Transcript: ‘Using Analytics to Scale Your Syndication Business’

Edited Transcript from the podcast episode ‘Using Analytics to Scale Your Syndication Business’

With Special Guest Val Despard

Originally Broadcast on April 28, 2022

Kim Lisa Taylor:

Welcome to Syndication Attorneys free monthly podcast, where we talk about topics of interest to real estate syndicators, with the opportunity for live questions and answers at the end of the call. I am attorney Kim Lisa Taylor.

Before we get started, please note that all of our podcasts 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; you can do that at our website.

Information discussed during this free podcast is of a general, educational nature, and should not be construed as legal advice. For today, if you’re here live, you do get to see the video of us talking. But for our general podcast is an audio-only presentation.

Today, our topic is “Using Analytics to Scale Your Syndication Business,” with our special guest speaker Val Despard. So Val, welcome to the program.

Val Despard:

Thank you for having me.

Kim Lisa Taylor:

We’re super excited that you agreed to come. And I’m really excited that we learned about your services because I have so many clients that come to us and they’re not really sure how to put together their resources and uses of funds, proposed access strategies, all that stuff. So, Val, tell us a little bit about yourself.

Val Despard:

Okay; I live in Denver. I was in Atlanta for a long time, went to graduate school in Atlanta, met my wife there. We moved out to Denver about 2015 and, it’s a really good real estate market. Obviously, the outdoor activities are great. Family likes it. Family’s happy. So, we’re good. … In terms of professionally, my dad was a home builder. So, I got into real estate kind of that way. I worked in the summers as a laborer on home sites, and majored in civil engineering, and thought I wanted be a home builder, ended up being in commercial real estate … just out of college, and really got into analytics. My first job was with a mortgage bank in New Jersey, and they were a conduit for life insurance loans. We would underwrite New Jersey real estate multi-family properties, and things like that.

That’s how I got my start in the business. And then eventually got my MBA in Atlanta, and kind of confirmed my interest in real estate, commercial real estate. And from there, the work that I’m doing now really began in 2007 when I joined a national brokerage firm called Transwestern. They have offices all over the U.S., but they have an office in Atlanta and I was an analyst. I got hired as an analyst for a team of three brokers who sell office and multifamily real estate. And so, I was their analyst, running the models, running cash flow scenarios for properties that they were trying to sell.

They had relationships with owners and sellers, and we’d put projections in offering memorandums, and buyers would look at our numbers, the total package, but part of the package would be kind of our financial projections. And we would sell properties that way. And that’s how we got started doing this type of work. The great thing about being a part of a brokerage firm is you see a lot of deal flow. So, you see a lot of different scenarios, different markets, different types of properties, different problems, and you gain a sense of what to look for, questions to ask, what are the things that derail a purchase, or what are the risk factors in acquisition? You also get a sense for what moves the needle in terms of your returns.

When I’m working on an underwriting model, I know that there’s only like four or five things that you can change really, that really impact your overall return on your investment. So, if you’re buying an office building, unless it’s a single-tenant lease with 15 years of term, you have to deal with a lot of rollover. So, what you assume for the market rents, what you assume for improvement costs on the landlord side, things like that … they really move the needle in terms of your returns. You’re in the models day in, day out, you really get a sense for what kind of moves the needle in terms of your returns, and therefore, what to look out for; if you’re an investor in a deal, what to be concerned with.

The first thing, if somebody sent me an investment and asked me to invest in their property, I would be looking at those four or five things. What are you assuming for market rents? What’s the vacancy factor? What’s your exit pricing? And maybe one or two other things. But it’s really rents, it’s your residual pricing, and what kind of occupancy you’re going to do. And there’s two or three other things that I’m not thinking about, but it’s not that many levers to pull that really impact it. I get into the details of a model looking for small mistakes. You want to be accurate, but those things really don’t move the needle.

So, I got involved in kind of the brokerage side underwriting … In 2014, I started doing some consulting outside of that for a developer and realized that people would pay me good money to do this on my own. I’d been doing it for seven, six or seven years, I guess, full time. And then somebody approached me, told me they’d pay me 100 bucks to do a simple model, and I was like, “Wow, somebody would pay me to do this.” So, I started doing that. And I started with pretty low fees hourly, and then I would do it myself. I would do it in the morning before I went in to work. So, I would do underwriting for different clients, and then kind of organically word of mouth grew the client base, and then started playing around with different business models.

