‘Build to Rent Strategies for Syndicators’ with Dave Seymour

In this podcast, host Kim Lisa Taylor, Esq. interviews Dave Seymour, co-star of the A&E Network television show “Flipping Boston.” Dave shared his experience on build-to-rent strategies for Syndicators, and he and Kim discussed favorable markets, phases of a build-to-rent syndicate, economic risk factors you need to consider, when to raise the money, and other important considerations.

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Kim Lisa Taylor:

Good morning, everybody. 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’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. But if you use the question and answer function, then we’ll just read the question so your voice doesn’t have to be recorded and we’ll just identify you by first name. So if that’s okay, go ahead, ask questions away.

The information discussed during this free podcast is of a general educational nature, and should not be construed as legal advice or tax advice. This will be an audio-only presentation, unless you’re here live today. So our topic today, just one moment, let me get to it, is “Build to Rent Strategies for Syndicators,” with our special guest Dave Seymour. Hey, Dave.

Dave Seymour:

Hey, Kim Lisa Taylor.

Kim Lisa Taylor:

Yeah. So Dave is a bit of a celebrity; maybe he’s the most famous person that we’ve had on our show. Well, besides me, of course.

Dave Seymour:

Of course.

Kim Lisa Taylor:

He’s got a television audience, so that’s a completely different audience than we appeal to. So Dave, tell us about your background and your show and what you do.

Dave Seymour:

Sure. I’d like to look up the definition of “a bit of a celebrity.” That’s like you’re either not quite there yet, you’re kind of cool, you were cool, you’re not so cool anymore. I’m in the bit of a celebrity classification. So I’m not Daymond John from Shark Tank, but I’m not Dog the Bounty Hunter, I’m somewhere in the middle. How’s that for an opening line?

Kim Lisa Taylor:

Love it.

Dave Seymour:

First of all, thanks for letting me participate. I love to do this stuff, I love to just share whatever knowledge is out there in the marketplace that we see going on. I am Dave Seymour, I’m the CEO of Freedom Venture Investments. We’re a private equity investment company based up in Boston and Fort Myers, Florida. Briefly, I wasn’t raised in the investment world, I wasn’t raised in construction. I’m an immigrant to the United States of America, and I came over in ’86 from England. My family background is very blue-collar, kind of bring that blue-collar attitude into this white-collar world of commercial real estate finance today.

But as you alluded, I was famous once for a little while, we had a TV show called “Flipping Boston.” It aired on the A&E Network for about three and a half, four years. Was exciting, it was fun. We could do another show all about the truth of reality TV, and house flipping shows another time. But the real magic of being able to do that, they followed us during 2010, ’11, ’12, ’13, ’14 as we were coming out of the 2008 crash. And it was blessed, in the sense of it gave us expert status. I was a firefighter in Lynn, Massachusetts. One minute I’m sitting in the firehouse, the next minute I’m sitting on Squawk Box with Joe and Becky and the rest of those guys. So, it created some momentum in my business and then we’ve transitioned out of that into what we’re doing today. I’m a somewhat cool ex-celebrity who’s doing big stuff now in a different sandbox, but we feel an appropriate sandbox going forward.

Kim Lisa Taylor:

Probably making a lot more money now than you were then, right?

Dave Seymour:

Yeah. There’s no money in reality TV, unless you’re Kim Kardashian and my kadunkadunk doesn’t pass the Kim Kardashian test. So I’m not making a million bucks, not for that.

Kim Lisa Taylor:

Well, I have a saying about the legal field. There’s no old syndication attorneys, they all turn into syndicators. We watch our clients get wealthy and we’re like, “Wait a minute, I’m on the wrong side of this transaction.” Just need to move over there.

Dave Seymour:

Yeah, yeah, no, I’m with you. Yep, yep, yep.

Kim Lisa Taylor:

I haven’t made that transition yet, but definitely it’s always out there as a consideration. So I do some investing in some of my clients’ deals. All right, well, good. We are so excited that you’re here today, and we just want to pick your brain about this whole build-to-rent strategy. Because I don’t think this is something that a lot of syndicators are learning how to do — the value-add, and buy existing, make it better, increase the rents, increase the NOI, hold it for a little while. I feel like that seems to do the normal syndication model, but let’s talk about build-to-rent. What is it?

Dave Seymour:

Yeah, it’s kind of, I would say, a new asset class in the sense of it’s got a lot of traction during the COVID period, and now even more traction post-COVID. With the massive amounts of capital that came into the marketplace, we know we saw the compression of cap rates in existing structures. It’s very hard to syndicate a sub-three cap deal without making up imaginary rent increases of 5% to 10% a year, but your expenses stay at 2% a year. And there’s a lot of pro formas out there, let’s just be honest, that are floating around with that BS attached to them. So for us, we looked at the landscape as we were going through the COVID scenario and began to see what we believed to be opportunities in pockets and markets throughout the U.S., and then we dug in, we did our diligence.

And without getting overly deep into all of the analysis, it’s really the fundamentals of supply and demand. Which markets in the U.S. are so undersupplied for rental housing that there’s an opportunity to go in there and as it says, build for rent? … I’ll take Cape Coral, for example. Cape Coral, Florida, we’re heavily invested in that marketplace. The City of Cape Coral pulled down a study a few years back to find out what their supply side looked like for their demand side for rental housing. And they projected out to 2027, that they would be approximately 10,500 units undersupplied with the current amount of units coming online.

Now, those can be build for rent as in let’s build a new apartment complex, which we’re in the middle of doing right now in Cape Coral, but also build for rent single-family communities. And that’s the sexy button, if you will, in the build for rent space. Being able to find plots of land that will allow for multiple single-family homes, but in a rental community. And what it’s doing is it’s … I’ll give you an example. Blackstone just allocated $25 billion for commercial real estate investments, a big portion of which is in the build for rent community, to hedge against the current inflation status.

