Trust Deed Investing


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Trust Deed Investing

  1. 1. Trust Deed Investing With Sterling Pacific Financial Security. Innovation. Growth. December 2008
  2. 2. Presentation Overview <ul><li>Brief Introduction to Trust Deed Investing </li></ul><ul><li>Why Trust Deed Investing is a Logical Choice for Many Investors </li></ul><ul><li>Choosing a Trust Deed Investment Company – Things to Consider </li></ul><ul><li>Sterling Pacific Financial and Your Clients </li></ul>
  3. 3. Trust Deed Investments in Brief <ul><li>A trust deed – or deed of trust – is an investment instrument similar to a mortgage </li></ul><ul><ul><li>Deed of trust secures a loan made to finance purchase or development of a subject property </li></ul></ul><ul><ul><li>Provides lender recourse in case of default </li></ul></ul><ul><ul><li>These private loans also known as “hard money” loans because they are secured by hard assets (collateral) </li></ul></ul>
  4. 4. Trust Deed Investment Process <ul><li>Investor (the lender) provides loan funding and receives monthly interest at a predictable, stable rate </li></ul><ul><li>Process is brokered and managed through a licensed company known as a TDIC </li></ul><ul><ul><li>Licensed lender can avoid state usury laws and charge market-driven interest rates </li></ul></ul>
  5. 5. Trust Deeds Versus Mortgage Loans <ul><li>Trust deeds typically generate much higher yields than ordinary mortgage loans </li></ul><ul><li>Investments can usually be made on a fractional basis – one investor needn’t fund the entire loan </li></ul><ul><li>Whether a trust deed or mortgage loan/lien is used depends on state law </li></ul><ul><li>Recourse for lender in default situations is usually more straightforward </li></ul>
  6. 6. Real Estate and Portfolio Diversification <ul><li>Public stocks have battered most portfolios – short term yields are needed to rebuild </li></ul><ul><li>Investors need diversification beyond stocks and bonds </li></ul><ul><li>Real estate has become more attractive for security, long-term growth – but is only really appropriate for some investors </li></ul>
  7. 7. Real Estate Investing Caveats <ul><li>Real estate offers real diversification, but requires more expertise to evaluate </li></ul><ul><li>Costs of errors can be devastating </li></ul><ul><ul><li>A single RE investment can account for most of a portfolio’s value (limiting diversification) </li></ul></ul><ul><ul><li>If leverage is used, risk increases substantially </li></ul></ul><ul><ul><li>If the investment is in a retirement account, tax laws add complexity </li></ul></ul>
  8. 8. Trust Deeds as a Lower Risk Proxy for Real Estate <ul><li>Trust deeds are tied to RE– benefits of collateralization with hard asset, but risk is shared with borrower </li></ul><ul><li>A good TDIC will be expert at choosing properties – investor can learn through them </li></ul><ul><li>Smaller minimum investments – easy to achieve true diversification across multiple projects </li></ul><ul><li>Unlike direct real estate investing, returns are immediate and stable </li></ul>
  9. 9. Credit Crunch = Opportunity <ul><li>Banks’ tighter credit standards mean very few borrowers qualify </li></ul><ul><li>TDICs can tap many attractive lending opportunities ineligible for bank loans </li></ul>
  10. 10. Adjusted Annual Returns at 35% Tax Rate <ul><li>At 3.5% inflation </li></ul><ul><li>At 5% inflation </li></ul>
  11. 11. Public Markets, 1998-2008
  12. 12. Trust Deeds Deliver Steady Returns, Beat Inflation
  13. 13. What Current Investors Like About Trust Deeds <ul><li>Relatively secure and predictable, but returns beat inflation significantly </li></ul><ul><li>Monthly growth rebuilds wealth </li></ul><ul><li>Simple, transparent </li></ul><ul><li>Like RE investing without the hassles of ownership … </li></ul><ul><li>… and with the benefits of relative liquidity </li></ul>
  14. 14. What Current Investors Like About Trust Deeds <ul><li>They can diversify across multiple RE projects with relatively small investments – without leverage </li></ul><ul><li>They can diversify into real estate without acquiring that expertise – or learning the hard way </li></ul>
  15. 15. Unfortunately, These Benefits Haven’t Been Universally Available <ul><li>Private money real estate loan opportunities have been “under the radar,” not accessible to all investors </li></ul><ul><li>Sterling Pacific and its peers aim to expand access to quality trust deed investments </li></ul>
