Real estate syndications involve taking down larger deals, using other people’s money, and bringing in partners for deals. Be careful because the last thing you want to do is break the law, or you’ll be wearing an orange jumpsuit. There are no second chances when it comes to joint ventures with other people if it borders on syndication.
Today, Clint Coons of Anderson Business Advisors talks to Kim Lisa Taylor from Syndication Attorneys, PLLC, about creating syndications.
Kim is the author of How to Legally Raise Private Money, hosts the “Raise Private Money Legally” podcast, and teaches at real estate trading events. She started Syndication Attorneys, PLLC, to help entrepreneurs create sustainable, successful real estate investment companies.
Highlights/Topics:
- Joint Venture vs. Syndication: What’s the difference? Whether or not you’re selling securities. In a joint venture, all members play an active role in generating their own profits. In a syndicate, passive investors rely on the promoter to generate profits.When passive investors rely on you to generate profits, you’re selling an investment contract.
- What is an investment contract? Investment contracts are securities. The Securities Act of 1933 created a definition of what constitutes securities.
- What is the friends and family exemption? It’s called Regulation D Rule 506(b). It’s the federal exemption, but each state has its own securities agency. Most people follow the federal rule because it preempts all these individual state laws.
- How are investors sophisticated? If they are interested in being in the deal that you are proposing, whether or not this is a good fit for them, you have to document that conversation before you even tell them about a deal.
- When should you get a syndication, operating agreement going? Kim recommends three things: A deal under contract, review of the financials, and physically visit the site. By the time you’ve done those three things, you’re 90–95% likely to close.
- How long does it take to generate legal documents? About 140–180 pages of legal documents are generated and you have to review them until 100% correct. Then, you’re ready to start raising money. The whole process takes two to three weeks.
- What’s the appropriate structure and what’s going to pass with the lender? Draft the securities compliance documents (a private placement memorandum that describes all the risks of the investment), and a subscription agreement, where investors certify to you that they read the private placement memorandum, understand the risks, can afford to take the risks, and how much they’re going to invest.
- With a non-recourse loan, how could they still be a guarantor? There are things called carve-outs for anything illegal that happens at the property that causes the loss.
- What are some common mistakes that people make? Drafted documents are inconsistent and incorrect. Sometimes, starting over costs less and is necessary.
Resources
Free Ebook: How to Legally Raise Private Money.
Raise Private Money Legally Podcast
U.S. Securities and Exchange Commission (SEC)
Full Episode Transcript:
Clint: What’s up guys? Hey, it’s Clint Coons here and in this episode, what I want to go through is syndications. I talk to people all the time and I get emails from individuals, people that put the comments in the channel. They want to know about how they go out and raise money or how do I partner with someone else.
This is an area of the law that if you’re out there, you’re trying to take down larger deals, and you’re looking at ways to use other people’s money, bring people into your deals, you got to be careful because the last thing you want to be doing is wear an orange jumpsuit because you screwed this up. There are no second chances when it comes to joint ventures with other people if it borders on syndication.
What I wanted to do is bring on an individual I’ve known for many years who’s worked with a lot of my clients when it comes to creating syndication so you can go out there and take down those multifamily deals, pull the properties, or just one big huge house. Whatever it is, this person is an expert in her field and she is going to talk to you today about how to set up these types of things and the things you need to look out for.
Her name is Kim Lisa Taylor. She’s here from Syndication Attorneys, PLLC. Kim, how are you doing?
Kim: I’m doing great. Thanks for inviting me, Clint.
Clint: Thanks for coming on. This is a topic that there’s a lot of confusion about. Everyone seems to have an opinion, and I don’t really have an opinion. I just know that I’m not going to talk about it because it’s not my space. I don’t operate in this lane. But I do know this, I don’t want to be sharing a bunk with someone in federal prison because I got it wrong.
So good to have you here. Just to start off, all right, how about we just start, joint venture you hear me talking about. I brought up syndication, I’m sure you get this all the time. What’s really the difference?
Kim: Well, the difference lies in whether or not you’re selling securities. The way to determine whether you’re selling securities is in a joint venture, all of the members have to have an active role in generating their own profits.