If you just keep your ear to the ground, and you start to pay attention to what the big boys are doing and where they’re allocating capital, we’ve got a saying at our company, we just want the crumbs that the big boys leave behind. But as long as you’ve got the infrastructure to execute on this stuff. So what’s exciting about it is the supply and demand imbalance. One was the migration into the Florida market where we are; you see it in the California market down to AZ, big influx, California market down into Texas. This influx of human beings, this movement of people creates that demand side and the supply side isn’t there to sustain it. So, it screams for housing.

But the challenge is, a lot of people don’t want the typical old single-family stock that’s been rehabbed 20 times over the past 30 years. You’ve still got the pee stains in the bedroom from the cat that lived there 25 years ago. People don’t want that. They want A-quality assets, but they want to be able to rent single-family homes. So, that rental base is the retirees, it’s now the urban professionals who can’t afford the single-family home, it’s the millennials. And in the Florida market with its massive influx of retirees, that retirement community statistically is pulling down three to four support positions or jobs for every one retiree. So that’s especially, obviously, in the healthcare community for retirees, but also in home care and also in service-oriented positions.

So that’s really what it is, it’s single-family homes that are for renters by choice. That’s really one of the catch phrases that any of your community could type in and see what’s going on. “Renters by choice,” “build for rent” or “BTR” or “BFR”are the two classifications. And the one thing that it doesn’t have right now, it doesn’t have the exit strategy numbers to (quantify) its valuation on the way in, because it’s so new. If you build a 130-unit complex, we have enough data to know what the exit strategy on a 130-unit complex should or could look like in any market. But we don’t have that data yet (for build to rent) because it’s a newer asset class.

But basically, and I’ll sum it up with this: our cost, our build to cost percentages are coming in anywhere between six and a half and 7%. So if I can, if my build to cost is coming in at that number, that’s still beating existing cap rates in the marketplace for other multifamily assets. So I can bring a brand new quality asset online with a better return profile than some of the existing structures. I hope that was clear enough, I don’t always think nor talk in a straight line, but that’s that’s what a BFR is.

Kim Lisa Taylor:

No, I’m taking notes and I hope everybody else on the call is taking notes. This is some good stuff. So I do want to follow up on a couple of things that you said, though. It sounds like you’re looking for markets that are under-supplied for multifamily housing. Where would that data come from?

Dave Seymour:

We work with a couple of different data suppliers. You can go to the free online sites. What is it? citydata.com, stuff like that will be able to help you out. We like to pay for our services, so we work with a company called Yardi, Y-A-R-D-I, Matrix. They’re affordable, but we just pull down that data. Look, for us, Kim, and I can only speak from my experience, Freedom Venture Investments, we invest only at this point in the Florida market. And my team has over 25 years on the ground in that market. So it’s easy for us to pull down city data, to pull down the Yardi Matrix data that we need. And that’s how we cross-reference that on the supply demand side. But look, I can do big picture. Macro, micro markets, macro markets are easy to pick. Florida, Texas, Carolinas, Arizona. Which interestingly, most of them are also red or blue states. And we’ll just leave it at that, we won’t have a political discussion, but we like to do business where we’re welcomed.

Kim Lisa Taylor:

Yes, yes. That’s absolutely true. So it sounds like, the apartment complex you’re building, how many units is that?

Dave Seymour:

The one we’re in right now is a 106-unit build that consists of five buildings. Equity raise on that is coming in just shy of $5 million. The financing is interesting right now, so I don’t just go with one potential lender, I’ll stroke the checks for due diligence for a couple of different lenders to be able to get to the full construction loan on it. But it’s all in process, so it works quite nicely. The system has been established, and then it’s just a case of implementing.

Kim Lisa Taylor:

I’ve had two clients recently, one that was buying an existing project that said, “Yeah, our lender just dropped out” and another woman who was doing a 255-unit multifamily property out in the Pacific Northwest, who said that their lender’s ready to go, but they had somebody else who was going to do the private equity, and they dropped out. And so it’s just, people are getting skittish right now. So your idea of paying the money to get two lenders to do due diligence is probably very sound, because it’s likely that one of them’s going to close. Even though it might cost you $50,000 or $60,000 to get them that far, right?

Dave Seymour:

I’m paying almost a half a million dollars for a balance sheet and a credit enhancer on this particular deal, because it makes sense for us to do that. It goes back to the fundamentals, Kim, that no skinny deals are going to get through in this market. The old adage was we make our money on the buy side, we realize the profits at time of refinance or sale. It’s the same thing, no matter what scale of investment it is. So don’t buy any skinny deals; make sure the numbers make sense on the way in.

Kim Lisa Taylor:

So these single-family communities that you’re doing, is there a preferred number of units that you look for? Would you do a three-unit property, or are you looking for 30, or what’s your sweet spot?

Dave Seymour:

Yeah. That’s a great question. The ideal is anywhere between 75 to maybe 250. So what you need for that is obviously a sizable piece of land that’s in the demand market, where you’re doing business. And then, is it already zoned for multifamily? Does that community understand what you’re going to do, even though it’s under a multifamily zoning process? And if you can find that piece of property, then it’s a case of how many units can you fit on there? So that’s when you need to start dropping the money for your engineer and your architectural to get through the entitlement phase.

But these particular projects are designed to be what’s called zero lot lines, so they’re closer together. It’s the same as multifamily. More bedrooms, more doors, more value. So, we want to maximize the dirt infrastructure to get to vertical construction on these. We want to be able to get as many single-family homes on there as is possible.

