Edited Transcript from the Webinar, “How to Resell Interests in a Securities Offering”

With special guests Simen Ruge and Jackson Stith

Originally broadcast Sept. 24, 2020

 

Watch/listen to the webinar

 

Kim Lisa Taylor:

Welcome to Syndication Attorneys, PLLC’s free monthly teleseminar. We hold these every month to talk about topics of interest to real estate syndicators with the opportunity for live questions and answers at the end of the call.

I’m attorney Kim Lisa Taylor. Before we get started, please note that all of our calls will be recorded and may be used for future promotion, posted on our website, or broadcast in a podcast available to the public. If you don’t wish to have your voice recorded, please schedule a one-on-one consultation instead of asking questions during the live call. The information discussed during this free webinar is of a general educational nature and should not be construed as legal advice.

We have some really special guests today. We have Jackson Stith and Simen Ruge of SyndiGate Capital.

 

Simen Ruge:

Hello.

 

Jackson Stith:

Hello.

 

Kim Lisa Taylor:

Hello, hello. Thank you for joining.

 

Simen Ruge:

Thank you for having us. Thank you very much.

 

Kim Lisa Taylor:

Welcome. I’m super excited that you guys reached out to me and that we’ve been able to connect. And I think you have an important service that our clients and potential clients need to know about. Everybody who’s syndicating just needs to know about all the different services available to them. And that’s one of the reasons that we do these calls. So tell us a little bit about yourselves and SyndiGate and give us an introduction.

 

Simen Ruge:

Yeah, sure. I mean, maybe I’ll start off. My name is Simen Ruge. I’m originally from Norway. You might be able to tell I have a bit of an accent. Prior to moving to Florida last year, I spent the last 10 years working in London for a couple of different investment banks. I worked in institutional distribution. I sold securities, and derivatives to pension funds, bank treasuries, to larger asset managers. And we’re doing that for 10 years. Then came Brexit and the team I was part of was moving to a different European country. And me and my wife, who’s from Miami, decided to move there to settle down. So that’s me.

 

Jackson Stith:

Yeah. And so I met Simen through his wife, actually, because we had some mutual friends. And my name is Jackson Stith. I’ve been in real estate development acquisitions for 15 years. Have worked in Miami, New York, Las Vegas, in Dubai, and also in Texas, and syndicated my own deals with partners in Texas primarily. And Simen and I got introduced. And I started kind of speaking about this inefficiency in the real estate market when it comes to liquidity for secondary positions, limited partnership positions. And he was coming from the world of creating liquidity for illiquid assets. So we started talking about it and what the problem was and how to solve the problem and decided that there was a needed service in the industry. And really, thanks to Simen, who is the driving force behind crafting the solution to the problem, we launched SyndiGate officially four months ago. Took us about a year, a little bit more than a year, to put the business together to get to that point. And we can get into that later in the webinar about how that all played out. So yeah, that’s how it came together. And I think you probably want to know a little bit about actually what we do. Why don’t you address that, Simen?

 

Simen Ruge:

Yeah, absolutely. It’s probably good to start to just say that we’re not marketing securities here; we’re not soliciting trades. This is just general education about what we do and how this market looks.

Coming from the securities world, I was kind of surprised to see that these LP interests that are securities didn’t really have a functioning intermediary. Or there were few of them. I’d seen some illiquid fixed income transactions find buyers. And I was quite surprised this didn’t exist. We then spent a lot of time trying to figure out, is this a problem that Jackson is the only person in America to have had or are there other people that have this problem?

And that’s where we found that a lot of GPs we spoke to, a lot of investors we spoke to … I mean, I’d say almost 50% remember a time when they got stuff themselves in the deal. So we found out that this wasn’t a unique need problem. We then went about trying to find out, is there investor demand for secondary positions? And then ultimately, also making sure there was the right regulatory setup. Finding a broker-dealer that we can be registered representatives of that we’re comfortable with the business that we do and that we can work with and trust. So that was a process in itself because this isn’t a very common thing to do. And having gone through all of that, we came to a place and obviously during COVID, we were in our separate homes speaking on the phone trying to get a business off the ground. It’s been an interesting process. But we’ve managed to get to a point where we’re off the ground. And the reception has been fantastic.

 

Jackson Stith:

All right. So just to boil it down to what we do, right? We do basically two things, and all revolves around the equity portion of the capital stack in a real estate deal. We solve problems in the equity portion of the real estate deal. And we let people access opportunities in the equity portion of the real estate deal. What does that mean? If a limited partner wants or needs out of a real estate deal, and it’s not always because it’s distressed or the deal has gone sideways, there’s a whole host of personal reasons an LP might want out of a deal. We help that LP find a buyer for their position so they can access liquidity, step out of the deal, do whatever they need to do with their money, and somebody else gets the opportunity to be in a deal.

 

Kim Lisa Taylor:

So when we’re talking about LPs, just for our audience, we’re talking about either members in an LLC or limited partners in a limited partnership. We’re really just talking about the investors in your syndications. So what they’re talking about would apply to either an LLC or a limited partnership. There’s no restriction. I guess it could even apply to a corporation that sold shares.

So would this mostly be for a situation where there’s one investor that wants out or are you looking for people that are trying to completely recapitalize their deals? What’s your sweet spot?

 

Jackson Stith:

Why don’t you go ahead, Simen?

 

Simen Ruge:

We’ve seen both; there’s a short answer. Every situation or problem has a solution. The problems are different. We do see individual LPs that might have both. Let’s take an example. I’m an owner of a business, own a franchise, a number of franchises. Over the years, I’ve done well. I’ve invested that money in real estate syndications. Then comes COVID and suddenly, my businesses, my operating businesses, need more cash than what I have on hand. And I’m interested to try to redeem some of these illiquid investments. That’s one situation.

 

Jackson Stith:

Right. And we also get like … 50% of our business “back of the envelope” is actually GP-led. So it’s GPs who have never had investors and capital markets aren’t quite functioning where they were a few months ago. And they want liquidity for new opportunities. There’s deals on market. They want to do that.