In a syndicate, you have passive investors that are relying on the promoter of the deal to generate the profits for them, and when you get into the second situation and these passive investors are relying on you to generate the profit, you’re selling something called an investment contract. Investment contracts are securities. The Securities Act of 1933 created this whole big long definition of what constitutes securities. The one that usually pertains to real estate investors is the one called an investment contract.
You’re selling interest in a company to passive investors. You’re running the show or you and your management team are out there finding the deals, conducting the due diligence, overseeing the deal on behalf of investors, and the investors are just putting in their money and waiting for you to send them checks, then you’re selling investment contracts or selling securities.
Now that means that you need more than just an LLC operating agreement. You need to have some disclosure documents, and maybe some filings with the SEC. There are some specific rules you have to follow.
Clint: Okay. I want to break this down here because it is confusing and people always ask these questions. Let’s assume that I’m going to set up a limited liability company and I have three family members that want to invest with me, but I’m going to run it because I have the knowledge and expertise. I’m going to go out there, we’re going to maybe purchase a mobile home park, maybe something even smaller. They come in and it’s a manager managed LLC, and I’m the manager. Would that be an issue?
Kim: Probably. When you’re forming an LLC, you have an opportunity to form it as a member managed LLC, in which all of the members are considered to be managing members and each of them have the right to contractually bind the company, to open and close bank accounts, and to make their own decisions regarding the investment. That’s typically the structure you would use for a joint venture, that would be a member managed LLC.
The other option that you have when forming an LLC is to form it as a manager managed LLC where the manager is the only one that has the opportunity, the ability, and the authority to make all of the day-to-day decisions and certain major decisions on behalf of the group. There might be certain decisions that are reserved for membership to vote on, but that’s not enough to take it out of the realm of securities. They actually have to be more in that member managed LLC scenario where they are actually managing members and in control of their own investments.
Clint: Say I brought in my mother-in-law, my brother, my sister-in-law, and maybe a cousin and I was the manager, that could cross the line into being considered a security because I’m controlling everything. They just sit back and collect money.
Kim: That’s exactly right. You sold them an investment contract and that’s the trigger for having to comply with securities laws. It doesn’t matter how many people, it’s whether or not you have passive investors.
Clint: This is the thing, everything is fine. People always say to me, well, Clint, I’ve been doing this for years and it’s never been an issue. Of course not, right? Until your mother-in-law gets upset with you or your sister-in-law gets upset with you because you got drunk one night at Christmas time and you made some inappropriate comments. That’s when you could probably get in trouble, I imagine.
Kim: What really happens is, somebody gets sick and they want their money back. Somebody dies and you’re no longer dealing with that original investor that you knew very well, now you’re dealing with their heirs. Their heirs look at you as, hey, you’ve got $100,000 of my mom’s money and we want it.
They don’t care what’s going on with the deal. They didn’t sign up for the deal. They just want the money, and when you say I can’t give it back because it’s tied up in this deal. We’re going to own it for another 3–5 years. They’re like, no way. They go to an attorney who starts putting pressure on you and then the whole thing starts to unravel.
Because that attorney, if they have any knowledge of corporate securities laws, is going to start finding out how you structured this deal, whether or not you provided the appropriate disclosures, whether you followed the right securities laws, made sure that the people had the right financial qualifications, and all of that. If they can find that you violated securities laws, there is no limited liability for you.
Clint: What’s this term people throw around friends and family exemption? I’ve heard it a few times.
Kim: There is a friends and family exemption. It’s called Regulation D Rule 506. It’s the federal exemption, but each state has its own securities agency. There are 15 mini SECs running around there that each have their own set of rules. Most people follow the federal rule because it preempts all these individual state laws.
If you’re raising money from people in multiple states or you have properties in a state where you don’t live crossing state lines, then everybody follows the federal law. The federal rules, there’s one that most everybody uses is called Regulation D Rule 506, and the one that you use for your friends and family is called Reg D Rule 506(b). That exemption allows you to raise an unlimited amount of money from an unlimited number of accredited investors and up to 35 nonaccredited but sophisticated investors, but you can’t find them through any means of general advertising and solicitation.
