How To Raise Money From Private Investors Legally!

On This Episode of Peak Market Watch...

How To Raise Money From Private Investors Legally!

Gene Trowbridge, Founding Partner of Trowbridge Law Group and a Senior CCIM Instructor, and Anton Mattli, together with this week’s co-host, John Martinez, dive into Gene’s broad knowledge in the world of real estate and syndication, being in the space for over 40 years!

Episode Highlights:

  • Learn how to raise private equity in commercial real estate syndications the legal way
  • Changes in SEC rules and how the world of syndication has evolved
  • How to engage and educate new investors on real estate syndications.
  • Investors that wanted to invest outside the state have plenty of access to syndicator deals… Learn what Gene has seen that works well and what does not for out-of-state multifamily investors!

You can also find our episodes here:

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Show Host

Guest Speaker

Co-host

Connect with Anton Mattli

Connect with Gene Trowbridge

  • Email: gene@trowbridgelawgroup.com
  • https://trowbridgelawgroup.com/attorney/gene-trowbridge/
  • https://www.linkedin.com/company/trowbridge-law-group-llp/
  • http://facebook.com/trowbridgelawgroup
  • http://twitter.com/law_trowbridge

Connect with John Martinez

VIDEO TRANSCRIPTION

00:00
about yourself and your firm all right
00:03
well thanks for having me i
00:04
appreciate it and as we’re all kind of
00:07
locked down here virtually it’s great to
00:09
get out and see so many uh
00:11
so many people even though they’re only
00:13
on camera and that’s for sure
00:15
my career really is has had three phases
00:18
and it it it’s built to what i do today
00:22
the first phase i came out of college
00:24
and i became a real estate broker
00:26
and i sold commercial real estate and
00:29
while
00:30
i was doing that i was able to get on
00:33
the ccim faculty where i stayed for 40
00:35
years
00:36
teaching ccim classes and i learned a
00:40
lot
00:40
as a teacher but i’ll tell you you
00:42
really learn when you’re doing
00:44
that and after a certain period of time
00:47
in
00:48
as a broker i was out investing myself
00:51
and um ran into a property that i
00:55
that like almost all syndicators that
00:57
i’ve interviewed
00:59
uh i didn’t have enough money to buy it
01:01
by myself so i had to go out and find
01:03
some investors
01:04
and that brought me into contact with
01:07
the word syndication
01:09
and securities and actually i went off
01:12
to do a 15-year career
01:15
in uh syndication where i raised money
01:18
from the broker dealer network basically
01:20
and built
01:21
many storage facilities primarily i
01:23
think we did 17
01:25
mini storage facilities here in southern
01:27
california
01:29
built them got them 50 occupied and then
01:33
sold them to
01:34
uh operators of storage facilities we
01:37
sold a lot of projects to sell
01:40
to sell storage
01:43
a public storage excuse me and then
01:48
one reason or another uh the syndication
01:52
business became something that i was
01:53
really
01:54
going to have to make a commitment to to
01:56
grow
01:57
and grow bigger my broker dealers wanted
02:00
me to do bigger deals
02:02
more deals which meant more staff more
02:05
space
02:06
more headaches and
02:09
my last year i remember i i counted we
02:12
sent out 1676 k
02:14
ones we had over 850 investors
02:18
and boy to do any more i just i just
02:21
didn’t want to do it so
02:23
i went home to my wife and set her on
02:25
the kitchen table where all the great
02:26
decisions in life were made
02:28
and i said you know what am i going to
02:29
do our next 15 years because i’m going
02:31
to retire at 60.
02:33
what am i going to do and i had a stream
02:36
of income coming because i probably had
02:38
six seven
02:38
eight years of projects that i had done
02:41
that needed to mature and
02:42
and all that and so i said i think i’ll
02:45
go to law school and be a securities
02:46
lawyer
02:47
well that was 27 years ago so
02:52
so i’m still doing that and that’s the
02:53
only law i’ve ever practiced
02:56
and i have a firm and all we do is
02:59
really
03:00
um with the exception of one or two
03:03
regulation a plus offerings we do
03:07
regulation d rule 506 offerings
03:09
exclusively and
03:11
we’ve done almost in this in this
03:14
version of partnerships that i’ve been
03:17
in since 2014
03:20
we’ve done almost a thousand offerings
03:22
we’re in the high
03:23
900s and for about 700
03:27
unique uh sponsors so that’s a big uh
03:32
that’s much more than i thought i would
03:34
ever do and
03:36
uh and i’m grateful for it yeah that’s
03:39
great to hear i would say certainly
03:41
anyone who has
03:42
already been active in syndication uh
03:46
likely have heard of you right and have
03:48
come across your name
03:50
and uh it’s only someone everyone should
03:53
know
03:53
right again not just from a uh
03:56
structuring the deal for to meet all the
03:59
sec
04:00
requirements but also just to knowing
04:03
that someone is
04:04
is doing the legal work who actually has
04:06
also done syndication himself
04:09
uh i cannot even imagine how you deal
04:12
with 1600 plus okay
04:14
once and all the questions that you have
04:16
to answers
04:17
come from the recipients
04:20
in those days i was licking stamps and
04:24
we were licking envelopes
04:25
there were no today there are back
04:27
office companies
04:29
who would help me do that work i would
04:31
have signed up with one of the companies
04:33
that my clients are using now
04:35
and someone else would have done that
04:36
but we didn’t have that back then
04:39
if if we had had that maybe i would not
04:42
have
04:43
have left although my
04:46
my life experiences in business
04:50
have always gotten to a certain point
04:53
and to go to the next level up i’ve
04:56
always backed off
04:57
yeah yeah so and you know and right now
05:00
my
05:00
my law firm has six people and that’s
05:02
plenty of plenty big for me
05:04
don’t give me ten just fine
05:08
yeah okay very good so
05:11
considering that you have been in in uh
05:14
in this world of syndication for
05:18
longer than virtually anyone including a
05:21
lot of lawyers
05:24
i’m sure you have seen a lot of changes
05:26
uh throughout that
05:27
uh period so maybe you can share with
