Legal Syndication Matters, With Jonathan Mickles

In this interview with Jonathan Mickles on his podcast, Strategic Multifamily Investing, guest Kim Lisa Taylor, discusses securities law, and how to legally raise private money, and other legal considerations when syndicating your investment deals.

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Jonathan Mickles:

Hi, this is Jonathan Mickles with The Strategic Multifamily Investing Podcast. And today, I have with me, Kim Lisa Taylor.

I’m going to let you introduce yourself. Who are you with? What kind of organization are you with?

Kim Lisa Taylor:

I’m the founder of Syndication Attorneys, PLLC. Our website is www.syndicationattorneys.com.

We help entrepreneurs who are raising money, mostly for real estate, but it could be for  other things as well. We do all of their securities offering documents for them, we provide deal-structuring advice, and we set up their companies and draft the operating agreements. We also do joint venture agreements, and just anything that’s related to using other people’s money, that’s our niche.

Jonathan Mickles:

That’s a good thing because we need all of those. You referred to securities a couple of times, and I know that there are some people who are in multifamily that are doing securities and some people who are doing joint ventures, and some people say that there are different types. What is securities law? Let’s talk about that real quick. What is securities law? So we have a definition.

Kim Lisa Taylor:

Sure. When you are selling interest in a company, then you’re selling something called an investment contract because these investors are investing in a common enterprise, they’re expecting you to generate a profit for them. And when you’re doing that, when you have passive investors that are relying on you to generate the profit, you’re selling something called an investment contract, and investment contracts are securities. So if you look in the definition of “what is a security” from the 1933 Securities Act or from any state securities act, you’ll see this big, long definition, it’s about a half-page long, but investment contracts are in there.

Also in there are promissory notes. Some of you that might be borrowing money from people should be aware that if you’re doing that repeatedly and your business depends on it, you are also selling securities, so securities laws would apply to you. But when you’re selling investment contracts, definitely securities laws apply.

And so what does that mean? That means that you either have to register your offering by going public and getting preapproval from regulators before you can sell it to anybody, which is like an IPO, that’s what Facebook did, Google did. It takes a long time and it’s very expensive. The alternative to that is to qualify for an exemption from registration, and the exemptions each have a very specific set of rules.

Once you learn what the rules are for your exemption, then you have to document how you’ve followed those rules and have the proper documentation to give to your investors, and then there’s some filings that we do with the securities agencies to tell them what you’re doing. And that’s what it means to be selling securities.

Jonathan Mickles:

There’s a couple of questions you’ve just raised here. You mentioned people who are borrowing money consistently. Now, is that borrowing money from a bank, borrowing money from some of the agencies, or is that borrowing money from private people?

Kim Lisa Taylor:

Private people, and people who are not holding themselves out to be in the business of lending. So if you’re borrowing from a hard money lender, I wouldn’t worry too much about it, but if you’re borrowing from your acquaintances that you meet at your Real Estate Investment Association meetings, individuals with self-directed IRAs and things like that, that’s when you need to start thinking about complying with securities laws. And really, that means following these exemptions, which is probably going to require that you… Well, it will require that you disclose all the material facts, including the risks of investing with you, and then there might be some filings that you have to do as well.

Jonathan Mickles:

And for anybody who is listening, we’re going to have one of the guys who wrote the book on risk for the Project Management Institute joining us talking specifically about some of the risks in multifamily, but when you talk about holding out and in disclosing risks, again, I’m going back to something I asked a little bit earlier, sometimes people go to the REIA — REIA stands for Real Estate Investment Association for those who don’t know — and they meet people who may be interested in working with them on a multifamily project, and they say, “Oh, well, let’s just joint-venture because if we joint-venture, then it’s not a security and so we don’t have to follow these securities laws.” That’s what I hear.

Now, I could be incorrect in saying that, but is there such a beast in terms of the way to do business like that?

Kim Lisa Taylor:

Yes. You always need to understand the difference between a joint venture and a security. So I mentioned when you’re selling securities is when you have passive investors that are relying on you to make a profit for them. In a joint venture, all of the partners have to be actively involved in generating their own profits. So it’s more than just a voting right, they actually have to meaningfully participate in the investment. You don’t take control of their money, so they’re not putting their money in a bank account that you make all the decisions on how you’re going to spend it. And when you need money for a project, you’re going to ask them to make that deposit and then you’re going to go ahead and spend it according to what the two of you or however many of you there are, have agreed to.

Jonathan Mickles:

Exactly. This reminds me of something. When I was taking the Certified Investor Agent Specialist designation, when we were teaching that, we would say, “If you’re going to be meeting with a group of investors who are going to be doing something with residential real estate, everybody needed to have a say in that particular thing, otherwise you could be working with a security.” Thank you very much for clarifying that.