The way to prove that you didn’t advertise for them is to be able to demonstrate that you had a pre-existing substantive relationship with that person prior to asking them to invest with you. Substantive means you already knew enough about that person to understand their financial qualifications. You already knew whether they were accredited or not accredited and if they’re not accredited, how are they sophisticated. Are they interested in being in the deal, as long as the one you’re proposing, whether or not this is a good fit for them? You have to have that conversation and document it before you even tell them about a deal.
Clint: Under that rule that you just brought up, going back to my family members that I laid out there, if I already know about their situation and I bring them in and I say, well, it’s qualified under this exemption. Do I have to file anything or can I just set up the LLC, and if ever get challenged, I would hire you and you would cite out this 506(d), whatever it was you said, and that would cover me?
Kim: You have to have documented how you followed the exemption. There is a filing. It’s not 100% required, but if you do the filing, then it is considered a safe harbor because it’s presumed that you knew about the rule and you followed the rule if you file what’s called a Form D with the Securities and Exchange Commission.
Then the states also want to have a copy of that. They want to know that you did file the appropriate paperwork, this Form D with the SEC, and then they want to see a copy of it. They also want to have the notice filing fee that comes along with that, that’s what they’re really interested in.
You also have to file notices with the state securities agencies where your investors claim residency, and there’s a 15-day filing deadline on these filings. Within 15 days, when an investor’s funds become irrevocably contractually committed, you’re obligated to make this filing and to have that filing in with the appropriate securities agencies.
Clint: Interesting. You brought up something that, I was just joking around, but your mother-in-law or sister-in-law getting upset with you. The way I would see this really playing out is if I brought people in, my family members, and one of them’s going through a divorce. The spouse could use this to apply pressure to your sibling or your close member for settlement purposes because that’s what I would do.
I would say, listen, if you don’t meet some of my demands, I’m going to report your brother to the Securities Exchange Commission because I don’t think he set it up the right way. He didn’t follow security’s rules and I’m going to try to bring pressure to bear on him to get an investigation started.
Hopefully, my brother would say, oh, yeah, I don’t want that and maybe boost the check that he’s been asked to cut. That would all fall back on me because I looked at them as family members not thinking that down the road, there could be these situations where somebody gets a divorce or somebody receives the money in the inheritance. They’re not happy about it so they try to come back on you. Interesting. The manager idea, let’s say I made them all managers, but really, I’m the one in control.
Kim: It’s not what you say is what you do that’s going to determine. Well, a former SEC commissioner was asked one time, how many times when you’re asked if something is a security, does it turn out to be a security? He said 95% of the time.
Clint: Interesting. I’ve heard this and maybe you could confirm it. One of the ways in which people have tried to get around this is they attempt to structure the money coming in not as equity, but as debt. They’ll work with 10 different lenders that are all unsecured loan money to the LLC, use those funds, and they’ll say, listen, I have no investors. Now, all I have are lenders, all unsecured lenders.
Kim: If you read the definition of securities in the 1933 Securities Act, the very first thing on the list are notes.
Clint: That is it then.
Kim: If you’re borrowing money from a family member, it’s a one-off deal, nobody cares. It’s an isolated transaction. If you’re only borrowing from one accredited investor that you know very well or something like that, nobody’s going to care about it.
If you’re in a business that depends on repeatedly borrowing money from what the SEC calls retail investors, those are people that you know, your friends, your family, your acquaintances. If you’re in that business and you’re repeatedly borrowing money, you are in the business of selling notes as securities and you still have to follow securities laws.
Clint: Okay, then what I’ve heard is this, if you got the relationship, close family members, maybe you get by without having to file anything, but if you’re going to be bringing in other people, you definitely need to do something here to make sure that you’re setting it up the right way. Of course, that’s where you come in as an attorney, you draft these things all the time.
For somebody who is contemplating this, they’ll come to us and have us set up an LLC and I tell them, you cannot use this operating agreement to this LLC that I’ve set up for this deal. When should they consider contacting you, getting that syndication going, that operating agreement, all of that. After they found the property? Before? What do you recommend?