05:30
with our
05:31
listeners a little bit what what you how
05:34
how the world of of syndication and
05:38
also the sec rules have have evolved
05:41
over time
05:42
sure well that’s a good question um
05:45
i think the number one thing that i’ve
05:48
seen
05:50
goes back and it started really in 1981
05:54
when the sec
05:57
liberalized they liberalized the ability
06:02
to raise
06:02
money by uh giving us more rules
06:07
actually because for a very long time
06:09
there was
06:10
uh regulation d and there still is and
06:13
you could raise money but
06:15
you could really only raise money from
06:17
accredited investors
06:18
and you couldn’t advertise and in 1981
06:22
they came along and they gave us
06:24
rule 506 and in rule 506
06:29
what they did is they said we’re going
06:32
to
06:34
give you a definition of what a credited
06:37
investor is as opposed to guessing
06:39
and we’re going to let you take we’re
06:42
going to tell you that you can raise an
06:44
unlimited amount of money in a 506
06:46
offering
06:47
from as many accredited investors as you
06:50
want
06:50
and in addition 35
06:54
sophisticated investors we could never
06:56
do sophisticated investors
06:59
but now we could we still couldn’t
07:01
advertise
07:02
but the ability to take people who
07:04
weren’t accredited
07:06
and back then when they gave us the
07:07
definition of accredited
07:09
a million dollars net worth and 200 000
07:12
income i mean in 1981 a million dollars
07:16
was a lot of money
07:17
so so uh so that
07:20
giving us the 35 investor limit of
07:23
sophisticated investors who weren’t
07:25
accredited really
07:26
exploded exploded money raising
07:30
and uh that really allowed me to go
07:33
into the broker-dealer network who where
07:36
the
07:36
the securities uh reps had
07:40
um databases rolodexes
07:44
of a lot of investors who weren’t
07:46
accredited who were buying other things
07:48
but now they could invest in real estate
07:51
offerings that open the market
07:53
and then comes 2012
07:57
the jobs act where they said okay that
08:00
set of rules
08:01
is 506. that’s fine we’re going to leave
08:03
that set of rules
08:05
and we’re going to call it 506b and then
08:08
we’re going to give a new set of rules
08:09
which is 506c
08:11
which says now you can advertise
08:15
uh we’re taking you know the the chains
08:18
off of you go out and advertise and find
08:20
all the accredited investors you want
08:22
and sell to them well although i wasn’t
08:26
selling syndications and i was already a
08:29
lawyer i saw the change and i’ll just
08:31
i’ll put it in in in my view
08:35
while i was syndicating i could raise
08:38
money from as many accredited
08:40
investors as i could find but i couldn’t
08:42
advertise
08:43
and they and accredited investors
08:46
if they found me they could invest with
08:50
me
08:50
it was very difficult now with with 506c
08:54
i can go out and i can find some of the
08:57
16 million households that are
08:59
accredited investors any way i want to
09:02
and then they can go on the internet and
09:04
through social
09:05
media they could find all the
09:07
syndicators like me
09:09
who are offering offering
09:13
funds to accredited investors and it
09:16
really
09:17
we really thought it would open
09:18
everything up guys
09:20
and i’ll just tell you one more and then
09:22
i’ll get off of this rant
09:24
in the uh every year the sec puts out
09:27
statistics
09:28
and they get the statistics from the
09:30
form d’s
09:32
that we file and we file the form these
09:35
for all of our clients
09:36
and uh the last set of statistics and it
09:40
usually comes out march or april so i’m
09:42
i’m a year
09:43
i’m you’re behind but that’s the most
09:46
current thing
09:47
the private placement business
09:50
is 1.8 trillion
09:53
dollars that’s seven times the ipo
09:58
business on wall street during the same
10:00
period of time
10:02
1.8 trillion dollars
10:05
is raised and 99 of it is raised in
10:09
rule 506 but here’s the surprise
10:14
1.4 trillion of the 1.8 trillion
10:18
is raised in 506 b where there’s no
10:22
advertising can you believe it and
10:25
200 billion is raised in 506 c
10:29
so it really never caught on
10:32
it never really caught on and it’s it’s
10:35
just amazing
10:36
most of my clients have plenty of
10:39
investors
10:40
they don’t have to advertise for new
10:42
investors and they’re doing social
10:44
they’re doing social things where
10:45
they’re bringing new investors in
10:47
the correct way into their daily lives
10:50
yeah
10:51
so it that that’s amazing some of my
10:54
newer clients will do a 506 c
10:56
just so they can advertise and build
10:58
their database so they can go back to
11:00
506b
11:01
and do it so that’s yeah that’s
11:04
that’s amazing that’s it’s it’s really
11:07
very interesting the
11:08
statistic so why do you think that is
11:13
even if you have a very large
11:16
investor database right and you say look
11:18
i don’t have to advertise
11:20
because i have enough investors in my
11:23
database to start with
11:26
wouldn’t that just help you to build
11:28
even more
11:29
uh uh of your database
11:32
so what is have you talked to some of
11:35
them why they still
11:36
shift towards the 506p i understand you
11:39
have the 35 sophisticated
11:42
that you can bring in but
11:45
is there such a big demand from from the
11:48
sophisticated investors that most deals
11:52
are still
11:52
easier done when you do a 506p i’ll give
11:55
you
11:56
three three reasons number one
11:59
uh referrals are not considered
12:02
solicitation and advertising right yeah
12:05
if you have a big enough
12:06
network of investors and you’re talking
12:08
to them and you’re doing good for them
12:11
they’re going to present referrals to
12:14
you that’s
12:14
very good number two
12:20
a lot of the investors that you have in
12:23
your database
12:24
are accredited investors and in 506
12:28
b all they have to do is check the box
12:34
and to get them if they’ve invested with
12:37
you over and over
12:38
and over just by checking the box to get
12:40
them to
12:41
give up their tax returns to a third
12:44
party
12:45
administrator to go through the the
12:49
third party verification you need to do
12:51
for a 506c
12:54
they’re not they’re not going they’re
12:57
not
12:57
