Ryan Miller
My name is Ryan Miller and for the past 15 years I've helped hundreds of people to raise millions of dollars for their funds, and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, this show will give you the answers, so that you too can enjoy your pursuit of Making Billions. Let's get into it.
Ryan Miller
Look, I've been in school and working for the last 25 years in finance, and I've never heard of methods of raising debt capital for your next project startup or investment fund like this. Listen as my next guest and I chop it up on the new methods of financing some of the hardest challenges in deal making, bringing you further to the top in your pursuit of Making Billions. Let's get into it.
Ryan Miller
Hey, welcome to another episode of Making Billions, I'm your host Ryan Miller and today I have my dear friend Vernon Beckford. Vernon is the CEO of a debt fund called Diversified Lending Solutions. After graduating from both Columbia and Harvard, Vernon has spent his 15 year career honing his craft at places like Credit Suisse and Global Atlantic Financial Group, where he nailed it in the structure finance group. So what this means is that Vernon understands credit markets and debt funds, and he's about to walk you through step by step on how to get debt financing, to not only change your career, but to change your life. So Vernon, welcome to the show, man.
Vernon Beckford
Ryan, thanks for having me, I gotta tell you, I've been looking forward to being on the show for a while, big fan, you have an awesome community. So just excited to be a part of this.
Ryan Miller
Oh, man, well you're definitely part of the community now man, there's no going back, but we're certainly honored to have someone with your background and your expertise on the show. So let's jump right into it, can you tell me just a little bit about what you do, just 30 seconds, Diversified Lending Solutions, what you guys specialize in, and then we'll get on to the good stuff.
Vernon Beckford
Absolutely. So Diversified Lending Solutions is a capital markets advisor and when you strip that down, what it basically means is that we help real estate operators and developers get funding for their projects, focusing specifically on those that have the largest challenges around capital, small, emerging and diverse investment groups. So for us, the goal is to take wherever they're living now and help accelerate their growth, they're doing much larger transactions than they are currently.
Ryan Miller
Man. Awesome and you know, we got a lot of emerging fund managers listen to the show, and even entrepreneurs and everyone in between. But at the end of the day, a lot of us need to do something called, build a cap stack. Oooo the big scary word, all it means is we got some debt, we got some equity. Now you specialize on the debt side, I'm just curious from you, so for the beginners that are out there, right, the people that are looking for their first check. Whether it's from an equity provider or a debt provider, like yourself, people who are syndicating, fund managing, whatever it is, we got to raise money. With that said, for the beginners would like basic advice. Can you give people who are just starting out on their journey to build their cap stack on debt? What would you tell someone?
Vernon Beckford
Absolutely. So for us, there are really four key pillars that any investor is going to have to master in order for them to obtain the debt that they want. And I'm thinking from the perspective of someone who may have been flipping deals and now wants to do multifamily, or maybe they were doing small multifamily and wants to do much bigger deals and so just walking through those four. The first is what I like to call litmus testing and litmus testing is another way of saying does your deal pass the smell test for any investor that's going to look at it, right? So are the assumptions that you're making that drive your returns defensible? Are the returns that you're actually targeting in line with what someone would expect, given where we are in the market? Are you actually pursuing a project that is truly financeable, think about how much news there is about office, there are many people that think there's opportunities in office, but you go out and you don't address the fact that it's very hard to get financing on it, you're not going to look very smart. So litmus testing is really that first rung of the ladder that demonstrates to any investor that you've actually done the work to bring them something that's rational in the current market environment.
Ryan Miller
Perfect and what about number two, three and four? What are those other, those remaining three that you got?