Kim: We recommend that you have a deal under contract. You have a signed purchase agreement because until then you’re just having a conversation. We usually recommend three things. You get a deal under contract, you review the financials to make sure that it still is a deal, and someone from your team physically visits the site, drives through the neighborhood, figures out whether or not this is even something you want to own.
Based on our experience—my own personal experience with syndicating properties and the experiences of all my clients—by the time you’ve done those three things, you’re 90%–95% likely to close. Anything else you might find during your due diligence is just going to be a deal negotiation point, not necessarily deal killer. Once you’re 95% certain you’re going to close, get us involved because there’s a time period that we need in order to generate these documents for you.
We are typically generating 140–180 pages of legal documents and you have to review them. We end up going back and forth a couple of times on the draft until we get them the way that you want them and 100% correct and then you’re ready to start raising money. That whole process can take two or three weeks.
Clint: You brought up a really good point there at the end about raising the money. If I’m making that transition from, say single family to multifamily and I’m going to bring in some investors to work with me, it just seems logical that I would first start talking to people just to get a sense of if I have people that would be interested in going in on a deal with me like this. Is that a problem?
Kim: As long as you’re not talking about specific deals. Number one, you don’t want to talk about a deal until you have a purchase agreement because if you do, I’ve seen many times where you talk to the wrong person and they go steal the deal and we have a purchase agreement […]. They go, they figure out what you offer, and they offer $50,000 more, and then they have the deal, you don’t. You have to be cautious about what you say.
You can always advertise your company. You can talk in generalities. I’m in the business of syndicating multifamily property, or I put small groups of investors together and we buy properties. If that’s something you’re interested in, let’s have a one-on-one conversation. There are going to be some questions I have to ask you. Some things I need to know about you to make sure you’re suitable to be in these kinds of deals, and then I’d be able to tell you about some future deals.
Everybody you meet today, you’re talking about future deals. You shouldn’t be meeting people today and talking about a deal that you’re raising money for right now.
Clint: Unless you have your docks in place, correct?
Kim: Like what I said, you shouldn’t be meeting someone today and talking to them about a deal that you have today because you really need to have that conversation with them about their suitability and document that you had the conversation, you understand their financial qualifications, whether they’re suitable to be in your deal before you start telling them about deals.
There used to be people that would say, oh, it’s a three-touch rule and you have to have three touches in 45 days. That kind of somebody’s idea of hey, this would probably be defensible and they’re probably right. What the SEC really said is that, no, you have to have this conversation with them and document the conversation about their suitability in your deals.
Once you have that information, then you have the right quality of relationship to be able to offer them investment opportunities. It’s not about the duration of time, it’s how much you know about that person.
Clint: Got it. If I find the deal and then after I get this deal it’s under contract, […] I know they want to close on it, then I would contact you, and you would help me then prepare the documents that I could then take and go out to my investors on and say, here’s the deal, here’s the offer, here’s what I’m looking to bring in. They would read it and then they can make a determination if they wanted to invest, then I could run it, and everything would be good?
Kim: That’s exactly right. We would set up your companies. We would draft operating agreements. There’s usually going to be at least two companies and sometimes more in a syndicate. You’re always going to have an investor level LLC that’s going to be manager manage, and then you’re going to have your management level LLC that could be a joint venture, that could be member managed, it might be manager management.
Let’s say if only one or two people were signing on the loan but you had four other members of your management team, then you would make it manager managed with those loan guarantors as the managers.
We have some discussions with you about all of that to determine what’s the appropriate structure and what’s going to pass muster with the lender. We are always thinking about what’s going to be acceptable to the lender and we’re creating the organization chart that we know that they will accept.
Then the other thing that we’re going to do is draft the securities compliance documents. That’s usually going to be a private placement memorandum that’s going to describe all the risks of the investment. There are about seven pages in there that talk about all the different things that could go wrong, and then a subscription agreement. This is where the investor tells you about themselves. This is where they certify to you that they read the private placement memorandum, they understand the risks, they can afford to take the risks, and here’s how much they’re going to invest.
With those two documents, that private placement memorandum, the subscription agreement, your investors have assumed the risk of that investment. So, you’re not on the hook now if all of a sudden an earthquake happens and the place collapses, a hurricane comes through and blows it down, or when it damages a building and you can’t rent it out anymore. You’re not responsible for that or for any losses that are generated from any of those risks that you warned them about.
