[00:00:00] Speaker A: Welcome listeners. You're listening to the Deeds in the Desert where real estate investors tune in for the latest news.
[00:00:08] Speaker B: Welcome back to the next episode of Deeds in the Desert. From dirt to door. This is the second episode of our three part series. If you have questions about financing your dream project, please let us know. Let's get back to the show.
[00:00:20] Speaker C: We're gonna move on to the next segment, Financing the Dream.
Here it comes. Did you like that?
[00:00:27] Speaker B: That was a good one. I like it.
[00:00:29] Speaker C: We're trying. We're trying here. Thank you. Marketing department. Shout out to the marketing department. So at Ignite Funding, we specialize in trustee investments.
[00:00:36] Speaker B: Yes, ma' am.
[00:00:37] Speaker C: That offer projects in their earlier stages. Right. We're not the end financing. We're really helping the borrower get to the means of the end.
That's the goal and for them to make money. But from a developer's perspective, what are the advantages of private lending versus institutional lending during that period of time?
[00:01:02] Speaker B: It really breaks down to three criteria. Speed, ease and convenience.
That's it. That's the only reason they'll utilize us. We will never be cheaper than a bank. We will never be able to give them better terms. We'll never be able to give them longer durations. It'll always cost more. But it should be cheaper and easier and a lot quicker than it would otherwise be to go through a bank.
[00:01:27] Speaker C: Okay, I'm going to break down that sentence you just said.
[00:01:30] Speaker B: Okay.
[00:01:31] Speaker C: We're always going to be more expensive, but we're going to be cheaper.
What do you mean by that?
[00:01:37] Speaker B: Cheaper in the long run. Right. So when you take out a long term loan, you will usually have a process in place that has a defeasance on the back end, which basically means you have to guarantee certain amount of interest that will be paid and a certain return to the investors or the bank that has originated that loan. We don't have a defeat process.
[00:01:59] Speaker C: No prepayment penalties, period of time. Right. You lock in 30 years at a lower interest rate here. You lock in 12% at a shorter period of time.
[00:02:09] Speaker B: That's correct. And we don't have a prepayment penalty. That's right. So these ancillary costs that could build up on a bank standpoint are non existent on ours.
[00:02:18] Speaker C: Yeah.
[00:02:19] Speaker B: So from purely a cost perspective, when I say cheap, I don't necessarily mean dollars. I mean the brain damage that goes into it, the time and energy and secondary money that is necessary. You know, a bank may require additional valuations, additional environmental studies, additional impact studies that all need to be addressed into their name. We won't require it in our name, which saves some money from the borrower. So when I say cheap, it doesn't necessarily mean direct dollars, but it could mean sweat equity, could mean time that they have into the deal. What we want to do is enable them to spend their time and effort on what makes them money, which is not obtaining financing, but that is finding good properties, that is good properties and building good communities. That's where they're going to add value. And so we want to have them focus on that side of it and we will handle the other side.
[00:03:14] Speaker C: Okay, makes sense. Flexibility.
You talk about us being flexible. Does that mean we're adding risk? Does our flexibility add risk?
[00:03:23] Speaker B: Flexibility does not necessarily add risk. It could, but it doesn't necessarily. What I generally mean by that is banks have preordained buckets of money. They will have their investment committee say, we're going to lend 20% in multifamily here. It's got to go in this bucket and we're going to lend 20% in single family residential.
Now if I bring a borrower, brings me a deal, and in that project, half of it is multifamily and half of that is single family detached residential. They bring it to a bank. Bank says, which bucket do I go with?
This is a multi purpose loan. I can't do it. It's not going to fit my buckets.
[00:04:04] Speaker C: Or my bucket's full.
[00:04:05] Speaker B: Or my bucket's full. Yeah, it could be a great project. But my 20% threshold is I can't lend any more in there. If this was commercial, I could do it or industrial.
We don't have those arbitrary buckets, hamstring buckets associated with it. And so we can kind of look through that minutia to see the viability of that asset itself.
And so that's what I'm referring to when I say flexibility. We don't have arbitrary quotas that need to be met. We can look at the deal for what it is and see if it's a good project.
