haven't already, but typically it's like pre-19, I think it's 70s buildings, are ineligible for condo conversion. And then post that date, might be under certain circumstances, eligible for condo. so it's typically older product. You're getting like Victorian, Edwardian era properties. You might get a two bedroom, bath that has, you know, 1200 square feet versus a two bedroom, bath in a new high rise condo building that might be like 800 square feet. So, and you know, you're going to get a backyard and in a HIPAA neighborhood. so, you know, there are pros and cons to the way the structure and, you know, kind of the quality of the unit and much better than the family members. what you're getting versus what the cost is and some of these other variables and liabilities, if you will.

Rocky Butani (49:06)
And why does the city of San Francisco mandate that buildings cannot be converted to condos and they must be TICs? Is that related to the age of the building or is that just across the board?

Alexis Rouda (49:27)
Yeah, I mean, the the history behind it is obviously from the standpoint of protecting housing inventory and rental apartment inventory. Right. So there were a lot of developers and investors that were taking over property and vacating tenants in mass and then selling the units as condos. And so I think that in an effort to maintain apartment stock, which is something that San Francisco, California, the US now in general, kind of desperately needs more of the city put new protections in place to prevent the conversion of units into condos. Ironically, the TIC process effectively stills allows the same process to occur with a slightly different structure. there have been, larger the building, the harder it is to consider a TIC investment because obviously if their existing individuals who are renting there, they have a lot of protections in the city San Francisco.

And that type of an investment play carries and bears a lot of risk and liability associated with it. We typically see the best TIC play is in a building like this, a three unit building where, and I think in this case, there's, well, I don't actually need to talk about this specific example, but in a building that might have three units where two are vacant, there's an excellent opportunity to buy, improve two units, sell them, and retain one. Right. You likely are able to pay off the debt by the sale of two units and own the remaining property to be cleared and have a cash flowing property as an investment. And you know, it's the high property. So you likely are able to pay off the debt by the sale of two units and own the remaining property free and clear and have a cash flowing property as an investment. And it's successful play.

Marc R (51:16)
Yeah, Alexis, this property is actually eligible to condo convert because it's two units above a commercial unit.

Alexis Rouda (51:26)
Right, for that particular specific one, it's only two residential units.

Marc R (51:28)
Yes, so here Rocky if you have if you have a duplex or you have two units mixed use you have two units above the mixed use You can fast track the condo conversion by fast track It still takes a while, but you can fast track it you can't do it the triplex or a larger building So from a property owners standpoint you know... You know, sure, if you have a duplex and you think that you can make renovations and get your condo conversion process, it can still take 18 months, hold onto it and sell it, you know, that's a great, that's a golden opportunity. But folks who are doing apartment to TIC conversions, owners of buildings, buyers of buildings, don't have to hop through San Francisco's condo conversion process. So this is this is a huge boon to a lot of folks because obviously if you sell each unit piecemeal You're gonna get a lot overall for for the building than you would if you just sold the whole entire building.

Rocky Butani (52:27)
Great. And are TICs really only a thing in San Francisco or do you see them in other cities in the Bay Area?

Marc R (52:34)
We've been approached on TIC properties, existing TIC properties or apartment to TIC conversion properties in some parts of LA like Santa Monica, mostly West LA. We don't know that market as well, but I think there is an opportunity there too. That's the only other market that I know of that really has a TIC imprint. I don't know of others. But I think TICs are kind of unique to California because real estate acquisition costs are so expensive. So TICs make sense, especially as an entry-level home.

Rocky Butani (53:05)
And let's talk about the Bay Area in general for 2024, maybe even going back to 2023. Are there any trends that you've seen overall with investment real estate?

Marc R (53:35)
Alexis, you want to talk about the past and maybe I'll talk about the future?

Alexis Rouda (53:41)
Yeah, mean, you know, again, a lot of our business in 22 to 23 had been focused on multifamily property. I mean, historically just over the last, you know, eight to 10 years. And that's a space that has seen a lot of upheaval and has been pretty heavily impacted. Rents in the Bay Area, you know, took obviously a big hit after COVID and have not really come back fully. Certain metrics, I think in San Francisco on one bedroom units have gotten closer to what they were in the past versus Oakland where the numbers are down 25, 30 % and have not come back very much at all. those particular markets, have just the demand for you know, obviously acquisition and trying to improve multifamily property has not been present.

We're starting to see that trend turn now. So I would say literally just with interest rates, short-term rates starting to drop and some expectation of longer term rates, I'd say steadying out because I don't think we have a high level expectation that the 10 year, which is how a lot of these takeout loans are based on, right, the 10 year treasury, I don't have an expectation that that's going to continue to drop. I think that's bottomed out and it may flatline for a while or maybe bump up a little, but investors are at least in a place where now they know what it's going to cost to get something done.

And I think that certain investors and sellers are at a place where they know they have to dispose of property at a certain price level to, you know, exchange into something new or move on or whatever it might be and kind of right the ship as opposed to continue to carry maybe the debt they got, know, in call it the 20, 22, 24 of some of those loans. during that period, we actually had been doing a lot more single family residential deals and small investment deals like we're talking about. The TIC loan had 2022 to 2024 vintage, right, of some of those loans. So during that period, we actually had been doing a lot more single family residential deals and, you know, small investment deals like we're talking about. A TIC loan had
continued upside, right? Where you're buying a two unit property, but you're selling two parts of it that are greater than the whole, or three parts that are greater than the whole, right? So this kind of ties back to that example. so, but single family rehab deals have continued to be successful.

