REI Mastermind Network – Real Estate Investing Tips & Strategies, With Jack Hoss

Syndication Attorneys, PLLC founding attorney Kim Lisa Taylor was the featured guest for Episode 328 of REI Mastermind Network —Real Estate Investing Tips & Strategies, hosted by Jack Hoss. Kim discussed “What You Need to Know About Starting a Syndication,” including these points:

• Legally raising money from private investors
• Blind pools and other types of syndicates
• The JOBS Act, crowdfunding and advertising for investors
• Writing effective investment summaries for investors
• Different means of taking title to investment real estate
• Selecting the proper securities exemption
• Setting up a hard money loan fund
• Using other people’s money and self-directed IRAs to fund real estate transactions
• Including foreign investors in a U.S. securities offering
• Structuring group investments for multifamily and commercial real estate transactions
• Structuring group investments for hard money lenders

Scroll to read the transcript.

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Voiceover:

Welcome to the REI Mastermind Network, where host Jack Hoss gathers amazing stories from leaders in real estate investing. In each episode, our guests will tell you what they’re doing that works, what they’ve tried that failed, and best of all, you’ll learn actionable steps to take your real estate investing to the next level. Now, here’s Jack with another value-packed episode.

Jack Hoss:

We have Kim Lisa Taylor on the call. Kim, I really appreciate your time. And if you want more information, including a copy of her free book (“How to Legally Raise Private Money”) head over to syndicationattorneys.com and I’ll make sure to have the link in the show notes. But really appreciate your time today.

Kim Lisa Taylor:

Thank you for inviting me. I’m happy to be here.

Jack Hoss:

So, if you haven’t been able to tell, based on her domain name, we are going to be talking about syndication and the proper way of handling that and how to raise private funds. So let’s just start, jump in. I always want to set a baseline for our listeners. Can you briefly describe what a syndication is? Especially coming from a lawyer, I’m guessing that might have a different definition compared to an actual syndicator.

Kim Lisa Taylor:

So it’s really just, instead of buying real estate by yourself, you’re pooling money from family and friends in order to buy bigger real estate or more real estate. So it’s really just pooling resources for a common goal.

Jack Hoss:

Sure. And I understand there’s a couple different levels of syndications, right? One is accredited investors and some have to be informed investors. What are the distinctions there between the different types of syndications?

Kim Lisa Taylor:

What you’re referring to are securities exemptions that are promulgated by the Securities and Exchange Commission. And there’s different levels that you can pick of these exemptions. And one is called the “friends and family exemption.” That one allows you to bring in an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors. And then there’s another exemption that’s very commonly used that allows you to advertise, but everybody has to be verified accredited investors.

With those two exemptions — one is called Rule 506(b) and the other is Rule 506(c) — when you’re dealing with those exemptions, you have to understand what those definitions mean.

So an accredited investor is someone who has over a million dollars net worth, excluding equity in their primary residence. Or they have $200,000-a-year income if they’re single or $300,000-a-year income if they’re married or a marriage-equivalent couple. So people who are not accredited don’t meet that definition.

But then in order to invest in the “friends and family” 506(b) exemption, then they would have to be able to demonstrate that they’re sophisticated, which really just means that it’s more than somebody with just some savings and a job that’s never invested in anything before. They have to have some investing experience, maybe some real estate experience, or have gone through some training to understand the process of investing in a group syndicate and how that works and what kind of risks are associated with that.

Jack Hoss:

Sure. It’s always interesting to find out, how did you come around to being so engrossed in syndications like this?

Kim Lisa Taylor:

I started doing this in 2008. My husband and I went to a multifamily training seminar to learn how to legally raise private money. We went to the RE Mentor one that was held by David Lindahl. And during that process, we learned that, of course, if you’re going to buy bigger real estate and multifamily projects, that you’re going to have to have either a ready source of income, or you’re going to have to be able to pull some investor money.

I was an attorney at the time and realized that if I was going to be doing this, I really needed to learn how to do it well so I wouldn’t lose my law license. So we went to a private money training and learned what the nuances were about securities laws, what those exemptions meant, what those definitions we just talked about meant, and how you could legally approach people to invest with you, what kind of relationships you had to have with them.

I met another attorney that was doing it at the time, and I started working with him and we ended up forming a law firm together. And then, I just really immersed myself in this practice while my husband went on (investing) and we did syndicate a property with some friends. But then he decided, he went ahead and retired and I continued in the law practice, really enjoying this area of the law. So really just found my niche in helping people put these deals together.

So in 2016, I started this firm, Syndication Attorneys. And I’ve been the responsible attorney for probably well over 400 syndications.

Jack Hoss:

Sure. So are you limited to the areas in which you serve or is it nationwide?

Kim Lisa Taylor:

Because everything that we’re doing is under federal law, we’re able to help people in any state.