[00:04:40] Speaker C: Let's talk flexibility from product types. Are there some things that banks just absolutely won't lend on?
[00:04:47] Speaker B: Yes.
And it doesn't mean that all banks will do it. But certain banks or certain lending institutions, everybody has their specialty and what their kind of core competency is and what they're kind of going after.
[00:05:01] Speaker C: Which is understandable.
[00:05:01] Speaker B: Which is understandable. It's hard to understand all of it. All of it. Yeah. Right. You want to be a master of something and banks are Very good at that. And they will master one or two segments of that market.
But what hamstrings them is they can only do that bucket. And so when you have a downturn in that particular part of real estate, you're disproportionately affected. Cause 100% of your portfolio is in multifamily or whatever the case may be.
[00:05:26] Speaker C: That's why we see banks collapse.
[00:05:28] Speaker B: And that's part of the reason. Absolutely, is the diversification of risk. So to me, the flexibility, although could lead to higher liability and higher loan to values and higher, higher risk associated with the portfolio. Flexibility is not necessarily derived from that risk propagation. We aren't taking on risk by being flexible. In my mind, we're deviating from risk by being flexible.
[00:05:56] Speaker C: Yeah.
I remember when we had a whole portfolio in Las Vegas, remember that?
How'd that work out?
[00:06:03] Speaker B: Not too well.
[00:06:03] Speaker C: Not too well. Yeah, yeah. If you lived here in 08, you know, what happened to the Las Vegas Valley and market and all of those things. And I don't want to say it was a lesson learned, but it definitely taught us that deviating outside of a market into multiple markets with multiple asset classes is definitely the direction we wanted to take the company. That was without a doubt when we went back into lending in 2011. It definitely was front of mind, I think, for both of us in that regard. So the one trick pony doesn't work. So from a flexibility standpoint, you know, sometimes when I talk with investors, they say, well, what do you guys specialize in?
They want to know, is it apartments? Is it, what is it? Is it multifamily, Is it commercial, is it industrial? What do you specialize in? And I tell them whatever the demand is, that's what we specialize in.
[00:06:57] Speaker B: Yeah. Because it's the truth. The way I answer that question is we specialize in risk adjusted returns.
[00:07:03] Speaker C: Yeah.
[00:07:04] Speaker B: We adjust our risk level to make sure you get the same rate of return by de risking that property, that asset. And whether that means going into a market, out of a market, into an asset class, out of an asset class, so be it. We have the flexibility and we're dynamic enough to do just that without having a large board of directors that we've got to go, you know, convince of what they will consider an arbitrary change.
[00:07:30] Speaker C: All right, Speed. Speed was the third one you said, gosh, this could be this, this can go two different directions. Speed.
I think most people think, well, if you can do it faster, it's got to be added risk in that. How did you have time to call the municipalities, figure out the feasibility studies, research what's going on with the borrower, figure out what their track record was, calling the references, visiting the property, all of those things.
Yet you can still fund a loan in a matter of days. Like how is that possible?
[00:08:03] Speaker B: Two. Two reasons. One, we don't have nine to five employees that are just in here clocking hours. We have people that are inher currently in the deal, that are in the project and in this company that are looking for the benefit and wherewithal of the investments that we put out there. Secondly, we don't hand off different parts of the project. So when you go to a bank, you'll talk to your salesperson and then you'll have an underwriter part of that, you'll have a processor part of that, you'll have a closing assistant part of that. And there will usually be four to eight different people with different opinions throughout that process before it even goes to the investment committee. Yeah, because of that, it slows things down. You know, you're sending an email and waiting for somebody to respond back. It takes time. Here there are three people that are doing this day in and day out that don't hand off files, that work on all the files together on a daily basis. Because of that, it's cuts down the time that the middleman time is virtually eliminated. So although we will look at all the same information, we're able to get it done in a much shorter period of time because we don't have any downtime associated with that. We're not waiting for the next department, the bureaucracy, the red tape associated with it. We handle those files. The three individuals, soup to nuts, all the way through the whole life cycle of it. From the earth first submission of the loan request to the ultimate loan being paid off. Those same three individuals, we, the same people contacting you throughout the entire process.