Kim Lisa Taylor:

Sure. Let me just mention one more thing about joint ventures. Joint ventures are great for three or four people, they’re never great for more than five.

Jonathan Mickles:

Okay. So three or four, no more than five. If you’re getting more than five, you might as well just go ahead and go into the securities thing.

Kim Lisa Taylor:

That’s right. That’s right. And my experience with doing hundreds of these offerings is that when you get more than five people in a joint venture, that you can’t agree on things and things always end in a dispute.

Jonathan Mickles:

Got it. It sounds like when you’re talking about a security, in which we’ll talk about the types of securities in a minute, that you probably want to limit the number of people that you have on the general partnership side if there’s security as well then.

Kim Lisa Taylor:

It’s the same thing because usually, if you are doing a securities offering, then you will have some kind of a general partner entity, which could be a joint venture at that level. And so there, you want to limit that to no more than five. Every time we’ve ever seen more than five commits, it’s always ended badly.

Jonathan Mickles:

That’s very, very key. So now, there are different types of offerings, I think you talked a little bit about them before, alluded to them, but there are two big ones that normally most of us see in the multifamily space and those that are doing syndication, and they are?

Kim Lisa Taylor:

So are you referring to like a specified offering, or …?

Jonathan Mickles:

Well, yeah. The types of securities exemptions. Are we talking about a B and a C?

Kim Lisa Taylor:

Okay, securities exemptions, got it. All right. So the exemptions that most people are using… Well, let’s just back up a little bit. So what are the rules of these exemptions? Well, there’s state exemption, so if everything you’re doing is all in one state — you, all your investors, and the property are all in one state — then you might want to be using an intrastate exemption. So if you’re in California, then you would look at the California securities exemptions and see if one of those applies to what you’re doing, because it might be a little less restrictive than the federal exemption.

But if you’re not, if you’re crossing state lines or buying property out of state, your investors are coming from multiple states, then you want to be looking at the federal exemption. And so the federal exemptions that most people are using—  there’s about 25,000 of these things filed every year with the SEC, the median raise for one of these offerings is $1.5 million to $2 million, so not a lot of money —  but there’s the two options available to you under the federal rules that most people are using. There are a couple of other options, but they’re not very well used.

Both of these are under Regulation D, and one of them is called Rule 506(b), B like boy. And the other is called Rule 506(b), C like cat. So 506(b) or 506(c).

Rule 506(b) has been around since like the 1980s. It was originally just called Rule 506. This rule allows you to raise an unlimited amount of money from an unlimited number of accredited investors and up to 35 non-accredited investors. The investors can self-certify, so they don’t have to go through a verification process, but you can’t find them through any means of general advertising or solicitation.

The way to prove that you didn’t do that is to be able to demonstrate you had a substantive pre-existing relationship with these investors before you started making offers to them — before you started telling them about your deal. So that’s 506(b).

The difference now with 506(c), you can raise an unlimited amount of money from an unlimited number of verified accredited investors. They actually have to go through a verification process within 90 days of making the investment, and then you can freely advertise those offerings.

Jonathan Mickles:

So then let me go back to 506(b). You mentioned that these non-accredited investors and I guess accredited investors can self-certify. How does that work? What does the syndicator, generally the person who the operator or someone who’s putting together this deal, what should they do? Because sometimes people can say, “Yeah, I have everything.” How does one self-certify? How does a syndicator make sure that they are doing the right thing around that?

Kim Lisa Taylor:

A lot of people will use a prequalification form where you’ll send them the definition of an accredited investor or a sophisticated investor and ask them, “Do you meet these qualifications?” And they’ll sign that. And then you can start talking to them. But I think a better avenue and more in line with what the SEC has in mind is for you to actually have a conversation with them and talk to them about their qualifications.

This is a good time for you to introduce what you’re doing and just say, “Look, I’m just filling it out to see if this is something you might be interested in doing.” And if they say, “Yeah, that sounds interesting.” Then you can say, “Well, in order for me to show you the deals that I might have in the future, I’m going to have to do a little prequalification here, so I’m going to have to ask you a couple of financial questions.”

There’s an article on our website, if you go to syndicationattorneys.com, in the Library, select the Articles, there’s one that’s called “Determining Investor Suitability.” And that article explains what the SEC thinks is necessary to establish a substantive pre-existing relationship, and it talks about actually going through this qualification process and then documenting what questions were asked and what their answers were.