The other thing to take into consideration, is what that specific ZIP code or neighborhood is looking for in amenities. If you’re in the Florida market and you drive by some of these condo complexes, for example, they’ve got the guy at the gate with the hat, with the security badge, and there might be a couple of golf courses on the site, blah, blah, blah, and the swimming pools and the clubhouse. We’re not necessarily going down that road, because the economics don’t make sense for us. So we like a lot of land, or a plot of land that’s already multifamily zoned, that we can go to that city with a good business plan. The city likes what we have to offer, we get in there with their engineers to make sure that we can get the number of units on there to maximize the investors’ potential and our potential as the operators.

And once we can tick all of those boxes, then we’ve got to get into some kind of contractual relationship with the seller. And that can be interesting. We can pay anywhere from $15,000 a door to $70,000 a door just on the land costs as we go into these projects. So, that’s the big picture idea of the process.

Kim Lisa Taylor:

Well, that’s all really helpful. And so when you’re doing this, are you using your own money to … Let’s talk about just the financing, because we’re talking about raising private money legally. So when do you raise money? And do you do it in phases; do you raise money for the land acquisition and the entitlement, and then do another phase for the construction? Or how do you do that?

Dave Seymour:

Yeah, that’s also a great question. And it’s interesting. We have a lot of optionality at this point. So the first in capital is obviously at a higher risk profile than the last in capital. Everybody feels warm and fuzzy if they can see the building, and they see tenants in it, it just makes sense up here for them. Our investors that come in at what we call the co-GP level are in a preferred position with us. And they will come in for land acquisition up until entitlement. Once we’ve got that piece of our PPM in place, then we can get into the LP economics and the LP raise. And that’s where we are right now with the 106-unit build.

So at that point, their economics or their shares are a different class of shares in the PPM structure. Once we’ve allocated and taken care of the equity position, then we go into the debt, obviously. And usually the debt is coming in closer to the start of the vertical construction. So, I may have a combination of co-GP capital coming in at a higher risk profile, LP capital coming in once I’ve got commencement, a notice to commence. That LP capital immediately goes into the dirt, is what we call it. And don’t think we’re burying your money, but we’re moving dirt. We’re building slabs, we’re pulling utilities, we’re going through grading and all of those processes. So some of the LP capital will go in there, and then a portion of the LP capital will start the vertical construction as we get into putting the construction loan in place.

Kim Lisa Taylor:

Okay. That’s, I think, super helpful for people to understand. And I just want to explore the concept of the co-GP status, because you could just put people in a separate class by themselves as part of the LP class, and give them a better return. But my guess is that one of the reasons that you’re putting them in co-GP is so that you help get your 10% into the deal that the lender’s requiring?

Dave Seymour:

Yeah, great point. Yeah. So that co-GP position, obviously it looks good to the lenders later on down the line. Everybody says, “How much capital do you have in?” So, we’ll do a pari passu in a co-GP position, so that we obviously have skin in the game as well. So yeah, that’s the answer to that. Yes. We have more GP money in the deal, but it’s a pari passu with our co-GPs. Most of the time, there are no definites. Each deal has fluidity to it

Kim Lisa Taylor:

For anyone who’s wondering what pari passu is, it means the distributions happen in order of preference. So you usually do have preferred class that gets paid first, and then you go to the next class, they get paid. And on down the line, that’s pari passu. Versus the other concept of pro rata, whatever money you have, you just give whatever percentage of that to every class, all concurrent.

Dave Seymour:

I had to look that up by the way, Kim. I had to look that up when I started, guys kept on throwing pari passu around. I’m like, what the hell does that mean? There’s a whole new language out here.

Kim Lisa Taylor:

Well, there’s always been a time when we’ve had to learn … Hey, I was at an event years and years ago where it’s like, what’s a security? I didn’t know that either.

Dave Seymour:

Yeah. Right, right.

Kim Lisa Taylor:

We’ve all got to learn, and we’re all starting in a different place on the road, so that’s all right. All right, so renters by choice. I actually know some people who are renters by choice. I have some family members who have chosen that route, against my judgment and against my advice. But if you’re like me, you probably have some people in your life who can’t be helped, and you just have to love them anyway and try not to talk to them about business.

Dave Seymour:

Sure, sure. It’s about attraction, I think, rather than promotion. You know what I mean? Let people see the results.

Kim Lisa Taylor:

They see what you’re doing and they see, “oh my gosh, you’re doing really well doing this.” But some people are just risk-averse, they just don’t want to take the risk of putting money in anybody else’s hands.

Dave Seymour:

I’m sorry, I have to take that bait. So in this economy, you’re talking about risk-averse. I had a conversation with an incredibly intelligent guy. He’s probably pulling down anywhere between $350,000 or $400,000 a year salary, another $400,000 bonus, accredited times 10. Very, very smart. And he is incredibly risk-adverse. And he said to me, “What’s best-case/worst-case scenario?” I said, “Look, this is a syndicated asset. You’re an accredited investor, you’re an intelligent human being. The SEC requires, and I’m telling you right now, you can lose every single dime that you invest in this deal. Do not invest a penny, if it’s a penny you cannot afford to lose. Now, if you and I were just hanging out, having a drink, shooting about a deal like this, I’d tell you worst-case scenario is probably going to be just getting your principal back with no capital add-on.”

And he said to me, “Well, if that’s the case” — listen carefully — He says to me, “If that’s the case, then I’ll just leave it in the bank.” And I thought to myself, “how, with all of that intelligence, are people really not able to wrap their head around the fact that capital that sits still, is capital — especially today — that is dying?” Every single day. It’s like, I almost think of myself as like a superhero. Like I want to pull the cape open, Yieldman, out to save every static dollar in the economy. Get it out the door, make it go to work. So, risk aversion is an interesting concept if it’s uneducated. The educated investor knows the difference between money sitting still, and money going out the door and going to work. So I’m off my soapbox now, you can continue.