Jack Hoss:

Sure. You’ve done over 400. You’ve seen everything then, I’m sure, in comparison, or do you still find that things surprise you?

Kim Lisa Taylor:

I learn new things from my clients every single day.

Jack Hoss:

Yeah? Well, based on that, let’s say somebody is interested in starting a syndication. What are the few things that they should have ready before they come to you to discuss this possibility?

Kim Lisa Taylor:

Well, they really have to have gone through some kind of training or have experience in what they’re buying that they now want to bring investors into. Because you don’t want to … buy the wrong properties with investor funds and then make a $100,000 mistake. So you really need to get some training or experience or team with somebody who’s done it before.

If you want to buy multifamily, for instance, go get some training on how to buy multifamily properties and what not to buy, what to buy. And team with some experienced syndicators who’ve already done it for your first few deals. And that way, you’re going to de-risk that investment for your investors. And you’re going to get the experience you need to be able to go out and do it on your own and to be able to qualify for bank loans and all of that.

So really, it’s just, you have to learn how to buy what you’re going to buy and what’s a good deal, what’s not a good deal. And then when you come to us, then we can teach you what the nuances are and what’s involved with raising the money legally.

Jack Hoss:

Sure. And then the packet that you’re talking about, would you help them put that together? I know that one of them is writing an effective investment summary for the investors. Is that something you help with as well?

Kim Lisa Taylor:

Yeah, so there are different types of investment summaries. We like to have a standalone marketing piece that gets attached to legal documents, because you don’t want your investors to have to wade through 140 pages of legal documents to try to figure out what you’re doing. So if you can put that into a succinct package where you’re just explaining the investment to them in plain English with some nice photographs, explaining what the property is, what the opportunity is, where it’s located, what’s around it, what you plan to do with it to make it perform better than it was before, showing what kind of funds you need to get into it, what your pro forma is for how it’s going to perform for the period of time you plan to own it, and then what your possible exit strategies are and when those might occur. So that’s really what goes into an investment summary for a specific project.

And then, there’s people that want to do funds or want to invest in more than one project. So for them, they need to write a business plan that says, “These are the kinds of things that I’m going to invest in, or that the fund will invest in.” And making sure that you set out what the parameters of those things are, so that if you find projects that meet those parameters, you can go ahead and use the fund’s money to be able to invest in those things.

We can help create both of those. We offer our clients templates for the specific offering — we call it a specified offering — investment summaries when you’re buying one specific project. And then we also have a team of talented professional editors and graphic designers that can create these fund investment summaries. Because as we found that’s the biggest stumbling block to somebody being able to do the fund they want, is that they’re either not good writers or they just don’t have the time to sit down and spend 20 or 30 hours to write up a good plan. And we have people that are devoted to that. So that’s how we can help people move their projects forward if they’ve been thinking about something for a long time and they haven’t really pulled the trigger.

Jack Hoss:

Well, I’m guessing that you run into, on occasion, some people who’ve put the cart before the horse and they’ve tried to get things started on their own. What are some of the main mistakes that you’ve seen people make that could have easily been avoided?

Kim Lisa Taylor:

Well, we do see a lot of people coming to us that want to create a fund and raise money for multiple projects before they’ve ever even done one. And so that’s generally a mistake because it’s going to be very, very difficult to raise money if you don’t already have experience doing the thing you’re raising money for, unless you can demonstrate a very specific project and people like the project. So we usually recommend that people start with a specific offering first, and then after they’ve done several of those, then they may want to go on and do a fund.

So we do see a lot of people trying to jump into a fund when they’re not really ready to. And we try to discourage them because we don’t want to write legal documents for people that are not then going to be successful raising the money.

And we also see people who have these specified offerings or who are trying to buy a specific project, and we call it a “rookie mistake,” that they end up talking to the wrong people. They start instantly thinking, “Oh, I’m going to go to hedge funds. And I’m going to go to institutional investors and family offices. And they’re all going to invest with me. And I’m going to find one single investor to take on the whole deal.” And that just doesn’t really happen.

The people that are successful at syndicating and go on and do multiple deals are the ones that really take the time to develop a database of prospective $50,000 and $100,000 investors and pool all of them together in order to do their deals. These big investors, they’re usually too polite to say no. They’ll string you along. And it’s always kind of an unattainable hurdle: “Well, if you do this, then I can do it.” And then they end up just disappearing and not doing the deal. So I always recommend that you don’t spend time talking to those people because you really need to spend the time developing relationships with your friends and family and people that really will invest with you.

Jack Hoss:

Sure. Just a reminder, it’s syndicationattorneys.com. Take advantage of the free book. And I understand you also have a podcast, “Raise Private Money Legally for Real Estate.”