And from that point forward, then you would be free to start making offers to those people. They would know enough about you and what you’re doing, and you would know enough about them and their financial qualifications or whether your deals are suitable for them, for you to be able to start making offers to them in the future.

Jonathan Mickles:

That makes sense. So these are phone conversations that you’re having with these potential individuals. I know some people have gotten to the point where automation has come in to play where they send out a questionnaire for someone to maybe complete or fill out, and then follow up with that questionnaire and answering or asking or re-asking those questions. Is that something that you would give a thumbs-up to?

Kim Lisa Taylor:

I think that’s okay, as long as they also are having the conversation.

Jonathan Mickles:

Just automation alone is not going to work?

Kim Lisa Taylor:

Electronic relationship is probably not going to cut it with the SEC, but an electronic relationship combined with a verification conversation is. Now, the other thing about that is that during that conversation where you’re determining their suitability, you’re also getting a feel for this investor, whether you like them, you want to be in business with them for the next five to seven years, because not all investors are suitable investors for you.

Jonathan Mickles:

And I can say that. You’re 100 percent right about that. I’ll say yes.

Kim Lisa Taylor:

I also agree with that.

Jonathan Mickles:

We’ll say yes. So then, in this article that you mentioned, we talk about having a conversation and sending out something to them and then give them a call. These are sometimes called touches, but how many touches do you think, in your opinion, should one make, if you will, in order to satisfy those options for the entity?

Kim Lisa Taylor:

The analysis the SEC went through when — and that’s what I talk about in that article, was it’s not about the quantity, duration of time or number of touches or anything like that, it’s about the quality of the relationship — so actually, having a knowledge of that investor’s financial qualifications and whether or not the deals you’re offering them are suitable for their investments. Just think about what other things might apply besides finances. Well, what about the duration? What if this person is saying, “Well, yeah, but I’m going to retire in two years and I’m going to need the money, and your deals are five to seven years.” That’s not a suitable person for your deal.

So duration of time. And I think you’ve got to take other factors into consideration besides just whether they’re accredited or sophisticated.

Jonathan Mickles:

And as you mentioned, those are a lot of people, most models again, pre-COVID-19, you never know what happens after COVID-19, but pre-COVID it was five years in and out. Now, I’ve seen a lot more people use a little bit longer term where, say, they may use 10-year funding, and so then that means that they’re holding on to principal for at least eight years and maybe return it in year eight. And I recently just talked with an operator who is now moving to a legacy model where they are getting into maybe a 10-year, five-year, maybe in a bridge loan, reposition the property, return back the capital within three to five years, and then get over into a federal loan, I think it’s a 40-year hard loan.

Kim Lisa Taylor:

Oh, hard loans?

Jonathan Mickles:

… for 40 years. And so then at that point in time, your returns are infinite because, again, you’ve returned your principal and you can use that principal in other deals with them, but you’re locked into deals so you continue to get that cash flow.

Kim Lisa Taylor:

That’s a pretty tried and true model. It’s different than what most people are doing, but it’s a great model to have. There’s a teleseminar that we did on our website with a gentleman named Sam Freshman and it’s called “60 Years Of Investing Experience with Sam Freshman.” I asked him during the interview, “How much money have you raised from investors?” And he said, “Oh, probably a billion dollars.”

Jonathan Mickles:

We need to talk to Sam.

Kim Lisa Taylor:

I know. And asked him, “Well, how did you do it?” I was furiously taking notes while I was interviewing him because it was just such a wealth of knowledge, but he said they use that legacy model.

Jonathan Mickles:

Well, that’s good.

Kim Lisa Taylor:

Their model is to get into deals and get rid of the loans as quickly as possible so that they own the deal 100 percent and they can share all the cash flow with their investors. And he said they have investors now that are grandkids of their original investors because nobody ever wants to get out of a deal.

Jonathan Mickles:

That’s how you do it if you’re in it for the long-term because most of the game that I’ve seen so far, and I could be very wrong, and again, there’s positives and negatives, so all of this, it’s every five years, every 10 years, you’re potentially refinancing into another agency loan or you’re leaving that property and then going into a larger property. So you started off maybe with 10, 15 units, now you’re moving into 30, 50 units, and then you move up ultimately to the larger deals. But sometimes if you are using this other model where, “We’re going to keep on to everything that we got,” then that seems to be the right way to go.

Now, there seems to be — I think I understand it, but I want to make sure that the other people who are listening to this, who we’re dealing with attorneys and trying to build, if you will, a team that they know who is on their team and that there may be one different type of attorney. Now, you can correct me in terms of — you mentioned what your niche is, but here’s what I think I see, and please help my understanding. Number one, I’m going to have an attorney that’s going to help me with my operation. So we got Red Boot LLC, we’ve got to organize this in such a way, and so I have an attorney that’s helping me to get the operations together.