I tried to bring in a junior analyst to do the numbers for me, and then I would approve it. But that was just too many hands on a model. And then over time, we realized our model is really senior analysts. So, it’s bringing in people that have enough experience to be able to engage directly with a client. And we do peer reviews, but we don’t really have junior analysts on our team. And so, over time, with trial and error, I think I’ve made every mistake in the book, but over time, we’ve figured out our model, which is senior analyst model engaging directly with a client. And we try to have teams on each client … We try to have two or three analysts on each client so that we can review each other’s work, or if one analyst is busy, somebody else can jump in. And so, that’s now our model, and we’ve got 18 analysts.

Kim Lisa Taylor:

Wow. That’s fantastic.

Val Despard:

Fully remote. And pretty much everybody on our team is part-time, but they have pretty good availability, given they typically have some time nights, weekends, or during the day. I mean, the remote work, hybrid work environment has probably helped us as a company, because we’re fully remote. We can have an analyst in New York working with a client in Florida and that’s just how we do it. We have a couple of analysts in Asia. So, we have a little bit of global … All of our abstracting team is in India. So, if we abstract leases, we coordinate it here with somebody on our team, but then the actual abstracting is done in India.

Kim Lisa Taylor:

What does that mean, abstracting?

Val Despard:

A lot of times, if you’re buying a deal, let’s say it has eight tenants in it … Usually, at some point during the process, you want to actually have somebody reading all the leases on those tenants. And so, acquisition groups and brokerage groups will pay us to … We have a template, and we will go through every lease and break out the important parts of every lease. And usually, you’re looking for renewal rights, termination options, anything that could kind of impact the valuation.

Kim Lisa Taylor:

Well, that’s interesting because I didn’t know that that was part of the things that you do. Let’s talk a little bit about all the different things that your firm does. You do the analytics, and I guess that would be for people who are buying properties, or maybe refinancing; any other applications for that?

Val Despard:

Yeah. We have three purposes. We work with brokers who are selling a building, we work with investors who are buying it, and then we work with developers who are doing ground-up development. Those are our three buckets. And then that cuts across different property types. So, it’s primarily office, retail, little bit of industrial, multifamily, and self-storage. So, those five property types. So, it’s kind of like three types of clients, and then who are working on different property types.

Kim Lisa Taylor:

So you said multifamily, office, self-storage; what were the others?

Val Despard:

Retail and industrial. A lot of what we get, we tend to get the more complicated projects at the project-level so, office and retail can be more complicated. We get more of those, but we do quite a bit. We have a large self-storage client out of the Midwest, and we do multifamily as well. And then occasionally, we’ll have … We have one industrial client out of Atlanta, but those tend to be … A lot of groups will do it internally just because it’s often a little bit more of a simple underwriting. But yeah, those are the five kind of major property types that we work on.

Kim Lisa Taylor:

I’ve heard you say that, of course, you do the deal analysis, but also lease abstracting; are there other services that you provide?

Val Despard:

That’s pretty much it. It’s the financial projections for our clients, and then the lease abstracting and that’s really … In terms of our underwriting capabilities, that’s really kind of our core offering. We’ve thought about maybe do we add banking to our client list? But currently, we’re really just focused on commercial real estate teams.

Kim Lisa Taylor:

Okay. Question that came to mind was when we’re counseling our clients, if someone comes to us with a specific project, then we tell them, “You need to create a property information package,” and there’s many names for it: Investment summary, property package, property overview, offering memorandum. But we tell them they need three different analytic models in there to present to investors. One of them is their sources and uses of funds. Where’s the money coming from? How’s it going to be spent if this is an acquisition? And then the second is usually a five-year projection, or a projection out for the number of years they plan to hold it. Maybe within that, there’s going to be some kind of a refinance event that’s going to change the analytics before and after that event. And then also, we ask them to provide what their exit strategy is, and kind of project into the future, making some assumptions about cap rates, and things like that.

And saying, okay, if the cap rate is the same then as it is now, and we’ve been able to increase the NOI by this amount, then this is how much we should be able to get out of it in equity. And using all of that information to create their overall cash on cash return from that, to be able to figure out how much of it they have to give to investors in order to be able to give them what kind of annual, or well, their preferred returns, plus whatever other additional returns they get from equity so that they get their overall annualized return in the target range for their investors. And all of that stuff really needs to be done up front before they come to us because we’re going to be creating waterfalls that are going to reflect all of that.

But I get a lot of people that come to me that are like, “I don’t know how much to give away to investors. I don’t know how … I don’t understand the overall cash on cash return,” and that kind of thing. Are those the types of things that you would be able to support all three of those areas?

Val Despard:

Yeah. We could definitely help with the … We could do the writing and the presentation, we don’t get into the graphics of putting the….