Kim Lisa Taylor:

No, no, I completely concur with everything you said. Again, it goes to the concept of people who can’t be helped. They either aren’t educated enough, or have a skewed concept of what it means to build equity. And they don’t understand that, and they think there’s limitations, or they’re going to lose everything. Really, it would be even hard just to get into a situation where you could only give money back. The situations I think that cause that are people who have loans of short duration, who can’t ride out whatever the market cycle is. So if we have a downturn, if you ride it out long enough, you will get your money back and more. You just might have to wait a bit longer to do it. And if something happens in that interval that you have to get your money out of that deal, or you have to refinance and you can’t because the market cycle is wrong, that’s where you’re going to lose.

And so, the rule there is: don’t over-leverage, and also make sure your loans have as long as possible maturity dates or extensions that can help you ride that out. Because in the last recession, the people that had those short-duration loans that came due during the when the market was depressed, and they couldn’t even sell the property for what the loan was worth, they’re the ones who got in trouble.

Dave Seymour:

Sure, sure. Yeah, yeah.

Kim Lisa Taylor:

So, there’s ways to de-risk that or to minimize that risk as well. But those decisions always affect returns. If you want to have a lower loan to value ratio, then your returns to your investors are going to be lower, but maybe that’s what your investors want. So, we talked about what neighborhoods you’re looking for, I guess let’s just talk about what kind of markets you’re looking for. Are you looking for emerging markets, or certain community amenities within the area, or are you building way out in the country? What are you doing?

Dave Seymour:

Yeah. Look, it’s all data-driven. It’s all data-driven, population, the average cost of a single-family home, the average income for the specific market, demographic-driven. I don’t have all of that data at my fingertips, but we take all of that data into consideration. Because that gives us a picture of whether it makes sense. Just because you could buy something for a buck, it doesn’t mean it’s a good deal. So, do you have the supporting data, do have the population growth? Look, I’ll say it again. We’re undersupplied in Cape Coral where we’re doing quite a bit of business right now, to the tune of 10,000 units undersupplied at the current build ratio.

We also like to focus on the median price units, not these expansive condo conversion type units. There’s a workforce housing challenge in the state of Florida, and I think in other parts of the country, and that’s just speculative but I’m sure Florida isn’t an anomaly in that sense, so workforce housing. Those full support jobs or positions need somewhere to rent, they can’t afford a single-family home, but they can afford somewhere that’s decent for rent. So those are the markets that we focus on.

Again, I don’t need to come out of Florida right now. If you write me a check for $250 million, I’m pretty comfortable that I could deploy that in the next eight months with the same yield profile that we’ve been working with, with our current structure. So, there’s plenty of work to do in our market without us needing to go look elsewhere.

Kim Lisa Taylor:

And just jumping back to the financing a little bit, so I assume that you’re raising equity through some kind of a securities offering. Is that right?

Dave Seymour:

506(c), Reg D. Yep.

Kim Lisa Taylor:

Okay. So you’re using 506(c), so you’re able to advertise for accredited investors. Are you also using private equity? Some quasi-institutional lender, hedge fund?

Dave Seymour:

Oh yeah, yeah, yeah. They’ll come in on a JV relationship, so we’ll work a JV deal. We might bring in an SPV, there’s a couple of different structures that we’ve entertained and looked at. Yeah.

We had a lot of non-accredited investors that were biting at the bit to participate with our company. And it was interesting, because you want to help. It’s like, they’re $20,000 short of accredited and it’s like, “You can’t come in.” And they’re like, “Why?” “Because the SEC says so.” “Come on, Dave, make an exception.” “No, I can’t. I love you, but I can’t.”

So what we were able to do was, and there’s still the limited number of investors that can come in. But we also run almost a revolving expansion fund, which is a fixed income expansion fund that allows non-accredited investors to come in as well. So, I have non-accredited investors that are with us that take the 10% monthly distributions on their principal, and then that capital is paid down by development fees and acquisition fees on their projects as we’re going along. So they get to participate kind of through the back door, if you will, but it’s still legal, honest and ethical, and they understand exactly what they’re investing in. So, that’s how we get to work with them.

Kim Lisa Taylor:

Okay, so that’s interesting. So they’re not directly investing in the 506(c) offering, because they couldn’t unless that 506(b) funded $5 million in assets. But they can provide some at risk capital or things like that in to the GP, co-GP? Is that kind of how you guys are (doing it)?

Dave Seymour:

No, what they’ll do is they’ll put the money into the fund, and then the fund will make a loan to Freedom Venture Investments, the mothership if you will, and then that company can deploy capital through the management company into various assets.

Kim Lisa Taylor:

Okay, sounds great.

Dave Seymour:

Yeah, get creative.

Kim Lisa Taylor:

Yeah, that’s an interesting concept. Yeah, so that allows you to do that. The other thing you could do is you could do a Reg A+ offering.

Dave Seymour:

Right, right. I’ve spoken to a couple of heavy hitters over the years, and the Reg A documentation — reporting, customer service — that can be pretty challenging. So, we keep the non-accredited investors to a minimum. They are people who’ve got pretty substantial relationship with us, they’ve got my cell phone number, put it that way. It’s just the way I am. Look, my No. 1 job, I’m sure you appreciate, is to be a custodian and a steward for other people’s capital at the end of the day.

Kim Lisa Taylor:

Yeah. And that’s important; you need to have that mentality to be in this business. It’s not about us, it’s about them. It’s about your investors.