going to do it plus
13:00
the third and the last thing is
13:03
syndicators who have a strong
13:05
track record are happy to know who their
13:08
investors are
13:10
and are a little concerned about taking
13:12
people in the deal that they don’t
13:15
that they don’t they don’t know there’s
13:17
there’s no question about that my
13:20
my most prolific syndicator
13:23
i’ve done 121 offerings with them
13:26
since uh 2014.
13:30
they do 506b only
13:33
accredited investors and two years ago
13:36
they froze
13:37
their investment pool and their investor
13:39
pool
13:41
yeah they don’t take any new any new
13:42
people at all great positions to be
13:45
in all the all their offerings are maybe
13:48
between five and ten million dollars
13:50
they’re in the multi-family business
13:53
and uh uh they’ve got it you know
13:56
they’ve got a good program and they’re
13:57
not gonna
13:58
not gonna change yeah that’s amazing
14:01
yeah
14:02
very good uh so just uh one more
14:05
question maybe john you can jump in
14:07
there too then
14:08
uh when it comes to that certification
14:12
uh if if i’m correctly inform them
14:15
please correct me if
14:16
if i’m not uh a third-party verification
14:20
is
14:20
not really required but it’s highly
14:23
recommended from a
14:24
from a sponsored perspective so that
14:26
you’re truly protected
14:28
well the sponsor could do the
14:30
verification themselves
14:33
someone needs the the rule the legal
14:36
rules are the sponsor
14:38
has taken steps to be
14:41
reasonably assured not guaranteed
14:45
reasonably assured that every investor
14:47
is accredited
14:49
and they give you four or five steps
14:50
that you can take but most sponsors that
14:53
i deal with
14:53
don’t want to ask you don’t want to ask
14:55
john for his tax returns
14:57
and john doesn’t have really a balance
15:00
sheet that he publishes
15:02
and maybe john has maybe has a stock
15:05
broker a cpa or an attorney who’ll
15:07
verify
15:08
that he’s accredited but most sponsors
15:12
sign up with one of the many companies
15:14
that are out there that you can google
15:16
and find who will do the verification
15:18
for you
15:19
and it’s not an easy deal you have to be
15:21
verified any verification you have of an
15:24
investor
15:25
that states he’s accredited is only good
15:27
for 90 days
15:28
right so you have to continue uh
15:32
to do that so that’s kind of a challenge
15:34
and
15:35
i’ll tell you something interesting i do
15:37
uh continuing education
15:39
courses for cpas on the
15:43
the securities world and uh when i get
15:46
to the point
15:47
that we talk about um
15:51
we could send our investor to their cpa
15:54
and their attorney and have the cpa or
15:56
the attorney
15:57
uh write a letter that they’re
15:59
accredited i
16:00
i ask a polling question if an if one of
16:03
your clients came to you
16:05
with this form letter asking you to sign
16:09
that you know them and that they’re
16:11
accredited
16:13
would you do it and then i have a
16:15
multiple choice
16:16
no only only if it was a client i really
16:21
knew and then the other one was
16:23
gosh i don’t think i can do that can i
16:25
and
16:27
the answers are heavily weighted to no i
16:29
would never do that
16:31
and gee i don’t think that’s in the
16:33
provision of what a cpa does
16:36
so uh that hasn’t proven to be very
16:39
successful
16:40
alternative for my sponsors most people
16:43
typically
16:45
uh end up going through a third
16:48
a third party and you know you ask the
16:51
question what’s changing in
16:52
and one of the things i can talk about
16:54
is is what’s changing right now the
16:57
the uh the sec is continuing to do
17:01
things
17:02
that are going to open up promote
17:05
capital formation that’s what the jobs
17:07
act was all about
17:09
they said you know all the companies in
17:11
the united states that have less than
17:13
500 employees
17:14
are small businesses and their path
17:18
to money is through private placements
17:21
i mean 1.8 trillion dollars
17:24
but a mine a very small portion of that
17:28
is the real estate market
17:30
it’s businesses who are growing and are
17:32
raising money
17:34
through regulation d rule 506 and
17:38
uh the sec has come out with some rules
17:40
that are finalized
17:42
and are going to be effective now here
17:44
on march 15th
17:46
uh coming right up i don’t know when
17:48
we’re going to broadcast this but
17:50
they’re either coming up that would be
17:52
effective
17:53
you broadcast this the first thing that
17:55
they’re going to do is
17:57
which i think is a big deal there’s a
17:59
rule called integration
18:02
and what integration is is if if you are
18:05
doing
18:05
two offerings and they’re too similar
18:08
or they’re too close together the sec
18:11
can come in
18:12
and integrate them into one offering and
18:15
apply the most restrictive rule
18:18
okay let’s say you’re doing 506 b
18:22
you’re taking 35 investors and you’re
18:24
buying dirt
18:25
with 35 investors and then you’re going
18:28
to do another offering
18:29
to raise money to buy the building
18:31
that’s going to sit on top of the dirt
18:33
and you’re going to get one investor
18:34
that’s sophisticated
18:36
well in the old days before march 15th
18:40
if those two offerings were done within
18:41
six months of each other
18:43
they’re going to integrate them into one
18:44
offering and you’ve got 36 investors
18:47
and you’ve blown your exception right
18:50
it’s now a 30-day rule
18:52
just 30 days for integration
18:55
so you do an offering 30 days and then
18:57
you do another offer in 30 days
19:00
you’re out of the six month roll which
19:02
is amazing
19:03
sure and they’re going to apply that to
19:05
doing advertising
19:07
so if you do an advertising offering now
19:10
if i was succeed you close that down
19:13
30 days after you close that down you
19:15
could do a 506 b
19:17
where the rule is today you’d have to
19:19
wait six months
19:21
after doing a c to do a b because they
19:23
think they’re afraid that the people
19:25
you’re advertising to
19:26
who aren’t accredited are going to go
19:28
into your new offering right
19:30
30 days that’s that helps capital
19:33
formation
19:34
um they’re expanding uh
19:38
reg a plus we’ve done some reggae plus
19:41
uh we did grant cardone’s reggae
19:43