 

Kim Lisa Taylor:

So this would be somebody who’s gone in and bought their own stuff. And then they want to syndicate it, and you guys will come in on the back end. But what about people who are raising money for … they’re issuing securities to buy something, do you guys get involved in those deals?

 

Jackson Stith:

So that’s what we call primary deals, as opposed to secondaries. And yes but no, meaning if there’s an obvious investor that we have and we know and trust the guy raising the money — or the girl raising money, whatever the case may be — we’ll make that connection for them. But we try to stay in our niche of secondary liquidity.

 

Simen Ruge:

We find quite a lot of people raising money for primary deals, a lot of people getting involved in the market. Very few people would get involved in the secondary market. For us, fewer people, more need, better fit. So that’s where we tend to focus. But obviously, if we see a natural fit, if we remember we spoke to a guy who’d be very interested in looking at something like this, then obviously, we’ll make that connection.

 

Kim Lisa Taylor:

And so you guys are affiliated with a securities broker-dealer, right?

 

Simen Ruge:

Yes, registered representative. So I deal with the distribution of it. So I have all of that. And Jackson is just in the process of doing his final exam. So hopefully soon, he can join me on the distribution side as well. So far, he’s been just looking at origination. And that’s really what allows us to do this, to be able to market, be able to not only that but legally profit from a securities transaction, charge a commission. So that’s key to our business, really key. And as when we wanted to get into this market, part of the reason there was a gap there is because very few people used to do this. And that hurdle, once you come over and you do it properly, it’s a nice barrier to entry.

 

Jackson Stith:

Yeah. So just to give a little bit of a background on that, a lot of people that limited partners who go into deals think that they own a piece of real estate, and they actually own a security and a piece of real estate. Since 1946, the Supreme Court of the United States has taken the position that if you’re a hands-off investor investing in a piece of real estate syndication, then you own a security, right? So that’s why we belt and suspenders, cross the T’s, dot the I’s, get our registered representative affiliation so that we don’t build a business that jeopardizes the limited partner, the general partner, ourselves and doing the transaction.

 

Kim Lisa Taylor:

Yeah. Now, we could do an entire show about just that because I will tell you that I get asked that question every single day. People are trying to pay other people to help them raise capital. And I’m constantly educating them that the only way that you can legally do that is to bring them in as part of the issuer of your securities, and give them a meaningful role in management other than raising money and don’t pay them any amount that’s related to the amount of money that they’ve raised. So they really just have to be a member of your management team with the job besides raising money. And everybody in management should be raising money if you’re the issuer and you’re doing your issue of direct offerings.

So what we’re getting at here is that you can’t pay commissions to anybody that is not a licensed broker-dealer or affiliated with a licensed broker-dealer. And that means a securities license; it’s not a real estate license. It has to be a securities license before you can pay commissions. And so that’s where these guys are different. They don’t do your primary raise for you, but they can help you if you want to recapitalize.

So let’s just talk about some of these recapitalizing situations, right? What if we have a syndicator that has a deal and they have investors that they’ve told they’re going to get out in five to seven years? And here it is five to seven years later, but the deal is too good to sell, and they can’t find anything better. So they want to keep it and those investors want out. Would that be a situation where you guys could help?

 

Simen Ruge:

Certainly. Look, one of the key areas where we get involved is the time scale of these things. As they say, look, interest rates are where they are. If you 10 years ago bought a deal that’s yielding at a very attractive level, selling that asset and taking the cash out, you don’t really have that many replacement assets at the moment where you can get a similar yield level. So these deals just run longer than what many investors thought. A good way to solve this divergent in investor needs within your syndicate is to try to make these types of solutions for individual LPs. So that’s a great example.

Another example that we see a lot is different investors have different preferences when it comes to risk appetite, return needs, these kind of things. So let’s take a ground-up development. Ground-up development is not for everyone’s taste. It’s riskier than the stabilized assets. So it’s a different pool of investors you’re getting at. Once the development is done and the asset is stabilized, those investors might not want to stay in that field because they want to look for the next development opportunity. Well, there’ll be plenty of other investors that are interested in taking up these kind of stabilized assets. So instead of having to sell the building and you as a developer move on to the next one, you could swap out investors like that. So those are kind of examples of where this makes sense from the GP angle.

 

Jackson Stith:

Right.

 

Kim Lisa Taylor:

What’s the minimum amount that you guys would want to get involved with as far as an amount that someone needs to raise?

 

Simen Ruge:

That’s a good question. Let me start at a little higher level, right? We focus on the middle market. So we focus on real estate that is somewhere between $10 million to $15 million. The vast majority of American commercial real estate is the middle market. It’s not particularly sexy, but that’s what we like. Sexy assets are really particularly good assets. That means that we are focusing in on an equity position, somewhere between half a million to $30 million. And below half a million dollars, it becomes difficult with economics, just onboarding, KYC and doing all those things that we need to do. And also finding investor demand for it. The majority of investors we speak to are institutions who need a certain size in order to get involved.

 

Jackson Stith:

Right. Most of them like to write a million-plus check. And it just depends. We deal with smaller family offices, multifamily offices, ultra-high-net-worth individuals, very boutiquey sort of property funds, these kind of guys. So it just really depends on who we’re talking to that day. But half a million, as Simen said, below that … because we’re registered — Simen’s a registered representative broker dealer — there’s onboarding that the broker-dealer has to do of all the participants in the transaction. They cover that cost. So really, we can’t bring positions that are below that because it’s not economically feasible for them. Right? So that’s where we end up.

 

Simen Ruge:

It comes with a bit of a process, but let me address the smaller size because that’s a vision for us for the future. We definitely want to get involved in that. Us stepping away from that part of the market (right now) isn’t because there isn’t a need. I mean, over the last 10 years, crowdfunding has exploded. I think the amount of 50K, 100K, and even 10K positions out there have gone through the roof. And investors have gotten involved with sizes that are much smaller than they used to be. And we are conscious of that. And we’re trying to find solutions where we can make these positions work for bigger institutional portfolios.

