Fund Creation and Fund Structures, with Ruben Greth

On this episode of Ruben Greth’s “The Capital Raiser Show,” Kim Lisa Taylor detailed a variety of structures for fund creation (including the “deal by deal structure”) and numerous topics around the do’s and don’ts of syndicating while navigating the advancement of your syndication business.

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Ruben Greth:

I have Kim Lisa Taylor, Esq., on “The Capital Raiser Show.” Thank you so much for coming on. What an honor. How are you doing?

Kim Lisa Taylor:

I’m doing great. Thanks for having me on your show.

Ruben Greth:

Yeah, I can’t wait to dive into so many topics. I don’t do a bio on here, but I know a little bit about you. I met you at the Jake & Gino event in Orlando, probably in October 2019. And you gave me this book and you pulled it out from underneath the table. It’s called “How To Legally Raise Private Money.” And I should have had you sign it. That’s one of my biggest regrets.

Kim Lisa Taylor:

I didn’t sign it? Oh no.

Ruben Greth:

It’s because we were so busy talking. I was like, “Hey, I have a show on raising capital,” and then you just instantly got interested. I think that’s why you brought out the book. That was really cool. Very, very nice to meet you, and I’m so stoked to get you on the show. Why don’t we start with a little bit about your background? How did you get into becoming a syndication lawyer?

Kim Lisa Taylor:

Well, I was learning how to be a syndicator, at the same time I was a lawyer and I’d been practicing real estate litigation prior to that and actually, some environmental law. My husband and I were looking at buying some multifamily properties and we went to training programs and learned about it, and there happened to be an RE Mentor event with David Lindahl that we went to, and he said he was going to do a Private Money Bootcamp. We decided that we should go to that because if I’m a lawyer and we’re going to raise money, we better learn how to do that right. There, I met another attorney that was doing syndication and started working with him, formed a partnership in California that we ran for about eight years. And then I decided to move to Florida and set up my own shop in 2016.

Ruben Greth:

Okay. You’re currently not in Florida, but I think that’s where you run your business out of. Can you tell the audience where you are at the moment?

Kim Lisa Taylor:

Well, I’m currently up at our second home in Coeur d’Alene, Idaho.

Ruben Greth:

Congratulations. I understand that you just purchased that.

Kim Lisa Taylor:

That’s right. My goal is to live where other people vacation. I like to have homes in places like that. We have one office in St. Augustine and one up here.

Ruben Greth:

I dig it. I am curious about this. You mentioned RE Mentor. Do you have an association with them as their preferred syndication attorney?

Kim Lisa Taylor:

I do some work for them and for a lot of their students, because I met them in 2007 and actually became a coaching student of their program. My partner and I started doing teaching for them. I still co-teach their Private Money Bootcamp and have just been around their program for a very long time. I’ll have to say that my most successful clients that have done the most deals and the biggest deals have come out of their program. It’s solid. The education is top-notch.

Ruben Greth:

How about that? Now, what about with Jake & Gino? I know you had a booth at their event. Are you their preferred?

Kim Lisa Taylor:

I do some training at their events as well. Those guys are great. What’s so great about Jake & Gino is that they’re so giving of everything they learn; they want to give and share it with everybody they meet. They’re just very, very generous with their time and their knowledge. And so they’ve got a lot of clients that are coming along and students that are coming along and building their own syndication practices at the same time they’re building theirs.

Ruben Greth:

Yeah. I was highly impressed at their event and I told you as much. I’m like, “This is amazing, the amount of talent that you have walking around here.” What did you expect? We are good syndicators over here, but yeah. I want to give them a shout-out, Jake & Gino — rock stars! Their events are amazing. If COVID-19 ever goes away, I hope you go and check them out.

All right. Let’s dive a little bit into a couple of things. I want to ask you about your book, of course. And I want to ask you, I guess the purpose of the show is to talk about fund structures. I’m looking at creating a fund.

I just got off a phone call with you about a week ago to talk about this. I’ve been discussing it with people that I’ve been having on the show, how they created their fund, in what situations does it makes sense? How do you structure it? And you’re pretty solid when it comes to advice on that specific topic, so why don’t we go into that right now? What are the different types of fund structures that syndicators can do, that other investors to use?

Kim Lisa Taylor:

Sure. Let’s start with the typical syndication model. There’s a couple of articles on our website at www.syndicationattorneys.com. If you go into the “Library” tab and then select “Articles,” there’s two that I would direct the audience to. One is called “Which Fund Structure is Right for You?” We’re going to be talking from that today. And then also there’s one called “Joint Ventures and Member-Managed LLCs — When Should You Use Them to Raise Money?” Those are both really good resources for you.

You’re starting with the typical syndication model, otherwise known as a specified offering. That’s where you’re raising money to buy one thing. And it doesn’t matter if it’s an airplane or multifamily property, or any kind of property or a startup company. You’re just raising money from friends and family for one thing. It doesn’t necessarily have to be friends and family, but you’re going to find a securities exemption that applies to what you’re doing. That’s something we will help you determine based on the qualifications of your investors and whether or not you want to advertise.