Vernon Beckford
Let's jump right in, so number two is objection smoothing. So as you well know, even though any investment whether it's venture capital or commercial real estate, comes down to the numbers, fundamentally, every deal comes down to a story. What is the story that's going to compel an investor to stop looking at whatever else that they're focusing on, and to actually prioritize your deal. And for us, the real nuance in the art of framing the proper narrative is objections, moving. Taking whatever challenges and risks are associated with that deal, and weaving that into your narrative so that you look smart prepared, and that you are not just a renegade deal maker, but you're someone who's actually in touch with risk management and knows how to respond to challenges when they come. And so that's a piece of the puzzle that I think a lot of people don't lead with, they want to hide the objections that they think someone may face and hope maybe they just don't ask that question. But in the process of doing so, they're in a very defensive position if and when someone raises it and it looks like they haven't even thought about it, or we're not taking a proactive measure in structuring around it.
Ryan Miller
You know, you're, if I can show up in here, you remind me of a deal that I've been on just to share are some real experience about how good this piece of advice is, Vernon, this is really good. So I've been on a deal, I had a partner on the deal, who has, let's say, some scar tissue. He's been around for a while he's done stuff, he made a ton of money, lost a ton of money. So he was a land developer and 2008, right, had a great track record, 2008 happened and unfortunately, the deal fell apart, like for him, but also, millions of other land developers and real estate folks around the world, it was, it was a really deep recession. So he's coming out of that, and anyone's going to do due diligence on the partners and the deal and all that stuff as they should, we highly recommend it and that that was out there, right? That he had a deal that went south, and look, if you're in this game long enough, you're gonna have some deals that don't work out, okay. And one of the things that he did was just like, ah, he was getting frustrated before he came to talk to me, because, you know, I'm known for helping people to raise capital. And Vernon and also everyone that's listening to my voice right now, one of the best things that you could have done is exactly what you're talking about Vernon, and this is what he did and this is what I advised him to do, is to just get in front of it, right? So you say, look, there are some things that are out there that I was in this deal, let me explain. I was in this deal, did everything we could, full investigation, full audit, there was no crime, there's no nothing was done. It was just literally one of those things where, you know, it was just a nasty recession and no matter how hard we had, we tried to hold on, we couldn't hold on to the deal and unfortunately, it went by the wayside. And surprisingly, because he was a little bit nervous, he was like, dude, like this one thing happened and ruin my pristine record and the fact that exactly what you're saying, actually worked. And so what happened was, is people were not surprised and I think and keep me honest, Vernon, one of the benefits of this is you just don't want prospective investors or actual investors to be surprised. So do not do anything that would surprise them and so getting in front of that objection smoothing, is to say, look, they're gonna figure this out. So let me get in front of it, anticipate some of these objections, and smooth it out ahead of time. Would you say that that encapsulates that principle?
Vernon Beckford
Absolutely. At the end of the day, you want to own your narrative, you don't want someone sitting in a room and coming up with the narrative around you and your credibility and your reliability and your transparency, right. You want to be able to tell that story on your own terms.
Ryan Miller
Yeah, brilliant. Now, what about risk? Like, you know, just getting a yes, from an institutional investor, I'm assuming is a lot of these things that you're talking about for beginners? How do you, what advice can you give people on say, just de-risking the deal or just presenting it to investors? What would you say?
Vernon Beckford
This is particularly important, especially where we are in the economic cycle. So given how much trepidation there is around the state of the economy, it's very difficult, even on fairly straightforward deals to get a term sheet from a lender. And so there's a propensity to get that term sheet and sign on the dotted line, as soon as you get it for fear that there's nothing else out there, or for fear that the markets only get worse and then the lender is going to come back and retrain you on terms. And I think that that's a disservice because that's short term thinking, if you actually end up getting funding from this lender, and are now in business with them. You want to be very, very cognizant of the structure that you're stepping into, around the provisions that you've agreed to because while it may seem like an afterthought now. If after the fact when the deal has actually been closed, you realize that you signed up for, agree to things that either make your life harder, make it harder for you to execute your business plan, or make it harder for you to monetize a return because you've given away too much of the economics and another way, you're going to kick yourself and ultimately, your investors are either going to be unsympathetic because it impacts them negatively or they're going to just shrug their shoulders and say you went into this with eyes wide open why don't you do your homework? So de-risking is really taking that upfront step and whether that means you're doing it yourself or working with a mentor, or engaging an advisor to go through a term sheet and make sure you're treating it like a true negotiation and you're not just accepting terms just because you feel like you need to.