Kim Lisa Taylor:

No, we do all that part. What I’m asking is: you do the sources and uses of funds, the performers, and the proposed exit strategies. Is that part of your wheelhouse?

Val Despard:

Yeah, it definitely is. So, a typical model that we have will include: What does the debt look like? When is the debt funding? What’s the purchase price funding? What’s the future funding?

So, we will underwrite that, especially with development deals, sources and uses, we’ll break that out. And we can break that out with any underwriting that we do. So yeah, all of that is really part of what’s the equity … And it can vary from a quick and dirty underwrite, leverage is 60% of purchase, and there’s the interest rate to we’re going to project a refi in year three, and here’s what that looks like. So, we can do all of that with the debt.

And then as far as the exit pricing, we always underwrite an exit, and you’re assuming an exit cap rate, and you’re assuming certain growth in the income, and it’s really just putting eyes on that and looking at it from an experienced standpoint … Is your exit pricing per foot, or is the cap rate, or is your market rent growth out of alignment, or risky? And do you want to stress-test that? Like what if your cap rate is significantly higher five years from now? Another thing to look at is timing of your exit. So, I don’t like underwriting a three-year hold because your levered returns, so if you look at your levered IRR with a three-year hold, it gets really boosted up because of the short-term nature of that strategy. So, if you underwrite a five-year hold, and it works, then it gives you flexibility. So that way, you can exit at year four, you can exit year three, you can exit year six or seven, and your numbers still work.

So, a lot of it is on the exit strategy, a lot of it is kind of stress-testing, the timing, the cap rate, the total exit pricing. So, we can help with not just underwriting it, but also different scenarios, and stress-testing those scenarios.

Kim Lisa Taylor:

And can you do models based both on average annual return, and IRR, or do you typically prefer one over the other?

Val Despard:

We don’t tend to look at annualized returns. So the four or five metrics we tend to look at, what’s you’re going-in cap rate? What’s your cash on cash? What’s your average cash on cash?… I like the unlevered IRR too, because it strips debt out of the equation, because you don’t know what the debt markets are going to look like, and if you have to refi or sell. So, you want the unlevered IRS to look good … a lot of investors will look at multiple. It’s just all my money in five years type metric. We can model pretty much anything, so we can model that as well.

Kim Lisa Taylor:

Okay, great. Well, you know what? This is an absolutely needed service, I know that for a fact. Have you ever supported anybody who’s doing a fund model where they don’t have properties, but they have kind of a model of what they’d like to look for, or what their properties would like to look like;, have you ever supported that type of model?

Val Despard:

Yeah. I recently worked on … there’s a multi-family group that’s vertically integrated, so they’ve got … they do everything. They’ll buy it, they’ll manage it, but they were raising money for a fund, and it was complex because it had two different scenarios, or two different types of funds, and we’ve done fund modeling and it gets really complicated. We’ve also done … like we’ll have a group come to us and say, “All right, what if we raise money for a fund, and buy 10 properties?” And then you have to start looking at like, okay well, what happens when you sell a property? How does that flow through the waterfall? And so, it’s a lot of those small decisions, or maybe not small, but decisions on kind of how you handle capital events versus cash flow, and GP versus LP, and all of that. So yeah, we have experience with that.

Kim Lisa Taylor:

Cool.

Val Despard:

I worked for a private equity firm as well for two years. And I even got involved in some of the decisions, like, let’s see, a capital call for $1 million, and one of your investors writes a check two weeks after everybody else. Like how do you handle that if it’s an IRR hurdle type situation? And so, one of the things that I’ve kind of developed a sense for is, I think, a lot of waterfalls are too complicated.

Kim Lisa Taylor:

I agree with that.

Val Despard:

I think that on the front end, it looks really cool like IRR hurdle rates, and it looks fair because you once you hit this hurdle, then you get … But calculating that in real time, like on a quarterly or semiannual basis is, it leaves a lot of room for mistakes and interpretation. So, my mindset is to create as simple a waterfall structure as you can. And you’re really backing into the same type of returns. You’re just doing it in a more simple way. Could be a simple preferred return to the equity investors and then split after that … Obviously different scenarios can change it, but I feel like you get to the same result having hurdle rates 8, 12, 16, 20. I mean, there’s not that much money in those gaps because IRR is so volatile and can move so quickly that one of the things that I see people make mistakes with at the operator level, or the investor level, is create waterfall structures that are too complicated, unnecessarily complicated.