Then we’ll select the securities exemption, then we’ll create a company. And then that company, you’re going to keep a portion of that for yourself and the ownership interest. And you’re going to sell off a portion of that to the investors in order to raise the money you need to do the deal. That’s a very typical syndication model.

Usually, there’s three aspects of that model. It’s a manager-managed LLC, or it could be a limited partnership with a general partner and limited partners in a manager-managed LLC. You’ll have a manager and you’ll have members with the LLC structure, which is the more common of the two at this point in 2020.

In that particular structure, you’ll usually have two classes of members. You’ve got the manager and then you’ve got two classes of members. The Class A members are everybody that pays cash for their interest, including the members of the manager; anybody who pays cash gets Class A membership interest. And then there’s Class B, which is the management class. That’s the specified offering model. That’s pretty typical syndication structures, so you might want to look at that.

Then the fund structure gets a little bit more complex. The distinction is you’re not buying one property anymore, you’re buying multiple properties.

You may be trying to raise money prior to having those properties under contract. That’s when the funds start to kick in.

Probably, the tried and true model is the blind pool. The blind pool fund — or it’s also called a whole fund model — is where you’re going to have one pool of investors … maybe we’re going to raise $5 million to $20 million, and you’re going to try to buy as many properties as you can with as much as you can raise in that fund. Maybe that’s depending on the property size you’re buying, you’re buying four or five different properties. In this particular structure, you’re going to have a pooled investment entity. Again, it’s usually either going to be a limited partnership or an LLC that’s going to be manager-managed. Same structure that we had for the specified offering and now we’re going to add some pieces to that.

You still have your Class A or Class B members in your fund. Then every time you acquire property, you’re going to have to create a new single-purpose entity that just takes title to the property and becomes the borrower on the loan. That’s going to be owned by that fund. It’s going to be wholly owned. It’s a wholly owned subsidiary of that fund. If you’ll just imagine this — I call this the “spaceship model” — imagine you’ve got the body of a spaceship. That’s where your investors are. You got the little bubble on top, that’s the manager. Then you’ve got the legs down below with feet, and that’s all your different single-purpose entities for the properties that you own. That’s your little visual for the day. That’s something that’s kind of silly.

Ruben Greth:

I like that.

Kim Lisa Taylor:

That’s the spaceship fund model. I don’t think you’re going to find that in The Legal Times, but…

Ruben Greth:

It’s all good. That helps for the visualization. It’s good to be entertaining a little bit, you know, we’re we got lawyers and lawyer-talk going on here. You know, you got to shake it up a little bit to keep the listeners’ attention, for sure. I mean, I’m fascinated with everything that has to do with syndication law. Let’s keep going because you have one that’s called a “Deal-By-Deal Segregated Fund Structure.” I am very curious about this one.

Kim Lisa Taylor:

Yeah. So here’s the problem with the blind pool: the blind pool is great because it’ll allow you to raise money maybe before you have deals under contract. Instead of attaching property information to your offering documents, you’re going to attach your business plan. The investors are going to see, “Here’s the business model we’re following and the types of properties we’re going to buy,” and what parameters they have to meet. It talks about your team and all of that. And so that’s something that we can help you create. We call that an investment summary.

That’s the whole fund model, but the downfall is that it is the hardest possible way to raise money. When you tell somebody that you have a private equity fund or a blind pool fund, the images that instantly jump up in their minds are you in a Ferrari, in private jets and exotic vacations, and them driving a Toyota, shivering in the winter in their homes. It’s very hard to get people to invest in that model. I can tell you that we’ve written a lot of funds that I don’t think anybody’s raised money with, just because it’s so difficult. There’s a hybrid …

Ruben Greth:

I’ve got to stop you right there before we go into the hybrids. The people that do have success with the fund models is the people that have like really high-net-worth networks, I mean like really high-net-worth. Those are the guys… I had somebody that’s raising for a hundred-million-dollar fund on the show that I just released today, and he seems very confident because of his church-TV personality background, that he’s going to raise the whole thing and do another two or three funds after this one.

Kim Lisa Taylor:

Yeah. You’ve got to have a marketing machine in place and you have to have a significant track record. The first thing everybody’s going to ask you when you’re doing a fund is, “How many of these have you done before?” If you can tell them, “We’ve had five that we did as one-off deals as specified offerings, and now we want to go into this fund model so that we can execute faster on these deals or we can get better deals.” You’ll rationalize why it’s better to do it that way. Then they may say, “Okay, that’s fine; you have the track record and the experience to go ahead and do it.” It’s really about having the track record, but then also having a marketing machine to get out there and really get the word out about your fund.

Somebody that a lot of people are probably familiar with is Grant Cardone. Grant Cardone has a Regulation A+ fund, and he’s allowed to raise up to $50 million in a 12-month period. I don’t think anybody would argue that Grant is a marketing machine. He’s just got the network and the ability to get that out there to enough people that they’ll invest in that kind of a thing. For the ordinary people who are buying two, three deals a year, it’s going to be a challenge to go with that blind pool fund model.