Ryan Miller
Thank you for watching, if you've made it this far, we must be friends, so don't forget to like, subscribe and click that notification button. Now, let's get back to the show.
Ryan Miller
Brilliant, I'm curious what you think as far as advice for beginners, but you know when I was a beginner, I had a lot of education, but not a lot of experience, right? There's that moment where you got to leap into practice out of school and kind of spread your wings and I was very nervous and I just felt like I needed to prove myself and overcome. I was like people are gonna look at me like I'm a child and I probably was, you know, so I overcompensated by almost being like a professor, right.
Vernon Beckford
Yeah.
Ryan Miller
We've all been in grad school and you know, there's a certain way you present your case studies or your thesis or whatever it is and it's not that engaging. Although they're very accurate, it's not that engaging and so I would present these things and they're super boring or oversharing or under sharing, I mean, what's your experience or your side? I mean, you've delivered some, you've received some pitches, you know, what advice can you give to beginners in, in that moment?
Vernon Beckford
Well, you almost read my mind because the fourth of the pillars is fact filtering and this is exactly what you were alluding to. There's a tendency and I've, early in my career I was in the same boat, there's a tendency when you know that especially you expect to be under higher scrutiny. There may be a tendency for you to overcompensate, overshare, to show that A: I'm as credible as I'd like you to believe I am. B: I'm a trustworthy, transparent person, so much so that I'm going to just give you so much information that you could drown in it if you wanted to. And ultimately, as you mature, you come to the realization that that can actually hurt you. Because if you're in a position where you're giving A: Either too much information, or you're giving information at the wrong time. You're creating an environment where that individuals now potentially misinterpreting certain information you've given them. They may focus on the wrong information, they may become distracted and so you have to distinguish being honest and trustworthy from being pragmatic in terms of giving people the information they need to arrive at the decision to fund your deal. And, and being in a position where not taking every file and dumping it for someone to see or instructing them on the things they didn't ask for. But this is what they should be looking at is really, really something that you should fight your instinct to do that because you're not helping yourself, you're just addressing your own nervousness.
Ryan Miller
Yeah, I love it. It's almost like I think it was a movie Braveheart, where they're holding the spears and then everyone's charging at them. They're like, hold, hold, like, temperament you need to have, and especially when you're first starting out, and hear, you know, just to echo your point, if I can add a candle to that bonfire. You know, Vernon, I would say, in my early days, when you're taking sales jobs, the best job you could find and it was fine. But I learned really quick, in that area and if this echoes into pitching, I would love to share that with the community and you as well, just to echo your point of don't over under share. And so one of the, I call it the three cardinal sins of amateur salespeople, or, or in this case of, of amateur capital raisers, for example, or people who are pitching. Is, they talk too loud, they talk too much and they talk too fast, which probably I do all three, especially on the show.
Ryan Miller
But when it comes to pitching, if you're talking too loud, too much too fast and like you said, you're oversharing and people are drowning in it, they don't know what you're asking or what you're not asking. And then you just it's got, you got these Tweety birds around your head, and you're just putting them in a cyclone and they don't even know what to pay attention to, because he painted nine targets. And so you know, learn to not talk too much too loud or too fast, do not overshare, be concise with your answers and really make sure that you are paying attention and delivering on these three above things, which would also help you to implement the fourth thing that you talked about. So that's really good litmus testing, objectives, smoothing, de-risking and fact filtering, I think were the four things. Man, that's incredible, so that's both how you win and not lose is really work on those things, it's phenomenal.
Ryan Miller
Now, I'm curious, just kind of shifting gears here. You know, we're all subject to the great and mighty market, right and make it sound like it's just this one thing. There's so many things that happen in the market, so many opinions within that market, and so many crazy operators that'll give it a shot like you and I. So I'm just curious, from all your experience with debt funds. I mean, you guys pay attention to some very unique things, interest rates, all kinds of stuff, what are you seeing out there in the market right now? What's the current state as far as Vernon's concerned?