  16. 16. Risks of Trust Deed Investing <ul><li>Secured by collateral, trust deeds are relatively low risk – but not risk-free </li></ul><ul><ul><li>Borrower default </li></ul></ul><ul><ul><li>Property value decline or disparity with market </li></ul></ul><ul><ul><li>Real estate risks: tax and regulatory changes, neighborhood changes, interest rates, changing economic conditions </li></ul></ul><ul><li>Choosing the right firm can minimize these risks </li></ul>
  17. 17. Choosing the Right TDIC <ul><li>Still largely unregulated – reputation and track record matter most </li></ul><ul><ul><li>Retained investors, repeat borrowers </li></ul></ul><ul><li>Highest return not the only consideration </li></ul><ul><li>Market expertise, staffing, infrastructure </li></ul><ul><ul><li>Local and general RE knowledge essential to identifying best investments </li></ul></ul><ul><ul><li>Recourse only protective if TDIC can effectively prevent/manage workouts and foreclosures! </li></ul></ul>
  18. 18. Choosing the Right TDIC <ul><li>Lending standards – LTV, etc </li></ul><ul><li>Investor qualification </li></ul><ul><li>Diversity of investment options </li></ul><ul><li>Capitalization – for fast action on prime deals, more options on refinance </li></ul><ul><li>Are the principals invested? </li></ul>
  19. 19. Sterling Pacific Financial – About Our Firm <ul><li>Ten+ years as a TDIC </li></ul><ul><li>Dedicated investment committee with more than 40 years of real estate and lending experience </li></ul><ul><li>We focus on mid-risk, quality investments </li></ul><ul><li>We focus on markets we know well (primarily CA) </li></ul>
  20. 20. Sterling Pacific Financial – About Our Firm <ul><li>Well-capitalized – so we can move fast </li></ul><ul><li>All principals invest – our goals are aligned with investors </li></ul><ul><li>We have a robust infrastructure – not a mom and pop </li></ul><ul><ul><li>Experienced, well-managed loan servicing operation </li></ul></ul><ul><ul><li>Regular communications program </li></ul></ul>
  21. 21. Our Borrowers <ul><li>Have needs that banks can’t fill: short-term or bridge loans, fast turnaround, mixed use </li></ul><ul><li>Shopping centers, medical office buildings, apartment buildings </li></ul><ul><li>Borrowers’ projects are located within geographic areas highly familiar to Sterling </li></ul><ul><li>Many of Sterling’s borrowers are repeat borrowers with a long track record of real estate success </li></ul>
  22. 22. How We Evaluate Loan-to-Value <ul><li>LTV is a measure of the protective equity in a property – lower LTV, lower investor risk </li></ul><ul><li>Sterling permits a maximum LTV of 75% </li></ul><ul><li>Credit history is not unimportant, but well-analyzed LTV provides more security </li></ul><ul><li>We also research title, determine the impact of any existing liens or other encumbrances </li></ul>
  23. 23. Typical Sterling Loan Terms <ul><li>12-36 months term </li></ul><ul><li>Interest only, with a balloon repayment of principal at the end of the term </li></ul><ul><ul><li>At the end of the term, principal is returned to investor(s) (individual or fractional trust deed) or to the fund for reinvestment (mortgage pool) </li></ul></ul>
  24. 24. Case Study: Speedy Medical Office Build-Out <ul><li>Madera County medical group sought to build out 7,000sf building – with Office of Behavioral Health Services ready to lease </li></ul><ul><li>But, OBHS needed their space within seven months – too fast for bank funding </li></ul><ul><li>Sterling provided funding in 15 days, so project could proceed – and the community now has needed services </li></ul>
  25. 25. Case Study: Bridge Financing <ul><li>Architectural firm owner ready to buy the Santa Cruz building he had rented for more than 20 years </li></ul><ul><li>Seller’s fast-close requirement almost left this highly qualified borrower’s firm homeless </li></ul><ul><li>A bridge loan from Sterling Pacific saved the transaction </li></ul>
  26. 26. Case Study: Mixed Use Shopping Center <ul><li>A Fresno community’s big-box center was held up by lack of bank financing </li></ul><ul><li>Bank lending requirements couldn’t stretch to fit this mixed-use project – even though the entire community supported it </li></ul><ul><li>Sterling assembled a mix of financing programs for the project’s different components </li></ul>