Then there’s these hybrids that you can think about. One of them, we call it the Deal-By-Deal Model. You’re still creating one LLC that’s going to raise money from investors, but instead of raising all the money in one pool, you’re going to separate it by classes within that LLC.

Class A or a Class A1 is going to be the class that acquires the first property and only those investors in Class A1 own that first property. You’re still going to use the single-purpose entity to take title to the property because the lender’s going to require that, but it’s just going to be owned by Class A1 of that fund. And then when you get another property, you’ll create Class A2 and a Class A3, and so forth. You’re still raising money deal-by-deal, and you’re still distributing cash flow deal-by-deal. Every time you get a new property under contract, then we would do an amendment to that operating agreement. Instead of starting over and writing a brand-new operating agreement, we’d do an amendment to that operating agreement saying, “For this deal and people in this class, this is the waterfall, these are the fees.”

Ruben Greth:

Let me see if I can repeat that. In my version of English, as English is my second language, by the way, so it’s not that good. What you’re saying is that I, as an investor, can create a fund and then as I get people very interested in investing with me — assuming that they know they can trust me and that I have a track record of doing syndication deals or my team does — we can actually say, “We can put your money in here, and before we put your money into a deal, you can actually look at it and then decide whether or not to proceed with that specific one, and yet still have the ability to diversify in multiple properties within the fund, but not be in every single deal in the fund.” Is that right?

Kim Lisa Taylor:

That’s exactly right.

Ruben Greth:

That is super sexy. I really love that model. I want to find out everything that I can about how this is structured. Before we go into that, I’m very curious about one specific thing. I even wrote it down in the book that you gave me. I’m curious about this: If you are raising capital from institutional financing or the private equity shops, or these broker-dealers, or single-check writers, do you structure the syndication or fund differently than if you’re raising from limited partner capital?

Kim Lisa Taylor:

My experience with those — I call them quasi-institutional investors — is that they don’t want to go into a blind pool fund. They might like your deal and they will go invest alongside your fund, but your fund is really better reserved for the “retail investors,” the individuals with $50,000 to $100,000 or a couple of hundred thousand dollars that want to invest. Put them in your fund, and then when you find these bigger players, use them for your bigger deals. Say you feel comfortable raising a couple million dollars, but you don’t know if you can pull down $4 million raised by yourself, then you could bring in a private equity company that might come in for half that. And so you raise half, you still create your syndicate and then your syndicate joint-ventures with this other private equity company, and there’s a side-by-side relationship there.

Ruben Greth:

Okay. Let me ask you, what exactly is a private equity company?

Kim Lisa Taylor:

A private equity fund is really just another syndicate. It’s just another fund. It’s somebody else’s fund that they’re going to invest in your fund, so it can be called a “fund of funds.” It’s just somebody else that either has their own money — maybe it’s a family office, maybe they’ve put together their own $20 million fund and they’re looking for people to co-invest with — it’s just another entity that’s formed and probably following one of the private securities exemptions like Regulation D, Rule 506 versus being a public company.

Ruben Greth:

Okay. People walk a dangerous line in the syndication business because raising capital can send you to jail if you do it incorrectly. I’m curious, I want to give you some hypotheticals here. Hopefully, you don’t mind. I know that that can mean a lot of things, but I know some people that have developed nice networks of investors and they go to a sponsor and say, “I can bring in my pool of investors, but obviously as a capital raiser. And to be legal, I have to do other ongoing duties as a general partner within your business.” That’s the way a conversation may start that begins a beautiful partnership, right?

You get one partner that focuses on raising equity and doing some other things like underwriting deal analysis, market analysis, and ongoing duties, including investor relations. You have some other person potentially that could do deal finding and the locking up of properties, and putting them under contract, and all of that stuff, and those two people merged together. I want you, if you could, perhaps break down what can go wrong in this situation. How can people go to jail?

Kim Lisa Taylor:

Yeah. The red flags here are these capital raisers. You’ll get people who will say, “Oh, I can raise capital from my group of investors.” There’s two models for you to do that. You could either refer your investors directly to somebody else’s deal. That’s a little risky because if you’re ever planning to do your own syndications, you’ve kind of given away your investors, and now they’re somebody else’s investors, they’re not yours. You may be able to take a position in their management entity and still maintain contact with those investors, but it’s going to be hard for you to police whether or not that other group, and especially if you ever separate from them, continues to market to those investors that you referred.

The other way you could do it is to form your own, what’s called a fund of funds, where you create one of these, either a blind pool or a deal-by-deal fund, like we were talking about, and you put together your own group of investors and then you all collectively decide this is the deal we’re going to invest in.

The risk in both of those situations is the way that you’re compensated because you are not allowed to get a commission or any amount of money that’s related to how much you’ve brought to a deal, unless you have a securities broker-dealer license. And that’s very difficult to get.

It’s not something you can just go out and take a test for. Even if you have an actual securities license, like a Series 7 or a Series 22, you still have to hang your license with a broker-dealer who’s then policing what you’re doing, and they’re generally not going to allow you to do that. They have to do a lot of due diligence on deals before they would allow you to sell them under their name. Having a securities license, and unless it’s a required broker-dealer license, isn’t going to help you. That’s the only way you could get paid a commission.