[00:09:39] Speaker C: Yep. Makes a big difference.
[00:09:41] Speaker B: Huge difference.
That speed is important. Very important. So when you say that could lead to more risk, I don't think of it that way. All we're doing is getting rid of the fat, we're taking away the dead downtime, we're doing all the same information, observing all of the same things and requiring the same documents.
However, the three people that are underwriting it and reviewing it are working together all at the same time. So you don't have any downtime between departments or individuals?
[00:10:11] Speaker C: Absolutely. And then when it's time to fund it, I don't know if most people realize, I mean, we have a bullpen environment here and all the employees are invited. Whether you're selling the investment to an investor, whether you're a client service representative assisting in answering questions, whether you're chief compliance officer, the president of the company, the accounting clerk, everybody's invited to hear about these and learn about exactly what we do here.
And I think our track record of having a very low default rate investors have come to really trust everything that is pumped out of your department.
Not, not just investors, the employees.
And that's why I think just adding to it makes it faster for us to be able to get the product that you have underwritten to our market, our investors, out to our employees and fund it like it is like clockwork around here to get those types of things done, which is rare because sometimes you could have the most phenomenal underwriting department on the planet. But if you can't fund it, then Pat Vassar becomes very frustrated.
[00:11:25] Speaker B: Very true.
[00:11:25] Speaker C: So it really is, it's quite a machine here. It's quite a machine to get that, that flexibility that we're looking for, the speed that the borrower is looking for, the nimbleness of thinking like a developer that they're looking for. So yeah, financing the dream, like we're kind of a dream for some of these borrowers.
What do they typically face when they go from on a financing journey outside of institutional investing? What does it look like for them? What are they saying to you?
[00:11:55] Speaker B: What they're saying is there's more. Everybody out there is saying yes to their project. They're getting a lot of yeses and a lot of cheaper money. But when it comes time to actually transfer money, they get retraded, their rate goes up or the proceeds go down. Whatever the case may be, something changes to make our financing not look as quite as bad as it once did.
[00:12:19] Speaker C: Back to cheaper.
[00:12:20] Speaker B: Yeah, it really does because we don't retrade.
You know, if we could do it on a handshake, we would.
We do file our cross, cross our T's and dot our I's to make sure our files are complete. However, we want to work with reputable, trustworthy and honest individuals. While some may slip through the cracks and we're getting involved with less sophisticated or less knowledgeable or less credit worthy individuals, for the most part, we get the pick of the litter. Because of the, the ability of us to fund on time and doing so without being retrading, we've led to a strong reputation in town, and not just this town, but in this country. And so we kind of get our pick of the litter.
We turn down a heck of a lot more deals than we end up financing because we have the reputation. We do. And so we want to make sure we keep that. The speed, ease and convenience, what we offer has to be paramount when it.
[00:13:21] Speaker C: Comes to growing the business. I think we're always looking to expand upon our investors and we do marketing, we market to our investors to educate them about our product and what we do and our track record. But when it comes to borrowers, are we marketing for borrowers?
[00:13:39] Speaker B: Very little, if at all.
[00:13:41] Speaker C: Yeah. And I think that surprises people sometimes because they're like, how does that happen?
So when you talk about financing the dream and building that relationship, that relationship has legacy with it as well. You know, we have home builders that are purchased and individuals within their segment are filtered out. And then what does that create? Five more borrowers. Right. And so it just keeps happening. And we have been very fortunate to find really great borrowers that have been with us for a very long time. Right. Or through the legacy of a priority borrowing entity that they worked with. So we've been fortunate in that regard. I think that has helped us tremendously. They know what you expect, obviously, and so you could be a tough pill to swallow. So I know you scare them with me, but I mean, let's be honest. They got to get past you.
[00:14:38] Speaker B: Sure.
[00:14:38] Speaker C: In order to get to me. And rarely do I have to have those conversations. So that's. It's always a nice blessing in disguise. So financing the dream, you know, we just gotta. We gotta make sure we're nimble, we gotta make sure we're flexible, and we got to make sure that we perform.