offerings
19:45
and that was 50 million and they’ve
19:46
they’re going to raise that to 75
19:49
million
19:50
okay and crowd funding which was always
19:53
1 million
19:54
which no one ever uses for real estate
19:57
is going up to 5 million
19:59
regulation crowdfunding that might be
20:01
attractive now
20:02
and rule 504 which typically no one uses
20:07
but they’re
20:08
they’re increasing that to 10 million
20:10
and that’s kind of interesting because
20:12
504 will let you go into
20:15
into um two
20:18
states that might allow advertising
20:22
under their own in internal securities
20:26
laws
20:27
and so if you take your offering into
20:29
california
20:30
which does allow advertising if you do
20:32
it the right way
20:34
and california approves your offering
20:37
and then you take it into another state
20:38
which allows advertising
20:41
you give them your offering and if they
20:42
approve your offering
20:45
now you can raise up to 10 million
20:46
dollars in those two states and
20:48
advertise
20:49
prior to that we’re talking blue sky
20:51
here right anyone everyone
20:53
no one wants blue sky in 506
20:57
it’s uh preempted from blue sky the
21:00
states can’t regulate you at all
21:02
right federal government does but now
21:04
there’s a possibility with being able to
21:06
raise 10 million dollars in a couple
21:08
states
21:09
maybe we probably won’t write any 504
21:12
offerings but
21:14
someone someone might that’s that’s
21:16
interesting
21:17
and then the last thing um
21:21
for reggae and regulation crowdfunding
21:24
and i’m looking at my list here
21:26
uh they’ve made the rules on testing the
21:29
waters
21:30
uniform which means you can go
21:33
out and you could put a billboard up and
21:35
say i’m going to bring out an offering
21:37
that’s going to be
21:39
for hard money loans on real estate and
21:41
i’m going to pay 12 percent
21:43
are you interested and you don’t even
21:45
have your ppm
21:46
written you don’t have anything you’re
21:48
just testing the waters to see if people
21:51
are
21:51
interested you can’t do that in 506 but
21:54
you can do that in reg a
21:55
and and regulation crowdfunding so they
21:58
keep
21:59
moving moving the bar toward capital
22:02
formation but
22:03
one thing is i don’t know the name of it
22:07
but president biden since he’s taken
22:09
office
22:10
has signed an executive order
22:13
which tells the banking
22:17
and the sec commissioners to
22:22
stop what you’re doing and look at stuff
22:25
that’s
22:26
on the drawing boards and maybe you’re
22:28
getting comments on that hasn’t been
22:31
finalized
22:32
and look and see is there anything you
22:34
you really don’t want to do
22:37
because it’s not safe or is there
22:39
anything you’ve done recently you’d like
22:41
to rescind
22:43
you know investor protection is going to
22:46
be big in this administration
22:48
sure and make up of the yes the makeup
22:51
of the sec
22:52
the five commissioners is going to
22:54
change
22:56
so who knows i mean they could come out
22:58
tomorrow and decide that everything i
23:00
just talked about they’re going to put
23:01
on hold
23:02
yeah that’s a it’s a good point let’s
23:04
hope
23:05
we pay attention to that yeah let’s hope
23:07
it’s it’s not happening
23:09
right uh and you know the next thing
23:12
they’re talking about is finders
23:14
you’ve probably heard there they’ve got
23:17
a deal out there
23:18
getting public comments on can we
23:22
can we employ finders
23:25
employees and probably the right word
23:27
but can we use finders
23:29
that we don’t pay and don’t do certain
23:31
things to help introduce investors to us
23:34
boy that’s just right with fraud
23:37
possible i hope they don’t do that
23:40
that’s terrible but
23:42
who knows yeah you never know right
23:45
uh coming back to that 506 b
23:49
and c right john we obviously we work
23:52
with a lot of
23:52
indicators new and more experienced ones
23:56
and the interesting thing that we see
24:00
is a lot of them they started out with
24:02
the 506
24:03
b’s and then the fault vol
24:07
let’s try the 506 c and then the switch
24:11
back to the 506 b for the next offering
24:14
right so that’s okay and now if they
24:16
didn’t wait six months
24:18
they’re running a foul of the
24:19
integration rule if anyone checks
24:21
right but um but it’s not hard for the
24:25
sec to check because there’s going to be
24:27
a reg d
24:28
file form filed on the 506 that starts
24:31
february
24:32
10th 11th and then they’re going to do
24:34
another form d for the 506 b that starts
24:38
march 3rd
24:39
it doesn’t take much to put those
24:41
together and see that there’s trouble
24:47
[Music]
24:53
i’m having a little gardener noise i
24:55
hope that is destroy
24:56
everything but they should be going
24:58
right outside
25:03
[Music]
25:07
i forgot exactly what i what i was going
25:09
to say
25:10
so my newer
25:13
clients sometimes want to do a 506c even
25:16
on a small offering
25:18
we have one on the street now where
25:20
they’re raising less than a million
25:22
and they’re going to do 506c so they can
25:25
broadcast it and get out
25:27
their social media and capture as many
25:29
people as they can
25:31
and bring them into their database
25:34
strategy question i’d have you just
25:38
you touched on something there with like
25:40
a newer client
25:41
someone that is doing maybe a smaller
25:43
capital offering
25:44
my question would be you know how do you
25:48
how do you think about engaging someone
25:50
that’s newer to syndication because
25:52
we get a lot of folks that listen to our
25:54
webinars
25:55
well i’m really having trouble hearing
25:57
john can you speak it up a little bit
25:59
john
25:59
sorry any better yes thank you sorry
26:01
about that
26:02
sorry bad mic but my question is um
26:06
we get a lot of investors that are kind
26:09
of getting started in the syndication
26:11
space
26:12
you know how do you get them comfortable
26:15
with something that’s so complex because
26:17
i think that you know we’ve touched on a
26:18
lot of very complicated
26:20
um you know items and at a very maybe
26:23
higher level but
26:24
you know it’s a very complicated space
26:26
um you know what
26:27
what what’s your approach to getting
26:29
folks comfortable you know without
26:30