Dave Seymour:

Look, I brought an investor in this week. Not a huge amount of capital, it was a quarter of a million (dollars). They came into the build that we’re doing right now. And I’ve worked and known this guy for a long time, he’s a business owner locally. And it’s funny, because he said to me, he’s like “Dave, I understand what this is 99%.” He said, “But at the end of the day, I understand a hundred percent that I’m investing in you.” And he really has it right, you’ve got to bring that investor up the education gradient, all of us as syndicators. We’ve got to bring the investors up the education gradient.

And then at the end of the day, what are they really doing? They’re investing in our thesis, our investment thesis and us as a team. So if you are not available, if you’re flying around in your private jet or whatever it is you’re doing, and you’re not connected to your investors … Look, I could be wrong. Maybe I think too small, I don’t know, I got to sleep at night. And if I can’t know that there are controls in place for that capital to work with velocity, then I’m not taking the capital, I’m not interested in the business. It’s just my DNA. And again, I could be wrong, Kim. I don’t know. Maybe it’s because I’m a blue-collar kid straight out of university. I don’t know.

Kim Lisa Taylor:

Okay, so we talked about how you finance it up front, how you set up the acquisition with your co-GP, your LP structure, and two-stage phase, all of that. And then we talked about the fact that you hold these properties for rent. But what is your exit strategy? How long do you hold? Do you sell them off one by one? Do you hold forever?

Dave Seymour:

Yeah. Each property has its own business plan, obviously, depending on market, et cetera, what’s going on. But if I gave you an average, an investor would deploy capital without any expectation of any return for two years. So, a year to get through all of the entitlement, a year, 14 months to build, now we’ve got one year to stabilize, depending on the size of the asset. And then we’ve got two or three years to maximize rent. And at that point, it’s an exit into the market. And when we look at that structure, if you will, that business plan, the equity multiples target out to be pretty nice. They’re not 17X, but you can start looking at 3X, 4X multiples. The IRRs get to be pretty substantial, and investors understand it.

And it’s great having an attorney on the call, because we always got to be compliant and careful, but you tell me if this is non-compliant language. But one investor said to me, “Dumb it down, Dave, make this really simple for me.” I said, “Look man, you can take you your half a million, your 250, your 100 grand, and you can go put it in a bank CD. The certificate of deposit, and you’re not allowed to touch it for 24 months. And at the end of 24 months, you can cash out your CD at your zero point kiss my rear end return on your money.” I said, “The money’s gone.” I said, “You could maybe, if you chose to, I don’t know. I’m not telling you it’s the same, but you could potentially think about this investment in the sense that the capital goes in, and now don’t think about anything for two years. Other than the monthly updates, any communication with us as a company.”

I said, “And then that money comes out and starts going to work with some velocity. Right now it starts working, the cash flow, the lease-up, stabilization, property management, all the things we’re familiar with as syndicators.” I said, “And then it comes back to you with a whole bunch of friends at the end of it.” I said, “That’s really the concept over that five-, maybe seven-year run, depending on what the market is doing at the time of business plan disposition.” So, those are the expectations that our investors have.

Kim Lisa Taylor:

Five to seven years is what you said?

Dave Seymour:

Yeah, I would say five to seven. You could dial it back to a three to five, but I don’t think you’re doing the investors any favor at three, four years, when you can get another year and a half, two years of upside in decreasing expenses and increase in rent. And the other thing to take into consideration in the build for rent process, is I don’t have 25 years of the building being beaten up. So I’ve got a nicer asset to bring to market at that five- to seven-year point.

Kim Lisa Taylor:

I had somebody tell me once, a developer say, “Well, people typically sell after seven years because that’s the point at which things start to break. You have to start maintaining. If it’s new construction, it’s better to pass it down to the new person who wants to infuse new capital, and do that then to try recapitalize within your own syndicate.” And that makes sense. So, how did you learn how to do this?

Dave Seymour:

How did I learn how to do this? Look, it’s kind of interesting. I’d love to tell you I went to development school and graduated from Harvard with a real estate degree, but I’ve always been kind of in the trenches. So for me, I’ve learned to do this and be where we are by leveraging other people’s experience. And look, I don’t want to sound kitschy and seminar-y, Kim. I really don’t. But the truth of the matter is this: I don’t care who you are, if you’re the smartest person in the room, you’re in the wrong room. So, one skillset I’ve developed in my own journey is to surround myself with people a lot smarter than me.

So your question is, how did I learn how to do this? I had a five-year friendship, quasi business relationship with my chief investment officer, Walter Novicki, who had been developing and building and managing and raising capital for 25-plus years. And the skillset in that one market, Fort Myers, Cape Coral, Sanibel, up into Rotunda, anywhere in that Western corridor of Southwest Florida, they know my partner. So, what value can I bring to that guy so he can share all of his experience with me? Well, it’s my dynamic personality and my kind of celebrity status.

Kim Lisa Taylor:

“Bit of a celebrity.”

Dave Seymour:

“Bit of a celebrity.” I couldn’t remember the… See the way I went full circle on the conversation? So look, I’ve been able to glean and learn hands-on, the process of this development stuff. And look, it’s not wholesaling a single-family home. There’s not a home study course for 1,500 bucks that’s going to get you through this process. Whether you go learn it in a collegiate environment, you need capital on hand to do this, to get through development, acquisition, understanding the pitfalls, your 21Es, all of the challenges that we have, and then having the right legal team to make sure your documentation is solid.

It really is that team concept, everything that you do (with) the syndicators there, all of that is unbelievably valuable. Because you can go out with good intent, but it’s just like anything else, your good intent doesn’t keep you out of court if you don’t know what you’re doing. So, when we start taking millions of dollars of other people’s money in, you damn well better know what you’re doing, period. And that’s not “YouTube University,” it’s application. It’s knowing what’s going on in at any time. So, I learn from people around me.