And then, once we find a property, then there’s a securities attorney, like yourself, that I’m reaching out to help me organize the deal. Because generally that’s probably another LLC or Inc, depending on how all of the things work out, that that property is in that particular other entity. And then there’s a third attorney potentially in the acquisition of the property, because that attorney is going to be responsible for actually closing the deal. Or is there one person that I can go to and get all of that together? Or are they three different people?

Kim Lisa Taylor:

So I would simplify that and say there’s two. We’re corporate securities attorneys, so we can do all things related to all of your companies that are involved in your syndicates or your making offers and those kinds of things. You’re going to use a real estate attorney, usually licensed in the state where the property is located, who’s going to help you with that closing, they’re going to help you with the purchase agreement, the title, the escrow, working with the lender to make sure that they’re getting all the information they need to process the loan, and then they’re also going to review the loan docs for you. So that’s the real estate attorney. Your corporate securities attorney is going to set up all companies related to your matters, to your real estate investing.

So you might have a holding company, you might have a management company. And then for your specific offerings, you’re going to have a separate investor-level entity that takes title to the property, sells interest to investors. So we are going to help you with all of those documents and make sure that those three entities are all meshing together and that the operating agreements flow from one to the other. And they’re very different operating agreements for each one. The operating agreement for the investor level entity is 65 pages, the one for the management entity is around 25 pages, and the one for the title holding entity — if you need it, you don’t always need a separate title holding entity, but on bigger deals you do — those are 20-page documents or so. They each one has a very specific purpose and it’s constructed in a very specific way, and you have to make sure that you’ve got the correct ownership structure in each one.

Jonathan Mickles:

So if I’m just starting out, I’m a single person or me and my spouse, me and a couple of people putting together a syndication business, we can come to you and get that first entity set up. And then whenever we find a deal, we can come right back to you and you can get all of those things set up?

Kim Lisa Taylor:

That’s correct.

Jonathan Mickles:

And then when we’re ready to go to closing, maybe you can give us a referral for a closing attorney or a settlement attorney?

Kim Lisa Taylor:

Sometimes, or sometimes you’re going to just find one in the course of maybe getting a referral from your broker or somebody like that. But it is a really good idea to use a real estate attorney. I’ve had a few clients go it alone and it’s been a little painful for them and for the lender. So unless you have specialized knowledge of that field just from your prior profession, then it’s always advised that you hire that real estate attorney. And I can even tell you from my own personal experience that my husband I syndicated a deal and I thought, “Oh, I’ll just do the purchase agreement and stuff like that.”

It ended up costing us quite a bit of money because if I’d been the right attorney doing that, I would’ve probably thought of some things that later on cost us some money and that could have been included in the operating agreement.

Jonathan Mickles:

Cool. Cool. Okay. So my next question, in terms of when to involve you. I mean, if I’m just starting out, obviously I’m going to involve you, but if I’ve got something set up already and I’m running and I’m looking at my first deal, and I’m getting close to potentially negotiating something, when do I reach out to you? Before I actually put a letter of intent out? After I put a letter of intent out and get it signed? When do I bring you in?

Kim Lisa Taylor:

We always say when you have a signed purchase agreement is the time to hire us. So not until you’ve got assigned purchase agreement. LOIs, you’re going to do a whole lot of LOIs and just a few of them will get negotiated, a couple of them are going to stick. When you get to that point, you need to get to the purchase agreement, and sometimes things happen between LOI and purchase agreement and you don’t get the deal. So make sure you get a signed purchase agreement, then you have a binding contract. And at that point, you can freely start talking about your deal. In fact, don’t talk about it before you have that purchase agreement. Don’t start telling people about your deal when you have a letter of intent, because somebody else could come and steal that deal, and I’ve seen that happen and it does happen, unfortunately.

So wait until you’ve got it locked up with a purchase agreement. That’s not going to be easy for the seller to get out of, and then actually hire us and engage us at that point. The first two things you should do beyond that are send somebody to the site from your team who can look at it and also review the financials. If you can do that stuff in advance, that’s even better.

Jonathan Mickles:

So you’re talking about doing it during the due diligence phase?

Kim Lisa Taylor:

You haven’t reviewed the financials because sometimes they won’t release the financials until you got a purchase agreement.

Jonathan Mickles:

Oh really?

Kim Lisa Taylor:

Yeah. Usually, you can get it out of them, but sometimes it’s difficult. And then you don’t want to spend money on anything else, don’t hire people to go do property inspections or lease audits or anything like that until after you’ve done those three things. Because those three things, in my opinion, based on my experience in the hundreds of securities offerings that we’ve written for other people, that’s where you’re going to decide whether a deal is a go or no-go.