[00:14:55] Speaker B: Absolutely. And kind of. To accentuate on that for one more fact here.
[00:14:59] Speaker C: Yeah.
[00:15:00] Speaker B: And that goes back to the cost. We talked about us being expensive, but also cheap at the same time. How does that work? Well, when we talk about retrading, you know, when a borrower gets retraded at the 11th hour, where they have no option to go find better financing, they have to close tomorrow, they accept a higher rate or less proceeds. Another factor there is brokers. We don't work with real estate brokers, we don't work with commercial loan brokers. We go direct to the source. So a bank that will have a broker bring them a deal, yes, they may be charging a cheaper rate, but now you have to pay that broker and you have to pay a loan servicer and you've got to pay all these other fees. When we go in there, there is no broker involved for the most part, very rarely is there. And the fees that we charge are all inclusive. There are no junk fees associated with it.
Our costs are all baked in because we need to advertise that to the investors as well. And because of that it looks more expensive. But when you break it down with all these different hands in the pot, it really adds up and becomes not necessarily, necessarily a no brainer to go with the cheaper financing.
[00:16:06] Speaker C: Yeah, yeah, our financing is all front facing that is for sure.
And you're correct. That's a great point. It does look more expensive. But man, when you break that all down, it's, it's really not right. It's really not right. Okay, this, this was kind of interesting. We talked about financing the dream and we are part of the debt. We are debt. We are their debt financing after us. Are they looking for more? Are they looking for other partners and how does that impact our debt financing?
[00:16:39] Speaker B: So they're always looking for debt. Always. And they're usually looking for equity as well.
Financing is usually the biggest capital, the biggest constraint on a project. The source and use of capital. Yeah, the source is hard. The use for them is pretty easy to come by. They're building things. It's a capital intensive process. As far as our debt financing, to your point, we are only debt. We aren't involved in the equity. We are only on the debt side things collateralized by a first deed of trust or mortgage on a particular property. Because of that there are needs for additional parts of the capital stack to finance projects. Whether that is additional debt on that property or additional equity on that property in addition to that when the property is completed. We are not a long term solution. It is not wise to rely on 12% interest money to hold on to a project long term. It usually will not cash flow and usually lead to not good things to happen in the long run. We are a short term solution for long term investors because of that. That short term nature of what we lend on gives us the ability to be nimble, to be dynamic and change where we're lending, how we're lending on a more routine and systematic basis. Because our payoffs happen sooner.
Because they happen sooner is because we are not the long term desk. We are not that financing. So although we may be paid off, that usually doesn't mean that project is done being owned by the borrower or being financed somehow through the borrower. Usually what a commercial borrower will do is get it refinanced into conduit debt or life insurance money or long term financing that they can usually put into a portfolio loan and hold onto for an extended period of time.
Other developers that are most commonly referred to as merchant builders will build and sell that asset. So they they realize a capital infusion and equity bump when they sell that property that they will reinvest into their next deal, usually with us.
[00:18:44] Speaker C: Yep, makes sense. You know, the other thing about financing the dream that we didn't touch on is we strive really hard to compete with banks too.
And in order to do that, we have to create financing structures that mirror them to some degree too.
So talk to me a little bit about the evolution of that since you've been here, which is like dinosaur years ago, of how we've evolved in making sure that we are capable of providing a traditional financing package, but yet flexible enough to be that person and resource that they go to for all different types of structures. How have we done that? How has that evolved and how has that impacted the borrower's perception of us and their ability to utilize our lending more than they would have otherwise?
[00:19:43] Speaker B: So our biggest, hands down, our biggest change has been our tranche land loans. The ability to bifurcate when we actually lend out the money and when we deploy money and therefore when the borrower starts paying interest on that money. Because of that, we are able to get into different type of loans more down the lifecycle of the project, more into the construction development phases as opposed to the land acquisition entitlement phase as we talked about earlier. That earlier phase is the more risky component. And because of the tranche loan we have enabled, it has enabled us to de risk our average portfolio by getting involved on late cycle projects where that's the horizontal development or the vertical construction of the asset.
So singular. You know, the one single point that has really changed things the most is really that development loan, the tranche loan aspect of it.