And that's what we did a lot of in the last 12 to 18 months. And I think it was...a rough year across the board for many in real estate in the area. You know, again, going back to the time period where we had two banks fail and, you know, rates were high and, you know, there was just kind of a vacuum of kind of equity players that wanted to be in this space and have capital that was interested in giving them money to lend to invest in this space geographically. So I think ironically, Southern California and many other parts of the country saw a lot more transaction volume than we did. And that certainly impacted us. But I think we're definitely starting to see positive momentum. Marc, maybe I'll let you talk about that. Talk about the future since I've covered some of the past.

Marc R (57:23)
Yeah, so I mean, we're not we're not prognostic haters, but obviously we follow interest rates very closely. We follow real estate trends very quickly, closely local and national political trends, you know, all of which is to say that we believe that 2025 has the potential to be a very strong year for local Northern California real estate investment. Why do we believe this? There's a couple factors as things stand today interest rates are poised perhaps to go down a little bit more you know the fed may be there's a good chance the fed may decrease interest rates the fed rate this month not sure about anything after that it's entirely possible that the rate could stay the same maybe even goes up a touch but The bigger picture is that interest rates have normalized or stabilized. What we're hearing from our investor community is that they're more comfortable getting into the market. We've seen a lot more loan demand just in the last two months, 90 days. know, stabilized interest rates are definitely favorable. know, cap rates aren't getting slammed anymore, right?

Hopefully the lower interest rate environment continues. There's no certainty, but at the very least they've stabilized. The second thing is the political environment. We're not gonna make any political commentary here, but I think what we will say is that it is possible that this presidential regime could be very good for technology investment and AI investment in particular. It could be potentially a boom in tech and AI in the beginning of 2025. If that does happen, if more investment comes into a lot of the tech firms that are here in the Bay Area, obviously that'll trickle down to employees. and those employees, if some of those companies go public or they are acquired in a merger, any number of scenarios are going to be more flush with cash. Generally, will be more money, more liquidity in the Bay Area and Northern California. as we saw in sort of the last cycle in 2017, 18, 19, that led to and increased in property values. So it's entirely possible that there could be an organic appreciation in values in 2025. The other thing I want to mention is that there are still some areas that remain depressed. And Alexis may disagree with this, but in my personal opinion, feel like spots like Oakland, the pendulum has swung too far. There is too much pessimism in the market. know, folks, some folks, especially institutional investors, were and are still allergic to Oakland because of, you know, the, I think the political climate. You know, it's obviously very difficult to work with non-cooperative tenants in Oakland.

You know, and we've had, again, feedback from the client community, from the investor community, that there's not as much interest in Oakland. I do hope that changes. I'm hopeful it'll change in 2025 because as Alexis pointed out, property values in Oakland, multi-family property values in Oakland went down 25 to 30%. I don't see them going down further. It's possible, anything's possible, but it also could be a very good opportunity to get in now. You know, if the theory holds that more investment in tech comes, tech workers, secondary industries, those workers are all gonna be needing more housing and they're gonna be renting, they're gonna need rental space.

And, you know, Oakland and the East Bay is very close to a lot of these tech hubs. think the last thing, just a quick shout out to Daniel Lurie, I think in San Francisco. you know, there was, think, certainly a lot of well-intended efforts by the previous administration, but I think Daniel Uri, the new mayor of San Francisco, is very serious. increased real estate investment not only throughout San Francisco but especially in downtown. We'll see what happens but you know I guess what I'm trying to say is that we have a very pro-development, pro-real estate pragmatic mayor who wants to make things happen and he knows how important it is for you know real estate to be revived in San Francisco and it'll prop up the rest of the city's economy.

Rocky Butani (1:02:51)
Great. Thank you for that. One last question before we wrap up that I didn't ask earlier. What parts of the Bay Area or parts of Northern California do you typically lend and let's just go back the last year, year and a half. What are some of the cities that you have loans in?

Alexis Rouda (1:03:12)
Obviously San Francisco, Oakland, Berkeley, and most of the core East Bay are heavily covered all along the peninsula. We've been lending Belmont, Santa Clara, San Jose, Palo Alto, Mountain View, you name it. we've done, I think we did a deal, a couple deals in Monterey, Santa Cruz area. And then obviously in terms of up further north, we've done a number in Sonoma. So obviously Santa Rosa area, we did a deal in Sebastopol and we've gone, you know, looking east towards Sacramento and Tahoe. You know, don't want to forget obviously Concord, Martinez, Walnut Creek, Dublin, that whole zone as well, right?

So those have been cities that kind of pop out at me. We've also been doing some deals here and there in Southern California, right, where there are opportunities. Mark, I don't know if you want to talk about a couple of those deals and opportunities, where you've seen them or where you think there could be future opportunities as well.

Marc R (1:04:20)
Yep. Just gonna imagine. Yeah, mean, know, the the lending market in private lending market in Southern California is so different than Northern California and we won't get into the reasons, but I think that we've been presented with some opportunities that made a lot of sense because they were relatively low LTV deals and we were able to provide pricing that was significantly lower than what the bar was at. were.

So, know, it's something that we'd like to expand on actually, but I think we have to be selective just to be honest. You know, I think we're probably going to, you you know, be very selective about coastal communities, probably more residential areas, more residential property types, know, multifamily, SFR, maybe mixed use, primarily resi. I don't know how comfortable we'd be doing, know, straight commercial warehouse, industrial, specialty purpose, property types in Southern California, because we're still, you know, we're still learning. There's a little bit of a learning curve there for the Southern California LA markets.

Rocky Butani (1:05:49)
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