Kim Lisa Taylor:

Yeah. We typically see three models. We see a straight split model, we also see a preferred return, and then a split, but the model that we actually like the best is a preferred return, a Class B catchup, and then a split. And then sometimes within all of those, we’ll see a cap where the split changes after a second hurdle rate is achieved. But the first hurdle rate is the preferred return, making sure that’s paid before the management team, or the Class B interests, start to earn their profits. And then also, but the reason we like the Class B catchup so much is because, in my opinion, there’s a significant difference between taking, say you have a 70-30 split, and giving your investors an 8% preferred return, giving them 8 and taking 30% of what’s left for management, versus basically, splitting everything 70-30 from day one. But if there’s a shortfall in the 70% that so in some year the investors don’t get that 8%, then the Class B will give up some of their earnings for those years to be able to make that up.

But they’ll recapture that or have the right to recapture that at a later time. And in my opinion, there’s a significant difference on how much the management team earns with the Class B catchup, and it doesn’t impact the returns to the investors very much. There’s certainly an impact, but not as much as you’d think, versus I’ve had a lot of clients that just did the preferred return and then they took whatever was left, and they said, “We had too many deals where we gave all the money to the investors. We did all the work, and we never got anything.” So they just said they werern’t doing it.

Val Despard:

Interesting.

Kim Lisa Taylor:

So, that’s kind of what we see. We advocate for the Class B catchup all the time. And if anybody wants to more about what that means, there’s an article on our website called “Class B Catchup Distributions Explained,” which might be worth reading, definitely worth reading. Okay. So, typical clients, brokers, buyers, possibly banks in the futures, developers, what do you think the number one problem your company solves for real estate syndicators or buyers?

Val Despard:

A lot of times our clients, they know the deal, they know the market, they have a sense for the deal working. We come in and kind of confirm and detail out their thinking. So, they might be raising equity, or raising debt, or they’ve got partners, or it’s a lot of money that they’re putting into a deal. So, they might know it, or they’ve done a quick underwrite and they feel good about the deal working in terms of the market dynamics. But we help them really have a detailed approach to a tenant-by-tenant assumption, confirming their understanding. We have a client in Salt Lake City and they’re doing a large mixed-use development. And they’re working with the city to help fund the development because development doesn’t work economically without city assistance.

So, they hired us … I think it’s still ongoing … to kind of model out what does it look like, market based deal. We do office, certain number of floors, and we do hotel, and what are the returns? And then model in kind of city assistance. And so, it’s that kind of thing where it’s like, I think the deal works, doesn’t work, but I just, I need to confirm it. And then I need to know what questions to ask. So a lot of times, we’ll get a model and you realize the anchor tenant is expiring in nine months, and you have to figure out what’s that tenant going to do because it spurs questions and gets everyone thinking about the right things.

Kim Lisa Taylor:

So to me, one of the things you said is it helps validate what the person has already done on their own in a lot of cases, and I think that’s got to be a great confidence builder … there talking to investors, you feel very confident in the numbers that you’ve put together. You’re like, “Hey, not only did I do this, I hired this professional company to review it, make sure that it was correct, and I feel pretty confident that we’re going to be close to projections.” So, I think that’s going to be a big aspect of this.

Val Despard:

Yeah. A lot of our operating clients, they really know the market really well. They know which areas of their market they want to be in, they know the supply/demand imbalances, and they have a really good feel for all of that. So, we’re just coming in and kind of validating. We rely on them to know the market for the inputs and the assumptions. And we’re just kind of validating those assumptions and also if they want to stress-test different assumptions, we can help them with that as well. And then within our company, we try to have … If one analyst does it, ideally, we’ll have a second analyst review it. So not only have you outsourced the underwriting to somebody who does it all the time, there’s another pair of eyes looking over them. And so, together, you’re all kind of looking at the same deal and it creates a lot of confidence after a while.

Kim Lisa Taylor:

Yeah. We use that approach in our law firm too. We try to have whoever writes it have somebody else review it before things go out the door. So, it’s a good quality assurance measure.

Val Despard:

Yeah.

Kim Lisa Taylor:

For sure. So, what kind of mistakes have you seen operators make when they’re doing their own analytics?

Val Despard:

That’s a good question. A lot of our clients think they have the time to do it, and then they don’t really, because it’s hard … You have to be kind of immersed in a model to really do it justice. And a lot of our clients are entrepreneurial, and they’re being pulled in so many different directions. So, they might think, “I have a background in it, or I can do it on my own.” And they can to a large degree, but I think the biggest … It’s two things. One is time availability, and two is passion for it. A lot of our clients are more, let’s say, they’re more extroverted. They want to go out and find the deal, and network with people. They love that part of it. They don’t really want to sit in front of a computer and work on a model. So I think all of our clients certainly are capable of modeling a deal in Excel, but I think their limitations are on time. Time, and also passion for just that type of work.

