NPLA Founder Jonathan Hornik on How Private Lending Rose to Meet an Unprecedented Real Estate Moment
NPLA Founder Jonathan Hornik
Whether in his role as Chair of LHR&G’s Private Lender Law Group—representing “over 100+ nationwide lenders, originators, investors, including top Wall Street banks and many others”—or as founding member and general counsel for the National Private Lenders Association (NPLA), Jonathan Hornik is as ubiquitous in private lending as he is respected.
“I love this space,” Hornik says. “I live this space. We have the largest law firm in the country in this space, doing a thousand loan transactions a month across every state. We represent over a hundred aggregators and originators actively. We have a full foreclosure loss mitigation group in every state. So, we touch every aspect of it. if I thought the space was soft or there was weakness, I would pivot. And I'm certainly not pivoting, I'm doubling down.”
In other words, Hornik—who has also served as mayor of Marlborough Township, roughly the fiftieth largest town in New Jersey, since 2007—believes that though the nature of risk has changed in the current “unprecedented” real estate market, with the right guidance, partners, and patience, you can still successfully navigate it.
A&S spoke with Hornik recently about not only how to do just that, but his own history and future in this ever-evolving space.
So, before we talk about the present-day lending landscape, I was just curious if when you initially went to law school whether you knew private lending was going to be your practice area? Or is it something you discovered along the way?
Definitely something I discovered along the way. Law school breeds litigators. If you go to law school, you most likely think you're gonna be heading into court and arguing. That’s how LA Law made it seem in the eighties, anyway. So, I went to Big Law out of law school—I had big bills so those type of salaries are what I needed. And, while there, I got trained in all these different facets of the law. I ended up really liking transactional real estate. I liked that it had a beginning, a middle, and an end. Also, it had a happy result: your client was happy, you got paid. So, I eventually got recruited to be general counsel at a private lender where they stuck me on the credit committee. And that's when I learned everything there was about the underwriting side.
So, no, I never planned on being a private lender or in the private lending space. I first became a competent lawyer and then the opportunity presented itself. I took it, I loved it. And, you know, thirty years later, here we are.
You’re also a founding member and general counsel for the National Private Lenders Association (NPLA), which puts on the “largest private lending conference in the country.” Why is the NPLA important?
Well, the industry is still transitioning from a mom-n’-pop individual lender scenario to an institutional scenario. So, during that transition, the industry needs leadership and collaboration to establish ethics, best practices—that’s where NPLA comes in. This space is literally growing around the NPLA right now. We’re made up of big firms, small firms—we service everyone. You’ll get the support and connections you need to grow. It’s like being a member of a golf club. There’s a real bond and camaraderie among members.
When you meet October 15 – 17 in Austin, what’s going to top the 2023 agenda?
I mean, interest rate increases and the impact that has had on the private lending space is paramount. But that’s not everything—when I ask our capital markets panel, which includes many of the top people in the space, what comes up is liquidity. Who is either turning off the spigot or limiting what they're willing to buy this week? And they're in contact with active investors every single day. So, the idea is to gauge where we are in this real estate lending cycle to ensure people have some idea of what to expect both short- and longer-term in the private lending space.
Beyond that, we have three pillars at the conference: networking, education, and entertainment. If you come to our conference, I want you to leave with business. It’s not the place to be shy. I believe if you're there and really engaged, you're gonna leave with real meaningful business relationships—like I did over the years for my law firm. Sometimes that’s through a panel discussion, sometimes it’s at a mixer or barbeque or afterparty. We come at it from all angles.
It's interesting: I think the word unprecedented has been used to describe the current real estate market for, you know, an unprecedented length of time. You start to wonder how long we can be in, quote-unquote, uncharted territory. Working the lending side, what’s your advice for people looking to enter and/or navigate this market?
I would proceed with caution right now. I see people with established protocols and the right focus excelling in this market. The people who looked at each loan as a trade to maximize their value are struggling. So, it all depends upon what you’re trying to build. That said, I do think there's an opportunity coming. At some point, the Fed's not only gonna be done raising interest rates but lowering them as the economy slows down. We are backstopped by a shortage of housing in this country—anywhere between two and four-million units. That's not going away anytime overnight. Home ownership is still where people want to be. Also, there's going to be a rated securitization before the end of the year that will open-up the investor money available for this space. So, they're going to be looking to partner with originators. And when that happens, opportunity's gonna explode.
That ties into something I wanted to ask you about multifamily properties, which is, considering how much interest rates and unpredictability have shifted the matrix of profitability and risk, what should investors aspiring to build a portfolio in that space be looking at when assessing viability and potential profitability?
Look, I think in this market, presuming interest rates are going to eventually come down, you want to focus on any prepayment penalties. Make sure if you close with a higher price loan than you wanted today, you could get out of it in a year or eighteen months without a problem. That means you’re going to be looking at the bridge space rather than long-term products, which always have prepayment penalties.
On the credit side, we're doing a lot of reviews of investors giving credit lines, warehouse lines, to individual originators. In those documents, they have to be careful of mark to market (MTM) provisions and a termination event, which could happen at the credit provider's option. Because what that will do is cause you to liquidate a portfolio quickly at a time where the liquidity may not be there. So, again, everybody's got to be cautious about this stuff. In normal operating markets, this stuff doesn't really matter. It really matters now. So hire the right professionals to review and advise you so you understand the risks.
On the biography page of your law firm website, it talks about “defeating proposed legislation that adversely impacts the industry.” Is there a lot going on these days in that respect?
Oh, yeah. Constantly. There's a new community wealth preservation bill to limit foreclosure in New Jersey. We're gearing up for the fight. There's a national movement to limit ownership of rental properties to a hundred units or less for institutional investors. We're looking at that. There's constantly stuff in California as they come up with more cockamamie, judicial-made rules, which are wrong.
The idea is there’s a moral hazard there?
Yes. There is a natural life of loans: You either pay it back; you sell and pay back; or you go into foreclosure and the lender takes your property. Having judicial interference on a public policy matter is wrong. It disrupts the marketplace. We have to get back to commercial people being able to negotiate their own deals and stop with government intervention. It's wrong.
Over the last thirty years, what has changed in the industry? What's stayed the same?
The space is moving a thousand miles an hour. It's changing; it's becoming more institutional. What stays the same, though, is the relationships you build. As the industry grows, it’s to a large degree still the same people—they're just running bigger organizations. So, this was an opportunity that a lot of us just got lucky to come into—right place, right time. We caught a wave but worked hard to stay at the top of that wave. And I think that wave is gonna continue. I think we're in the middle of a big revolution. The space will mature, more people will come to it. It's exciting.
Talk to me about how you see A&S’ role in the space.
Listen, multifamily is an underserved market in the bridge space. And A&S is par excellence at what they do. Alexis, Jorge, Martin, and their entire team are top-notch. We love working with them. I love having Alexis on our panels at the NPLA conference. He brings a different insight. Jorge as well—I love talking to him—we spend a lot of time together, both when I see him and on calls. I'm very proud of what they built and we're proud to be a small part of the professionals that represent them.