  27. 27. Our Investors <ul><li>Have never lost principal </li></ul><ul><li>Reinvest at over 90% rate </li></ul><ul><li>Are individuals, foundations, corporations, retirement plans and other trusts </li></ul>
  28. 28. Leadership and Innovation <ul><li>We strive to lead the category in innovation and consistent results </li></ul><ul><li>Our level of capitalization and track record mean we get first pick of most local deals </li></ul><ul><li>We’ve invested in infrastructure throughout the lending lifecycle, including servicing and workouts (not just evaluating/funding) </li></ul>
  29. 29. Leadership and Innovation <ul><li>Sterling far exceeds industry standards for transparent communication with investors </li></ul><ul><li>Our investment committee is an unusual advantage and provides broad lending and real estate knowledge </li></ul><ul><li>We offer products for different needs, including fractional deeds, mutual-fund-like mortgage pools </li></ul>
  30. 30. Comparing Sterling Investment Options Most Diversification/Simplicity ---------- > Most Selectivity/Involvement ----> Mortgage Pools Fractional Notes Individual Trust Deeds
  31. 31. Option 1: Funding a Single Trust Deed <ul><li>Investor chooses best fit for investment preferences (rate, term, position, etc) </li></ul><ul><li>Capital must be committed for the full term of the loan (typically one-two years) </li></ul><ul><li>Sterling manages the entire process, paying interest on a monthly basis and returning or reinvesting capital at loan end </li></ul>
  32. 32. Option 2: Investing in a Fractional Deed <ul><li>Investors choose among fractionalized opportunities (rate, position, percentage interest, project type, location, etc.) </li></ul><ul><li>Capital committed for loan term </li></ul><ul><li>Sterling manages the entire process for all fractional participants, paying interest monthly and returning or reinvesting capital at loan payoff </li></ul>
  33. 33. Option 3: Mortgage Pool <ul><li>Increased diversification through collective investment in a deed portfolio </li></ul><ul><li>Sterling manages the pools – continuously investing funds into quality loans </li></ul><ul><li>Investors are paid a monthly yield – which can also be automatically reinvested </li></ul><ul><li>Minimum $25,000 investment (one year lockup) </li></ul><ul><li>Sterling’s simplest, lowest risk investment option </li></ul>
  34. 34. Sterling Pacific’s Mortgage Pools <ul><li>The Foundation Fund, LLC </li></ul><ul><ul><li>Open to CA residents only </li></ul></ul><ul><ul><li>Loans for California properties only </li></ul></ul><ul><ul><li>$500K net worth (net of home) or $250K net worth with $65K annual income </li></ul></ul><ul><ul><li>Open for investing through tax-advantaged accounts </li></ul></ul><ul><ul><li>Target yield 10-11% </li></ul></ul><ul><li>The First Floor Fund, LLC </li></ul><ul><ul><li>Open to all US citizens </li></ul></ul><ul><ul><li>Properties in AZ, CA, NM, NV, OR, WA </li></ul></ul><ul><ul><li>$1MM net worth (minus home) or income of $200K (individual)/$300K (couple) </li></ul></ul><ul><ul><li>No tax-advantaged account investing at this time </li></ul></ul><ul><ul><li>Target yield 11-13% </li></ul></ul>
  35. 35. No Hidden Fees <ul><li>There are no hidden fees or loads for any of our products </li></ul><ul><li>Sterling receives a portion of the interest paid by borrowers – which has already been deducted from the rate you’re quoted </li></ul><ul><li>In other words, what you see is what you get: the rate quoted is expected yield </li></ul>
  36. 36. Extending Tax Advantages <ul><li>Trust deed investments combine stability with regular, substantial yields – an excellent combination for self-directed retirement or education portfolios </li></ul><ul><li>Income accumulates tax-free until withdrawal – taking full advantage of tax-deferral on income </li></ul>
  37. 37. Summary <ul><li>Trust deeds are an excellent way to diversify a portfolio </li></ul><ul><li>Many of the benefits of RE investing, but fewer hassles </li></ul><ul><li>Choosing the right firm is crucial </li></ul><ul><li>Sterling Pacific Financial offers experience, integrity, and innovation – all backed by our track record </li></ul>
  38. 38. Sterling Pacific Financial Investment/Lending Contacts <ul><li>Joshua Fischer, Managing Director [email_address] </li></ul><ul><li>Joseph DeNigris, Director of Bus Dev [email_address] </li></ul>
  39. 39. Notes