Jonathan Mickles:

So we make sure we understand, those three things are, number one, review …

Kim Lisa Taylor:

Signed purchase agreement, you’ve reviewed the financials, and someone from your team has driven through the neighborhood and seen the site because you want to know. You could be driving through the neighborhood going, “No, I’m not doing that. I’m not getting out of my car unless I’m armed.” You don’t want that.

Jonathan Mickles:

Yeah. Workforce housing sometimes is like B, C-type class properties, but sometimes you can be right on the edge of what they will consider a D property. And unless you have some real experience about transforming that particular property or that environment or that neighborhood, because some people are really good at that.

Kim Lisa Taylor:

That’s right. If that’s your model, then go for it.

Jonathan Mickles:

Exactly. But if this is your first time out, don’t try.

Kim Lisa Taylor:

Anything can look good in pictures, but when you actually get out of the car and you’re just looking around, you get a feel for the place and you decide whether that’s something that you want in your life. So that’s my thoughts.

Jonathan Mickles:

Cool. What is your fee structure generally? Do you require everything up front when we do a purchase agreement? I’ve got it, I say, “Kim, I have it in my hand, I have a purchase agreement. I’m ready to engage you.” Am I sending you? How does that work?

Kim Lisa Taylor:

Usually, we’ll do lump sum because we know what it takes, and once we’ve had it, we’ll have a 30-minute conversation with you to decide what you need and that will happen before we’ve sent you the fee agreement. With that information, we’ll be able to tell you, “Here’s going to be your lump sum fee.” And we do ask for our fees up front because we’re going to get everything done for you within 30 days. And so there’s no opportunity for monthly billing and if we have to stop and wait for you to pay the rest of the fee, it is just going to slow down the process.

So we just jump on it right away, we get our team assigned. We have a very rigorous quality control process, we’ll do a deal structure in conference with you right away, then we’ll assign it to our team. Paralegal will draft it, securities attorney will review it, you’ll get the documents, then you get to review those and provide comments. We’ll incorporate your comments, go through a couple rounds of revisions and then you’ll have your final docs, you’ll be ready to go. Ideally, that whole process should occur while you’re conducting the rest of your due diligence and around the same time so that then you’ve got the longest possible time to go out and raise the money while the lender is processing your loan.

Jonathan Mickles:

Well, I have a question then. So a lot of times because we’re syndicating a deal and we’re raising somewhere, as you mentioned on average, a million, million and a half, $2 million, as you mentioned, that’s not a lot of money, but for some people who haven’t done it yet, it’s a lot of money, especially if you’re picking them up in maybe $50,000 or $100,000 dribs and drabs, so that you’re looking at 10, 20 people, maybe five one day or three or four on the GP side and then everybody else 17 on the LP side. Part of it is I’m going to spend the money up front working with you prior to me actually talking to them because that’s your advice as a legal counsel?

Kim Lisa Taylor:

Well, no, my advice is that you’ve already had those suitability conversations with them well before you have a deal because you can’t establish your pre-existing relationship, it doesn’t pre-exist if you already have the deal. So if you met someone after you’ve got a deal under contract and then you’ve hired your securities attorney and we’re working on your documents, you’ve got what’s called current or contemplated deal. Anybody you meet that point forward can’t be in that deal. If it’s 506(b), you got to put them in a future deal because the relationship had to predate the offering.

Jonathan Mickles:

Are those considered soft commitments because I would assume that it would be …

Kim Lisa Taylor:

Well, they’re not really even commitments, they’re just you develop a database of 30 or 40 people that you can call when you’ve got a deal, because the SEC says that that median raise is $2 million with 14 investors. Well, if you have 14 investors, the real estate group rule of thumb is that you need two or three times that many people in your database to call on who say they’re going to do your deal because only half of them or third of them are actually going to come through. So if you need 14 investors to fill your raise, then you better have about 30 to 50 in your database to call on.

And by then you would have had that suitability conversation with them. And so you already know how much they might invest. Are they going to invest $50,000? Are they going to invest $100,000? So you’d have a good idea of that. And at that point, nobody can commit to anything until they’ve seen the details. So you could talk to people and say, “Hey, I’ve got this deal,” but you’re going to want to send them over a property overview and that’s going to show what you’re raising money for, what is the property, describe it. It’s going to have your sources and uses of funds, like where’s all the money coming from to buy it? How’s it all going to be used? How much of it is going to you? How much of is going towards the property?