So that’s something we want to do in the future. But for now, we need to focus where we economically can make sense. And we can provide the service that we want to provide, right? It’s important for us to provide a good service for whoever we sign up. We want to be able to do what we can to try to create the liquidity.

 

Jackson Stith:

Right. We know with some clients is because they have an issue they need solved, right? So we’re not going to sell them a false promise and say, “Sure, we can sell your $50,000 position,” because it’s probably unlikely.

 

Simen Ruge:

Yeah. We want to deliver.

 

Kim Lisa Taylor:

Talking about what a structure would look like, if you guys were coming in and say bringing in $3 million into a deal, are you usually trying to find that from a single investor? Are you pooling funds from multiple investors?

 

Jackson Stith:

Well, I think we have sort of an example that’s live right now that we won’t go into the details of obviously because it’s under NDA and everything else. But it’s a $5 million piece of equity that the GP wants to basically syndicate out. He owns all the equity. And in that case, someone could come in with a $5 million check, or the minimum size is half a million, right? So it’s just really depends on the situation.

 

Simen Ruge:

And it really is more driven by the GP in this case, right? Because GPs might have different specials that they’re interested in. Some GPs might go, “As long as you fill this case to five million, we can do 100K positions.” Some might say, “I would like to have one investor. I’d like that one person do this,” and they’re specific that way. And it comes back to what Jackson said at the start of this call. These transactions are different than that it’s not just the buyer and the seller. There’s a GP sponsor involved in the room as well. And we kind of have to find a solution that works for all three parties. So that’s a big part of what we do, is trying to understand everyone involved and what their preferences are.

 

Kim Lisa Taylor:

If you’re bringing in multiple ambassadors into a deal, would you guys syndicate it yourselves? Or would you require that the person who owns that asset do a syndicate so that your investors could come in?

 

Jackson Stith:

I’m glad you asked that question. The GP needs to work with somebody like you to put the deal together. We’re not lawyers and we’re not CPAs. We can give some general insight like, “This is how we’ve seen it done. But you need to speak with Kim about this. The investors want this. You want this. There’s a meeting of the minds. Paper it.”

 

Simen Ruge:

We’re an introductory service. We put people together and that’s where our process stops. We don’t want to get involved in the field of law because we’re not lawyers. We leave that to better people than us.

 

Kim Lisa Taylor:

How about your broker-dealer? Would they then want to review those offering documents, make sure that they’re compliant?

 

Simen Ruge:

Certainly. Any transaction that gets close to being done gets reviewed both by us and by them. We certainly want to make sure we’ve fulfilled our obligations both in terms of KYC, and also in terms of understanding suitability with regards to the people coming in. We could go into tons of details about that, but there’s definitely a process that we need to go through. It’s more cumbersome than your standard like if you hire a guy that you know to help you with some money. But that’s just a function of how this market works.

 

Jackson Stith:

Right. And run afoul as the GP or the LP or whoever else is involved of securities law. Because if you run afoul of securities law, what I think people need to know is it’s not just a slap on the wrist. They can unwind your deal. The SEC can say, “Your deal is unwound. You owe the guy who paid you half a million dollars his money back.” They can do that to you.

T’s and I’s is what we always say. Cross your T’s and dot your I’s. And that’s what you do for people.

 

Kim Lisa Taylor:

Okay. So let’s see. Well, you described maybe a client that you’re working on with right now, but can you tell us about some of the other types of clients that have used your services in the past?

 

Simen Ruge:

Well, look, we’re a very young company. We’ve got three and a half months in.

 

Kim Lisa Taylor:

I didn’t think you’re that new. Okay, I didn’t realize that.

 

Jackson Stith:

We’ve been working on it for over a year, but finding the right broker-dealer really took a year. So he got his Series 7 four months ago, four-ish months ago.

 

Simen Ruge:

So far, I think we’ve worked with just over 10 to 15 different entities where we had a look at the deals, tried to find solutions. Some work, some don’t. We have a pipeline at the moment that we’re marketing. So that’s kind of where we are in the process.

 

Kim Lisa Taylor:

So let’s just go explore that a little bit. What kind of due diligence do you do before you’ll get involved in somebody’s deal?

 

Simen Ruge:

Well, we need to see all the paperwork. So maybe is a time to have a chat about the process.

 

Jackson Stith:

Yeah, so the origination processes. That’s right. First, I have a discussion with you. You’re an LP, you’re a GP. I have a questionnaire that I use for myself to make sure that I ask all the questions from the basics of the analysis. I need to see the operating agreement at some point. I need to know what the situation is, why you’re trying to get out or why you’re trying to recapitalize. What are you trying to achieve? What are the liens on the property? Your first lien. Is there a second lien? God forbid, are there some sort of lien against a contractor you never paid, so on and so forth?

So what you’re really trying to do is just determine what the value of the property is in a very big-picture, back-of-the-envelope way, what the value of the liabilities are. And so you can determine equity. And if you have 25 percent of that, your equity is in the range of this. That’s what it’s probably worth today. And then once you kind of have that moment with the potential client, what we do is we a lot of times will soft-sound it. We’ll put a teaser together. There’s no information that reveals who the client is, where the property is, but it has the dynamics of the deal. And we go out to our network and we say, “Would something like this be of interest to you?” And they give us feedback.

And if we think that there’s an opportunity to help the potential client, we go back and then we make that potential client or client say, “I think we can help you. This is what it’s probably going to look like. Best efforts only.” We make no guarantees, right? And then we sign an agreement. We start getting information. Depending off, they have their own NDA or we can use our NDA. We start revealing that information to the buyer base, investor base, who has expressed interest in it.

 

Simen Ruge:

And I think one key thing that we want to point out is that we deal with institutional investors almost exclusively. We make no claims that we do due diligence for them. The due diligence we do is for us in order for us to have covered our bases. And also for us to understand that we’re not wasting anyone’s time. We don’t want surprises. We don’t want to come halfway down the line and understand there’s something wrong with this.