How do you get compensated? Well, the way to legally get compensated in that scenario where you’re bringing your investors to somebody else’s deal is that you become a part of the management team. The general rule should be that everybody in management of that syndicate that your investors are investing in, has a role in raising money. They all have a job of raising money, but everybody gets paid for the jobs they do in management other than raising money. It’s not you can get a portion of the ownership of that management LLC or the GP, and you can also get a share of those portions of those Class B interests we talked about, or the limited partnership interests.

Ruben Greth:

I want to bring that up actually. You mentioned that you can’t get paid commissions or money, but you also can’t get paid in terms of percentage change of the general partnership or ownership shares of the company. Is that right?

Kim Lisa Taylor:

You can get paid in shares, but again, there should not be a formula related to how much money you raise. The formula needs to be related to what job you’re doing for that syndicate other than raising money. Right? Everybody raises money. You should have a role in management. I’ve seen people before where they have 15 or 16 people in management. It’s just not feasible to keep all those people actively involved in the role of management in a syndicate, because they’d been stepping all over each other. You really have to be very cautious if you are a syndicator about who you let in and what role they play in making sure that they actually perform that role.

If the only thing they did was brought investors and they never did anything else, and then if you were ever challenged by a regulator, you wouldn’t be able to defend. The regulators don’t want to see transaction-based compensation, and they interpret that very broadly. That’s what they’re looking for. If they ever had the person that referred that money on the stand and said, “Well, how was it determined how much you got paid?” Well, the last thing that should be said is, “Oh, I brought in X number of dollars and we had this formula, and this is how we calculated my percentage of ownership and my compensation,” because that would be like, “Okay, you lose.” That’s not the way to do it.

It’s a very tricky thing. There was a reason that it’s this way. Regulation D, Rule 506 was created in the ’80s and mid ’80s. It was created so that people could do what they called “country-club deals.” They had all these people who knew people in their country club and they wanted to bring them in on their deals, and buying shopping centers, multifamily, whatever. It was like the secret club that could get involved in these deals, but you had to know each other pretty well. These were word-of-mouth deals. These weren’t meant to be advertised on social media or in any other fashion. They were just people that you knew wanted to put together a small group of people and take down some deals. That’s what Regulation D, Rule 506 was originally designed for.

In 2012, when the JOBS Act passed, then the SEC created regulations that allowed the original Rule 506 to became Rule 506(b). That’s still your friends and family exemption not allowed to be advertised, it really needs to be distributed by word of mouth. Then they created Rule 506(c), where they said, “Well, okay, if everybody in the deal is accredited, then I guess you can go ahead and advertise.” If you want to be able to advertise, you can do that, but everybody in the deal has to be a verified accredited investor. In the 506(b), they can self-certify; they can just check some boxes and say, “Yeah, I meet that criteria. I am accredited.” In 506(c), they actually have to go through a verification process.

This is really just the regulators trying to protect investors. If you know people well enough, and you want to take a chance on those people, and you want to invest with them, they’re not going to stop you from doing that as long as you’re not advertising to strangers. If you’re going to advertise to strangers, they want to make sure that the people you’re advertising to are savvy enough to be able to understand the risks and they could afford to lose the money. That’s the distinction there.

Ruben Greth:

Wow. It’s so hard to listen to you and hold a question that I have for you simultaneously. Those two things, I was just, “Wow, I’m listening to everything that you said, but I want to go back a little bit and see if I can eloquently put this question.” We talked about people that have ongoing duties in the business, but one thing that we didn’t bring up is what happens if we bring in a person that has some equity partners or a database of investors, and then they agree to do X, Y, Z ongoing duty, but they fail to perform on those duties.

Kim Lisa Taylor:

When we write the management operating agreements, we actually have a place where you can insert the scopes of work that you expect each of the members of your management team to perform. If you do that and attach it to that manager’s operating agreement, well, now you’ve got some teeth in the event that somebody just drops out and they don’t perform. You need to remove them then, because otherwise, you’re losing your defense that they had a role in management other than raising money, and that you should still be allowed to retain your exemption.

Ruben Greth:

Well, what happened in that scenario with the person that raised the money? They would just get booted and then the other sponsor would keep all of those investors?

Kim Lisa Taylor:

You’ve got to decide upfront and make sure that it’s written into the management operating agreement, what should happen if somebody is unable to perform. By then, they probably would have also gotten a share of the acquisition fee or some of your upfront fees, and you’ve just got to establish those rules up front. That’s part of the reason that you want to work with a very experienced securities attorney, because our documents evolve all the time based on the real experiences of our clients. I’ve been involved in 300 syndications where I’ve been the responsible attorney, and we see things all the time and we’d go back and look at our documents and say, “How can we guard against this and make sure it’s easier for the next person that has to deal with this situation?” You’ll find a lot of unique provisions.

If you’re dealing with somebody who doesn’t do this on a regular basis or their real estate attorney, who says, “Oh yeah. We can just write a joint venture agreement for you or we can just write this, we can write that,” they aren’t going to know that stuff and so you could end up in a situation later on where you would wish that you have used somebody who had had that experience and could have helped you prevent it.