Then you’re going to do your projections for five years, and then you’ll also do an access strategy. And just a little rule of thumb for anybody that’s just starting out doing this, that’s called many things. Some people call it an investment summary, some people call it a property package, property overview. It doesn’t matter what you call it, it all has the same information. When you do that, make sure you tell your story in the right order. Your story has a beginning, a middle and an end.

How many times I see property packages where that stuff is all mixed up, and you’re talking about the exit strategies before you talk about the acquisition costs. And then somewhere in there has the projections. You got to buy it, you got to run it and you’re going to sell it.

Jonathan Mickles:

Can I send you my sample deal package? Can I send that to you?

Kim Lisa Taylor:

Yeah, of course. We have one, we have a template on our website. We’ve got an affiliate marketing company called Investormarketingmaterials.com. And you can get to that from our syndicationattorneys.com website, or you can go there directly. But one of the things that we sell there is a property package template. It’s like 250 bucks, it’s PowerPoint, or if you become a syndication client, then we’ll give that to you for free.

Jonathan Mickles:

Got it, got it. Hopefully you can deduct that from the price.

Kim Lisa Taylor:

All of the legal fees and all of your pre-closing expenses, you have to remember this, this is all reimbursable. So you’ve got to build that into your raise. So you’re going to have some upfront expenses, and you’ve got to have that and your management team has to be able to collectively put that together, and those are the funds that you’re putting at risk. And maybe you’re going to get reimbursed for all that, maybe you’re not going to leave any money in your deal, but if an investor asks you, what’s your skin in the game? You’re going to say, “I’ve just put out $60,000 worth of pre-closing expenses, and if I don’t close, I don’t get that money back. That’s my risk.”

So you need to have a good $20,000 to $50,000-$60,000 to get a deal to the closing table. And you probably want to have within your management team enough to pursue two deals at a time. So think about that. You need to keep a certain amount in reserves or you’re not going to be able to do any more deals.

Jonathan Mickles:

Got it. So even just having risk capital out there is good enough if you don’t have additional money per se to put into the deal, especially if you have your first deal, you’re just getting in and getting that done. Now, can I ask about your fees, I know that at the time of this recording we can’t hold you to that in the future because rates do change, but what generally are your fees?

Kim Lisa Taylor:

You should be budgeting around $15,000. So part of that is going to be our legal fee and part of it’s going to be out-of-pocket costs for forming LLCs. And then when we file notices with the state securities agencies — those are called blue sky notices — then each of those states where your investors come from, then you have to file a notice in those states and they all have various fees associated with them.

Jonathan Mickles:

So then in terms of let’s see, I think that makes sense. And I would say that you mentioned hundreds and hundreds of these things that you’ve actually built together. I know when I did some research initially, I believe you used to work with the man as we call it, who wrote the book on syndication as an attorney, Gene Trowbridge?

Kim Lisa Taylor:

I used to work with Gene. Gene and I had a very successful partnership for about eight years together. We worked wonderfully together, but I moved to Florida and we just decided to spin off, get away from California taxes. And I’ve written my own book, which I think is it’s gotten a lot of good reviews.

Jonathan Mickles:

What’s the name of your book?

Kim Lisa Taylor:

“How to Legally Raise Private Money.” It’s a number one Amazon bestseller, and you can get a free copy of it on our website, if you want a digital copy, or if you want the Kindle or a soft copy, you can buy it on Amazon.

Jonathan Mickles:

That is perfect. So we’ve learned about what type of syndications there are, we’ve learned about how we should raise money. I think you’ve given us some good guidelines. Generally, most of the syndications are B syndications. Am I correct in saying that?

Kim Lisa Taylor:

Almost. All of our new clients always start with Bs. And the reason is because the strangers, if you’re advertising, aren’t going to invest with you until you have a track record, but the people who will invest with you and help you develop that track record are your family and friends and acquaintances, people that you already have met face to face. So get those people in your deals, plus, all of us usually know some of those fine investors that are not accredited, but they’re great investors and they’re hungry for these kinds of opportunities, too. So help them out, help get those family and friends into, they’re not accredited into your deals.

And then once you’ve developed a track record and you’ve got all of those people invested with you, then that’s the time to make the decision if you’re going to go out and do advertised offerings, or if you’re going to stay with the 506(b)s. I have some clients that never graduate from 506(b)s because they still continue to meet non-accredited but sophisticated investors that they want to include in their deals, so they just stick with 506(b).

Jonathan Mickles:

Got it. And there are on average 14 people that are in syndication deals, which means that you need to have at least three times that amount in your database, so you’re talking about 50 people. And you’ve mentioned that the average raise is $1 million to $2 million. So if anybody’s looking to figure out what they should be doing in terms of a database and how many people to talk to, those are the options.