[00:20:39] Speaker C: Yep.
[00:20:40] Speaker B: That has enabled us to compete with banks more hand in hand and put a package together from our standpoint that can really compete against what a bank is offering. Not usually on the top line interest rate, but when all the fees are considered the speeds convenience of it, we can go to head to head with most banks.
[00:21:01] Speaker C: Interesting. What does that mean from a borrower's perspective on the lending side?
Does it help them allocate their funds more efficiently? Does it help them?
How does it help them? It helps them buy what is a tranche.
We have some people are listening that don't even know what a tranche is. Oh, so maybe drill down a little bit more as to how that works and the benefits. Maybe to the investors and the borrowers.
[00:21:29] Speaker B: Sure. So we call it a tranche loan.
It's most commonly referred to as draws, where you take out a construction loan you don't need. The developer doesn't need that money all at once. They need it throughout the construction cycle. They get money from a bank and start paying interest on that loan once the money hits their account.
And that is being reimbursing them from work that has already been completed on the site, therefore adding value to the property and keeping the investors in a good loan to value position. So it helps the borrower by paying less total interest because they are not paying on the full loan amount, but only on the drawn amount.
But it helps the investors by being involved in different phases of it. You can get late cycle where this is the last draw the project's done and they just need money to market it for sale. You know, that project's probably not going to last very long. Whereas if you're on the front end of it and you're doing the initial acquisition, you know you're going to be in a fairly long term project.
So that enables the investor to kind of curtail their duration risk associated with our investment.
From our standpoint, we're just the middleman. We are enabling the borrowers to pay less interest and giving the investors more flexibility with their hard earned capital.
[00:22:47] Speaker C: Yeah, it's super close. Talking to investor the other day and he was talking about how he was really laddering his payoffs. So he's been watching our tranches and as they come to the end, he ladders it out month by month for his payoffs. And I thought, gee, I didn't even know any of our investors were doing that. I had quite a conversation with him about it. And he's built a portfolio up. He's a couple million dollars with us and he's built a portfolio up at this stage where he's looking into the future saying every month there's going to be these pay downs happening.
It was very interesting and you really can do that. You follow what we do. Our investment overviews are very detailed as it pertains to where we're at in that project, which tranche we're on in that project. So. So pay close attention to that. We do have more information about the tranche program out there so that investors can understand a little bit more. But obviously for borrowers it's the most cost effective way.
We didn't used to have that. It used to be you've got a loan, you pay on it from the get go, you pay on the whole cycle and that was just too expensive and it really didn't make sense. If we're going to think like a developer, we have to act like a developer. We have to provide financing to coincide with that. So it was a, a, it was a good improvement for us to make and, and now it gives us the most flexibility possible for all durations.
[00:24:03] Speaker B: Absolutely.
[00:24:04] Speaker C: Construction and development and even acquisition. Because sometimes it blends over, right. Sometimes it's bleeding one into the other and if we can save the borrower, you know, origination fees by blending some of those loans, even better for them. So.
[00:24:19] Speaker B: Absolutely. And if you look at the risk profile, we talked about land acquisition being the riskiest deal well before tranche loans were put in place. That was a vast majority of our portfolio because it was a one time capital need, it didn't need to be drawn out in process. So it made sense for developers to use us in that sense for that.
But because we were able to do draws and because we were able to do construction loans, now we de levered our portfolio and changed the risk profile of our portfolio by getting to develop, development and ultimately construction. So that simple change has really dramatically changed how we run our business and ultimately how the investors see their, their interest income and risk levels.
[00:25:02] Speaker C: Totally agree with you. Totally agree with you. It's been a huge change. Thank you for watching this installment of Deeds in the Desert. Dirt to Door. We hope that we gave you the insight that you needed to finance your dreams. Don't forget to like like comment and subscribe so that you do not miss a single episode. We'll see you next time for the final episode of Deeds in the Desert. Dirt to Door.
[00:25:28] Speaker A: Thanks for joining us this week on Deeds in the Desert, where short term investments meet long term investors. We hope you enjoyed the content so much that you share it with all your friends. Who doesn't like learning about passive fixed income, right?
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