having to walk through the whole process
26:32
but
26:32
what are some things that you know you
26:34
get folks you know
26:36
a sense of comfort that well you know i
26:38
will look after your best interest
26:40
this is something that you can do as far
26:42
as getting out and raising capital
26:45
well are you asking how do we make the
26:46
passives comfortable
26:48
or how do we make the new syndicators
26:50
comfortable the new syndicators folks
26:52
that are the new students wanting to
26:55
grow the new syndicator is has put their
26:57
foot in it
26:58
they found a property they want to buy
27:00
and they don’t have enough money
27:02
so you either walk away
27:06
and don’t do it or you say bye god i’m
27:08
gonna do it and
27:09
i’ve been doing a series of interviews
27:12
um
27:12
i think i’m up to 25 26 interviews now
27:15
with people in the business
27:17
on our uh our youtube channel and
27:20
when i ask then the last question i ask
27:23
is what advice do you have for rookies
27:25
and john that’s what you’re talking
27:26
about and almost without exception
27:30
they say have a team don’t do this alone
27:36
get together with people who have some
27:38
experiences
27:40
on different things not necessarily
27:41
syndication maybe the team is three
27:43
people
27:44
and we’re all doing our first deal
27:46
together but at least there’s comfort
27:49
or misery and comfort or whatever the
27:51
way that saying is
27:52
and i think that’s very important i
27:55
think that
27:56
that i think a syndicator needs to be
28:02
educated in the asset type so well
28:06
educated that they feel comfortable in
28:08
investing in it on their own
28:10
and if they had enough money they’d buy
28:12
the property that they’re looking at
28:14
themselves because they know it’s a good
28:15
deal
28:16
they just don’t have enough money so
28:18
they go
28:19
to investors and i also think
28:25
that your first syndication if you do it
28:27
right
28:29
isn’t really about the property don’t
28:31
get so hung up
28:33
on the on the spreadsheets and all this
28:37
because in in your first year the
28:38
investors are going to invest because of
28:40
you john
28:42
the investors don’t know about the
28:44
property either they just know that
28:45
you’ve been in the real estate business
28:47
and you’ve done well in the real estate
28:49
business
28:49
they don’t have the time the money the
28:51
knowledge to do it themselves and
28:52
oh my god john are you really offering
28:54
me an opportunity
28:56
to invest with you see
28:59
i think uh passive investors and i say
29:02
this a lot you guys have probably heard
29:04
this
29:05
passive investors call me and say will
29:07
you look at this deal and i said no i
29:09
won’t
29:09
but these are the four questions you’ve
29:11
got to ask
29:14
ask the sponsor john if i give you my
29:17
money what happens if something happens
29:18
to you
29:20
so you gotta have continuity don’t
29:21
invest if there’s just one manager
29:23
number two
29:24
john have you done this before and all
29:26
of us have had to say no
29:28
but john you’ve got experience in real
29:31
estate so tell me about your experience
29:33
so i feel comfortable that you know what
29:35
you’re doing in the real estate space
29:37
okay and it’s real important to get your
29:40
first deal done
29:42
so when they ask you that question john
29:44
you say hell yes i’ve done it
29:46
once okay that’s fine and then
29:49
i i didn’t have any skin in the game
29:51
john are you gonna put some money in
29:52
there with me and not only am i going to
29:55
put money in you say but i’m going to
29:56
sign the mortgage
29:58
so i have more than just skin in the
29:59
game and don’t forget to say that
30:02
if i’m a sponsor don’t forget to say i’m
30:04
going to sign the mortgage that’s a big
30:06
deal
30:06
and if you’re in a passive investor and
30:08
you hear that that should be
30:10
that should be good and then the last
30:12
question the passive should ask is john
30:15
if something happens in my life do we
30:18
have any provisions for liquidity
30:20
and john having been a good syndicator
30:23
and reading the documents that attorney
30:25
has given him
30:26
says yes in article 12 and 13 of the
30:30
operating agreement we talk about
30:32
liquidity whether it’s forced on you
30:35
or whether it’s voluntary and we have
30:38
plans for both of those
30:39
and those are the four questions a
30:41
passive should ask not what’s the cash
30:43
on cash not what’s the cap
30:45
rate not you know you can talk about
30:47
real estate
30:50
in addition to that i think the passive
30:52
investor
30:54
has an obligation to
30:57
himself or herself to get educated
31:00
in the asset class that they’re going to
31:04
invest in
31:05
there’s plenty of guys out there
31:06
teaching you how to invest in apartments
31:09
teaching you how to invest in mobile
31:11
home parks teaching you how to invest in
31:14
storage facilities
31:17
go take some of those courses learn
31:19
about the product type
31:21
because the syndicator is not going to
31:23
teach you about the product type the
31:25
syndicate is going to teach about his
31:26
deal her deal
31:28
so you better have a broad knowledge of
31:30
the product type so you know what
31:32
questions to ask john does that make
31:34
sense do you think
31:35
that’s something a passive should do
31:38
yeah that’s exactly what i was
31:40
trying to get to is one your your
31:42
encouragement of that
31:44
you just have to step into it and and
31:46
find a good partner that knows
31:48
you know the path that you need to
31:50
follow that can advise you well
31:52
and and be able to get through your
31:53
first deal and then you know
31:55
and excellent points for passives about
31:57
you know what they should be thinking
31:59
about
31:59
as they’re beginning to look at deals i
32:02
could only imagine i’m telling you
32:04
i’m telling you that this business
32:05
quickly if you’re
32:07
if you’re an active syndicator after you
32:10
get past your second or third deal
32:12
you’re in the people business you’re not
32:16
much in the real estate business you’ve
32:18
got the team that’s working on the real
32:20
estate
32:20
the real estate may be 2 000 miles away
32:22
from you but the people
32:24
are as far away from you as their
32:25
keyboard so
32:27