Kim Lisa Taylor:

I do. Yes. We’ve been doing monthly recordings for over five years. I’ll either teach a subject or we’ll interview someone who has some service or product that’s related to syndication. So we can introduce our audience to those people and the services they might need. But yeah, we just reached over 4,500 downloads. So that’s a big milestone for us. And we continue to grow that audience.

Jack Hoss:

Well, congratulations on that. I mean, sticking with something for five years, that’s something to say right there.

Kim Lisa Taylor:

Yeah. Yeah. It’s been a learning experience for me.

Jack Hoss:

Yeah. With that, I know a lot of people, one of their first inclinations regarding syndication is how to leverage people’s self-directed IRA. Are there rules and guidelines associated with that they should be aware of?

Kim Lisa Taylor:

So right now, we do have a lot of clients that bring in self-directed IRA investors or 401(k) investors. There is some proposed legislation that would eliminate the ability of those type of investors to invest in these kinds of offerings that depend on their financial qualifications to invest. But last I heard about that, the provision that was going to prohibit that had been removed from the bill, but you never know what’s going to get stuck back in. So that’s still under debate right now, but we’re hoping that those provisions don’t happen.

So as of right now, the people with those kinds of investments can invest in these types of deals. And as long as the syndicate that they’re investing in has direct control of the real estate, there’s no prohibition on the amount of money that can be raised from retirement fund investors. If somebody is kind of one step removed, if they’re raising money to invest somebody else’s deal and they’re not going to have direct control over the real estate, then there is a limitation of 25% of those funds is the limit that can be raised from those types of investors.

Jack Hoss:

Do those people also still have to be an accredited investor, or is that a way to step around it?

Kim Lisa Taylor:

They would still have to qualify. The account holder still has to qualify for either the accredited or the sophisticated investor standard.

Jack Hoss:

Sure. Well, you said that there was some legislation that’s pending regarding that. Is there any other legislation or changes that people maybe should be aware of?

Kim Lisa Taylor:

That’s the only one I’m aware of right now. It’s part of this Reconciliation Bill that’s being debated right now. So we’re just hoping that doesn’t make it into the final bill and that this issue doesn’t become a problem for those investors. Because one of the provisions would be that they would have to divest themselves in any of those types of investments within two years, which is a problem, because a lot of those investments in real estate, if you’re buying a commercial real estate project, the typical hold time is five to seven years. And so if somebody just bought something last year on a five- to seven-year hold and they have some self-directed IRA investors, if this proposal were to pass, then they would have to find a way to get out or replace those funds with cash. Or they would have to take it as if it was a distribution and pay the tax on it right then.

Jack Hoss:

Sure. I would suspect that you have an opinion on some of those crowdfunding services. What are your thoughts on that? And it seems like they can seem to be skirting a few of these rules.

Kim Lisa Taylor:

Well, there’re different kinds of crowdfunding. So there’s the regulation crowdfunding, which is the big thing that got the buzz way back when crowdfunding became effective. The regulation crowdfunding allows people to raise up to $2,000 from anybody. But they can only raise it through these registered investment portals that have gone through a registration process with the SEC or with FINRA, which is the security self-regulatory authority. So if they use one of these portals to advertise their deal, then they’re allowed to advertise and allowed to bring in these investors.

There are some issues with that. If you raise over $500,000, which is very, very common for real estate, then you have to do an annual audit on the fund, which is going to really cut into your profits. Regulation crowdfunding has been widely used for people that are doing startup companies or non-real estate type offerings, but it’s been lightly used for real estate offerings.

There’s another kind of crowdfunding. And we mentioned the exemption earlier, the Regulation D Rule 506(c) that allows investors to advertise. And so that too is called crowdfunding. And there are some websites and platforms that will allow you to post your Rule 506(c) offering on their platform, and then they’ll push it out to their group of investors. You would pay some kind of a marketing fee to them for doing that. And then their investors would invest directly in your deal. We’ve had some clients that are very successful use some of those crowdfunding platforms. But they are very, very selective about who they will allow to put deals on their site. And so they’re only looking for people that have like $10 million worth of deals that have gone all the way through, from acquisition to sale. And very picky about who they’ll take on and the kind of experience your team has to have before they would even do it.

Jack Hoss:

Sure. So let’s go to the flip side here, since you are an attorney associated with this, I’m sure you might have a different perspective. If somebody was interested in getting involved in a syndication, what type of questions do you think they should consider asking?

Kim Lisa Taylor:

So you always want to know about the track record of the sponsors or the managers. You’ll hear them called various things, so sponsors, managers, GP (general partner). Look at the experience of their team and how many of these deals they have done before. Ask if you can talk to some other investors in some of their past deals. Look on the internet to find out if people are saying bad things about them. You may even want to ask them, would they be willing to undergo a background check? And sometimes, they may just provide you with a report or they may get very offended by that. And those that get offended by that, that’s kind of a red flag.

