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Lender Beware

Specialty lenders adopt forensic background checks to avoid doing business with bad actors

In early 2012, Rajesh Veejay Ansari approached a direct money lender in California for a multi-million dollar loan. He had purchased a hotel out of foreclosure and needed to close the deal in less than a week. Aaron Goldberg also went in search of a specialty lender when he was under pressure to refinance a number of commercial properties. At the time, both men appeared have the necessary bona fides to qualify for large loans; they were successful entrepreneurs who had property to put up as collateral.

Forensic background checks, however, revealed both Ansari and Goldberg were high risk individuals with significant reputational issues including fraud lawsuits, criminal records, and even allegations of sexual abuse.

According to industry observers, most private lenders never learn about many these issues about their borrowers prior to underwriting loans worth tens of millions of dollars. With real property backing the loan, the thinking has gone, a simple credit check and a Google search is good enough due diligence.

The cautionary tales of Ansari and Goldberg spotlight the high-wire act that many private lenders perform when deciding – on short notice – who to extend millions of dollars of credit. They also demonstrate the value of knowing everything you can about those with whom you do business.

Specialty lending to the real estate industry has graced American commerce in one form or another for decades. Although these lenders often charge higher interest rates, they work with borrowers and properties that traditional banks do not service typically due to the short transaction time frames. In general, direct private lenders are far more agile than most banks and provide considerable value to borrowers who need to close deals virtually overnight.

Kevin Miller is CEO and Co-President of Thorofare Capital, Inc., a Los Angeles based national direct lender that specializes in special situation commercial real estate loans. Thorofare’s “strike zone” is loans from $5 to $10 million but closes loans up to $20 million. The company closed more than $100-million in loans in 2012, a figure expected to triple this year.

Miller is part of a new breed of direct lenders that wants to professionalize the industry. He believes that in order to originate successful loans and underwrite moral hazard issues Thorofare must take a deeper look into the backgrounds of prospective borrowers and not just rely on the value of the real estate collateral in approving a loan.

” We’re looking at (our borrowers) in a very detailed way, ”
said Kevin Miller, CEO, Thorofare Capital, Inc.,
” including behavioral issues that might lead to headline risks and
moral hazard if we were to do business with them. “

“Ultimately it’s the deals that we say ‘no’ to that makes us successful in the long term,” Miller said. “We are very selective as to what deals we want to fund and who we want to work with, and due diligence is crucial to those decisions.”

Thorofare caters to real estate entrepreneurs in need of quick cash for a wide array of reasons that range from an opportunity to pay off a credit line at a greatly discounted rate to meeting an auction call’s cash-on-hand requirements to legal settlements that can require near-immediate payment.

If those seeking a loan from Thorofare think that the accelerated pace of its process and its first position on the collateral property translates into a skimping on the due diligence they are mistaken. Thorofare requires forensic background checks, or a comprehensive personal examination, of every borrower or guarantor they loan money to.

“We’re looking at the big picture in a very detailed way, including behavioral issues that might lead to headline risks and moral hazard if we were to do business with them,” Miller said. “We’re looking for patterns of behavior or conduct that point to real risk, be it litigation histories or someone who is just an outright bad actor running some operation we want no part of.”

Such was the case with both Ansari and Goldberg who sought fast-tracked loans from Thorofare last year. Sapient Investigations, Inc. conducted investigations of the men and quickly identified red flags on each of them that eventually disqualified them with Thorofare.

Ansari was a nightclub owner in his early 50s that had branched out into motels, purchasing a small chain of roadside inns on the eastern seaboard. He also maintained an interest in several nightclubs and convenience stores.

As Sapient’s investigators peeled back the layers on Ansari, they uncovered a series criminal indictments that both state and federal authorities had brought against him, including one in which a grand jury indicted him with four felony charges of not paying sales tax at his club, Mr. Happy-Go-Lucky, for a two-year period. Shortly before trial Ansari negotiated a deal with prosecutors in which he plead guilty to two of the charges, was given a three year suspended prison sentence, placed on parole and fined $60,000.

Ansari’s motels were apparently operated much in the same fashion as his nightclubs, just with overnight accommodations. Allegations of flagrant drug sales and usage as well as prostitution hovered over most of his hospitality properties. Several of Ansari’s motels were even subjected to multi-agency task force raids and shut down as public nuisances.

“The criminal activity at one of his motels led to an investigation by the DEA and mass arrests before the motel was finally condemned,” said David Cogan, Managing Director of Sapient Investigations, Inc. “Ansari managed to sell the motel shortly before the raids and arrests, but it was clear how he operated his business.”

Across the country on the West Coast, Goldberg, age 63, had also made a name for himself in business that looked equally good on paper. He owned and operated a small chain of assisted living centers, owned property and had meticulously cultivated a reputation as a generous and altruistic civic leader who was well connected in both religious and political circles.

In contrast to Ansari, Goldberg’s business dealings appeared relatively uneventful. But as Sapient’s investigators began to analyze court records naming him, they were able to follow a trail of court documents to series of damning allegations against Goldberg.

The first piece of evidence was a twenty-year-old criminal case in which Goldberg had been charged with the felony rape of a minor, a charge that was not prosecuted and summarily dismissed. The seemingly minor incident came into stark relief when investigators learned that state regulators had revoked Goldberg’s state license to operate group homes in the mid-1990s and his wife had taken over management of the businesses.

Goldberg, it turned out, had been accused of sexual harassment by a female worker and a subsequent state investigation uncovered a cache of child pornography on Golderg’s office computer.

“This was a challenging case,” Cogan said. “On the surface Goldberg looked clean, so it required careful research of court records and contacting government agencies to get to the bottom of the matter.”

Thorofare’s Miller said that while some of his competitors in the direct lending industry are still unconcerned about reputational risks, he believes instituting higher standards has made Thorofare a better company.

“Our investors absolutely love the extent to which we perform background checks on our borrowers,” he said. “During some of our meetings we will spend an hour going over loan applications that we rejected, detailing what the issues were and why. It is a confidence-builder for our investors, they can see what really goes into the consideration of each application.”

There is significant evidence that specialty lenders avoid due diligence at their own peril. Real Estate consultant Amnon Cohen, who was brought in by investors at the San Diego-based direct lender Scripps Investments & Loans as it was collapsing five years ago, told the San Diego Reader that “questionable due diligence” played a role in the firm’s failure, along with a business model that emphasized making money off transaction fees over properly appraising the real estate they were lending on.

Miller believes Thorofare has succeeded by being concerned both with its bottom line and the success of its borrowers. Conducting background checks, in that sense, is part of the company’s positive process of identifying qualified borrowers as much as weeding out bad apples.

“[Our investors] know we’re are rooting for our borrowers. They know we are lending to people that we want to succeed,” Miller said. “They know that we are not lending in order to foreclose; that’s not the point of the exercise. The point is to do good business with people you believe in and conducting deep due diligence background checks are an indispensable part of making sure we meet that standard we have set for ourselves.”