you know you’re in the people business
32:28
right and right yeah
32:31
absolutely right uh
32:34
one question i have is when it comes to
32:36
particularly
32:37
passive reaction and that will also how
32:39
the sponsors should deal with it and the
32:41
reason why i’m asking is we have seen it
32:43
now more and more over the last
32:44
year or two where uh sponsors are
32:48
raising money
32:49
right so they plan to do the typical
32:51
five or six p or five or six c
32:53
and then they realize oh we have a
32:55
problem we cannot raise all the money
32:57
that we plan to raise
32:59
now everyone has been talking about
33:01
private equity checks or why don’t don’t
33:04
we bring in some breath equity here
33:07
and now that is
33:10
something that has come up more and more
33:12
where the sponsors say well
33:14
we need to fill that capital stack and
33:17
let’s get
33:18
a big private equity check now
33:21
certainly that private equity has a
33:22
preferred position
33:24
gets eight to twelve percent or whatever
33:27
the percentage is
33:29
so how how would you advise sponsors
33:32
as well as the passives to react to this
33:34
obviously
33:35
you you initially drafted that ppm
33:38
assuming it’s a standard
33:40
506 b or c without having a breath
33:43
position
33:43
in front of them so what do they need to
33:46
do to protect themselves as a
33:48
as a sponsor but also what would you
33:50
advise to the passives who
33:52
have originally signed up to essentially
33:54
a different deal
33:56
well let’s look at the operating
33:58
agreement you know
34:02
my operating agreement and this deals
34:04
with
34:05
cash management my operating agreement
34:07
allows
34:08
a kind of a cascade type of how do i
34:11
bring in more money if i need more money
34:14
number one the operating agreement gives
34:16
the manager the right
34:18
to go to third parties to borrow money
34:21
and it gives the manager the right to
34:23
negotiate
34:24
that borrowing in whatever the manager
34:28
the sponsor thinks is in the best
34:30
interest of the deal
34:32
okay number two it says
34:35
uh the manager could make advances
34:39
short-term advances and in my operating
34:42
agreements
34:43
the terms of those short-term advances
34:46
are spelled out
34:47
so everyone knows how much interest the
34:49
manager
34:50
can charge and take and what are the
34:52
terms and then the third thing says the
34:55
members
34:57
could make loans the members themselves
35:00
who are already members could
35:02
could step in and make individual loans
35:04
and the manager can
35:05
can negotiate that with
35:09
the members and when all those things
35:12
have happened
35:14
the cash distribution pattern changes
35:16
there won’t be any distribution until
35:19
uh the manager advance is paid back and
35:22
the member loans are paid back
35:24
if it’s a third-party loan treated just
35:26
like a second mortgage or a bridge loan
35:28
that’s fine
35:30
there might not be any cash to
35:32
distribute but there wouldn’t be a rule
35:34
against distributor then of course
35:36
there’s the the infamous
35:37
capital call which never works
35:41
so my documents call that
35:45
the question is is your entity
35:48
formed yet and generally your entity
35:51
gets
35:52
formed when you raise the minimum
35:56
and break impounds and accept
35:59
investors into the deal so
36:02
if you haven’t broken impounds
36:07
uh i think you have to redo your
36:08
documents and you have to
36:10
tell the investors this is the new
36:12
capital stack
36:13
you want your money back if you’ve
36:16
broken
36:17
impounds and they’re all they’ve all
36:19
been admitted
36:20
into and this this would be happen when
36:22
you were you’re trying to buy a property
36:24
that’s a value-add
36:26
you have to raise three million dollars
36:28
to buy it and a million and a half to do
36:30
all the work
36:31
and put the reserves to the lender
36:34
and that’s what you’re short on is is
36:37
the reserves
36:38
and doing the work but you’ve already
36:42
closed the property well then you have
36:44
to look at what the operating agreement
36:46
says
36:48
yeah yeah yeah so if that’s only the
36:51
case like once you close on the property
36:53
what i was referring to more was
36:55
obviously with mestat and all that where
36:58
you have actual that that’s
36:59
that’s that’s a little bit different but
37:02
it was more referring to
37:04
where essentially they create a separate
37:07
class of equity right well the operating
37:10
agreement has to allow that
37:12
so you wouldn’t have to create a
37:13
separate class if the operating
37:15
agreement allows you to go out and
37:17
borrow money
37:18
from unrelated parties you just go and
37:20
borrow i don’t care if it’s
37:22
if it’s an equity if it’s a
37:25
a shared equity loan because next
37:29
percent and then you give them part of
37:30
the sales votes
37:31
proceeds the mayor has the right to do
37:33
that
37:34
as long as we’ve reached the minimum
37:38
uh if you haven’t reached the minimum
37:40
then you don’t have any members
37:43
so you have to go back and adjust your
37:46
adjust your offering documents because
37:49
the whole key in the offering documents
37:50
is
37:51
is total total disclosure right and if
37:54
you’re changing the deal
37:56
um but you really don’t have the
37:58
permission to do that
38:00
like once again i’m a flat ass excuse me
38:03
a flat out statement
38:05
if you haven’t reached the minimum and
38:08
formed your entity officially with
38:10
members
38:11
you better modify your your
38:14
uh operating agreement to allow that and
38:17
then give everyone
38:19
a chance to take their money back but
38:21
you’ve formed the company
38:22
and you put in there that you have the
38:24
right to do that
38:27
i don’t care there are a lot of things
38:30
that go on
38:31
on the street that i don’t think
38:34
are legal and run potentially in the
38:38
area of fraud
38:39
and misrepresentation so i do
38:42
think you have to be have to be careful
38:46
but if you don’t have that clause in
38:48
your operating agreement and you decide
38:50
you want to go out and get that private
38:52
equity
38:54
i don’t know how you could do that
38:55
because now you have to have all the
38:57
investors
38:57
vote on a change the operating agreement
39:01