Kim Lisa Taylor:

I want to let everybody know that we are going to go to live Q and A in a couple of minutes. So some people have been putting stuff in the chat, I’ll check that out. But also you can click the Q and A button if you want to ask some questions there. Or there’s a way for you to raise your hand, so we can look for people that have their hand raised as well. So if you have any questions for Dave or me — he’s far more interesting than I am — I would suggest you ask him his questions, because you can get access to me in other ways. Let’s pick his brain while he’s here; I think he’s got some really valuable lessons for us.

One thing I would respond is I know that CCIM courses for real estate brokers do go into development. I think there’s another organization called NAIOP, N-A-I-O-P or something like that, that I believe also has some development style courses. None of these courses are cheap, and of course they take time, but there are some opportunities that you can learn this information if you want to. But I did the same thing you did. When I started out as a securities attorney, I had a mentor, I worked with them for eight years. And we built a business together and then went our separate ways, but leverage is, I had instant credibility because of who I associated with.

And so, if you’re just starting out and you’ve never done this before, then you need to go where builders and developers go, and try to become part of their team and work for them, offer services, bring them investors, whatever you can do to add value to what they’re doing, that they’re willing to then share their knowledge with you. And a whole lot of people that attain some status in their professions really want to pass it on.

Dave Seymour:

That’s the truth.

Kim Lisa Taylor:

(If you approach) people in the right way, and you can offer them something so that you’re not a burden to them, you’re actually adding value. I actually have a client that went to work for a developer, fresh out of school and fresh out of college, and has worked his way up into being the secondhand guy in probably five or six years with this developer, just because the other developer’s like, “Hey, I’m 68 years old, I want to retire.” So, you can get in with people like that, that are looking into their future and figure out how you can leverage off their experience and help them in the process. So, I always think about “how can I help you?” for your investors and for other people that you might be working with as your mentor. All right, so anything that you think we should talk about that we haven’t covered yet, Dave?

Dave Seymour:

No, I’m good. I’m an open book. I like Q and A, there’s no area that we can’t address. Put it that way.

Kim Lisa Taylor:

Okay. So just before we go to Q and A, in case some people have to drop off, is there a way that people could reach you? Or do you have a website or something they can go to, just to learn more about your organization, whether they want to invest with you?

Dave Seymour:

Yeah, absolutely. Look, I’m old school. You can actually pick up the phone and get ahold of me via a telephone. It’s a thing that you punch numbers in, and people answer them on the other end. So the phone number for the company is 781-922-4418. If you do reach out and want to have a conversation, make sure you let me know that you heard us here on this particular podcast. If you are newer to syndication, if you’re newer to investing, if you’re newer to development, reach out to info@freedomventure.com. You can also go to our website, freedomventure.com. There’s a bunch of resources, there’s a free download on there somewhere for what is a good diversified portfolio, between stocks and bonds and real estate? Or just Google my name, Dave Seymour. I got rid of all of my past arrest records, so it’s clean now. That’s not true, or the SEC won’t let me do what I’m doing. But seriously, you can Google my name. Dave Seymour, S-E-Y-M-O-U-R. And I’m sure you can find a way of getting hold of us.

Kim Lisa Taylor:

Okay. So I put all those contacts in the chat, and if any of you know how to save the chat, you can do that. There’s three little dots just to the right of where you would actually type a message. If you click those dots, you’re going to pop up in one of those going to say, “save the chat.” All right, well, let’s see. I’m going to scan the chat right now and see what people were saying. All right. So Sag says, “How to decide if the land price is expensive or cheap for construction?”

Dave Seymour:

Yeah, great question. So look, everybody’s concerned with construction costs right now, they’re concerned with supply chain, et cetera. Your underwriting and your pro forma needs to be stress-tested. Just because it’s 15 grand a door doesn’t mean that it’s a good deal if the market, once you run your rents and your expenses and your building costs and everything else through your underwriting pro formas, you might want to be at 10 grand a door or 15 grand a door is a steal.

And I don’t mean to take it at such a high level, but you have to, because there’s so much involved in a good underwritten pro forma. But it’s basically income and expense ratios, do they make sense? Management costs, expense costs, annual expense increases, annual rent increases, and then getting through your project with what’s called a GMP. GMP is your gross maximum price construction contract. And being able to get a competent GC to put that GMP together, I’m going to be honest with you. It takes a lot of work. It’s not something that happens overnight. We use a national GC that comes into our markets and builds out that team to execute on the build.

Kim Lisa Taylor:

GC is general contractor.

Dave Seymour:

Yeah, GC is your general contractor. We use a national contractor because they have massive buying power. They don’t go to the Home Cheapo or Slow’s to buy two by fours, right? They’re buying them on bulk, they buy their steel on bulk. They can store that product, if you will, and pull it down as they need it. So to answer your question succinctly, which isn’t always my strength, work from the back to the front. What is your income at the end of five years? What does that look like? And then work … all the way to land. Make sure that you’ve got good numbers for your entitlement, make sure you’ve got good engineering numbers, make sure you’ve got good architectural. I’m into architectural plans on the 106-unit build probably around a quarter of a million right now. So, this isn’t buy, fix and flip a 1,500-square-foot house. It’s a different game. I hope that answers your question.

Kim Lisa Taylor:

No, that’s absolutely right. And even with a lot of my value-add clients, they come to me and they don’t understand that you’ve got to do the … you have to know what the likely sources and uses of funds are for your project, which means you’ve got to calculate out what is the total in cost? What is going to be my construction cost, my position fee, my closing cost? What’s going to give me some money for working capital and reserves? What might the bank require … some impounds for insurance and taxes, those kinds of things? You’ve got to factor all that stuff into your uses of funds. And then the sources of funds has to equal that. Because if there’s a disparity there, then you can’t get the project done. Then you have to do your operating pro forma.