 

Jackson Stith:

Yeah, like there’s a second lien against it that no one ever told us.

 

Simen Ruge:

So we’re not investment advisors. We don’t do due diligence for investors. People need to look through the deals themselves, understand the deals for themselves. And that’s something we’re very clear about.

 

Kim Lisa Taylor:

Let me just kind of recap this a little bit. So it sounds like your due diligence starts with your interview with a client much like ours. You want to review the documents that they have in place or have a discussion with them about what documents they’re going to need before you could get involved, I would imagine. And then you’re going to be reviewing the capital stack to see what kind of other financing is already on the property, including, I would assume, looking at what their current investor profile is, assuming they have one. And then you’re looking at any outstanding liabilities like liens against the property or anything like that. And then you’re going to do a best efforts offering. So I would imagine there’s an agreement that you’re going to sign that says that we’re going to do our best to go out and try to find you investors, but there’s no guarantee that we will. And then if we are successful because you’re affiliated with a broker-dealer, then you’re going to be able to take usually a commission based on the amount that’s raised. Is that correct?

 

Simen Ruge:

Right, through the broker-dealer.

 

Kim Lisa Taylor:

That amount is going to be a variable percentage based on how much is being raised and the specifics of that transaction. Right?

 

Simen Ruge:

100 percent. We try to scale it based on the difficulty of the deal, based on our efforts ourselves. One thing that we didn’t address in our processes is to say we also have to do background checks of the people involved. Is obviously crucial obligations around understanding because people are clients of us. They’re giving us money. We need to understand where that money comes from and who they are. Very important for us. There are a number of laws in this country of that. It’s the same as the guy running a Ferrari dealership in the corner. If someone comes in and buys a Ferrari with cash, you need to understand where that comes from, and it’s the same with us. We deal with money. We deal with investments. We need to know who the people we do business with are. That is a crucial component as well.

 

Kim Lisa Taylor:

And on both sides, right? You need to know who the people are you raising money for, as well as who the people are you raising from.

 

Simen Ruge:

Yeah. It’s usually easier with institutional investors because this type of information is quite common to them. So in those cases, it’s an easier process. But yeah, we definitely assure ourselves that who we do business with. It’s kind of crucial.

 

Kim Lisa Taylor:

So let’s just back up a little bit. You’ve mentioned a couple of acronyms. I want to just make sure the audience understands what those are. One of them was a KYC. And that’s a “know your customer” requirement that broker-dealers have. So they actually have to do some vetting on all the people that they do business with. And that’s where we’re talking about these background checks and vetting just to make sure the person who’s raising the money is not a bad actor, who would be raising money. And then also making sure that the investors aren’t using this as some kind of money-laundering operation, or aren’t on some prohibited list where they’re not able to invest in the U.S. Is that right?

 

Jackson Stith:

Yes, it’s anti-money-laundering law and the PATRIOT Act for terrorism. I mean, those are the two big primary drivers for all of that.

 

Simen Ruge:

Yeah. And then on the other side of it, in terms of the investor base, there’s a suitability requirement with understanding whether the investor is suitable for this type of investment … they understand what they’re doing. Which, again, with institutions is a lot easier. Which is why we just don’t deal with smaller Accredited investors, retail clients, we don’t go anywhere near because it’s very difficult to feel comfortable with them fulfilling those types of requirements. I mean, there’s tons of details we can go into. If someone wants to have a conversation a little bit about our procedures, we’re more than willing to jump on the phone and have a call, talk through how we do things and how the process works. But yeah, those are kind of the acronyms that we deal with.

 

Jackson Stith:

Sort of a new world for real estate people sometimes, but it’s a necessary world to safeguard them.

 

Kim Lisa Taylor:

Right. Is this only for real estate or do you do this for other types of businesses?

 

Simen Ruge:

We focus on real estate.

 

Jackson Stith:

Yeah, we focus on real estate. I’m a real estate guy. I mean, there’s all sorts of inefficiencies in other markets. We’ve calculated that there is approximately $1.6 trillion worth of limited partners equity in American middle market real estate. That’s a huge unaddressed market. I think we’ll be busy for the next few years just dealing with real estate. Plus personally, I live and breathe real estate. I love real estate. I’ve been in it for a long time. I’m dragging Simen there as well. I think he’s starting to love it as well.

 

Simen Ruge:

I’m getting to know it, definitely. And the thing to say as well is that this is a function that exists in other parts of the market. If you own shares of Blackstone’s private equity fund, there are people that will help you find buyers for it. And so in the private equity world of like strict traditional private equity funds, those types of fund shares, that’s something you can find liquidity for. There are even platforms for it. So that’s part of my surprise, why didn’t this thing exist in the real estate world? Because it does exist in other parts of the market.

 

Kim Lisa Taylor:

I’ve actually met someone probably eight or 10 years ago that said they were doing this, but I don’t know if they still are. And I think that their terms were pretty unfavorable at that time. So that’s a good question, is what if you have a million-dollar investor that wants out of a deal? Is that person likely to get 100 percent for their investment? Or is there going to be some kind of a discount applied? Or is it situational?

 

Jackson Stith:

I think I’ll take that one. I mean, it’s highly situational. And discounts of what? There’s basis, what they went in for. Have they held it for 20 years and there’s been three liquidity events and they’ve been paid back multiple times already? Or are we talking about NAV? And are we talking about NAV pre-COVID? Are we talking about I guess that NAV post-COVID? So it’s very situational. For example, if there’s an LP position that’s been in existence for 20 years, and it’s had multiple liquidity events and their basis is basically zero, it’s hard to get them 100% NAV, today’s NAV, because it just won’t yield anything. It won’t yield anything.

 

Kim Lisa Taylor:

Can you define NAV for the audience?

 

Jackson Stith:

Net Asset Value. So what that asset, the property, is worth.