Kim Lisa Taylor:

Yeah. I think time is critical. I mean, a Syndicator has so many things on their plate. They’re finding deals, they’re finding financing, they’re finding investors, they’re trying to conduct due diligence on the property, and then to figure out all the analytics on top of it can be pretty overwhelming. And if you don’t have someone who’s got real strong analytics background on their team, this is a great way to bring in someone to help you kind of round that out without bringing in another partner that does that. So, it’s always a good idea to have experts on your team. And I’ve learned in my own business to stop doing things that I’m not an expert at, and hire other people that are. It just makes such a difference in my business. And it’s helped my business grow exponentially by doing that, even though sometimes, it’s kind of like, you got to take a pill to… Swallow a big pill to think, “Okay, can I really afford to do this?” It’s really more that you can’t afford not to do it, right?

You can’t afford not to do it because once you get the right people helping you do this, it frees up all your time. Now, you can go find bigger deals, better deals, and you’re going to be more confident talking to your investors. I think it’s just going to help propel everybody forward. So, what kind of waterfall trends have you seen?

Val Despard:

We recently worked on a waterfall that had a compounded pref. So, it was instead of a simple prep of … It was like 7 or 8%, I think it was compounded. So the math is a little bit different. Essentially, it’s an IRR, it’s just another way of saying IRR hurdle because it had to hit a 7% IRR before it went to the next hurdle. And so, the client was looking at it and it didn’t seem to make sense to him because we had broken out return-of-capital above the hurdles. And he was like, “Well, why is it not?” But actually the second, after the refi, the second, I think it was the residual sale was in the hurdle rates because it was essentially all it was, there was no pref, there was no splits, there was nothing except for this hurdle, this hurdle, this hurdle, final split.

Now, I don’t know if that’s a trend, it’s how he was doing it, I’ve seen that. Again, I always have a preference for avoiding anything IRR-related, but that’s something … Really it’s like, whatever you can imagine, you can put into a waterfall as I’m sure you know I’m sure you’ve seen that’s on different structures…

Kim Lisa Taylor:

When I first started doing this back in 2008, we were writing deals with 60-40 splits. And then we started writing deals with a pref and 60-40 split. Then we started doing 65-35, but eventually, right now, we’re pretty much at 8% preferred returns with 70-30 split. And with a catchup for the manager, whenever we can get them to do that. I was on a continuing legal education yesterday, and some other securities attorneys were just, they were saying, the 8% preferred return has been in place for decades. And so, it’s not likely to go away, you may see some people offering 6 or 7 in certain instances, but for the most part, this is still going to always be that sweet spot that is going to cause the investors to pull out their checkbooks. So, I thought that was kind of interesting…

Let’s see if we can answer any of these questions. So, Dwayne says, “You don’t know how excited I am to be on this Zoom.” Okay, that’s great, Dwayne. I think that there’s a lot of people that need this service so that’s why I wanted to bring Val on.

Let’s see if we’ve got any other questions that we want to go to. And then we want to go to live Q&A here in a couple of minutes. We are getting some questions in the chat, so I want to make sure we have time to answer that.

We’ve talked about the fact that we think that this mitigates risk for investors because just having a professional look over your shoulder, make sure that you’ve got the right numbers, that’s going to give your investors great confidence, and you’re going to be able to promote that in your offering materials. You’re going to be able to say, “Hey we had our analytics done by a professional.” And I don’t know if you allow people to cite the name of your company in there, but you might want to ask Val if that’s something that they would allow you to do. At what stage of the deal should people hire you?

Val Despard:

That’s a good question. I think typically, we get hired from Syndicators when they have something under contract, and they have confidence in closing on the deal. Now, we can get involved earlier, but typically, we’re not. But we can help screening deals. So, if you’re looking at deals as they go, you have multiple sources, brokers sending you OMs and things like that, we can help screen out deals … In the past, we’ve developed a real quick one-page, quick-and-dirty performer, or there’s a couple things you can do to just really quickly screen things out. But typically, our clients hire us when they’re willing to spend money when they have something under contract.

Kim Lisa Taylor:

And that’s consistent with what we say. We don’t allow anybody to hire us until after they have a deal under contract to sign, purchase agreement. Someone from their team has physically been to the site, and they’ve reviewed the financials … Because until then, they don’t know if they have a deal. And our statistics have shown that 85% of our clients close on their deals on their specified office when they’ve done those three steps first. I’ve known other securities attorneys before. They’re like, “No, no hire us when you have an accepted LOI.” It’s like, well we require our fees up front, and as soon as you give us the fees and give us the details about the property, we’re drafting documents. So, you don’t want to get into a situation where you decide two weeks later that you’re not going to do the deal.