Clint: Okay, you said something there, you and I are so in alignment on this that when it comes to investing that lending portion, that’s what I always refer to as the business planning side of it. You have to make sure what you’re doing is going to work with the lenders, otherwise, you’re not going to get their money. If I’m out there, and I know that on this deal, it’s not going to be me, I’m not going to go on the loan. My credit has been hit because I’ve been doing 20 other deals and I want to bring someone else in for the lender. That person that I bring in is going to have to go in the management arc, is what I’m hearing.
Kim: That’s what has been our experience. I think one time, there was a local community bank that said, no, they can just be a member and they didn’t care, but if you’re dealing with any Fannie Mae, Freddie Mac lender, or CMBS loans, they’re always going to require that the people who are guaranteeing that loan, even for nonrecourse loans they’re still guarantors, that they’re going to be in ultimate control of that deal. If it starts to go down in flames, they’re the ones that are dealing with the bank and trying to salvage the investment.
Clint: When you say it’s a non-recourse loan, how could they still be a guarantor?
Kim: Because there are things called carve-outs and these carve-outs are for anything illegal that happens at the property that causes the loss. You allow somebody to have a meth lab in there and they blow the place that, well, you’re on the hook; or you run it as a prostitution ring or something. I used to be a head housing inspector and I’ve been to some really scary places that I wouldn’t even go there without a police escort. There are some scary places out there.
There are bad boy carve-outs that hold the guarantors responsible for losses that the lender incurs because of illegal acts. There’s also environmental indemnification. If some later discovered environmental issue is discovered and the responsibility for that isn’t placed on the current owner, then the lender is going to hold any deficiencies. They’re going to hold the guarantors responsible for those deficiencies.
That one is a very small risk because most commercial lenders are not going to allow you to buy a property until someone has done an environmental site assessment. That environmental site assessment is going to identify any of those potential problems. If you’ve done that kind of due diligence prior to taking the title on the property, then even in the eyes of the federal government, the EPA, and your state environmental agencies, you would not be held responsible for that if you did the due diligence and then it was later discovered.
Clint: Okay, when you’re talking about that management arm then, what type of entity is that typically going to be?
Kim: It’s still going to be an LLC, typically. It could be a corporation. Most of the time it’s an LLC, but if some tax advisers suggest that it should be a corporation for one reason or another, then we’ll defer to that. For the most part, it’s usually going to be an LLC.
I always say, don’t do a joint venture with more than five people because every time there’s been more than five people in the management of a syndicate or have a deal where there’s a member managed LLC, things go wrong. Six people apparently can’t agree, but five people can. I’ve seen managers of syndicates that ended up in litigation immediately after closing on the property. There comes a point where there are just too many people and it becomes unwieldy.
Clint: Yeah. And just to share something on my side, when we put together the last deal that we did, the way we got around dealing with the lender. Again, we were using […] in this deal. And because my partner is 50-50, they wanted us both to be guarantors and to qualify for the deal.
What we did is we created and structured the operating agreement so I was a springing member. That LLC interest didn’t come into existence until after we closed on the loan, and that worked for the lender. Then they just took my partner’s information down. He was a guarantor in that deal and then I didn’t have to go on it or go through any of the financials, he did it all. Have you seen that before?
Kim: I haven’t seen someone use the springing member for that purpose, but it’s interesting. The way that we would typically structure that is we would have created a manager managed LLC for the two of you and just let him be the manager. Because if you create a manager managed LLC with him as the manager, they don’t care who has the percentage interest. If it’s a member managed LLC, then anybody with 20% or more, the interest has to be underwritten and they want the guarantor to always have the majority interest.
Clint: Yeah, I’ve seen that too. Wow, there’s just so much there when it comes to putting this stuff together. That’s why you need someone like yourself who’s knowledgeable. When you’re doing this and you’re putting these things together, what are some of the, I would say, common mistakes that you’ve seen during your practice that people make?