 

Simen Ruge:

The accounting value of the portfolio at the end of the year.

 

Kim Lisa Taylor:

And you’re looking at their percentage interest in relation …

 

Jackson Stith:

Yes, after debt.

 

Simen Ruge:

And this is a crucial thing about the way we work. So we work to try to find the market price as opposed to the theoretical accounting value. That said, whoever is our client has no obligation to do a trade. We’re just presenting them with options. They can walk away, at which point they don’t owe us anything. We work on a commission basis, on the best effort basis. And if we don’t attract the price that’s to your liking, you have the option to step away and say that, “No, I’m not going to do this.” It’s much like any transaction really.

 

Jackson Stith:

Right. We provide optionality.

 

Simen Ruge:

Yeah, pretty much.

 

Kim Lisa Taylor:

It brings up a good question. Are there any upfront fees associated with somebody signing up with you guys?

 

Simen Ruge:

No, no, absolutely not. We agree a percentage commission. That’s what we do. And that’s based on there being transactions, it’s based on the transaction value. And that’s how it works. We don’t get paid any other way. Transparency is important for us. And it’s important to know who your master is. If we were getting paid on both sides of the transaction, it’d be really difficult for people to understand whose side we’re really working for. So the seller is our client. And we pre-agree a percentage commission and that’s how we work.

 

Kim Lisa Taylor:

Now, you also mentioned another acronym I wanted to clarify, and that was an NDA. Can you talk a little bit about that and where that comes in?

 

Simen Ruge:

Sure. Yeah, it’s a non-disclosure agreement. In order for us to share documents with our prospective clients, we need to have some kind of agreement that keeps that information safe.

 

Jackson Stith:

So there’s two NDAs. There’s the NDA we sign with, say, a limited partner who wants to show us the documentation. And that NDA says we won’t show it to anybody unless we get your permission. We’re not going to share this outside doing, contemplating any transaction with you, meaning being the intermediary here. The other NDA is the one we sign with potential buyers that flows through to whoever is giving us their information and says, “We are going to show you information coming through us that is our potential clients or our clients already. You can’t show that to anybody else in the world. It’s only for you to see to contemplate doing this transaction.”

 

Simen Ruge:

Yeah. I mean, these are sensitive transactions, and people don’t want the details of them out. That’s the reason why we don’t comment on transactions we do in detail. Part of the why we get involved and why people want to hire us is we can keep stuff secret. So we open up to the people that need to be part of it. And we do that through these agreements.

 

Jackson Stith:

Yeah, that’s something I think we should address. Our style, so to speak, is very tailored, very “white glove.” … we don’t shotgun these deals across the universe and send it to every real estate agent we know and every money guy that we know and so on and so forth. We’re very curated and very… we try to have a laser focus of matching the correct buyer with the deal that we’re looking at that particular moment in time.

 

Kim Lisa Taylor:

What kind of offerings are you able to find these secondary buyers for? Would that be rule 506 offerings? Is it 506(b), 506(c), Reg A+? What works?

 

Simen Ruge:

506(c). We’re focusing on Reg D; A+, we don’t. We just focus in on that area. We find that that gives us the scope also, and correct me if I’m wrong, but from a legal point of view, it’s a pretty standardized process by now. So that’s where we focus.

 

Jackson Stith:

Yeah. Private placements.

 

Kim Lisa Taylor:

You can blast it out to your network.

 

Simen Ruge:

Correct.

 

Jackson Stith:

We’re not blasting out.

 

Simen Ruge:

Yeah. We don’t do that. But there’s limitations to transaction frequency, to the distribution, to all these kind of things that we stay within. But we find that with that format, that gives us enough freedom to do what we need to do. We don’t need more than that.

 

Jackson Stith:

Right. And also it bears mentioning that a lot of these deals have already been written. It is what it is. We’re not structuring anything for anybody.

 

Kim Lisa Taylor:

So I’m just thinking about the people that are on the call and the clients for us that are on the call and how this would work for you or potentially for your investors. So, if you have a syndicate that we’ve drafted for you and some of your investors want to get out, I mean, I can see that this could have tremendous application for the syndicators themselves if maybe they wanted to sell some of their own interests. Right? Or if they wanted to recapitalize an event like we discussed earlier. Recapitalize so that they’re getting out some of their previous investors, or maybe if they have a private equity partner in their deal, and they’re coming up close on their maturity date, maybe the private equity partner only wanted in for two or three years, and then wanted to be out. So I can see where the syndicator could come to you and say, “Hey, can you help us find someone to replace this person?”

 

Simen Ruge:

Precisely.

 

Kim Lisa Taylor:

Then also there’s the situation where the investor themselves wants out, and they come to you. In the documents that we write, there is always a transferability section in the operating agreement that says that if somebody wants out, they would have to come first to the management and ask them if they would like to buy it, and if they don’t want to buy it, then they would have to offer it to the other members. But you could come with an offer already or you could just say, “I want to sell it. Can you guys do it first?” And then if they didn’t want it, then you could go out to a third party. But we do have a provision that says that if they did that with a third party, they’d have to come back and re-offer it to those other investors. Is that kind of typical? Or do you a lot of variation in that?

 

Jackson Stith:

There’s variation. As you know, you like to write your operating agreements a certain way. Other lawyers write them other ways. But there’s always a provision in there of … first of all, you … can’t just allow a new investor to buy your position, and it’s automatically accepted. The GP, always in some format, will have the ability to say yes or no to that new investor. And when an LP comes to us and says, “I want to sell my position. I’ve already offered it to my GP. I’ve already offered it to the other LPs,” if that’s the order of operations and their agreement, we say, “That’s great, we need to talk to the GP. We need to verify the story.” Because we don’t want to get involved in some sort of fight between the GP and the LP. We want everybody on board, full transparency, so on and so forth.