But you can’t wait until you’ve got all of the due diligence done to hire us because it can take up to three to four weeks to get a final set of offering documents. From the time you engage us, we’re going to issue drafts, we’re going to go back and forth a couple times, make sure they’re correct. You’re going to be gathering information, providing it to us during all that whole process. And if you’re using Val, then you’re going to need to incorporate that time of getting his projections done so you can get those incorporated in your property package. And I did mention earlier that we do the property packages? We have a template that we give all of our Syndication clients. They can just plug your numbers into that and cut and paste information into it. But we also have professional editors and graphic designers that can write them for our clients, but we don’t do the numbers.

So, with your numbers, what our graphic designers have put together, your package, you’re going to have a pretty spectacular package to show to your investors. All right. So, how would people reach you? What’s the best way for them to reach you?

Val Despard:

The best way is probably email. First name, last name at Despard, so it’s val.despard@despardanalytics.com. It’s the best way.

Kim Lisa Taylor:

And then you also have a website so people can go check out your services.

Val Despard:

Yes. And that’s despardanalytics.com.

Kim Lisa Taylor:

Now I’ll go start getting some of our questions.

Bud asks, “Is this and your other webinars taped so I can view them later?” Bud, you need to join our podcast. It’s called “Raise Private Money Legally;” it’s on 20 different podcast platforms. You can also go to our website at syndicationattorneys.com, and you can look at them there. So if you go into the library, and then select our podcast, they’ll all be there as well. But the easiest way to get them is through the podcast, and you can listen to them on any of your devices that way. And there’s over 50 different podcasts that we’ve done now. We’ve hit over 50, and we’ve got a pretty good following. So, it’s been helpful for people.

Kevin asks, “I heard Val say, we don’t do graphics, but Kim does. What does that mean?” So Kevin, if you want to know more about our services, go to investomarketingmaterials.com, or you can get to it from our syndicationattorneys.com website. There’s a tab there that says “Investor Materials.” You can click there and it’ll take you to investormarketingmaterials.com. It describes the products that we offer, and also even the pricing of them. So, that’s great. We’ve got some other questions in the chat. Let’s see.

Richard asks, “Does, or can Val’s service evaluate the assumptions of the sponsor, such as the credit, or stability of a commercial tenant?”

Val Despard:

We do have a client that we do that for him. He consults with institutional medical office investors. And we’re always looking at the credit rating of the tenant, because it might be single tenant. And so, really, you’re buying the credit of that tenant. And so yeah, we can do a credit search if it’s a public company, obviously, we can do to research there, but we don’t typically get beyond looking at the credit rating of the company, but we can go pretty deep. We can go pretty deep on the prospects of the company, the basic credit profile of the company.

Kim Lisa Taylor:

Okay. And then just a couple followup questions. “Can you evaluate assumptions of the sponsor such as expense category assumptions?”

Val Despard:

Yeah. That’s a really good point. I’ve thought about at one point kind of creating a database of building expenses across markets, and different property types. But yeah, it really, it falls to the analyst on the deal who hopefully has seen enough deals in that market or that profile to know if something’s out of whack. For example, in my market in Denver, I kind of know where operating expenses fall in urban areas versus suburban areas. And you just kind of get a feel for what taxes are, but a lot of times, it’s really the analyst working on the deal who’s… You just need reps really to get a feel for that.

Kim Lisa Taylor:

Okay. Yeah. And I know there’s some industry standard books on what construction costs are for different items. I mean we used to do HUD housing surveys. I worked for an architectural firm that we did HUD housing surveys, and we would actually create entire repair books using these industry standard references. But I wonder how current they are right now, if they’ve been able to publish them once a year. You kind of have to add a one and a half factor.

Val Despard:

Yeah, for sure. And it goes to the operator more really, you’re relying on the operator and the person on the ground who knows the market to know these things. And obviously, if they have a track record, that’s great. But there is a level of trust, and that’s when you fall on who is this person that’s sending me this deal, and have they’ve done 10 of these deals before, and if so, then they’re going to know the expense profiles.

Kim Lisa Taylor:

That’s right. That’s right. Jake asks, “Can you speak about the best way to find investors after a deal is under contract?” Well, so, Jake, if you’re doing 506(b) offerings, you really need to find your investors before you put deals under contract, because you have to be able to prove that you had a preexisting substantive relationship with them prior to making them an offer to invest. And that relationship has to occur before the deal is current or contemplated. So, current certainly means you have offering documents in hand and you’re raising money. Contemplated means you’ve hired your securities attorney and they’re drafting the documents for you. Up until that point, even if you had a dealer contract, you could say it’s not contemplated until we’ve at least made that commitment to hire the attorneys, because until then, we’re still in due diligence and we don’t know if we’re going to go forward with the deal.