But then you’ve got to look very closely at the documents. If you don’t understand the documents, then you should be hiring somebody to help you understand the documents. And the things you want to look for are the fee structure. What kind of fees is the management team going to take? Do you feel like it’s fair, fair compensation? If you don’t, then don’t invest.

Look at what’s called the “waterfall.” So there will be a distribution schedule, and we call it a waterfall, that shows that when there’re profits to be distributed, that they’re going to be distributed in a specific order. Make sure that you understand that waterfall and where you would fall in within that waterfall. And if you don’t understand it, if it’s overly complicated, maybe it’s not the right deal for you.

We’ve helped people before look at other people’s documents to help them understand what their requirements are and what things that the manager can do without their consent. And those are the things you want to look for. What kind of voting rights do you have? What things is the manager allowed to do without your participation? And is there a removal provision for the manager? If they don’t perform and they just disappear and they stop responding to you, is there something that the members can do in order to remove that manager and put somebody else in place to manage that investment?

And it could be that something happened to those people. So you always want to also look and see if it’s just one person running the show. What happens if something happens to them? Who’s next in line? Who runs the show? Who keeps the investment going for the investors until it can be sold?

Jack Hoss:

Sure. I usually like to close things out with some actionable items. And I think you already gave us one, where if you’re interested in doing a syndication, you need to go through some proper training on how to purchase that type of asset. Is there anything else that you can think of that somebody could take action on right away in order to set themselves up for a level of success?

Kim Lisa Taylor:

Well, I would suggest that you read my book. You can get a free copy of it at our website at syndicationattorneys.com. You can get a free digital copy instantaneously. I wrote the book step-by-step talking about what you need to do first. Starting with, learn about the thing that you’re going to buy and how to buy it and how to buy it correctly.

And then, start thinking about the steps related to the syndication, which are going to involve making sure that you understand securities laws so that you follow the correct laws (and) you don’t ask the wrong people to invest, you don’t advertise when you can’t. But also learning how to structure a deal with investors so that you know how to split money with them, what they expect. And what is that waterfall? How does that look? What fees are common for a manager to take? So the book is really just a step-by-step process. It’s written in plain English, the same way I speak. I think it’s a good, valuable resource. And it’s gotten a lot of good reviews.

Jack Hoss:

That does lead me to another quick question. Are there servicing companies to help with this type of thing? You get the property, you get the syndication under control, and then now you have to satisfy these investors. Are there services out there to help manage some of that? Sometimes I think a lot of people take on a lot of this on themselves and I could see how that could be fraught with issues.

Kim Lisa Taylor:

Yeah. You could hire a fund manager, but they’re very expensive. There are some investor management platforms that can help you keep track of investors and how much they’ve invested and how much has been paid out to them. They give you a place to post reports, periodic reports about how the property’s doing and also to post your K1s and your tax forms and things like that. So it just keeps everything contained in one place. And usually, these platforms will also allow the investors to log in themselves and see what’s going on with the investment. And it just requires that if someone’s going to use one of these platforms, that you have somebody that’s dedicated to maintaining it and keeping it up-to-date and providing timely information to the investors. And then letting them know that there’s something new that we posted at the platform.

Jack Hoss:

Sure. Well, this was a great conversation and I really appreciate your time here today. And if you have more questions or would like more information, make sure to head over to syndicationattorneys.com or check out the podcast, “Raise Private Money Legally For Real Estate.” I’ll make sure to have those links in the show notes, but I mean, you can’t beat the price. Take advantage of the free book.

Kim Lisa Taylor:

Then, if you want the hard copy, you can get it on Amazon. It’s a number one Amazon bestseller.

Jack Hoss:

But before I let you go, is there a question you wished I would’ve asked you here today?

Kim Lisa Taylor:

I think you were pretty thorough in your questions. I guess the one thing that we hear people trying to do a lot that’s a big mistake is trying to draft their own documents. And yes, you may be able to get some templates, but I can tell you that there’s been plenty of times that we’ve had clients come to us that have asked us to help them fix what they tried to do by themselves. And if we can do it before you start raising money, then we’re able to help you. But once you started raising money, if your documents are wrong, then you could get in trouble down the road. It’s like heart surgery, right? You don’t want to go to a general practitioner for that, or you don’t want to try to do it by yourself. You really need to hire a professional that can help guide you through the tax pitfalls and the deal structuring. And also making sure that you’re complying with securities laws adequately.

Jack Hoss:

Well, I really appreciate your time. Again, it’s syndicationattorneys.com. Well, you’re welcome back anytime. I hope you’ll take me up on that invite.

Kim Lisa Taylor:

Absolutely. I’d be happy to come back. Thank you for having me today.

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