Just how do you raise money for a business? What’s that structure look like? And exactly how do kickers work? These two topics are going to be covered in this video, which is actually a blast from the past. This video was recorded about two years ago and goes through those topics for my elite mastermind that I used to run, coaching very high-level people from the top of their profession, primarily in real estate but also in other industries.
Let’s say there is a building that you want to buy. I’m going to talk about this in the exact context that I experienced this year. One of the projects I was working on, which I still think is an incredibly great business idea, never got started. But we got everything formed, we had investors who were interested and were coming in. Unfortunately, it didn’t happen, and you’ll find out why in a minute.
So you’ve identified a property, but you also have a purpose for occupying that property with a business entity. In my case, Anya and I were working on a project to do executive suites for kitchen space. The idea was to take an existing warehouse, convert it into commercial kitchens, and then rent those spaces out on a month-to-month or year lease, essentially turning it into executive suites for kitchens.
The advantage of doing this is that all co-packers use this same model. People who sell to grocery stores or restaurants cannot operate and sell food, at least in California and probably throughout the country, unless the cooking takes place inside a commercial kitchen. So the people who would occupy these spaces are bakers who sell fresh baked goods to restaurants or coffee shops, school lunch programs, or caterers.
As part of that deal, we needed some amount of capital. We were in escrow to buy a building, let’s say it was a $2 million building, plus $1 million to build out the space and finish the business. So we needed to raise $3 million total. How do we do that in terms of investors, given that Anya and I wanted to own this business forever?
We went to the investors and explained how the business would operate. We were putting together an LLC that would own the property, do all the work to build out the kitchen space, and in exchange, the business would have a lease with the property. It wasn’t going to be just any lease; it was going to be a percentage rent lease. The rent amount would be based on the income of the tenant. As the business took off, the rent being paid for the building would go up, allowing us to offer 30% returns to our investors.
We also included a buyout clause in year seven, just like Grant Cardone’s buyout clause. We had a built-in mechanism to value the property and determine the dollar amount. It was all spelled out in the PPM, the operating agreement, and our business plan.
Now, the reason it was fortunate that this particular business didn’t happen was because our estimated start date for looking for tenants was March 15, 2020. Given the pandemic, that would have been a disaster of epic proportions. It was a good example of the universe stepping in and saving our bacon.
The deal ultimately fell apart as we got closer to removing contingencies. Our estimated costs were going up, and the city of LA was being inflexible about parking requirements. The more strict they were about parking needs, the more challenging it became. The city didn’t like our idea of putting in all these kitchens, demanding more parking and raising concerns about handicap accessibility.
Let’s talk about kickers. Kickers are incentives or bonuses that you give certain investors to encourage them to come in or do certain things. You might need kickers for cash for deposit, cash for due diligence, signing on the loan, or cash for closing.
There are two ways to structure kickers: as part of your team or as an investor. If it’s part of your team, it’s simpler because it takes place internally and doesn’t need to be disclosed to other investors. If it’s structured as part of the investment, it needs to be disclosed and set up in a specific way.
A good example of this is Grant Cardone’s syndication, where he had two classes of membership units. If investors came in early, they got an 80/20 split of cash flows. If they came in later, it was a 65/35 split. On the sale of the property, everyone gets their money back first, then any proceeds are divided pro-rata between the two pools based on their respective percentages.
The easiest way to do kickers is through the team, but structuring them as part of the investment can be a nice way to incentivize people to invest early. You can clearly state that only a certain dollar amount of A1 shares are available until you close or until a specific date.
If you’re looking to raise money for your business or need help with kickers or anything related to raising money under Regulation D, I can help. My name is Tilden Moschetti, and I’m a syndication attorney with the Moschetti Syndication Law Group. I’d love to talk with you and help you be successful with your Regulation D Rule 506b or 506c offering.