So in a development project, you’re not going to have any income for a couple years, but you’re going to have a whole lot of expenses. But at some point you are going to have rentable units and you’re going to start getting some income, and you’re going to start having the customary expenses. So in a value-add, you just work those numbers in from the beginning, you would have income and expenses. And hopefully the income would be increasing, and hopefully the expenses would be increasing at a slower rate …. And then you have to go, what is my exit strategy? What is my proposed exit strategy?

So, you’re trying to figure out cash on cash return during the year by year pro forma, and also at the exit strategy. What is my overall cash on cash return? And add together what came from cash flow. Plus the equity that you get from the sale, divide that all up over however long you’ve had everybody’s money, and that gives you your annualized return. Once you know that overall the annualized return, now you can figure out, all right, how much of that do I have to give to investors? What percentage of that do I give to investors in order to get them the return that I want them to have, or that’s going to entice them to invest with me? And how much of it do I get to keep? And is it worth it to do the deal? Because if there’s nothing left for you, don’t do the deal.

And I have people come to me, it’s like, “Well, I’ve got this deal and I can buy into it. And I’m going to get a 7% return every year, and I want to get investors.” It’s like, you can’t. You can’t; you can put your own money in that deal if you want a 7% return, but there’s nothing for you. It’s just not a viable, syndicate deal. So, you’ve got to figure all that out. And that’s when you now are ready to start showing your deal to investors and getting your legal documents prepared. Because until you have gone through that exercise and learned those numbers, you don’t even know if the deal makes sense.

Okay, all right. So Brandon asked, “Would love to hear about the fee structure, especially in this co-GP phase.”

Dave Seymour:

Yeah, great question. So the co-GP gets to participate in the fees, cash flow and disposition. Industry standard, 1% to 2% acquisition fee at the time of closing. And then the development fee is the capital that we use as GPs to pay ourselves, to keep the project moving. There’s a lot of investors … And that’s 5%, 5% of the overall project cost. There are some investors out there that start looking at GP fees and they start to beat them up. I’m going to say this loud, I’m going to say it clear: do not try and nickel and dime your GP. They are the most underpaid capital employee that you will ever have for your potential return profile.

So, that’s pretty much the fee structure. Then the waterfall structures at time of cash flow, we have generally preferred up to 8% for our LPs. Once we’re over 8%, we will get into a 70/30, so 30% to the GP or co-GP because that’s what they are at that point. They get to participate in that. Once we get to maybe a 12% return, we might up it to 60/40. If we get up to 16%, we might do a 50/50. So without sounding like a Fisher commercial, the better we do, the better our GPs or co-GPs and LPs do, it’s a true statement in this environment. So, acquisition fee participation, development fee participation, cash flow participation, and then disposition profit participation is where the co-GPs get to come in and play.

Kim Lisa Taylor:

The disposition waterfall is going to be, you got capital, makeup, pref, and then go through your split structure.

Dave Seymour:

Yeah, correct. But remember, again, they’re in a higher risk profile because they’re first in. So, some people understand it and want to participate anyway. I’ve got one investor that loves coming in early, and they’ll write pretty substantial checks to do that.

Kim Lisa Taylor:

So you would do your co-GP would get paid first, get paid back their money first and their pref first, before you’d get into the other class?

Dave Seymour:

No, nobody’s getting paid back first. No, they participate all the way through the full cycle of the investment.

Kim Lisa Taylor:

But you do have subclasses or multiple classes within your investor class? You have the one for the co-GPs, and you have a second one that came in later, right? So in that pari passu structure, your co-GPs are getting their capital back first? Or does everybody get capital back pro rata?

Dave Seymour:

Everybody gets principal back at the time of disposition.

Kim Lisa Taylor:

Okay, principal back first.

Dave Seymour:

It’s just that the co-GP capital is working at a higher rate of return than the LP capital.

Kim Lisa Taylor:

Okay. And so, everybody still gets paid back pro rata, but they just get a higher return.

Dave Seymour:

Correct, correct.

Kim Lisa Taylor:

That’s an interesting structure. You guys didn’t do any kind of Class B catch-ups, huh?

Dave Seymour:

No.

Kim Lisa Taylor:

Or a four year … catch-up, because you’ve got this tiered structure with your splits.

Dave Seymour:

Correct.

Kim Lisa Taylor:

That’s correct for that. And that works out well.

Dave Seymour:

We look at the deals. I want to take down a deal without puffing up any numbers. I want to take down a deal where I can in confidence, offer a 4X to my co-GPs. And I want to be anywhere between a two, five and a three, two for my LPs. If I can with integrity, plug all those numbers in, I like that deal structure. It’s exciting for my co-GPs. It’s also exciting for my LPs to potentially meet those kind of return profiles. So, that’s part of the underwriting for us to be able to structure these out so that people feel good about coming into the deal with us.

Kim Lisa Taylor:

Great. Okay, good questions you guys. Art says, “Yes, it’s very important that you protect your investors’ capital.” Calvin says, “Hey, really enjoying learning about this stuff.” Thanks, Calvin. Then Stony says, “Do you have any interest in any Florida markets beyond Cape Coral?”

Dave Seymour:

If the supply and demand is there, yeah. I did a small deal in West Palm Beach on the other side of the state. We held that property for nine months, and brought it back onto market. So that was an existing structure, that wasn’t a build for rent structure. The answer to that is yes, I can deploy teams anywhere in Florida pretty rapidly. But again, supply and demand. They got to meet the underlying requirements for it to make sense.

Kim Lisa Taylor:

So Brandon asked, “Is there a way to JV with Dave in the Seattle market?”

Dave Seymour:

No.

Kim Lisa Taylor:

That goes back to that earlier question that we don’t want to touch.