and usually the operating agreements
39:05
i write say that if if the manager wants
39:09
to bring
39:10
people in in a in a superior position
39:14
to the existing investors you’d have to
39:17
get
39:18
a vote maybe 75 80
39:21
unanimous you’d have to get a vote to do
39:24
that
39:25
if it’s going to be a superior position
39:27
but if it’s just alone
39:28
it’s not necessary
39:34
and that’s too bad yeah that’s too bad
39:36
that they have to do that
39:37
so yeah well but it’s
39:42
it is what it is right i think if what
39:45
you just highlighted is really key
39:47
transparency is key
39:48
right so that the investors the passives
39:51
know
39:51
what they are getting themselves into
39:54
uh doing the doing the money race
39:58
and that they clearly understand what
40:00
they
40:01
what the consequences are uh after
40:05
the deal has closed and what the sponsor
40:08
can and cannot do
40:09
right and certainly today with financing
40:12
and
40:12
the way the lenders want 12 months of
40:15
all this stuff in reserve
40:17
i mean you could come out with your
40:18
offering before you finalize the loan
40:22
yeah and say this is what i need and all
40:25
of a sudden you have to
40:26
you have to get an extra two million
40:28
dollars to put in reserves
40:31
well once again my question would be is
40:34
is your
40:35
is your entity actually finalized it
40:37
formed
40:38
right if you haven’t broken impounds
40:40
it’s not formed
40:42
you can always give the money back
40:44
absolutely back the investor said this
40:45
isn’t going to work
40:46
and then you’re you’re out the sponsor
40:49
is out hard money
40:50
the sponsor’s taking a loss the sponsor
40:53
isn’t going to get the income they
40:54
thought
40:55
and all of a sudden the issue becomes
40:58
is the sponsor more concerned about the
41:01
sponsor
41:03
than the sponsor is concerned about
41:04
going into a deal that
41:06
isn’t well funded and has the potential
41:10
of losing money for the investors
41:13
and i see both sides of that question
41:16
yeah
41:16
there’s really only one side
41:20
you’ve got to protect the investors or
41:21
you’re out of business absolutely
41:24
yeah it’s a very good point
41:28
before we wrap up one one other question
41:32
i’ve had and we we have seen it now
41:35
more and more over the last couple of
41:37
years i would say
41:39
where some indicators are willing to
41:41
take on
41:42
uh take investors right obviously
41:46
you you live in california right and a
41:49
lot of californian investors they want
41:51
to invest
41:52
outside of the state sell their property
41:55
in california have a big chunk of money
41:57
that
41:58
they want to protect in the 1031.
42:01
uh do not find their own opportunities
42:04
but have plenty of access to all these
42:06
syndication deals
42:08
and there’s only more and more
42:09
indicators that are
42:11
open to accepting a tick
42:14
structure uh what
42:17
what have you have you seen there what
42:20
has worked well
42:21
and what what has not worked that well
42:24
well i’m a child of the tick of the tick
42:27
world in
42:27
in you know 2004 to
42:30
2008 2010 i was i was
42:34
active in that world so i’m pretty
42:36
comfortable with
42:37
the pluses and minus of a tick structure
42:40
and i’m sure i do one every month
42:44
every month the best the most recent one
42:47
we did
42:47
which i thought was a little complicated
42:49
is we had
42:50
we had a syndicator who found a an
42:53
investor
42:54
who had like 13 million dollars in
42:58
a family trust equity in a property
43:02
owned by their family trust
43:03
and another 12 million dollars in equity
43:06
in a property owned by a corporation
43:10
and that was 24 25 million dollars
43:13
and the deal needed 30 million so my
43:17
client
43:18
put together an llc to bring in the six
43:21
million
43:22
and so we have three tenants in common
43:26
yeah and that can be done the problem
43:30
the real problem the real real problem
43:34
is decision making because
43:38
no one has control of anyone
43:41
else’s deed so in that case it was okay
43:44
because
43:46
this husband and wife controlled the
43:48
family trusts and controlled the
43:49
corporations so we were looking at them
43:51
we were looking at one decision maker
43:53
and then my syndicator
43:55
was a decision maker an experienced real
43:58
estate operator
44:00
but what if
44:03
a difficult deal comes down the road and
44:06
things go
44:06
bad and we need some major decisions
44:09
made and no one can control the other
44:11
person so
44:12
it’s a terrible way to run real estate
44:14
it’s an absolutely
44:16
terrible way to manage real estate but
44:18
it does
44:20
accomplish and it’s the only way you can
44:22
accomplish uh
44:24
generally the uh the deferral right
44:28
the referral of the gain and if you do
44:29
it right it’s fine then you can go on to
44:31
the next property if you do it right
44:33
under audit it can all blow up for you
44:36
so i think we should all be watching
44:38
what the government is going to do
44:40
in the next six months about uh a tax
44:43
reform and
44:44
1031. i mean we won’t have this issue if
44:47
they
44:48
if they do away with 10 30. that’s true
44:50
yeah so uh
44:52
i think the general consensus today is
44:54
that they
44:55
will not uh take it away but you never
44:58
know right
44:59
yeah the last time what they did is they
45:01
took away the personal property part of
45:03
it
45:03
which is huge because there are more
45:06
1031s
45:07
done in corporate business property than
45:10
there are in individual
45:12
investors you have a plant in sheboygan
45:14
and you need a bigger plant design
45:16
and you exchange the whole thing well
45:19
all of a sudden all the personal
45:20
property doesn’t qualify
45:22
and all that personal property has been
45:23
depreciated to zero
45:25
yeah so if they get anything for it it’s
45:28
it’s
45:28
it’s it’s uh it’s ordinary income
45:31
because it took
45:32
more than straight line and so on its
45:34
can of worms
45:35
but that changed everything so uh
45:39
so maybe who knows what it what it’s
45:42
going to be but
45:43
yes that’s fine and i will tell you what
45:45
i find what i’m finding today that i
45:47
don’t like in the market
45:49
and i always take a risk when i tell
45:53
this because i’m it could be telling
45:54