Ruben Greth:

This is awesome. I love talking with syndication lawyers. You’re doing a phenomenal job. How about this? Let’s say that I have a database of investors and I want to partner with somebody that’s got a deal, right? There’s a couple of ways. I can either go into the sponsor’s deal as a part owner of the company, or I can create, separately and differently, my own fund of funds that invest in the sponsor’s deal. Now, you mentioned something that was very interesting to me, and I don’t want to take that concept from you, but can you explain where and when it makes sense to do it one way versus the other?

Kim Lisa Taylor:

Well, when you have enough investors, I mean, if you’re just bringing in a couple of hundred thousand dollars … for you to do a fund of funds, you’re going to have to create your own syndication documents and you’re going to have to hire your own securities attorney. You’re going to be following your own securities exemption and other regulatory requirements. You need to have a significant investment in your own fund of funds. It’s probably, this is where you might want to use that Deal By Deal Fund Model where you’re going to create one LLC, but you’re going to create a class for each investment that you make on behalf of the smaller group subset of your investors.

Ruben Greth:

Wow.

Kim Lisa Taylor:

You’d have one set of documents and we don’t have to keep rewriting the private placement memorandum and the entire operating agreement, and subscription agreement every time. We just have to write that operating agreement amendment.

Ruben Greth:

The fund of funds can go and select different sponsors. Is this how people become private equity shops or private equity…

Kim Lisa Taylor:

It may be one thing that they do and there’s all kinds of business models out there. People can invest in anything. There’s giant hedge funds that rely on the same securities exemptions that our clients are using, but they’re raising billions of dollars using those exemptions. As of a couple of years ago, most of them were still using the Reg D, Rule 506(b), and they were developing relationships with prospective investors before they started offering them investment opportunities.

Ruben Greth:

You mentioned and broke down something that a lot of people do and know about, which is you got your Class A investors, and then you’ve got your Class B investors. Let’s say that I have or I am a private equity shop or I’m a fund manager, and I come to a sponsor and I negotiate, “I can bring you a $5 million check or whatever amount of investors that equates to 5 million, and I’d like to get my group of investors a better deal than you, because it’s going to be very challenging for you to get a trillion or however many individual investors. I can bring you a big chunk of them right now, as long as either I am a GP in your company or I manage my own fund.”

Then that creates this whole separate class. There’s like a Class A1 and a Class A2, and then there’s the other. Have you dealt with that at all in the work that you’ve done? Tell me a little bit about that. I don’t think people discuss this enough.

Kim Lisa Taylor:

Yeah. That’s going to be described in that article that I mentioned called “Joint Ventures and Co-Investments.” Now you’re looking … if you want to get some special terms for your group of investors or you’re bringing enough money to a deal that you want your own separate terms aside from whatever they’re offering their other investors … you can either ask them to have a separate class, and that would become a priority class that will get paid even before the other Class A investors in somebody’s syndicate — you have a special class — or you can do a side-by-side investment with them where you’re creating a joint venture entity, and that’s going to be the owner of that single-purpose entity.

We’re back to our spaceship model, only now the body of the spaceship is a joint venture entity with your syndicate as one member, and this other company that’s bringing the significant money as its other member. Then the two of them are creating a joint venture agreement. The cash flow is going to flow from the property up to the joint venture entity, then be split amongst the joint venture members side by side. If one of those joint venture members happens to be your syndicate, then your syndicate would then be the recipient of a portion of those joint venture proceeds. Then that would be distributed amongst your syndication. That’s your side-by-side co-investment model versus the preferred equity class model.

Ruben Greth:

From the perspective of somebody in my shoes, I think that’s a very interesting model, because if I have a fund of a group of investors and I can negotiate special terms that they couldn’t get as individual limited partners or retail investors, then that’s why they would come to my fund versus going direct, because they’re going to get better terms with me, right? Assuming that I don’t take too much of the pie, which would be the whole idea would be to get going and build some momentum, and then do everything legally and have an active role, and depending on the situation. The other aspect that I really like is that it protects me for my position as a sponsor from people, preventing them from circumventing me. Right? I can get them better terms. It helps the investors, it helps me, it’s great. But one thing that you mentioned is if I ever partnered with the sponsor and then brought my investors to them, and then did ongoing active duties within that general partnership, because I’m part of the LLC, now I have to be a guarantor on the loan, which is a major drawback.

Kim Lisa Taylor:

Anytime in either of those scenarios, either if you bring your investors in as a preferred class in somebody else’s syndicate, or if you come in as a side-by-side co-investor, the determining factor of when you have to present somebody who can be underwritten on the loan is whether or not your class or your joint venture member has the right to take over management of the property. If that right exists, then the lender is going to insist that someone from your team be underwritten. They don’t really care which of the joint venture members they end up with as owning the property in the end. They might even accept that there’s going to be a buyout scenario for one of the joint venture members in two or three years. They would be okay with that as long as both of them have been underwritten and they said either one of you have the financial capability to take on this deal on your own.