Kim: We just had some people that we were helping out not too long ago and they came to us with documents that they drafted. They said, well, will you just review these documents? A lot of times we will, sometimes we won’t, but when we do, we’re looking for things like do you have the right securities exemption? Do you have the right financial qualification requirements for your investors that match the securities exemption that you selected? Do you have the appropriate disclosure documents? And are your documents consistent throughout? Are there inconsistencies? Those are the kinds of things we’re always looking for.
In the case that we just recently had, someone had taken a set of documents for a Reg D Rule 506(c) offering, which is an offering that can be advertised to, but the only people that can be admitted are verified accredited investors, but they wanted to do 506(b) offering. It was inappropriate, the investors didn’t need to be verified. We had to reconfigure all of that. It was so inconsistent that we just ended up starting over.
Clint: Many times I tell people, if you want me to do this type of work, it’s going to cost you more than if you just let me start from scratch because I didn’t invest so much time in balancing it out. With the docs, one of the things that I tell people, and if they watch my channel, I discussed this, the documents that you put together are really important. People think they can get by with a 10-page LLC operating agreement. They pull them off legal […], they download them, and they fill them out.
They said, it all works until someone’s going to request a copy of those documents, and that’s where things start to fall apart because if you’re getting a loan, and I would assume, correct me if I’m wrong here, that when you apply for a loan, it’s a Freddie, Fannie loan, or the CMBS (Commercial Mortgage-Backed Security is what we’re referring to there), they have their own legal department. So they’re going to ask for copies of that syndication, everything you just described, is that correct?
Kim: That’s right and they’re going to review the managers’ operating agreement, the investor level operating agreement. Sometimes you’ll even have to have a separate title holding entity. They’re going to look at all that stuff because they want to know who the borrower is, how they’re structured, and who the ultimate investors are. In fact, they will even look at your investor level LLC to see who has over a certain percentage ownership in that company and every lender is going to have a threshold.
They’re going to say, for Fannie, it’s 20% of the total interest in your company, for Freddie it’s 25%, for CMBS, I’ve seen it as low as 10%. Whenever a single investor exceeds that threshold, they want to underwrite them, and that’s part of their requirements under the Banking Secrecy Act. You need to alert your investors that, hey, if you buy over X% of this company, then you’re going to have to be underwritten. If it’s too much, then you may have to even have to help guarantee the loan.
Clint: Okay, I heard that before and when I’ve talked to people, I’ve told them, you don’t want to go in—let’s say it’s a Freddie Fannie product—at over 20%. What you should do is set up different entities to hold your interest so that not one specific entity shows up as owning 20% or greater. Any experience in that?
Kim: Orange jumpsuits? Loan fraud. A couple of terms come to mind.
Clint: Who does that fall on?
Kim: Ultimately, it’s going to fall on the managers of that syndicate, especially if they had actual knowledge. If somebody comes to you and says, hey, my brother-in-law is going to invest through this LLC, I’m going to invest in that LLC. You didn’t have actual knowledge. Maybe you can argue and somehow defend yourself. But, if you’re advising someone, hey, just split it up into two LLCs, the lenders can look through those LLCs if they want. They may not want to until your loan fails, and then they may look very closely.
Clint: As a manager, if you’re setting one of these things up, you never tell that to anyone. You let guys like me explain how that works for them so you have plausible deniability.
Kim: That’s it. That’s right.
Clint: Yeah, I’m behind the attorneys. There’s just so much here when it comes to setting these things up and we didn’t go into advertising and all of that because what I really wanted to convey to people is the importance of knowing when you need to set up the proper docs, and don’t try to wing it. You brought up lending and right now, with putting these deals together, what do you see out there? Where’s the money coming from? Is it Freddie Fannie? Are they still lending a lot in this space or is it the other?
Kim: For multifamily, it’s always been Fannie and Freddie. For other types of properties, it’s usually CMBS loans. For smaller properties, I’ve seen community banks do the deals for development projects. Community banks like to do the deals. It just depends on the nature of your project, what it is you’re buying, and whether or not it fits their criteria.
Clint: I don’t need to, as someone who’s contemplating starting this, go out there and try to develop relationships with lenders ahead of time since they’re typically going to be asset-based, experience-based loans anyways, is that a fair statement?