this to someone who does this
45:56
okay i don’t like the idea that sponsors
46:01
who are going to go into a value-add
46:03
property and know that there’s no cash
46:06
from the operations that can be
46:08
distributed for the first
46:10
six eight 12 months they raise extra
46:14
money
46:16
and then they send people
46:19
that money because everyone likes to get
46:21
a check
46:22
right without fully disclosing
46:27
that that is a return of
46:30
capital it’s not earnings
46:33
you didn’t earn anything to distribute
46:37
but we’re sending you a check because we
46:39
said we’d give you a six percent
46:41
preferred return that is
46:44
fraud
46:47
okay so so it’s a it’s a it’s an
46:50
extremely important point that you just
46:53
raised
46:53
right that you can return
46:57
the money right but it needs to be
47:00
clearly disclosed that it’s a
47:02
return of capital so essentially just
47:04
raise more money so that you
47:06
can come up with that fake
47:12
picture of that you are able to pay a
47:14
preferred return right out of the gate
47:16
and i think if you explain that to
47:18
people all i’m doing is i’m asking you
47:20
for more money than i really need just
47:21
so i can turn around and give it back to
47:23
you
47:24
they may have other uses for that and
47:25
i’m not totally sure the disclosure
47:28
uh works we don’t write
47:32
offerings with that yeah probation i
47:35
can’t say i’ve lost any clients over
47:37
there but i’m pretty
47:38
pretty in tune with the sources and uses
47:41
and how we
47:42
we do that my real estate background i
47:44
know what’s what’s happening
47:46
so i’m very very concerned that that’s
47:49
uh and it you know that’s one thing and
47:52
sometimes it’s more subtle than that
47:54
sometimes you raised money for
47:57
uh capital improvements sure
48:00
and the six percent uh clock is ticking
48:03
and the property only produces four so
48:05
you’re reaching the capital improvement
48:06
budget
48:07
and send and send six back without
48:11
explaining what you’ve done and there’s
48:13
one that could be fraudulent and number
48:15
two when you need the capital
48:17
improvement budget
48:18
the money isn’t there and the investor’s
48:20
gonna say why can’t you replace the air
48:22
conditioners
48:22
well we sent you money for a return we
48:24
didn’t need that money
48:26
we can buy our own groceries we needed
48:28
new air conditioners
48:29
to to do the project but
48:33
my my most prolifics indicator that i’ve
48:36
talked to you about with 120 somebody
48:38
else
48:39
his distribution is a 12
48:44
distribution
48:47
yeah eight percent preferred and
48:50
four percent early and we’re going to
48:52
count
48:54
four percent as a return of capital
48:57
fully explained and but we don’t call it
49:00
a 12
49:01
cash on cash because it’s not it’s 12
49:04
distribution which is legal
49:07
eight percent preferred and four percent
49:09
to return up
49:11
yeah excellent point right uh so
49:14
make sure when you talk of cash on cash
49:17
return
49:18
what do you really mean with it right
49:20
right and i learned that in teaching
49:22
ccim
49:23
early on i learned the difference
49:24
between return on
49:26
and return of and that’s very important
49:29
and i’m kind of
49:30
i’m kind of on the the pulpit when i get
49:33
a chance to talk about that because i
49:35
really preach
49:37
there and there are gurus out there who
49:39
preach all sorts of weird stuff
49:41
stuff and i’ll tell you
49:44
don’t do that just don’t do that well
49:47
everyone does it well i don’t
49:48
good what did mom and dad say
49:52
just because everyone does this probably
49:54
doesn’t make it right
49:55
you know that’s right yeah yeah very
49:59
good
49:59
it’s been great thank you very good
50:01
points i really appreciate
50:03
you sharing all all your knowledge and
50:05
again you dropped
50:07
some some great nuggets there
50:08
particularly at the end
50:10
right i think everyone should should be
50:12
well aware of that
50:15
that you stay within the law right
50:19
so that was was truly great jean
50:22
usually we ask what are your contact
50:25
details
50:26
we don’t really have to ask it for
50:28
anyone who sees the screen
50:30
but we also have it on on
50:34
audio too so maybe if you still can
50:37
provide us with your contact details
50:39
that would be great
50:40
yeah the easiest way to get me is gene
50:44
at trowbridgelawgroup.com and if your
50:47
question to me seems like it has some
50:49
urgency i’ll just call you
50:51
okay and the one thing i would like to
50:54
talk about is our youtube channel
50:56
trowbridge law because like i said i’ve
50:58
done a lot of interviews with people
51:01
and this morning i interviewed robert
51:03
helms
51:04
and frank rolfe who’s the president of
51:07
the fifth
51:08
largest mobile home park owner
51:11
group in the country and an operator of
51:14
mobile home
51:15
university and
51:18
we publish all those interviews and
51:21
there’s a lot of wisdom a lot of
51:23
things that i’ve learned from
51:26
them and we put that on our youtube
51:29
channel and you get a lot of information
51:31
going back to what john says how do you
51:33
how do you get comfortable
51:35
how do you get ready to do this well you
51:36
learn you read everything you can and
51:38
you watch
51:39
all the interviews like you guys do i
51:42
watch a lot of these podcasts
51:44
and i’m interviewed on a lot of them and
51:46
i always learn
51:47
learn something so that’s good thank you
51:50
for having me i appreciate yeah so uh
51:52
yeah really appreciate it uh good that
51:55
you just
51:56
interviewed robert helms we are also
51:59
financing partners for the real estate
52:01
guys right so uh
52:03
they are still great educators as you
52:05
are on the legal side right and
52:07
again that’s the key piece to get
52:10
comfortable is really you
52:11
educate yourself through whatever
52:13
resources you can
52:15
and certainly appreciate that you did
52:17
exactly that today
52:19
uh with with us and uh so uh we see you
52:23
soon
52:23
might we we are at an event together in
52:25
at the end of february in houston so we
52:27
look forward
52:28
i’ll be there i’ll be there say hi to me
52:31
okay
52:32
yeah thank you thank you john thank you
52:34
john
52:35
thank you man thanks thanks
52:38
bye bye