 

Simen Ruge:

And I think also one thing to keep in mind is that GP equity looks very different from LP equity just return-wise. This is perhaps why GPs are hesitant to buy back LP equity. It’s a lot more profitable to go out and do more new deals with more new GP equity than it is to be buying back old LP equity. So these buyback provisions are there usually in order to make economic sense. We’ve heard some bits of pre-law on that, but it varies from GP to GP. Some GPs look after investors like that really well. Some don’t.

 

Jackson Stith:

Yeah. Some GPs will make their investors whole. And some GPs will say, “I smell opportunities to buy you back at 65 percent on the dollar.” Right? We’ve heard both stories. So it just depends.

 

Simen Ruge:

Yeah, it depends. This is all part of the process.

 

Kim Lisa Taylor:

We want to open up for live Q&A. So before we do that, let’s give your contact information and ours and then we’ll go to our questions that we have in the Q&A. If you are attending and you want to put a question in the Q&A, there’s a button that should be at the bottom of your screen where you can add a question there. Or there’s also a place where you can raise your hand. So Simen and Jackson, let’s go ahead and give your contact info.

 

Jackson Stith:

Simen, you want to go first?

 

Simen Ruge:

Yes. It’s simen@syndigatecapital.com.

 

Jackson Stith:

And that’s Simen spelled S-I-M-E-N.

 

Simen Ruge:

Yeah, Norwegian spelling.

 

Jackson Stith:

And my name is Jackson, jackson@syndigatecapital.com. You can also find our website,  www.syndigatecapital.com. And you can find us various ways there. Also on LinkedIn.

 

Kim Lisa Taylor:

Could you guys also maybe type your contact info into the chat so that we can just copy it and paste it.

 

Simen Ruge:

Yes, certainly.

 

Kim Lisa Taylor:

That was a question from one of our panelists. So to reach us, if you want to schedule an appointment with one of our securities attorneys, then you can do that at our website at syndicationattorneys.com. We also invite you to view our library where you will see … eventually, we will be posting this recorded teleseminar but all the other ones that we’ve done for over three years are also posted there on a lot of different topics related to syndication. We also have over 40 articles in our articles library and a bunch of FAQs based on things that people ask me every day. There’s some more in-depth white papers and other podcasts, recordings from other podcasts that I’ve been on.

So there’s just a wealth of information in there. And you can download a free copy of my book, “How to Legally Raise Private Money,” and that would be a digital copy. If you want to get it from Amazon, it is a No. 1 Amazon bestseller. Again, the name is “How to Legally Raise Private Money.” And you can buy that from Amazon as either a Kindle or a soft copy. And I want to tell you, the amount of books that we’re still selling is just amazing. I can’t believe how many are still selling every day and every month. And it’s got a lot of good reviews.

All right, so let’s go to the questions. Hey, Susan, are you there?

 

Susan Rathbone:

I’m here.

 

Kim Lisa Taylor:

Hey, Susan. This is Susan Rathbone. Susan is our new administrative office manager. And she’s going to help us get through the questions. So go ahead, Susan. What do we have?

 

Susan Rathbone:

Okay. We have a question from Matt: “I assume there is a discount when selling LP interest. What is typical?”

 

Simen Ruge:

Really depends on the asset in this situation. I mean, just to use a current example, there’s a massive difference between multifamily, for instance, at the moment than retail or office space, which is really depends on the situation. It’s hard to say.

 

Jackson Stith:

Right. I think it’s important to remember there’s a whole host of potential investors in these. Some are trying to get yield, and so they’re going to discount things, and some are just trying to create an arbitrage position with the duration. So instead of being in a deal for seven years, they know they’re buying in the middle of it, they’re going to be in three years, which juices up their IRR. And that’s already enough for them. So there’s a great variability between what one investor/buyer will bid and what another one will bid. So I hope that answers the question.

 

Susan Rathbone:

Okay. “Are key principals considered a passive or active sponsor under securities law?”

 

Simen Ruge:

I think that’s probably best answered by the lawyer in the room there.

 

Kim Lisa Taylor:

Yeah. So your key principals are usually going to be the people that are guaranteeing the loans. And those are generally people that are going to have to be put in an ultimate position of management and control. So they would have to be… generally, the lender is going to require them to be in management and they would be an active participant.

 

Susan Rathbone:

Okay. “So suppose a set of investors have a property worth several million dollars that is owned, free and clear. They want to do a joint venture and we want to use their property as the equity to do a $15 million-plus redevelopment. How could we structure that without bringing in additional investors?”

 

Simen Ruge:

Looking for additional investors, you’re probably looking at that. And honestly, the mortgages are cheap and easy to do if you own the real estate free and clear.

 

Jackson Stith:

Yeah. I mean, that’s a question for a banker, right? They’re probably going to look at how much equity to the total value of the development you’re trying to do, and they’re going to look at your track record and see, is there anybody on board who’s a developer? They’re going to want to see that it doesn’t go sideways in the middle of it because you don’t have the experience to develop.

 

Kim Lisa Taylor:

For the person who asked this question, I’m going to refer you to another attendee and you can share contact information in the chat. Julianne Peterson is attending today, and she is a banker, or she actually works for a company that does those kinds of commercial loans. And she may be a really great person for you to talk to. She does a lot of creative financing as well. So Julianne, if you could put your contact information in the chat, maybe these people would like to talk to you as well as others. Okay, great.

 

Susan Rathbone:

All right. The next question: “Does your business model only seek the entire LP position or would you look at a portion of it?”

 

Simen Ruge:

Well, depends on the size of the portion.

 

Jackson Stith:

We’ve had similar questions before and the answer is yeah, we can do portions as long as the GP and whatever is in the documentation allows for them. There’s agreement within their syndicate to allow them to… so they have $5 million in a deal and they want to solve two and a half million, we can certainly look at that situation.

 

Susan Rathbone:

Okay. “What things can we do to structure our syndication to make it more appealing to your investor base in the future? What are some things that make existing securities not as marketable?”

 

Simen Ruge:

Well, look, clear-cut business models are easier. Let’s say there’s a mix between a business and a real estate; that makes things more complicated to keeping things separate. So if let’s say there’s a business involved keeping the real estate as one particular asset and business as one asset is one thing.