Kim: Usually you’re going to work with a mortgage broker. There’s a variety of very experienced commercials. You always want a commercial mortgage broker to help you because they’re going to know who has what criteria and whether your loan is going to meet their criteria, so they’re only going to submit it to lenders that they think are going to be interested. You don’t want to have to submit loan applications and there are fees associated with that to lenders that aren’t suitable for your deal.
The other thing to realize is that if you’re doing Fannie and Freddie loans and usually even some CMBS loans, you can usually get these nonrecourse loans. If you start dealing with your community banks and your local lenders, they’re probably always going to require personal guarantees. In my experience, the people that had to declare bankruptcy after the Great Recession were the people that signed all these personal guaranteed loans.
Clint: Yeah, they got hurt. If I were to reach out to you and talk about the waterfall provisions, who’s going to get paid? How do they get paid? I hear those questions all the time, the tax ramifications of setting it up. Is that something that I take it you guys would go through with an individual investor who’s considering going down this road?
Kim: Yeah. Once somebody becomes a syndication client, we spent about two hours with them going through all these different questions and scenarios on how they’re going to set up their manager, who’s going to guarantee loans, and even so far as what are you going to use for your company names, kind of naming conventions are you going to use not just for this syndicate, but for the other 20 that you want to do. Making sure that you’re kind of creating a system for yourself that isn’t going to make you go insane.
We will help you figure out how to split money fairly with investors. There are times when we tell our clients, you’re offering your investors too much because too much, it breeds disbelief. Then people won’t invest because they don’t believe it. And then also, you kind of ruin your investors because then they never want to invest with you again until you got a deal just like the last one and that was a one in a million deal.
You have to be careful about what you offer, making sure it’s fair for you, fair for them. If your investors are concerned about what you’re making, you really need to deflect that conversation back on them. It’s about what you’re making. What are you making now on your investments? What might you make here? And you need to decide if it’s suitable for you. Yes, I’m going to make a lot of money, but I’ve spent a lot of time and effort learning how to do this and that’s why I’m able to offer to you.
Clint: In doing that, you’d probably walk the investor through where to set up the structure because I know a lot of people, they want to go out and just get the entity registered in (say) Texas or Florida where they think they’re going to be buying, but would there be circumstances where you’d want to set it up in Delaware beforehand? And you can’t use that Florida one to close on it because lenders or something is going to require it’d be registered in a different state initially […].
Kim: Typically, if the loan balance is less than $10 million, we typically suggest you use the state where the property is located because if you form it in a different state, then you still have to register it in the state where the property is located so it can do business there. If the loan balance is $10 million or above, that’s where you need that third title holding entity because the lenders want a bankruptcy-remote entity that’s one step removed from your investors as the title holding entity and the borrower on that loan.
They want that formed in Delaware. They’re going to have you hire a Delaware attorney to write an opinion letter that this loan is enforceable against this Delaware company, and then you’ll take that Delaware company and you’ll register where that property is located. Then you’ll have an investor entity that owns that title holding entity and then you’ll still have your management entity for all of that. It can get kind of complicated, even more complicated if you bring in private equity.
Clint: This is why they need you to put this stuff together. If people wanted to reach out to you, they’re thinking about doing this, how best to go about connecting with you?
Kim: We have a great way that you can schedule an appointment with one of our staff at our website at syndicationattorneys.com. You can also download a free copy of my book, How to Legally Raise Private Money. You can get a free digital copy there. Go to the syndicationattorneys.com website, click the tab get the book, and you’ll have it; or you can buy it on Amazon.
Clint: Great, I’ll put that in the show notes. If anybody, when they’re watching, they just want to get there immediately. They didn’t want to write this down or grab in the show notes. Just click on it, I’ll hyperlink it to take you there. Just definitely reach out to Kim if this is something you want to do because as we said, we don’t want to see you in an orange jumpsuit or use you as a future story of how someone did it wrong. Any parting comments?
Kim: Thanks a lot for having me today. I hope the information was helpful and it’s been a lively conversation.
Clint: Likewise, thanks for coming on, Kim, and sharing all this valuable information with the viewers. Take care.
Kim: Thanks, Clint.
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