Vernon Beckford
Sure. So, in the commercial real estate, capital markets, there's a lot of logic in the system and it's a really, really awkward time in the cycle. I'll tell you why, we look up right today rates obviously, much higher than they were two years ago, right? Banks, by and large, lending far less than they were two years ago, so invariably, if you're someone who's acquisitive and looking to buy properties, and there's less availability of debt, and debts more expensive, either A, you got to put up a lot more equity to buy something, or you're going to pay less for it, or both, right? So many of the buyers who want to buy assets are pricing in the market risk and many of the sellers in today's market have not fully adjusted to the realization that the property that was worth X two years ago, when they were high fiving is now worth 20 or 30% less today. And so, then think about the third individual who already owns a property has a mortgage on it needs to refinance their loan, but realizing that because availability of debt is less than it was they may have to put up fresh equity in the property as well that they don't have. And so it creates this really strange dynamic, where everybody is either owning property and trying to hold on for dear life, trying to find distress in the market, but but it really hasn't fully manifested itself. And invariably, always having to find out how to fund that little middle segment of the cap stack because they're not getting enough debt. And they're probably not going to want to fund all of the equity that makes up the difference. So it's a really strange and funky, you know, period in the cycle right now.
Ryan Miller
Yeah, which underscores the need for creativity right, creative financing. Sometimes people think that means scam, no, that is not what I'm saying. What I'm saying is just the usual way of going about it can trying to work, maybe with it's a little diluted right now and you just might need to reach out and find different avenues of raising capital, I love it. So that being said, it's not enough to know where we're at, I'm curious, where do you see the market going?
Vernon Beckford
Yeah, so there, as much as there's frustration and there's, in the logjam, there's so many opportunities to exploit. The first being is that there's a real need for gap financing and gap financing can mean a few different things, gap financing can mean okay, I need to buy an asset for 100. I know I can get a senior loan for no more than 60, I know I have 20 of equity, where am I going to get that other 20. And that 20 can take the form of a preferred equity piece, it could take the form of a mezzanine loan, it could take the form of a B-note to the senior loan, it can take any you know machination of what could be some hybrid of debt and equity. And so there's so much opportunity for folks that can figure out how to be a provider of that middle piece. What's happened is that operators have tried to hold the line, as we talked about with Braveheart and if they could get their lender to give them an extension, rather than having to sell their property or refinance it, they would do it. But the reality is that banks are under a lot of pressure to get these loans off their books. So the expectation is that if rates stay high, for the foreseeable future, they're going to force a liquidation, whether that be by foreclosing or forcing those investors to sell their properties. And so we're in a position then where folks that can provide rescue capital or gap financing, to recapitalize these projects are going to be very, very valuable, and very, very needed. I can tell you ourselves, that we've been in a space where we provided small balanced loans, anywhere from 100,000, to 500,000, to sponsors that are finding themselves in these special situations where they have a very, very short term time crunch that needs to be addressed. And they may have assets, but they don't have cash and they need some bridge to allow them to figure all of this out. So I think gap capital, gap funding is a huge opportunity. I know many of the community are emerging managers and if they're not already thinking about debt, I mean, there's so much opportunity, largely because the bigger players have really de-risked themselves and committed to putting out less money. And they have so much on their books already that's not being reified, you know, there's got to be someone to step in and fill that gap.
Ryan Miller
Oh, man, I just hear the mortgage brokers just assembling or as we speak, they're getting ready to, to fill out their debt fund. So emerging fund managers assemble, so get, gap financing, so you could build a whole investment thesis around it and you and I were talking offline as long as the market needs it shocking. Yes, you got to produce something the market wants, but, you know, according to the gospel of Vernon. I would say, yeah, gap financing could be in very interesting way and if you're a provider of that gap financing, you can provide many, many different ways, right? You mentioned, B-note mezzanine, pref equity and so on, so that, back to that earlier comment of creative, being creative in your financing, this certainly could be one of those areas and you could be one of those people that could provide that gap finding financing. I love it.