 

Jackson Stith:

Yeah. I’m going to defer to Kim here, but transferability can be written a number of ways. There’s certain minimum requirements that are necessary due to tax law and stuff that I can’t advise on. Basically, if it’s written into the contract that transferability is permitted by the GP, that is going to be more sellable than something that says it’s just absolutely not permitted.

 

Simen Ruge:

Yeah. Because if you think about if I’m coming in as a new investor, I’m also considering a scenario where this deal might have gone on for seven years. What if my horizon is five years and it goes on for another 10? What are my ways to get out? And we’re seeing some GPs are actually quite advanced in the language they write and they’re writing these provisions and they find that that’s really popular with investors. You always want to protect yourself as best you can when you’re a GP. You don’t want strangers entering your deals. But it’s also important to kind of allow for some level of transferability. That kind of makes investors more at ease.

 

Kim Lisa Taylor:

Yeah. Investors, typically in my experience, will shy away from deals where there’s no provision to remove the manager. So they can’t get rid of a bad manager or there’s no way for them to get out or transfer their interest because they feel stuck in both situations.

 

Jackson Stith:

Absolutely.

 

Susan Rathbone:

Okay. “Can you talk more about valuation? Do you use a bidding process or assess a value before sending it out for consideration?”

 

Jackson Stith:

No, we have an internal model that we use, and that model gets updated depending on the situation. And these deals are as varied as the flavor of ice cream out there, right? So we assess it based upon a pretty simple model that is a mixture of discounted cash flow and sales comps. And it’s assets minus liabilities equals equity, and you own such percentage of equity. This is the value that it should be. There’s going to be some people who want a discount applied to that. Some people who want a discount for a liquidity applied to that. And so we’re going to come up with a base value of if you’re trying to get more than this, you’re probably going to be disappointed.

And then it’s a bidding process. I mean, we go out and we talk to people. Some people pass, some people say, “Love it, interested, but I want to pay a little bit less than the value that you’re claiming to sell it for.” And we bring the offers to the table, and it’s a negotiation between the seller and the buyer. We try to smooth feathers over and all the rest of the things that a good intermediary does. But ultimately, it’s going to come down to a negotiated process between a seller and a buyer.

 

Susan Rathbone:

Okay. “Do you have a one-pager explaining your process and how to connect to you?”

 

Simen Ruge:

Certainly. I would refer people to our website, www.syndigatecapital.com. We speak more in detail about how we work. And also if you want more information, get in touch with us. We’re happy to send over more documents of the specifics of the process.

 

Susan Rathbone:

Okay. “Do you have redemption language or clauses in your agreements? Do you typically make investors whole or do you buy them out at a discount?”

 

Jackson Stith:

Yeah. So I think this question is written… I might be mistaken, but I think they’re mistaking us as principal buyers. We don’t buy. We’re an intermediary. There’s no language we force upon anybody. Again, that’s part of the negotiation process. I will say in general, depending on the situation, some general partners are willing to alter their operating agreements to allow for a deal to be done. But that goes back to the lawyers.

 

Simen Ruge:

But I think this is more of a GP question, right? For GPs and agreements with GPs and their LPs, so maybe it’s more for Kim to say what’s common there. Whether people have make-whole clauses in their contracts. I definitely don’t think those are very common.

 

Jackson Stith:

Yeah. Kim, do you have any color on this?

 

Kim Lisa Taylor:

Yeah. I mean, we customize documents for clients all the time. So this is something we need to be thinking about going forward is, how can we make it easy for our clients who want to recapitalize to be able to do so? But we have actually done that, I think, pretty well in the documents that we draft now. And if any of you haven’t had us draft a set of documents for you, you will find that the documents we draft are very unique in that we have a lot of unique provisions based on the real experiences of our clients over the years, over the 12 years that I’ve been doing this. And one of the provisions that we have in the last year or so really kind of focused in on was this transferability and making it easy so that if somebody came with a prospective buyer for their interest, that that could be more easily accommodated than having to go through a very, very cumbersome process.

So we just need to look at those provisions, and that’s why it’s really important that you read your documents when your attorney drafts them for you to make sure that you understand the transferability process. And if you think that there could come a time in the future that you might need somebody like Simen and Jackson to come in and help you recapitalize, that you’re able to do so. You got to read your documents. you got to make sure you understand those provisions yourself up front.

 

Susan Rathbone:

Okay, we have two remaining questions: “Do you also broker GPs carried/promoted interests? Or are you exclusively focused on LP interests?”

 

Kim Lisa Taylor:

I think we kind of answered that one already, didn’t we?

 

Simen Ruge:

Yeah, I think so.

 

Jackson Stith:

Yeah, but there’s a variation here. They’re talking about promoted interest. So GPs haven’t always earned their promote. So the equity is theoretical, right? We find that those kind of positions are very tough to sell. Theoretical equity is hard to get someone interested in buying. So I’ll just put that out there.

 

Susan Rathbone:

Okay. “What kind of cap rates and IRRs are investors looking for? Thinking specifically about multifamily investors looking for a longer time horizon of ownership.”

 

Jackson Stith:

It depends on class of property. It depends on geography. I will say that most people that are going into multifamily right now understood that their return, their yield to their equity position is compressing because there’s more money going into multifamily right now because it’s seen as a safer asset. So in general, we see somewhere between 10 percent and 17 percent is kind of like where the market … just depending on the asset we’re talking about, the sponsor who’s involved, so on and so forth. It just depends on the scenario. That’s kind of the broad spectrum. There’s other people who say they want 20 percent, but it’s like, “Well, you’re getting into some spicy stuff at 20 percent.”

 

Simen Ruge:

Right. We’re conscious of the fact that we’re using the words “it depends” a lot. There’s a lot of different flavors to what we do.

 

Kim Lisa Taylor:

Isn’t that the first class you took in your broker training? Because I know it was the first class I took in my law practice. “It depends” in multiple ways, right?