LOI is definitely not a contemplated deal because it’s just a possibility. So, your goal is to go out and develop relationships with investors now and vet them now, find out if they’re accredited, not accredited. If they’re not accredited, how are they sophisticated? Talk to them about the kind of deals that you do, and whether that’s suitable for them. And at that point then, from then on, you’d be able to offer them any deal that you put under contract. There’s an article on our website called “How to Create a Substantive Relationship.” So if you go to syndicationattorney.com, and then you go into the library, select articles, it’s one of the first one that comes up. Everybody should read that because that really goes through the analysis of what the SEC believes is necessary to have a substantive relationship. And it’s not that you touch someone three times, you met them at a conference, it’s that you actually had a live suitability conversation with them to make sure that they were suitable to be in your deals before you started offering them investment opportunities.

And you have to document when that conversation occurred, and what was discussed in that conversation. So, read that article, “How to Create a Substantive Relationship.” That’s super-important. If you already have a deal, and you don’t have that, then your only other option is to do a Reg D Rule 506(c) offering that you can freely advertise, but then you are going to be restricted to only allowing verified accredited investors to invest with you, and that might cut out some of the family and friends that would’ve otherwise invested with you. If you don’t have a significant track record, you’re going to have a hard time getting strangers to invest with you, but your family and friends will invest with you in your early deals. So the best thing to do is to vet all your family, and friends, and acquaintances, make sure that you have that substantive relationship in place. Start bringing them into your first three to five deals. After you do that, then you might be able to go out and start advertising for investors.

The other thing is, if you don’t know people, then you’ve got to bring people in to your management team that do know people. So, you don’t have the investors, you got a deal under contract, then you got to bring in people to your management team that can help you raise the money and then they get part of the management earnings for doing that. All right, so let’s see. “During Q&A, can you ask Val to elaborate on his 15 minutes of free consulting with one of his team members? Can he highlight a benefit to the client having done this?” He saw this at your website.

Val Despard:

Okay, great. Yeah. Usually what happens is a client will approach us, they’ll have a deal they want to talk about, or they have types of deals that they tend to work on. And we’ll connect you with an analyst on our team that focuses on that property type, and you can have a quick conversation, 15-minute conversation with our analyst about kind of what you tend to do, what kind of templates you use, or are looking for. We have templates that we use as well. So really, it’s connecting you with the right analyst on our team to kind of kick that off. And once a new client decides to go with us, we usually… We figure out what’s the template? Is it our template? Is it your template? Is it going to be our template with changes?

But once we get through that initial phase, which is really not that hard, we tend to get into rhythm with clients. We’re using the same template over and over again. So, let’s say you’re a multi-family investor, and you might have your own template, or you could use ours, we get into a rhythm where both the analyst on the team and you get used to using kind of the same template over and over again. But yeah, the onboarding process would be connecting you with one of our analysts and walking through what you’re looking to do.

Kim Lisa Taylor:

And so, how do you guys bill? Do you do lump sum? Do you bill hourly? What does the contract with you look like?

Val Despard:

We have two different ways. One is hourly, so we can give you estimate, “Hey, three to five hours we think. We’ll ping you if we think it might be more.” That’s usually how we start with clients. But then, our goal with the more recurring work and the larger clients is to shift to a subscription where we have a monthly plan with our clients. So we give them better rates on the hourly rates, and then even if we go over, there are allotted hours, we give them a reduced rate. And so, we’ve seen a lot of momentum with that in the last few months with larger clients signing up for that monthly plan. So we can go hourly, monthly fees starting at $500 a month, or our hourly rates, $116 an hour. And then if we do lease abstracts, we charge by the abstract. And it varies by the template, how complex the template is.

Kim Lisa Taylor:

Okay. Let’s see. So somebody asks, let’s see. “How do you vet international investors?” Well, that’s really difficult to do. Technically, you should not be doing business with international investors that you do not know because they might be trying to take advantage of you, and using you for money laundering purposes. So, unless you know them, and know who they are, then you’re going to have to figure out how to do that. There are companies that will do it, but they don’t generally… They do it for broker dealers, but they don’t do it very frequently for individuals. We may have a link to someone who might be willing to do it for you, but it’s going to cost you a few hundred dollars to have that vetting done. And you would have to get a copy of their passport in order to be able to do that and make sure that you have the right information about them, and the correct spelling of their name, and all of that.