But you also have some additional learning opportunities for people, and do you have a podcast yet?

Kim Lisa Taylor:

Well, we do free monthly teleseminars, we’re eventually going to turn that into a podcast and we just haven’t done it yet, but I usually either teach a subject or I interview somebody who has a service that can enhance the syndicator’s life and help them grow their business. So we pick a new topic, if you sign up for our newsletter at our website at syndicationattorneys.com, then you’ll get notified of all of our upcoming events, and we’d love to have you on them. We do live questions and answers, each time we do it on the third or fourth Thursday of every month at noon Eastern time.

And we will do 30 or 40 minutes of lecture and then we’ll go to live Q&A, where you can ask any question you want. Once you become a client with Syndication Attorneys, then we’re doing weekly Masterminds right now on Fridays. So weekly Masterminds where any client can get on the call and meet other clients. And we talk about things related to developing investor relationships, developing an investor marketing plan and stuff like that.

And we do have an introductory program if you don’t have a syndication right now, but you want to become part of that syndication Mastermind, you want to have access to us, we have a pre-syndication retainer, it’s $1,000. It gives you up to three hours of one-on-one legal advice. We can review your website, we can review your marketing materials or strategize with you about your plan. And we’ll give you an investor marketing plan template, and an investor relations blueprint that will help you start setting up your own policies and procedures on how you’re going to go about developing these relationships and finding these investors and getting this robust database.

So you don’t have any fear when you got your deal under contract, you know you got enough people to fill the deal.

Jonathan Mickles:

Got it. So if you, again, are beginning a and you want to be a part of that Mastermind and have access to Kim’s services you’re budgeting about $15,000 for all of the upfront costs and the costs to register those in the various states, if you happen to have more than one state where your investors are. And again, Kim has done this about 1,000 more times, I’m pretty sure she could do this in her sleep. And I know we’ve probably hit our time limit, I’m looking here that we have, but I do have a couple of quick advanced questions because I noticed that some of the investors that I’ve talked to before, they get a little bit more advanced.

And again, I feign ignorance in some of this area, but I’m pretty sure you know about it. So there’s some people, and again, this is something that is a hard and fast rule. Some people want to opt to pref or not to pref is the question.

Kim Lisa Taylor:

I’m getting asked that question a lot lately. Some of my most experienced clients are trying to get away from it because it can really dampen your deal where the first two, three years, you’re not making any money. And there’s two ways to handle that. One is, you can defer, so you could do a preferred return, but explaining to your investors, but they’re not going to get that full preferred return for the first two or three years. Whatever portion of it they don’t get in the first early years can be deferred and paid to them later when you either do a refinance and get some cash back, or when you sell the property.

Jonathan Mickles:

So you’re not obligated the first year, especially if you’re turning around a deal, you may need that extra cash and you want to use that extra cash. You don’t want to necessarily return that to the investors at that point in time, you want to wait till you get the higher rates that you then you’ll be able to return that money. So deferring that or having that option. Now, is that structured in that operating agreement that you mentioned?

Kim Lisa Taylor:

In the waterfall. Every operating agreement is going to have what’s called a waterfall and there’s going to be operations waterfalls, so what happens to cash flowed from operations. And then there’s going to be a separate one for what happens when you have a capital transaction, such as a refinance or a sale. And so we will in the waterfall, just describe step by step, “This is where the first money goes. If there’s money left, this is where it goes next. If there’s money left, this is where it goes next.” And you just go down the line until you don’t have any more money. So usually, you’re going to be doing quarterly distributions or you’re going to be evaluating distributions quarterly during the time that you own and operate the property.

And don’t say that you give quarterly returns because you may decide, “Hey, this quarter, we’ve got a really big tax bill coming up, so we’re going to have to withhold distributions and cover that.”

Jonathan Mickles:

So then what do you say if you don’t want to get pigeonholed into this quarter?

Kim Lisa Taylor:

Just say “we evaluate distributions quarterly.” And don’t ever do monthly. Monthly is a huge mistake. People start depending on the money to pay their bills, and then if you decide to withhold distributions, they’re in a jam. So don’t do monthly distributions.

Jonathan Mickles:

You mentioned earlier in our conversation that you would have like an investor operating agreement and management operating agreements, are those like class A, class B type thing? What is that class A, class B? And then do a one-to-one to what those operating agreements are.