If you’re dependent on someone from that private equity company or that joint venture partner to be able to qualify for the loan, then you would have to come up with a substitute guarantor before the lender would release them if you were ever going to buy them out.

Ruben Greth:

If a company has a deal and somebody wants to bring in their class of investors or their group of investors, and they raise a  specific amount, is there a specific percentage that they have to be guarantors if they’re in the management of the sponsorship company? If they have 50% versus 20%, is there some kind of rule like that that I’ve heard before?

Kim Lisa Taylor:

Well, it’s still going to depend on who the lender is. If it’s a Fannie Mae loan, then it’s a 20% threshold. Anybody who has 20% or more of the equity interest in your deal, they’re going to want to underwrite. Now, if they can see that your fund is bringing in 20% of the equity, they’re going to ask you for a list of those investors so they can see if any one of them is that 20% member. If you show them a list of 5 people that make up 20%, they’re not going to be as interested in underwriting you. If you brought in one investor or you were one investor coming in with that, that met that threshold, you’d have to be underwritten.

For a Freddie Mac loan, it’s 25%, but for CMBS loans, I’ve seen it as low as 10%. Bridge lenders don’t usually care, but you have to think about what’s your end game, because if your end game is to use a bridge loan to get the property stabilized and then get a Fannie or Freddie, then you have to have met all that criteria before, or then you could end up with some people who have to be guarantors that weren’t aware of that.

Ruben Greth:

That’s a very good point. Okay, let me ask you this, because I’ve heard this from a couple of syndicators that they form the company that owns the structure, the LLC that owns the property in the state where the investment is, and then the management company is somewhere else, like it’s in Delaware. Then the managers of that Delaware LLC are in Wyoming and things of that nature. Do you deal with this at all?

Kim Lisa Taylor:

Oh, yes.

Ruben Greth:

And then specific to lending, do some lenders require you to have an LLC where there’s a benefit for that lender to have it because of their own specific things that they want to protect for themselves?

Kim Lisa Taylor:

Sure. Any agency debt, if you’re getting a Fannie or Freddie Mac loan, then if you have a loan balance of $10 million or more, you’re going to be required to take title to the property in a Delaware LLC that would have to be registered in the state where the property is located. That’s going to always be a requirement. Some of our clients, as a general rule, just decide to use those single-purpose entities. Form it in Delaware, register in the state where the property is located. They just do that as a matter of course, but on the smaller deals, it’s more typical just to form the entity in the state where the property is located.

And so the entity that’s going to pull the money from investors and have the Class A and Class B members, that entity is usually going to be the one that takes direct title to the property in a specified offering. Then that would be formed in the state where the property is located. The management, if you have members who are in different states, then we just form the management entity in the same state where the property’s located. Or if we have some members who are from different states but they are going to continue to do a bunch of deals together, then maybe they’d decide to form a Wyoming LLC.

There’s a lot of different factors that go into where something should be formed as a general rule for a smaller deal. You’re going to deal with the state where the property is located, because it’s more costly to register in Delaware and then register as a foreign entity somewhere else.

For instance, if you wanted to register a company in Texas, it’s like $300. If you want to register it in Delaware, you’ve got to pay whatever Delaware’s fee is and then you’ve got to turn around and register it as a foreign entity in Texas. It’s $750 and that’s annually.

You just start escalating costs. You have to have a registered agent in both places. Now you’re paying a couple thousand dollars more a year than you really want to, and then you have to think about the protections. If you’re doing a big fund, then usually, all of those are going to be formed in Delaware. Big funds are usually always formed in Delaware, and that’s because Delaware has very favorable corporate laws and they also have a Court of Chancery that only deals with business disputes. You’re not going to get bogged down in a court system where you’re going to have to be in line with the evictions and criminal matters, and things like that.

You’re going to go straight to a group of judges that understand business matters and should be able to more expeditiously get through them. That’s why a lot of people choose Delaware just because it’s very corporate-friendly and you’re not going to get bogged down in the legal process.

Ruben Greth:

Absolute fire. I love this content. Okay. We need to go back and discuss the different structures. We went over blind pool and the deal-by-deal segregated funds. But before we go down that road, we’re going to jump into “The Lightning Round.” Let’s start with this: favorite vacation you ever took.

Kim Lisa Taylor:

Oh my gosh. Alaska. My honeymoon in Alaska, we rode bicycles with camping gear and took the ferry up and down the inside passage.

Ruben Greth:

I love Alaska. It’s absolutely beautiful over there. Okay. How about this: favorite personal development book or course.

Kim Lisa Taylor:

I think, “Think and Grow Rich” was a real an eye-opener for me. It started me thinking differently. Also, “Rich Dad, Poor Dad.” I think both of those were just turning points where I shifted my thinking and sent me on a different course.

Ruben Greth:

Okay. I know that you have a license as a geologist in California. Tell me something or your favorite thing that you love about geology.