 

Simen Ruge:

Yeah. That’s right.

 

Jackson Stith:

But it really does.

 

Susan Rathbone:

The last question: “What are your fees to find out LP interest buyers?

 

Jackson Stith:

Find out?

 

Simen Ruge:

So that means in terms of figure out whether there is demand for it? I mean, that’s part of our initial consultation trying to figure out what kind of demand there is for an asset. And as I say, we charge commissions based on actual transactions that have happened. So I wouldn’t imagine there being a fee for that. Obviously, we need to take a look at the documents, understand what the asset looks like, and then we can see.

 

Jackson Stith:

Yeah, again, it goes back to “it depends.”

 

Kim Lisa Taylor:

You don’t have to answer this if you don’t want to, but it there kind of an upper end of what kind of a commission you would typically take? Or is there a range?

 

Simen Ruge:

Yeah, sure. I mean, look, we typically charge between 3 percent to 5 percent depending on the complexity of the deal.

 

Kim Lisa Taylor:

That’s very reasonable.

 

Jackson Stith:

Yeah, we think so as well. I mean, 5 percent is for “hairy” stuff for lack of a better word, right? Something that’s been around for 20 years. There’s maybe some bad blood between some partners, and there’s layers of history of this thing that we have to like dig. It takes time. And it also becomes increasingly less likely to trade, so we have to price it accordingly.

 

Kim Lisa Taylor:

All right. So we’ve got just a few minutes left. And there were a few questions over in the chat, Susan, if you could help us weed those out.

 

Susan Rathbone:

We’ve had three more questions come in.

 

Kim Lisa Taylor:

Okay. Well, let me answer a couple in the chat before we go on to those. So somebody, Robin asks, “Is this a solution for needing a 1031 exchange into more passive investments?” And I think the answer is no. That’s a totally different mechanism. So if you wanted to talk about that, Robin, I would suggest that you would schedule a call with me and we can talk about kind of the ins and outs of that. But also, there’s an article on our website called “The 1031 Dilemma” that I would encourage you to read, which describes some of the issues associated with 1031s. And then if you still have questions after that, I’d be happy to talk to you.

Robin also asked, “Do you deal with or have knowledge of the hybrid offerings that allow an exchange … that provides for the tax deferred exchange needs?” Again, that would be a question we would want to discuss during a call.

Let’s see. And I think that’s the main ones right there. I did put Julianne’s contact information in the chat. And I also put in the contact information for Jackson and Simen.

And let’s see. “What type of entities do you market your sellers equity to?” And I think you guys discussed that, that those would be your high net worth investors or your institutional ambassadors.

And when you say institutional investors, you’re talking what? Investment banks, hedge funds …

 

Simen Ruge:

Yeah. Alternative investment funds, smaller pension funds, asset managers, these types of people, real estate funds really.

 

Kim Lisa Taylor:

Okay. Go ahead, Susan, with the other Q&A.

 

Susan Rathbone:

Actually, some of the questions you just asked were duplicated. “Is there an established marketplace to find securities available for purchase?”

 

Simen Ruge:

Not currently for this stuff. If you’re thinking about kind of a similar like service, there isn’t one.

 

Jackson Stith:

Yeah, there’s a few reasons why. It’s not commodified. There’s no GAP accounting. So when you’re buying an Apple stock or a Microsoft stock, you know that they’re following all the same rules and regulations. Not necessarily the case with privately placed stuff. So there’s also hold period requirements and such things that get involved with private placements.

 

Kim Lisa Taylor:

And then I guess if you’re looking for direct issuer interests, then you would want to look at CrowdStreet or RealCrowd and see what kind of offerings they have available as far as these secondary markets. It sounds like these are more of the private deals and not going to be the kind of deals that are advertised.

However, I did want to say something else is that you mentioned that you guys prefer 506(c) offerings. So I would imagine there’s some people on call thinking, “But I have a 506(b) offering. What if I need to recapitalize that?” Well, there’s no prohibition against you later on doing a second 506(c) offering to bring accredited investors into your 506(b) offering. But you can’t go the other way. You can’t have a 506(c) offering and then do a 506(b) offering to bring people into that because those 506(b) investors would not have gone through the verification process to prove that they’re accredited and they wouldn’t qualify to invest in that 506(c) offering.

So that’s just something to think about. And so as Jackson and Simen said, it is something you’re going to be working with your securities attorney to help structure in a way that’s going to make sense for Jackson’s and Simen’s investors. At the same time, it’s going to make sense for your current offering and not going to be something that’s prohibited by your current offering. And then there could be times when you might even have to obtain permission of your investors that are going to stay in your deal. So that could be it.

But anyway, I think that that pretty much answers the question. We’re right at the top of the hour. This has been a really great call and you guys have had a ton of questions. That always tells me that it’s a pretty important topic that people are interested in. And we thank you so much for being our guests today. And we thank everybody that joined us on the call today. We know that your days are busy and we like to be able to help you out in any way we can.

One other thing I just want to quickly mention is that if you are a client of the firm, then we are having weekly Masterminds. They’ve been fantastic. We’ve been really deep-diving into some topics. It’s been a great opportunity for our clients to meet and engage with each other. We’ve got some really well-versed clients and experienced clients on these calls. And so if you’re not attending these weekly clients-only Masterminds, then you really should be getting into that.

And if you want to become a client, and you’re not, we do have an introductory pre-syndication retainer program for you that’s just $1,000. It gives you up to three hours of legal advice and investor marketing plan, investor relations blueprint. And it gives you access to all of the weekly Masterminds as well as a discount off your first syndication equal to or greater than the amount you spent on the retainer. So that $1,000 is going to get you in, and we’d love to see you on our weekly Mastermind calls and on more of these calls. So thank you, everybody, for showing up today.

 

Jackson Stith:

All right, thanks for having us again.

 

Kim Lisa Taylor:

Thank you.

 

Simen Ruge:

Great. Thank you. Bye.

 

Jackson Stith:

Bye.

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