Vernon Beckford
And one thing I would just add to your, to what you said, think about this, people are typically so excited about being in the equity position on real estate, right, I want to own the property, I want to be the driving factor. But rates are high enough now that you can be much, in a much more secure place on the cap stack and still on a risk adjusted basis get returns that are often double digits and higher. So when you look about taking a risk adjusted position, where you would have targeted maybe a 15% plus equity IRR. Now you could potentially price prep for a mez with that same 15% but be much higher in the count or much lower, frankly, in the cap stack from a risk adjusted basis. There's a lot to get excited about there.
Ryan Miller
Yeah, boy, you knew that was so exciting, right? I've danced in debt funds and insurance and stuff.
Vernon Beckford
Woohoo it's a party!
Ryan Miller
Yeah, we're a fun bunch, man. So, but that being said, it's just fun to provide a service that the market needs and do it with excellence, that's what, that's really what gets me up in the morning. You know, and speaking of that, of just really doing cool things in the market, and let's, let's shift some gears again. So that was awesome, man. Now, at the end, for those who, who've enjoyed the conversation so far, here comes the good, so I'm curious if you got like two or three things, maybe some competitive advantages that you can leave behind with all of your information and all of your knowledge and experience, what are some say two or three competitive advantages that you can provide for our audience today?
Vernon Beckford
Sure. So I'm gonna drop some jewels for the community.
Ryan Miller
There you go.
Vernon Beckford
So, first and foremost, one of the things I would say that many people don't realize this available are loans to finance earnest money deposits. Why is that important? When you are going out and you're saying, listen, I'm sensing that there may be some blood in the water that there's distress that I want to exploit, and I was pursuing $5 million deals, but now I want to try to take down a $20 million deal. You're going to have to put down earnest money deposit on that $20 million deal, maybe, let's say 3% and let's say that 600k. And that exhausts your personal balance sheet, or you don't have the 600k, or you're in the process of studying underwriting and figuring out how to raise money and, but you want to get the property under contract, right? This is a service to provide you the ability to fund that earnest money deposit, get the property under contract, so that you now have the time to actually go out and fill your stack. And that's one of the products that we've been providing to operators and developers that are looking to be opportunistic, pursue really much bigger deals, and they had traditionally, but would never have pursued that deal. Because they just didn't think if I haven't raised a couple of million bucks, or at least half a million is sitting in a bank account, I shouldn't even be pursuing these deals because I don't have the deposit. So that's one thing that we've been providing and folks have been really excited because now suddenly, they can look at deals that they wanted to look at before but just didn't feel like they were in a position to so that's one.
Vernon Beckford
Two, which I think people will be very excited about is the idea of a guarantor. Most times I found when someone's, let's say, starting small deals and want to do bigger deals, the reason why they're not doing bigger deals is my balance sheet, I'm not ready and my balance sheet isn't big enough. If I go to a lender, I'm not going to look strong enough and so now suddenly, you're going to buy that $20 million asset, you putting on a $15 million loan, and the bank's gonna say okay, well, we want a guarantor on the hook, who can show us they have a net worth of 15 million bucks, and then you droopy face, you know, kind of sink down and walk out of the office because you know, you don't have 15 million net worth. What we will do is bring a guarantor to the venture, right, that has that $15 million net worth and so when you go out and you assert whoever your team is, you can have the strength of the balance sheet that will earn the trust and the credibility necessary to get you that bigger loan. And we don't know many folks that are doing that, but we know tons of people that just stop because they're like, listen, I'm not going to meet the threshold and it's a natural ceiling, to the size deals I can pursue. So that's two.