Kim Lisa Taylor:

I just love the mountains, that’s why I’m in Northern Idaho. I just love, I call it “naked geology.” I like to see the bare rocks above the trees, and have done a lot of backpacking in the past. I like to ski. I just like to be outdoors and doing those kinds of things. I never even saw a mountain — I grew up in Michigan, so I never even saw a mountain — until I was like 21. I remember driving across the country to Denver and seeing the mountains in the distance, and just not even realizing. It’s like, “Are those mountains or are those clouds, or what are they?” I think my first experience was just like going up Pike’s Peak and it was just amazing. I just loved that.

I used to live really far up in the mountains. I lived at 10,500 feet for a while. I went to law school in Denver and I commuted from a place called Saint Mary’s Glacier, where I lived for five years. That’s what made me feel really alive.

Ruben Greth:

You were older than 21 when you learned to ski. That’s interesting to me because some people are like, “Oh, I’m too old to learn,” but you went ahead and did it.

Kim Lisa Taylor:

Actually, that’s not true. I learned to ski in Michigan, but we used to drive an hour away and the hill was like 400 feet tall or something. They added dirt to the top of the hill.

Ruben Greth:

Ah, they weren’t real mountains. Interesting.

Kim Lisa Taylor:

Really short runs. Yeah. There were a lot of hills, so I learned to ski there, but I didn’t start skiing on big mountains until I got to Colorado, and then it was a different experience.

Ruben Greth:

What is your favorite ski resort?

Kim Lisa Taylor:

There’s a little cool one here called Lookout Pass that’s outside of Coeur d’Alene, but then there’s another really cool one in Colorado called Loveland, and I liked that one a lot.

Ruben Greth:

Very cool. All right. How about this? Let’s get into some deeper stuff. Have you ever experienced a miracle or had a near-death experience?

Kim Lisa Taylor:

Well, I mean, maybe. I had a very close family member that passed away, and it was actually my mother when I was a child, and she came to me in a dream. Just spoke to me and said, “You’re going to be okay.”

Ruben Greth:

That’s amazing. Woo. I love that type of stuff. Okay, so answer me this: What’s the best way for syndicators or multifamily investors to raise money, from your perspective?

Kim Lisa Taylor:

You’ve got to network. Face-to-face marketing is the most effective way to develop a database of prospective investors. In this world right now, we’re doing a lot of digital/online, but so you use Zoom for that. It’s better than a phone call. Phone call is good; Zoom, where you can see somebody and look them in the eye, that’s even better. Face-to-face at a networking event is even better yet. We interviewed a man named Sam Freshman…

Ruben Greth:

I love him. I had him on my show. He’s great.

Kim Lisa Taylor:

Sam is fantastic and Sam has a fantastic syndication book, too. I asked him how much money has he raised, and he said, “Oh, like a billion dollars.”

Ruben Greth:

It’s true. He’s done it for 60 years.

Kim Lisa Taylor:

I said, “How did you do that?” And he said, “I just joined every club that I could and I started showing up every month.” I think that was very wise. It’s like, get out of the real estate investment networking events and go to where you’re the only  real estate investor, because now you’re interesting versus competing with all the other guys and there’s always going to be somebody bigger than you in a real estate room, you know? And so if you try to be a big fish in a small pond, I think that’s going to be a more effective means for you to find long-term investors.

Ruben Greth:

Great answers on the lightning round. I really love that part of the show. Thank you so much. Okay. Let’s go back into the different kinds of funds.

Kim Lisa Taylor:

There’s the specified offering, there’s the blind pool model, and then there’s the deal-by-deal. Then there’s one more model that we do use. Instead of actually creating one LLC with separate classes of investors for each property, we could actually just create a master PPM with your business plan attached to it. Then when you have a deal, we create a separate LLC for that specific property. That one is a great way to go. That one probably segregates your liabilities the best that you can. Either one of the deal-by-deal or the segregated offering with a completely separate offering and separate LLC works.

We would just talk to you about the size deals you’re doing, the kind of investments that you’re doing, how much you’re going to be raising for each deal, and that would help us determine which of those models is going to be appropriate for you.

Ruben Greth:

Okay. Kim, you are actually an investor in a syndication or you are a syndicator, or you syndicated at least one deal, right?

Kim Lisa Taylor:

Yes.

Ruben Greth:

Would you mind sharing a little bit about that deal?

Kim Lisa Taylor:

This was a lot of the school of hard knocks. My husband and I, we went to the RE Mentor coaching program and we found a deal. Unfortunately, our timing was really bad. It was, I think we bought the property in 2010 in Columbus, Ohio, and our intent at the time was to get a hundred units, and we had three properties under contract. We were going to try to take them all down under what’s called a semi-specified offering. We had three properties. We were raising money for those specific three properties at one time. During the midst of it all, Fannie Mae redlined Columbus and said, “We’re not loaning there anymore.” We ended up getting a loan on one of the properties and the other two fell out.

We ended up with this orphaned property. It was 27 units. And we bought it from the Columbus Metropolitan Housing Authority, which was an experience. It was such a challenge. The property was a challenge, mainly because it was too few units too far away. We couldn’t hire a full-time property manager to run 27 units. And so we’d hire a local property manager and they’d come in great guns and say, “Oh yeah, well, we’ll get all these vacants and we’ll get all these units rented and everything for you.” We’d have to fire them every two years without fail.