So, it’s tricky. That’s a tricky question. So, the main thing is you really shouldn’t be having people invest with you that you don’t know, or that you haven’t developed a relationship with because otherwise, you don’t know. It’s like getting into a personal relationship with someone that you don’t know very well. It doesn’t always end well.

Let’s see. Then Jake asks, “Is there a timeframe you have to have of knowing investors before you offer them a deal?” So no, Jake, read that article. It’s not about the time, the SEC specifically said, it’s not about the duration of time you’ve known somebody, it’s about the quality of the relationship that you have with them. And that we believe the quality of the relationship has to be such that you have determined their suitability, and you have the recordkeeping system for documenting when that occurred, and only from that point forward, do you have the right relationship. You could have known somebody for 35 years, but until you’ve had a financial conversation with them, you can’t really technically offer them investment opportunities.

Jake also asks, “Can you group investors into one private mortgage if they’re all accredited? Would this be a way around having accredited investors?” No, absolutely not. Because every time you group investors into a private mortgage, and they’re unaccredited, you’re going to be doing a separate rule 506(b) syndication, or offering for them. So you’re going to have to follow all of the rules, but you’re going to be following it for a lot of really small deals, and it’s going to be prohibitively expensive. So, what I would recommend for people with questions like that, we do have a pre-Syndication retainer. It’s $1,000. It gives our clients up to two hours of one-on-one legal advice with me. But also, we have a weekly Mastermind that I host every Friday at 9 a.m. Pacific Time/noon, Eastern Time.

And so, it’s for clients only, they can get on the call, they can ask any questions they want. Those are the kinds of questions that we talk about during those calls. And then also, you get some free benefits for that. You get a discount off your first syndication, etc.

Let’s see. Richard asks, “Can Val’s service also help model or analyze a business acquisition which may or may not involve real estate?”

Val Despard:

We do not do that. No. We don’t have any background in that.

Kim Lisa Taylor:

Okay. And we may have some other resources that can do that kind of thing, Richard, if you want to reach out to us directly, I would suggest that you reach out to Michael at syndicationattorney.com. He’s the attorney with our firm that does the non-real-estate offerings.

And then Dwayne asks, “Is it possible to roll a 1031 into a syndication deal?” So, there’s an article on the website that is called “The 1031 Dilemma.” I would suggest you read that article. So, 1031 investors cannot become a member of your company because they would be exchanging real property for personal property interests, which would disqualify it from eligibility for a 1031 exchange. So they have to be buying, if they’re selling real estate, they have to be buying real estate, which means they have to have direct title to the real estate.

You would have to do a tenant in common agreement with them where they actually get titled to their portion of the real estate, you get titled to the other portion, or maybe your syndicate gets titled to the other portion, but you’re actually giving away that portion of the property to somebody else. You don’t get profits off that, you can get an asset management fee, and that’s about it. So, the read that article called “The 1031 Dilemma,” and you’ll understand what the issues are with that. So, 1031 exchanges are done alongside with syndicates, but the only reason to do them is if it’s your money. So, if you’re the 1031 investor, and you want to roll your money into a deal alongside your syndicate, that’s a good reason to do it. Or if you have someone who is bringing you enough money out of a 1031 that you can’t raise any other way, that you’re willing to give away half the deal and then have your syndicate only own that other half of the deal. So, that’s how that’s done.

All right. Well, we’ve come to the end of the program. I encourage everybody to go to syndicationattorneys.com. Check out our library; it’s very extensive. There’s over 50 different articles, there’s FAQs. Also, do join the podcast, “Raise Private Money Legally.” Reach out to Val. His company is offering a very valuable service that I think can benefit a lot of you. And I look forward to working with him in the future on some of our clients’ deals for sure. So, any parting words, Val?

Val Despard:

Just, thank you for having me. And I look forward to working with you and your listeners as well.

Kim Lisa Taylor:

Very good. All right. Well, thank you so much. And Jake, we aren’t sending the recording right now, we may send it out later. But it will be posted on our website, we’ll let everybody know when it’s there. But always check out our podcast, we update it frequently. All right. Thanks everybody for coming. Have a good day.

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Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

About Syndication Attorneys

We are NOT your stereotypical law firm. We don’t believe in simply taking your money, handing you a stack of technical, often-incomprehensible legal documents and then bidding you good luck and good-bye. At Syndication Attorneys PLLC, we are committed to your success – not just with the project at hand, but your continuing success in business and investing. We are your long-term legal team.

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Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!