Kim Lisa Taylor:

The structure of your investor level entity is usually going to have two classes of members and a manager. So your GP entity or your management entity is going to be the manager, but it may not have any actual ownership interests in that. But the members of the manager who are providing the services, they can become the class B members. So you’re going to sell off a portion of the interest in that company to investors in order to raise 100 percent of the money. So if you’re going to contribute…

Jonathan Mickles:

100% of the syndication money, because generally…

Kim Lisa Taylor:

… 100 percent of everything you need for the entire deal, you’re going to sell off a portion of your LLC, that investor level LLC. So you’re going to sell off a portion of that. So let’s just do like 70/30 split and sell 70 percent of the LLC to investors, but you’re going to raise all the money for the down payment, the closing costs, legal fees for us, for your real estate attorney, your acquisition fees, any capital improvement costs, plus operating capital on reserves. So that’s going to be your uses of funds in that sources and uses of funds table I talked about. So all that, the loan, plus all that that you raised from investors for all those things, that becomes the total amount of the deal.

And the purchase price, plus all those other things minus your loan, is the amount that you need to raise from investors. And when we do a deal, we usually have you do a target raise amount. And so that would give you exactly what you need to pay all those pre-closing expenses back, reimburse yourself, plus pay your acquisition fees and have a nice reserve, plus all the cap ex that you want. And then we’ll also do a minimum dollar amount. So it’s like, well, if we don’t quite get to our target, but we’re really close and we have enough money to close, but maybe we don’t reimburse ourselves, maybe we wait to take our acquisition fee, that kind of stuff, we can still close. So that’s our minimum dollar amount of our offering.

So when we’re writing the securities offering documents, we’re saying, “You got to raise this minimum before you can accept or use any investor’s money.” Up until that, it’s your own money.

Jonathan Mickles:

If you can’t raise that minimum, then you return back anything that has been transferred, correct?

Kim Lisa Taylor:

You return all investor funds without deduction. So that’s where your money’s at risk, is that pre-closing expenses that you have to put out, if you don’t close, for some reason, you’re not going to get those monies back. So you’ve just got to be aware of that. And that all has to come from your management team because you can’t use passive investor funds for that. If you were to give back passive investor funds, minus some due diligence costs, you probably wouldn’t be having very many people sign up with you for their next deal.

Jonathan Mickles:

Another question for you, with respect to the management team say, you’re a syndicator like myself, you may not have the full amount. You’ve seen people go out and maybe get an SBA loan in order to get that…

Kim Lisa Taylor:

I don’t think they’re going to be able to get an SBA loan for that, but you can go out and bring in one of your passive investors and put them on the GP side and say, “Hey, if you help us by putting up some of these at-risk funds,” maybe they’re even going to also help you guarantee the loan. So they’re going to have to be in that management structure for that to be satisfied. So you just elevate that and say, “Look, you can make some additional money for doing these things. And you’re going to get a share of the management earnings, maybe a portion of the fees, plus a share of the manager’s profits.”

Jonathan Mickles:

And that’s the one key thing I’ve also learned is if anybody’s going to be on the GP side, it’s not there just for money, they have to be doing something to help manage that particular property.

Kim Lisa Taylor:

That’s right. It’s not just raising money, you cannot pay people commissions for raising money for you unless they have securities licenses. You have to make sure that everybody in the GP has a meaningful role in management other than raising money and that’s what they get compensated for.

Jonathan Mickles:

Perfect. Well, listen, this has been a far-reaching conversation on securities law and making sure that we do this stuff correctly. I want to say thank you again. And how can people get in contact with you, I just want to make sure. Are you on social?

Kim Lisa Taylor:

The best way to contact us is through our website at syndicationattorneys.com. You can schedule a 30-minute consultation there if you want to; we’d be happy to talk to you. There’s a ton of educational material on our site. If you go into the library, you’re going to see over 40 different articles. And these are all one- or two-page articles, they’re not hard to read, they’re written in plain English, so not a lot of legalese, and you can learn a lot there. You can download my book if you want to. We’ve been doing our free monthly teleseminars for over three years, and that one was Sam Freshman is on there. So I highly recommend every syndicator should listen to that, every single one, he’s fantastic.

But we’ve got all of those recorded teleseminars there, you can listen to, and then there’s FAQs. So every time somebody asks me a question that requires a long, drawn-out answer, I write it down and I put it in there. These are the most commonly asked questions and there’s stuff in there about how does cash flow in a syndicate? And what entity should I use? And what title should I give myself? And how should I write a biography? Just really practical stuff that’s going to help you promote yourself and further your syndication business.

Jonathan Mickles:

Well, Kim, I want to say thank you very much for everything that you’ve done for Red Boot LLC, and making sure that I have all the education that I need. I know we’ll be talking very soon again on a couple other things and thank you for joining us.

Kim Lisa Taylor:

Thank you so much for having me.