We owned the property for nine years, because they realized after they got in it, that they weren’t going to assign some one person to it a third of the time, which is what I really needed. They’d just give somebody, like this orphan property and it wouldn’t get enough attention. Then they’d start charging us too much returns, and then pretty soon we’d end up with vacants that would start creeping up. So my advice is don’t buy small-ish properties far from home because it’s too hard to keep good property management, unless you’ve got that threshold: 80 units plus. That was one of the lessons that we learned on that one.

The other thing is I thought, “Oh, well, we don’t need a real estate agent attorney. I’m an attorney. I can just work on that purchase and sale agreement.” And so that was a mistake because the owner, the Columbus Metropolitan Housing Authority, decided during the midst of escrow that “All of our tenants were month-to-month before, and now they’re going to be HUD tenants, so they’re going to have to go to a one-year lease. We should give everybody the opportunity to move out.” They sent everybody a letter and said, “You have the ability to move out if you don’t want to stay, and we’ll give you $1,000 towards your moving expenses.”

We had 16 tenants take the $1,000 lottery and move out. We ended up with a largely vacant property due to the fault of the seller. Had we had a purchase and sale agreement drafted by a qualified commercial real estate attorney — not me — then perhaps we could have avoided that by having some clauses that they had a guaranteed rent, which made me think twice about offering that. We ended up with a lot of losses for that. We actually ended up living at the property. There’s another thing when you’ve got a property that’s suffering and you don’t have enough money to pay your investors, then you might have to live there. Be careful what you buy. We were there for about four months, and yeah, it wasn’t the best neighborhood.

Ruben Greth:

Wow. Those are some incredible lessons.

Kim Lisa Taylor:

There were some crazy lessons in that, and then we didn’t really have any cash flow for nine years.

Ruben Greth:

Wow.

Kim Lisa Taylor:

It was very difficult and we ultimately ended up selling it, and all the investors and us got made whole plus we earned, I think, like a 12% return or something like that, which made everybody happy. It was like, “Hey, we made something. We all got our money back and that’s good.” But my husband and I suffered through that property. He had to deal with it on a regular basis for no compensation for nine years, and he just couldn’t wait to get out of it. Lessons learned: Don’t buy at the wrong time of the market. Best laid plans go awry. Use a real estate attorney licensed in the state where the property is located to help you with your purchase agreement and with dealing with your lender, but don’t have them draft your syndication offering documents. Let them do what they’re good at. Let us do what we’re good at. Let us set up your companies, help you structure deals and help you comply with securities laws. Let them help you with the lender and the seller.

Ruben Greth:

Phenomenal. Shout out to The Capital Raiser Nation. Thank you so much for listening in. If you are still here after about 50 minutes or so of syndication talk, then you are super-interested in learning, so I want to congratulate you. Please leave us a five-star review and shout out to Bakerson, who is my multifamily company. Before we end off, I want to talk a little bit about your book before we end, but tell the audience how to get hold of you.

Kim Lisa Taylor:

The best way to reach us is go to our website at www.syndicationattorneys.com. You can schedule an appointment there with either me or another securities attorney, and we’re happy to talk to you regardless of what stage of your process you’re at. If you have a deal or if you’re just starting to set up your team. Our role and I think that the thing that we’re really good at, is helping people who are just starting out to start and grow their businesses, to understand their legal obligations and securities laws, and all that stuff. You can get some great information on our website about that. Check out the Library; there’s tons resources in there that’s free.

Ruben Greth:

There’s some amazing resources, for sure. Definitely, go to the Library tab there. Real quick, I want to, before we end, I want to know when you wrote this book, “How To Legally Raise Private Money,” what were some of the main things that you wanted to cover? What do you think is the greatest thing about this book that people can learn from?

Kim Lisa Taylor:

It was my brain dump, right? It was like, “Hey, if something happened to me tomorrow, all this information wouldn’t be lost, could stay out there.” I really just wanted to create a step-by-step guide on the mental process and thinking that you have to go through to become a successful syndicator, and the steps you need to take to help start and grow your syndication business. I think we did a pretty good job of that. And I wrote every word. This is not something that was ghost-written. I worked on it for about eight years and then finally decided I really had to get it out there. It is a No. 1 Amazon best-seller. You can get a free copy of it, a free digital copy at our website, at www.syndicationattorneys.com, or you can buy it on Amazon, but either way works. It’s gotten a lot of good reviews.

Ruben Greth:

Yeah. I read it myself. I read half of it, the paper, and then the other half, I think I have it downloaded somewhere on, I think on Kindle. Anyways, it’s been awesome having you. I mean, you shed so much light on so many topics that I’m so interested in and hopefully, the listeners love this type of information as well. With that, we’re going to wish you a great week and thank you so much for coming on, Kim Lisa Taylor.

Kim Lisa Taylor:

Thank you. Thanks for having me.

Ruben Greth:

You bet. Take care. This is awesome. I love talking with syndications experts.