Vernon Beckford
Then three, much like Ryan in his skills and helping you raise capital, what we will do from time to time is actually partner with an operator. We'll sit with you, and view us as your Capital Markets team, you're great at finding deals, you're great at evaluating deals and getting them under contract. You work with us and we'll take care of arranging the stack and that's debt and equity. And we'll go out to whoever the appropriate counterparties are, and that maybe that's a $5 million dollar raise 10 mil, 15 and be a partner in the venture and raise it alongside you. And so for us that's been catalytic for some folks that, let's say they were a spin out, they were working in a large fund. Now they're going out and doing deals, but they're really a sole practitioner, being able to buy into a team that says, listen, we can fund your deposit, we can bring a guarantor and we can actually run alongside you to raise the capital too.
Ryan Miller
Man, that's brilliant. So funding earnest money, you guys do that? I honestly, I did not know that that exists, I know the problem exists, but I didn't know that you actually provided the solution. You're gonna get, I guarantee you're gonna get a lot of calls after the show, so folks before, like, I'm geeking out pretty hard over running here. So, but you can see that in his industry, this is startup 101, is to say, where's the pain in the market and how do I solve that? And Vernon and his colleagues at Diversified Legacy Solutions, what you've done is you say, look, earnest money, that's the problem, how do we solve it? He came out with the product, net worth thresholds, right to borrow against, some, not everybody has it right? Great operators, you know, they're not quite there yet, you can bring someone in who will volunteer that be a silent partner, and they will help you get that over the line as if there's like a net worth threshold.
Ryan Miller
And then like gap financing, you know, I'm assuming less than a mil you know, those things I know that is a problem. So in investment funds, my world, sometimes you'll have an LP for, to translate that for those of you who aren't in funds, that's just an investor, limited partner. And you'll have an LP who you do a capital call, you got 14 days to get that money to the investment fund when they call it and one investor doesn't do it. And now we can't close on this deal and all of us are going to lose money. Well, guess what, there's a solution to that right? Sometimes it's a line of credit, so sometimes there are these gap financings for those "oh shoot" moments where you're like, we're gonna lose a deal unless we do something here. And so you know, I would advise folks to just have that gap financing setup and obviously Vernon you have a solution for that. But you know, whatever's right for people, it's not financial advice. I'm just saying like, it's just good business management to say, how do we prepare for some of the known unknowns is we don't know if or when that's going to happen on this deal. But we know if we're in the game long enough, eventually something's gonna happen and we need to be ready for it. And so having those products, so you can see by having someone like Vernon or anyone on the debt side or equity side and just really having those reputation relationships with lenders like Vernon can really help you to round out your offering. Alright, that's enough love and pouring and no he's not paying me for endorsement or anything, this is truly coming from the heart. But final, final remarks before we wrap things up, is there anything that you'd like to share with the audience, where they can learn more about you guys, anything at all?
Vernon Beckford
Sure. So check us out, dlsloans.com is our homepage, I'm pretty active on LinkedIn. So feel free to reach out to me, I respond to DMS and I'd also encourage you to check out a site called emerge-re.com and we created that, frankly, for the community of small developing and emerging real estate managers, developer and operators to be able to help share information, pool resources, so that you can raise more capital. So you can check us out on any of those platforms.
Ryan Miller
Brilliant. So just to summarize everything that Vernon and I were talking about, just look for funding earnest money as a short term loan. I mean, this is a brilliant solution that can really accelerate your project. The second thing that he mentioned is banks and lenders, they want you to meet liquidity and net worth thresholds, find those solutions and if you have to bring in a partner who's happy to take a small piece of equity, just to show that your general partnership or whoever's running the show has that, then so be it right. And so working out with people, either you find that yourself or you work with a provider, like Vernon at DLS. And then finally, just a small balance, gap financing. I mean, that's phenomenal. Just having those secondary financing sources of, for those oh, shoot moments are actually not just good at finance, but it's just good operations it's just good business. You do these things, and you too will be well on your way in your pursuit of Making Billions.
Ryan Miller
Wow, what a show, I hope you enjoyed this episode as much as I did. Now, if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better. And make sure to come back for our next episode where we dive even deeper into the people, the process and the perspectives of both investors and founders. Until then, my friends stay hungry, focus on your goals and keep grinding towards your dream of Making Billions.