Dave Seymour:

No. And I don’t mean any offense, but look, if you ever get an email from me, my email text says, “A yes or a no is more valuable than a maybe.” I’m not going to be the guy who goes, “Yeah, maybe I will.” No, I’m not doing business in Massachusetts where I live. I’m not doing business in New York. I’m not doing business in Seattle. I’m just not; it doesn’t excite me. And no disrespect to anybody who’s in those markets. It’s just, I don’t have to.

Kim Lisa Taylor:

Yeah. There are other more business-friendly markets, yeah. Okay. So Art says, “It’s been suggested that the GC becomes an investor in the project to keep them moving forward all the way to the end.” Well, I guess that’s the structure that you’re really using because … Oh, the general contractor. Well, I have mixed feelings about that. Okay, so if your general contractor is a partner and they don’t do their job, you can’t fire them. I don’t know. What do you think about that?

Dave Seymour:

That’s a great answer. No, I’m with you. I’m with you on that. You said something earlier in this conversation that was pretty poignant, was, “I’ve worked as an attorney and I get to see my clients’ checks, and I want to move over to the other side of the equation and still keep my attorney skills.” Well, it’s the same for the general contractors. They’re not stupid, they know where the money is. And at some point or another, we used to say back in the day in a single-family business, a good GC is only good for maybe five deals. And then they’re like, they want to raise their prices, et cetera, et cetera, et cetera.

I think for me — because I’ve dug ditches, I’ve been on the other side of the equation — I think for me, you let them perform. Show me why you should be a partner in the next deal, show me how fast you can get through without putting crappy work in the marketplace. Show me how flexible you are on change orders, show me how flexible you are on process. Are you a team player, or are you that egotistical general contractor that thinks they know everything? And if you’re a team player and you perform well, let’s have that discussion. Let’s have that discussion, but you’re going to bring some equity to the table as well. You’re not just coming in.

Kim Lisa Taylor:

That’s where I was going to go. I was going to say…

Dave Seymour:

There you go. You thought I was going to leave that out, huh? No, you bring some money. You put skin in the game.

Kim Lisa Taylor:

If they’re going to bring money, and all they’re doing is their job, then just pay them to do their job. And I mean, that’s true of anybody, a real estate broker, insurance agent, mortgage broker, any of those people. If they’re not bringing anything else to the table, they’re not helping co-sign the loan, they’re not helping bring money to the deal, something besides their actual job, then don’t bring them in as a partner into your deal. Because you end up paying them 10 times more to do their job, and then they know it’s kind of a guaranteed payment. They don’t have to perform to get paid. So, you’re stabbing yourself in the foot. And I’m sorry, Art, because Art is a general contractor I believe.

Dave Seymour:

I was too, brother, I’m with you, man. I was, as well. Look, everybody has to show their value. Everybody. The attorney, the engineer, the contractor, the operator, even the LPs. They got to show their value. A yes or a no is more valuable than a maybe. So if value is shown and proven, then compensate it well. Pay early, pay often. And then people appreciate that. So, that’s how I look at it.

Kim Lisa Taylor:

All right. I’m going to see if we can get through one or two more questions before we have to go. I think I know the answer to this one: “Do you only invest in build-to-rent, or do you also invest in existing multifamily?

Dave Seymour:

Both. We’re yield hunters. I’m a GP, I have one job, is to hunt yield. And when all of these compressed market acquisitions come back around in the next 12 to 18 months, (whoever) is most capitalized will win this game. So we’re ready, we’re bringing in substantial capital now to be able to take down existing structures and reposition.

Kim Lisa Taylor:

Okay, so here’s a question. I think we know the answer to this one, too. And I don’t even think we have to answer it, but I’ll ask the question: “What do you feel about the New Jersey market?” Okay, so we mentioned something before about business-friendly markets. I don’t think New Jersey qualifies for that, so I think we can just move on with that. So, sorry if you live in New Jersey. Hey, I used to live in California and my answer finally was to move, and I have clients that still live in California and whenever they say, “Well, how do I do this in California?” I say, “You don’t; you have to move.” That’s just the way it is. I think somebody asked “What’s your business track, or your sponsor track record?” Well, you just have to talk to Dave personally about that, or look at his website if you want to see that stuff.

Kim Lisa Taylor:

All right, well Dave, this has been amazing. I’ve learned a ton. I have taken a zillion notes; I hope everybody else has to. We will certainly post this on our website. We will also transcribe it, you’ll probably see snippets about it on YouTube. That’s one of the ways that we maximize these events, so that we can reach out to the largest audience and try to educate them. If you want more information about Dave, look in the chat. Let’s see, his number, I’m going to see if I can find it again. Dave, go ahead and just tell us your phone number.

Dave Seymour:

Yeah, 781-922-4418, freedomventure.com. If you want to shoot us an email, info@freedomventure.com. If you want to look at our offerings, we can talk. If you want to learn some stuff, the website’s got fantastic resources on there. So now it’s in your court, whoever you may be, you got to put the effort in. We did our part.

Kim Lisa Taylor:

That’s right. And if you want to reach us, it’s syndicationattorneys.com. If you’d like to schedule an appointment, there’s options there to schedule a free appointment with one of our staff, or if you want to schedule a paid consult with me, you can do that at our website. Just click that button, schedule an appointment, and we’ll be happy to talk to you. We also have some low-cost options for you to become clients of the firms. We have a pre-syndication retainer that’s for people that don’t have deals yet, but want to have continued access to us. And we do Masterminds, so that you’re able to weekly connect with one of our attorneys, either me or another one of our attorneys. So anyway, thank you everybody for showing up today. This was very lively and very fun, Dave. Had a good time.

Dave Seymour:

Thank you.

Kim Lisa Taylor:

Hope to have you back on the show again soon. All right, thank you.

Dave Seymour: