Syndication Attorneys Podcast
Probably the question I hear more than any other is how do I choose between a Regulation D rule 506b offer and doing a Regulation D rule 506c offer? Those two are different? How do I do it? And so let’s talk about the differences. Regulation D rule 506b says you can raise an unlimited amount of money from an unlimited amount of accredited investors, just like Regulation D rule 506c, unlimited amount of money, unlimited amount of accredited investors, there’s one difference between the two of them. And it comes in two different choices. You’ve got to choose either from taking accredited non accredited investors. So you may have up to 35 in any 90 day period, non accredited investors under Rule 506b, you don’t get that choice at all, under Rule 506c, you cannot have any non accredited investors in rule 506.c. So why wouldn’t you just choose a rule 506c? Well, it’s simple. Because under Rule 506c, you can advertise, see, under Rule 506b, you need to have a significant relationship with everybody that you wouldn’t have as an investor. Because if you didn’t advertise to them, how did you get the money? Right? That’s the question that has to be answered. And it’s answered kind of in the negative, right? Because you don’t know. Well, if if you didn’t advertise? How could How could you get the money? So that’s why you have to have a relationship, otherwise, there’s no way you would have ever found them to invest. So the choice between there? So the real question, when I get asked, well, how do I choose? Which one? The answer is simple? Where do you think your investors are coming from? Do you know a lot of people who can invest in your property, and you’ve talked with them and kind of gotten a gauge of that, oh, there’s no problem, I can raise $5 million from this group of people. Now, it’s not just friends and family, like friends, like your best friends that you’d go drinking with. It’s really that you ever relate a substantive relationship, such that your investors feel like they can pick up the phone and ask you a question. And you feel like you have a general understanding of the their level of sophistication. So that’s the definition of knowledge. But so you’ve got a pretty big sphere, if you think about all the people that you know, you may have a pretty big fear, and it may be possible for you to raise all that 5 million. And if it is rule 506b is probably the best choice, because you don’t have to go through an additional step that is under Rule 506c. And that’s verification that they are in fact accredited. You see, when you choose rule 506c, you get all the benefits of getting to advertise. But you can’t make the mistake of assuming that somebody is coming into the investment, just because you think they might be an accredited investor. And they said that they’re an accredited investor, you actually need a third party to raise their hand and said, I know this person. And yes, they are indeed an accredited investor, I put my license on the line to say that’s true. So those people are the accredited investors under Rule 506c, they have to be verified. That’s why what I say it’s just easier to do a 506b if you actually already have that relationship, because they’re, whether they’re whether they’re an accredited investor or not. It’s really up to their self selection. You just need to have a good faith belief that they are in fact probably a good an accredited investor. If they say they are. So 506b five succeed, look at your network and decide well, where are these people coming from? Are they coming from there? Or am I really going to need to advertise to meet have people invest with me who I just don’t know yet. And those people eventually then you will know and you can include them as part of a 506b. So I hope that helps. My name is Tilden Moschetti. I am a syndication attorney with this Moschetti syndication Law Group. We focus exclusively on Regulation D rule 506b and 506c offerings.
Let’s do a deal deconstructed all the way from choosing the deal to do all the way through to getting it closed and funded. This is a video I recorded about two years ago, with a very small group of new syndicators. It’s kind of the kind of work that I do a lot of times with my clients today that we don’t offer the coaching program anymore, I hope you find it useful.
Basically, what we’re going to be doing is we’re going to be doing a deal deconstruct it. Now we’re gonna go from beginning of the deal all the way to the close of escrow. You all can see my screen, I suppose. So I will go ahead and get started. So how do we do this. So we’ve got a syndication that’s for, you’ve decided to start looking for properties, you’ve got your fit. And your fit is, basically what you’re looking for is you’re looking for medium to low risk properties, you’ve decided you’re looking for properties that are something like mixed use or something with some sort of retail component to it in not a areas, but maybe those B and C, maybe even D if it was the right opportunity. But that risk level needs to be moderate to low, you’re looking at, for a first deal somewhere in a price point of a total cost of between 3 million and 5 million. And these are just a scenario. So this isn’t me telling you what you need to do for your own founder investment theory. This is just the scenario that we’re working with. So let’s start oops, with the fit. So you’re you’re looking at moderate to low, make it a little bit finer point. moderate to low risk, better.
You are looking at between three to 5 million to start in total cost. You’re looking at B to see maybe the areas and it should be mixed use flax and have a retail component.
All right. Does that all make sense? That’s sort of the basis that we’re going to be going through. So to do this, you do a survey of the area and you identify three properties. So we have the first property here.
We’ll call this one Wilson. You have another property here call this Xavier. And then I realized when I was taking my notes I skipped why. So this one’s Zapier.
We don’t have a why. Maybe you thought maybe you saw why but you immediately rolled it out. So what are these three properties? These are three properties that kind of made it into your bucket to kind of check out because all you know every day you’re you’re doing your base hits, you’re going through properties, you’re meeting with investors, and you are just trying to find things that are worth looking a little bit deeper into. So let’s start with Wilson. So Wilson is a Flexbox Wow. Okay, Wilson is a flex building. Oh, digressing for one quick second. If for those people who watch who are watching this live on workplace, just FYI, we’ve noticed that it that workplace doesn’t really stream it in a very good high quality image. And so this will be while we upload this as the better image so you’ll be able to see it more clearly. It’s just a because we’re trying to stream through zoom and then it gets priority over going to workplace that’s why it happens. So it will be uploaded. So sorry about the digression. So Wilson, it is a flex building it is out at 3.3 million at a 8.5 cap and it is so it has eight tenants in it has a billboard and a cell tower.
So, I should also say one of the things you’re always that that you’re really looking for on Fit to is your strategy. And I forgot to write that down here. So our first strategy here is a value add strategy. And so your guests have the location is a c plus, and you’re guessing whatever your play is, would be probably somewhere around a five year old. So let’s actually have to move these oops, let’s be a little bit over make a lot more room.
Okay, so Xavier is a is a triple net development project. So it kind of crosses between maybe retail a retail use, but it’s a triple net project. It’s a development project that’s come to you from a developer that you know, and the total amount they need to raise is 4.5 million. There’s no cap rate because this is a development deal. So they don’t know but your best estimate is that it probably be about a 30% return. So that’s a really good return obviously it is in a B location. And it would be a three year hold. This oh I should add would be a move put a moderate risk. This will be a very high risk. All developments tend to be high or very high risk. Zapier is a multi tenant retail. And these are all properties that I’ve underwritten before to I’ve just modified to slight things about them. So they’re their properties I’ve done I’ve worked on there they are. They are real. So we’re working with with pretty live data. So Zapier is a multi tenant.
Retail it is priced at 5.2. A eight cap the location is a c minus 10 year hold. Now the location is a c minus here because it’s in the middle of nowhere. So it’s just there’s nothing really around it and it’s a multi tenant retail space. It is a tenure hold. And you might think it because it’s a multi tenant retail, there’s not really and there’s no real added value added component to it, that it would be fairly low risk. But as you look at it, you know, everything is kind of just pointing to just risk of being in the middle of nowhere risk as to its actual how it’s seated, risk. All just feed in and make it clear. This is a high risk project. And it doesn’t even it doesn’t really have a it would be categorized as a cash flow property on your different strategies. So just to remind us we’re talking about on the complexity versus time continuum.
We’re looking at So the greater the complexity, the higher the risk in a fairly low time is your value add, you could certainly hold it for longer, but the maximum juice will be fairly short. The a development project is very, very high, you’re stabilized add value is just has that longer time horizon, but has that high amounts of complexity because really, what you’re trying to do is you’re trying to identify what the below market rents are, and then you’re trying to also go to you’re trying to make it so that you normalize that normalize the vacancy to bring people up. on your, on your less complex deals, you’ve got undervalued properties, this is almost like a flip. Except you wouldn’t be making any improvements. And then, much more complicated is a cash flow property, I mean, much more time intensive as a cash flow property. Where you’re just waiting for appreciation to take hold. So these are the the basic strategies. So we’ve got three deals here. And we’ve kind of outlined what we’ve got a bit now. I have my own beliefs on what, what way we should go with this. But let’s open up so anybody want to go off mute and say which one we think this is better for our fit? And then we’ll go from there. Anybody go off mute? Have somebody? Triple Net? Okay, triple net. But what about the fact that it’s a very high risk, and you’re fat, you’re fit scores of moderate to low risk? Strategy.
Well, so thinking, close that what it says very high risks? Yeah. I just been, I guess a little more partial bias towards triple net developments, because it’s a new construction. Therefore, you’re not dealing with too many headaches when terms of maintenance, you know, complete tenant responsibility. Be location sounds decent. That’s why I’m not really understanding the very high risk. And then it’s a development Yeah, well, it’s a development deal. So it’s very high risk. So you’ve got you know, anything can happen during that development cycle, you’ve just will probably come into it with a lease that’s been put in place, but hasn’t really been, they haven’t even moved in yet. So they may decide never to occupy it, because it doesn’t exist, right? It’s just ground. And what happens when the city decides not to give permits, or they like to slow things up, it’s not high risk in terms of they’re gonna lose all their money, because that’s probably not too likely. But that three year old can become a five year old or a six year old, which just kind of quashes your return down. And suddenly you look like a chump for telling your investors they’ll get the money back in three years. When it’s now been six years. Does that make sense?
Yeah, you’re saying that well, I mean, that’s that’s true I to an extent, but at the same time, I feel like if you just hold it longer, you’re just you know, still getting that cash flow. It’s not the worst position to be sure. That’s that’s a valid thing. Does anybody think another property would be good? And I’m assuming story that the triple net development has signed tenants already in place Yeah, yeah, he wouldn’t look at it if there wasn’t anyone else have a opinion Wilson Xavier Xavier Wilson Wilson’s All right. Wilson’s All right. Yeah.
What do you like about it?
I liked the lower risk. The cap rate seems pretty high going in. You don’t have to raise that much money compared to the other two. Yes, a desirable product. Yeah, I would say I mean, if I were choosing I I would choose Wilson. And I actually have underwritten that Wilson for this project. So Wilson is the correct answer, but they all are actually, they’re all correct. Except Zapier, I think it’s a terrible property. So Wilson is a is actually the one I would recommend based on a couple of things. So it’d be based on its its moderate risk, which matches your founder investment theory. So what the point I’m trying to make here is, this is a great return that you get with this, but it’s also taking you very much outside of your, your, your founder investment theory. So you’ve got now a high risk product. So you’ve spent all this time cultivating these investors. And when you’re trying to match them up to it, suddenly, you’re bringing them a very high risk product, it’s gonna be hard to make the case that they should go into it when you’ve been telling them, Hey, we’re all about low risk or moderate risk. And, and suddenly, you’re bringing this, this development piece, which is going to be hard to convert, the dollar amount is a concern, because it’s, as you said, it’s it’s four and a half million on Xavier. And it, it just isn’t quite there. What also I think is important is that you’ve got this, these eight tenants with a billboard and a cell tower, because there’s probably a value add component to this. So oops, get my so what we do with this from this point is so now we’ve we’ve identified these three properties. And what we’ve just done, is we put them through a funnel. And so first, the first thing we’ve done is we’ve looked at them through the lens of how do they fit with your founder investment theory. The next lens we look at it through is we do a basic underwriting. And then the last fit, the last step is probably to survey some investors, you know, the people in your list is this something that they would be interested in, you’re gonna cut out a lot of the making mistakes about doing something that you think is right. And I think what would happen is, if you were to bring Xavier to them, you probably find out that you have a problem with your risk Matt, with your, your risk profile for the investors not matching up with the investors. So out of out of this, you know, ultimately, you’ve got a shiny new property that you’ve identified.
That’s a training. And so let’s share the other screen, let’s share my spreadsheet. So the just a basic underwriting, we’ll probably go through underwriting in part two of this because I want to get kind of through the whole deal first, and then come back to the stock the share, go, and then we’ll share it again. And then I’ll share again, what the then what we’ll go through and go through more detailed like projected cash flows and, and how we got to where we got. So let me make this a little bit bigger, because I know the screen is probably a little small on your side. So not that big.
Okay, so this is one way to do it. This I’m actually rebuilding these sheets, so that y’all can see them a little bit better, and use them better. So these, this is the original version that I have of how I calculate projections, and do my very basic underwriting and then but we are going to rework this to make it more useful for you. Now it’ll be in the next couple of weeks. We’ll have nice spreadsheets for that. So but basically, it starts with your acquisition cost 3.3 million. I build in a reserve account, but for pretty much any kind of investment to make sure that we can cover costs. 50,000 is probably a little low for a property like this, but we’ll we’ll use it for the time being the cost of startup this is really just your filing fees for the entity This is the main basically making sure you get reimbursed for the things that have been out of pocket, like like the filing fees or your form D is is free, but your filing with your local state does cost money or you know, getting an accountant or your your printing costs, etc. Your cost of financing really is just loan points in in this particular scenario. So you can take point, you can take cost of financing and add that to your your costs as well to that would ultimately go to the syndicator. But for what here at what I’m using in this scenario is a just a very simple calculation that shows just the loan points and that’s just a 1% loan point plus $10,000 to cover any additional costs, like your appraisals, etc. You’ve got your acquisition fee. Now this is just your brokerage fee. So this is getting a 2% brokerage fee on the on the purchase price. So the cost to fund this is basically takes into account all of these costs, and then it subtracts the loan amount here. So this is the amount of equity you ultimately have of money that you ultimately need to raise. So I’m did this based on $1,000 a share. So 1303 shares, and then giving you as the syndicator at 20% off the top, if you’re buying this property at a good IRR. And we’ll go through this in the in the next video about the next call about that balancing about the IRR is that you think would be acceptable and you’re getting paid as much as you can, I think that you could take 20% off the top and I’ve done it. So that’s why I think you can whether you could take more than 20%. I don’t know on a project like this probably not. But you could probably take 20% Off the top as your equity. So that ultimately looks something like that they’ve got a VAT, your total number of shares in your company itself is 1564. And then ultimately, it has an IRR of 18.7%. So that’s that’s a good IRR, it’s actually on the high side for that moderate to low, moderate, low risk profile. And I think you would do that by basing, you’re making sure that your investors know that where the risks are, and what that does really does kind of more categorized under that lower risk. And we’ll go through that too, again in the in the next call.
So let me stop my share. All right, does that make sense so far about the underwriting piece? And how we get through the fit? And we’ve ultimately got a good selection to go forward with Are there any questions at this point? Actually, I do, but it’s to play around with the math of how everything’s calculated just remain the same, but I think it’s gonna take some time. So maybe that’s what we’ll do in the other in the next call. So then we’ll go, we’ll go much more deep on the underwriting so that way, you can see how that all works out and how you kind of play back and forth and make those numbers work for you. Does that make sense? Yeah. Great. All right. Any other questions? Okay, great. All right. So now let’s share so we’re back here, you’ve got this big, shiny new building, and you know, it’s the right one, what is the next step, the next step is to commit. So you need to make a commitment. You need to make it happen somehow you need to lock this property up because it may not be forever in existence forever. Now, if this was a property that was on the market, you would need to put it into escrow. If it’s not on market, maybe you could just lock it up with maybe an option to buy whatever works for you. Now, typically, we’re putting 3% down. I’m not telling you anything you guys don’t know that that property. And so three point, you know, we’re talking a significant amount of money here we’re talking, you know, over $90,000, that is going down for that property. And so the answer to the question that we get a lot is what happens if I don’t have that $90,000. The, the way to, the only way to get around that issue is, is one of two scenarios. So you could either, as you were surveying your investors, and seeing if they would be very interested in a property like this, you could elevate one of those investors and bring them into a deal that basically has them front the money for the 90,000 down, in exchange for some kind of increased return to stay in the project, maybe it’s something like, okay, they give you the 90,000, they put it in there, you put a contract that makes sure they get their money back, if it falls through, but that’s going to count as $100,000 of their investment, and you’ll just take that part out, or of the of your earnings, that additional 10, that bridges the gap from 90 to a to 100,000. So that would be one way to do it. Another way would be to borrow it. And so to find somebody who will, who will do a loan to you, it’s gonna cost you, but it won’t cost you 90,000, it’ll cost you less, it, if it’s a property you’re committed to, and you know you’re getting it are going to be closing on that property it’s been, it’s probably worth the risk to borrow that money for a short period. Because you know, at least you’re getting your brokerage fee, in addition to that money, and so you could use, that’s the money that you could use to basically pay that pay that borrowed down. So you’d get that 90,000 Back in the deal. But you’d also get whatever the costs are to finance that through the deal, you could also get it to have it just be part of your cost of financing in the deal as well. So, ultimately, you get to finally make a commitment. Now, let’s go to the side. So, you now go down a path
I have to give myself enough room here where you have are doing two things at the same time, on one hand, you’re syndicating. On the other hand, you are running a transaction so because you are the buyer, you’re you know obviously in that transaction mode, but you’re doing more than that, right? Because you are trying to you’re syndicating it as well. So let’s go through the the syndication steps in order that that we first need to get done. So the first thing we need to do is we need to form that entity. And so we need to form an entity that will be the syndication, basically the the company that has membership units, that gets to that your investors are buying into in order to go in order to become members of that is the syndication. So most of the time, this is going to be an LLC. There in there are a few exceptions, primarily if you’re doing pools, we may not do an LLC. But if you if this is a single property most of the time, that’s just going to be an LLC. Now, the next part and the next thing that you’re going to have to decide is what I consistently call the alphabet soup. And I think we’ve talked about that here and it’s certainly in the Knowledge Library to the alphabet soup is that decision on how exactly what exception to the SEC rules you’re going to come under. Now, I’m going to go under the assumption that for this property, you are bringing in some investors that you’ve talked to over here in a A survey investors, and you’re bringing some investors that you’ve been building up just in your investor, you know, on your list that are likely to come in. But I’m gonna guess that you’re probably going to fall short a number of people. And hopefully it’s a small number. But it may be more than a few number. So which means we’ve got to advertise, which means we don’t have time probably to do a reg a offering. So because that’s going to take a minimum of six months, probably nine months in order to get through, we don’t have that long. So the only way really to get around this, or, or we could put it to a reg CF. But then we’ve got the entire issue of we’re building on a portal, and we don’t really own the investors. And then there are costs associated with the reg CF. So I’m going to go with an assumption that you’ve decided that this is a that it’s going to go under Reg 506 C, which means you’re going to need accredited investors. But you can advertise and that will play into the rest of the things that we are doing so that it’s an important decision because you kind of need to know at the outset of setting it up. Not for the entity though, but for the next step, which is building your ppm.
So PPM stands for private placement, memorandum, its purposes, a few things, and I should just kind of Asterix, technically, under a 506. C, you do not need to do a PPM, I think that would be a really huge, gigantic mistake. Because of all the things a PPM gives you. So what does a PPM give you? Well, first, it’s a platform where you can tell the investors all the risks that are associated with the property. So that’s everywhere from this as a new company. Real estate is volatile. I mean, it’s not as volatile as Bitcoin but it’s certainly volatile. It is a that the risks are inherent in with the business risks of the tenants things like that. And there is so the there is the the PPM video in the Knowledge Library should be uploaded. Bye. Bye beginning of next week. So there this will have that all in great detail there. But this is just to give you an overview of what it is. So it gives you it it’s to tell everybody, okay, these are all the risks. It’s who the manager is, which is you and I cannot spell who the manager is you how you get paid. Which means that really what you’re doing here is you are disclosing everything you can possibly think of. I like to think of the ppms job is this first it is its purpose is for to disclose and to make sure all the risks are on the table. But I think that it is would be unfortunate to not do the opportunity to market using your ppm. So I would think of the PPM more as a think of it as a marketing tool that is suddenly inserting these things into it not like in tiny print, but it’s in print that is so long and boring that probably your investor may not necessarily go through in as much detail and it certainly isn’t as compelling or as interesting as these because none of these are really surprising, ultimately. But if there’s ever a disagreement, and you ever get God brought up and to say, well, they never told me, you can be easily pull out your PPM and point to it and say, I told you, it’s right here in in your ppm, I gave it to you signed you in acknowledged you got it. So that’s the role of the PPM, so it’s not mandatory under a 506. C, except to me, it kinda is, I would not even consider doing one without it. So the next thing that you’re doing is your operating agreement. Now, this has many, many, many things that are in the PPM. It has not your disclosures, but it has how you get paid how votings done, things like that. And in fact, you could also look at the PPM as the summary or the plain language version of that operating agreement, because it really is. And so the operating agreement, though, is the ultimate controlling thing. It’s the contract, it’s how your company runs. And it ultimately becomes first it starts off as the as the contract between the company that doesn’t really exist at this point, but the company and you and sets up all those rules. So it’s that it’s more than the constitution of the property, it is the, you know, every law of the land about how the company works. And so you are, you start off as the only signer to the operating agreement. Unless, then I’ll just do another aspect unless you did this where you got your, your investor to put up the down payment, he’s probably going to be a signer on the operating agreement as well. And then, out of the op, so you sign. So we’re just gonna put you for right now I’m just gonna make that assumption. And then the last step that you need to prepare is the subscription agreement.
So because the operating agreement is signed at one point in time, so you’re the only person in existence when you’re putting this together, so you’re the only one who could sign it. What the subscription does is it says, Okay, I agree that I’m going to be a part of this in exchange for money. So, this is what your investors will sign. Okay, now, this, look, this series of steps here, this is a sprint.
Actually, I’m gonna add one more step. And that is your marketing material. Because this is stuff that will set you up to look like a pro and help the investor see that you know what you’re doing. And so that could be anywhere from your brochures, you should have your sales funnel, which you should have, maybe it’s on your website, which you should have all those things that are necessary to market it, you know, for marketing. So this is a sprint. You are, and this is all under the under the core. Remember the core company operations, rally and exit. This all falls under operations. Its ups, rally and then form. So that’s that hierarchy, right. So it’s the operations underneath operations. Or I’m sorry. The rally is its own thing. So it’s under rally then form. So it’s a sub topic of rally. So now we’ve got everything that we need everything set up, and we’ve sprinted to get this done. I mean, you’ve got an escrow that’s going to take place in very little time, you need to get it done. And so this out of the way you’ve got an escrow that’s going to close in, say, you know, say you were able to get 90 days, that’s not a lot of time, because the clock’s ticking, you’ve got to get your one point, almost Oh, almost 1.6 million funded and in your bank account before that day, right now, if this all fell apart, you’re still getting your down payment back, you just went through a great deal of process in order to, to get done, but so the longer you’re taking on this sprint to the finish the sprint to get to the form, the worse off you’re going to be. So that’s why we want to really just get it done as quickly as possible. I wouldn’t necessarily even wait for your getting your entity paperwork back. I wouldn’t wait until doing it, I would just get everything going. Because ultimately, you’re going to need to get it done. And actually, one thing I wanted to mention too, is once you have your operating agreement, you can take that to the bank, not in terms of actual getting money from them. But in order to open that bank account, because you need a place to put that money. And I’m gonna go with the assumption here that you’re going to just deposit investor money into your account versus putting it into an escrow account. Most of the time, it’s not been an issue with investors. And if it is, then you could always do it through an escrow account if if that’s what’s necessary. So you’ve, you’ve gone through this now, at the same time, you’ve got stuff you’re doing to close your transaction to, I mean, primarily you’re working on, how are you going to finance this, right? So you are making your you’re getting your loans, you’re getting to loan commitment, you’re doing what you need to do on that on that piece. And that still actually has an interplay between the PPM and the finance and those loan Docs. So it’s going to change how things work, it’s going to change what the loan terms are. So there are things that are going to be changing back and forth, as you’re committing now. And that’s okay, that your PPM changes. So let’s say it takes you 10 days to finish a PPM from the start of the process. It’s okay that on day 15, suddenly, the balls shifted and you need a different amount of money or you need a different thing. You basically can reversion out your ppm, anybody who’s received the PPM before before you accept a subscription agreement, you would give them a new updated ppm or a summary of this is what’s changed in the PPM since we’ve done. So it’s actually not a problem that the PPM changes, your operating agreement probably isn’t going to change. But your subscription agreement, I mean, but your ppm, it will probably change through this process. So you’re doing everything you need to do in order to get your loan. You’re also doing all of your due diligence. And I would include in maybe in my marketing material, certainly all the good news, I would include in my marketing material I’ve uncovered through due diligence. And I probably would put anything that was surprising or bad, I probably would put in an appendix in the in the operating agreement, so you’re making all these disclosures. I’m sorry, not the not the operating agreement. In the PPM, so that way, you’ve been making disclosures, you don’t want this deal to go down at the end of the day and then say, well, you knew that this had dry cleaner on it before and there was possibly a risk of, of environmental and you didn’t tell me you don’t want that. So you want Gonna be communicating and the good news, make it real front and centered. The not so good news disclose it, but you don’t have to broadcast it like it’s the greatest thing since sliced bread. So we’ve got, now we’ve got the so this, this sprint to the the sprint that’s been taking place here is now done. The next thing we are doing is what we talked about last week. And that is our investor, target lock. Now I have something to give the investors who have invested money with me, right? So now I have all these things. So when they say, okay, great, I’m interested, I’d like to sign up, I’ve now suddenly told them, I’ve got, you know, okay, here’s my ppm, here’s my operating agreement, here’s a subscription agreement when you’re ready, and Oh, and here’s all my marketing collateral as well. So that way, you’re looking like you are ready to do this deal. Now, you’re going to get to different kinds of people that are part of the investor target law. You are going to get people from your list from the people that you’ve already identified who you want. And then you’re going to get the people who you just don’t know yet. That is why you did a 506 C. So that you could get those people that you don’t know yet, even if they don’t join with you, you are going to add them to your list. Because they may still invest in the future. Now under our investor target lock.
What we’re trying to do is get a yes. I want to invest. So we start first with our communicate our message, you’ve got to get their attention. And that could be setting up a meeting, it could be somebody symbols that doing a phone call, whatever, we’ve got to get them a message. You could also send a broadcast email, it’s just probably not going to actually get read very quickly. But you could, I would follow it up with phone calls, whatever you got to do, you’ve got to communicate that message. Next, you’ve got to capture their permission to talk about it in detail. Because if they’re not open to hear it, you’re not you’re wasting your time. So capture that permission set a meeting, get a time to actually talk with them. Most of the time, you’re going to do one on one meetings in order to talk about the deal, make them feel appreciated, make them understand what the deal is. Answer any questions. Can we create Kari asked, Can we create an entity beforehand? Sorry, you probably asked that earlier. Yes, you absolutely can create a entity beforehand. So if you think your entity so if you’re ready to, if you want to just MIT set up this entity, absolutely, you can do it, it would just it because most of the time, the the entity can be whatever, you may not know the name that ultimately you would ideally pick for it. Because for those entities, we tend to use either the address or the name of the property, but it doesn’t really matter. You could choose like your, whatever the name of your company is, and you could put investment one. So it could be you know, XYZ investments in XYZ properties investment one, fund one would be a totally valid entity name. And that way, you’re just marking it out. So just from a marketing point, it’s kinda nice when you know the name, but you can form that immediately so you can get started faster. So after captcha, convict permission, we need to convert the mindset and that’s making a case of why this property is the best property for them to go into. And ultimately, we are looking to get Yes, that’s that’s the goal. So you’ve gone through now you’ve talked to all your investors, you’ve got a bunch of people who are starting to say yes, the next step for each investor is a three step process that we refer to as the latch. And there, the first step is to accredit. This takes a couple of days, because you’re coming in as a 506. C, they need to be accredited investors, they need to be investors that either have the million dollars of net worth over. But so aside from their family residence, or that have $200,000 in income, if they’re just counting themselves 300,000 for them, but somebody needs to accredit them and give a third party certificate. So we use early IQ, I’ll put the link to them in a in one of the lists, you can use them, you can use whoever you want in order to get that accreditation, but it should be a third party that really does this accreditation that issues a certificate, because that certificate is what you’re going to hold on to to say that you did your job. After we accredit, we accept that money. And so that’s giving wiring instructions and making sure that it goes in I would probably always recommend you use wire have rather than check checks do have a greater potential for fraud than wire instructions than wiring. Even though there is a lot of news about wire fraud, there’s there is a lot of rights that are given to people who have checks and fraudulent checks do exist and can basically put you in a really bad spot. So I would say wire is the best way. And there’s a very nice audit trail and you’re never touching the money, which is great. Until it’s in your bank, then you have we have a test. And this is the circling back to the investor and let them know Okay, here is right where we’re at. So so this is communicate. position.
So they have X number of dollars received. We are closing on such and such date. And we’ll keep you informed of anything that goes on. And the purpose of here is, it’s not required, but it would be a big mistake not to do it. Because you’re you’ve got somebody here who’s probably given you at least $50,000. And they probably are little bit shaky about having done that. And you don’t want that shakiness to go forward in time, that for them always to have that if you communicate right away and make it clear that you know you’ve got their money it’s received, everything’s looks good from your end there, they’re going to be happy in their mind, they’re going to be putting put to rest. So as you build up your bank account, I mean, ultimately, probably looks fairly faint right now. Ultimately, you’ve got a big pool of money. Your quote winding down, you transfer this money into escrow, for those of you in non escrow states for where lawyers do transactions, for us all escrow tape, or for most for maybe more than half of the states. Most as what we do through Escrow is we put all of our money into a third party who holds that for us and they close the transaction, whereas in a non escrow state, oftentimes you’ll lodge that with a lawyer and there’s an actual formal thing that takes place over a table in order to complete a transaction. So when I say escrow, I’m being very general in terms of, we just put it into this transaction into this bucket until it’s ready to be distributed. And so we’ll even draw a little bucket there. And then finally, you get to the close. You’ve closed the transaction, and you communicate that to your investors. This is So this is kind of the point we got, we went from small to big. So we started up here. With a few properties that we identified, we sorted them out in using our fed and by underwriting and then ultimately surveying our investors to finally find which one we’re going to choose. Once we commit, at that point, we’re really up against the clock. And so that’s, that’s where your heart starts beating a little bit more, because you want to get this deal done. But you also don’t want to lose your money or invest your money. So we’ve got the two paths going on, you’ve got the syndicating path where we’re sprinting at first, to get everything in place. So that way, then all we really have to focus on on the syndication side, is getting the investors lined up through the investor target lock. And then, of course, we’re just too close working through at the same time to close the transaction. On the other side, you’re always probably going to be trying to get as much time as possible, because you would much rather you be in the driver’s seat in order than the then the seller in the driver’s seat in order to get there. But ultimately, you raise the money, you get the money all into the bucket, and you close the property. Now, there’s probably questions from that. And I know we went really quickly through a lot of these things. So any questions?
Okay, any questions yet? No, the lot to digest. So it’s very overwhelming. I don’t know what to ask about, I will need to review everything again, I guess. Yeah. And that’s why I wanted to do it this way. Because I wanted to show I didn’t want to get us to get into a position where the where the forest was being lost through the trees I wanted it to be. So you have an idea of of all of the steps that take place. And then as we go through each module becomes a little bit more makes a little bit more sense as to how it all fits in. That was really the purpose for I think we did that here. And then next time, what we’re going to do is sort of twofold. It’s going to be more about money than anything else. So I want to do first I want to go a deep dive into just how we do underwriting to see if this is a deal. That’s going to make sense. And then also how much are we going to make because we’re doing this to make money? And then the second half of that would be to go through exactly how that works. Now that we’ve underwrite it written it, how do we do the transaction after it’s closed? How do we run the property, so manage the asset from from the point of closing to deciding when it’s time to sell, and how the money works along the way for you and ultimately, for your investors? And so there’s that has its own things that take place at the same time. Does that make sense?
Yeah, that’s perfect. Are there any other questions? Did you find this useful? So it was I say it wasn’t say helpful exercise?
Yes, very much. I wasn’t aware of everything that is in the back of all of these activities, planning and all the points that need to be touched. It’s, it’s a lot. Good.
Great. Great. Thank you. Christian, Carrie, what do you think?
I think you’re great.
I know. Great work. Thank you.
Carrie, Was this helpful?
Yeah, we had a problem. Getting unmuted there. Yes. Very helpful. I guess, for me, just not clear about all the steps on commercial real estate, that transaction. So maybe later on Yeah, we could maybe go into that a little more. Absolutely. Yeah, it’s very similar. But there’s Yeah, we can easily outline all of all of what that is. That make sure that that is quite right. And just I guess how to lock it in and the time and money and all that so but this was very good. Thank you to them. Excellent, I appreciate it. All right. Well, thank you all. I think we had a great session today and next week, like I said, we’re gonna go through the second part of the deal be constructed. So that way we can see just how the money works for us and for our investors.
As a syndicator, or a fund manager, it is always your job to be looking for investors. Even if you already have deals going in, or you don’t have any deals that you’re looking for investors right now, shopping for them is the most important thing that you can be doing every day. When it comes to them. When it comes to investors, one of the best sources is a family office, family offices have a lot of money to invest, but they’re also very, very smart. So let’s go through 10 tips on getting a family office to be invested in your offer.
Family Offices can be a great investor base for you. They are led by very smart people who know the business very well, which is a challenge to sell to them, because you certainly can’t hoodwink them, but they also are very, they have a lot of money. And if they’ve decided that you’re a good pig, most of the time they invest with little additional oversight, they just want to make sure that their money is well placed, and that they can trust you to do a good job. But once they’ve made that decision, then they just review the documents or the notices or the updates that you send them and are very, very easy after that. Also, they can be a great resource to find other family offices. And they can also be a great resource if you just are hit a roadblock or a little problem that you need additional help on. As I said, these are led by very, very smart people. And so the additional help is oftentimes a phone call away if you really need it. So let’s go through the 10 tips that I would recommend in working with family office. Now first and foremost is trustworthiness and integrity. If they don’t trust you, you’re out the door. And everyone they’ve talked to is going to hear about how dishonest you are. The most important thing is that you are just transparent, open book, if you’re taking a big feat, disclose the fee, there’s no reason to hide it or to try and stuff it if your performance wasn’t what you thought it was going to be in the last investment. Still tell them why what happened, explain why it went on what you learn from it, you know why that why that situation took place, and what sort of things you’re doing to mitigate that chance in the future. Just be open and transparent. And that’ll go a very long way to building that trust and getting them to invest with you. Number two, also critically important is having a long term vision. For me, this fits in with the founder investment theory. Because if you don’t have that, what are you going to talk to them about? These people see deal after deal after deal, when they choose to make an investment, they’re choosing to make an investment in you. It’s not that they’re going to be interested in that plain vanilla box, multifamily building down the street. It’s not very interesting. They want to know the story of it. Why should you do it, now don’t waste their time with a very long story. But it needs to actually be coherent, show a vision of why you are the pick for them. It’s not always about long, long, you know, massive amounts of gains for them. It is about strategic long term vision, where they can basically count on you time and time again, to invest with they’re entering into a long term relationship in their minds most of the time. And they want to be able to not have to second guessed that every single time. And that comes from vision, which means your founders investment theory needs to be tight. Number three, and this also goes to that is the alignment of values. So if you are going to be doing a chain of vape stores, which is totally fine and doable to do, you may have investors who are just not interested in vape stores whatsoever. They are opposed to it, their great grandfather died of lung cancer, something like that. Whatever it is, it’s got to align properly with who they are and what they represent. Most family offices have a very clear picture of what their ideal investments look like or feel like to them, and it needs to match up to that. And if it’s not a match, that’s fine. It’s just not a match and they’re not going to change their values in order to invest with you. But make your values clear so that they can understand very quickly without having to read between the lines what you stand for. Number four, direct communication. They need to be able to pick up the phone and talk You immediately, they need to be able to have candid conversations quickly, they don’t want to waste their time on going through loopholes in order to get you on the phone, or to be able to understand XYZ. Number five, there has to be a clear exit policy, not a not sorry, clear exit strategy. You can’t just say, well, we’re going to hold it for a while, and then we’re going to leave, they are long term planners, they need planning is the key word there, they need to understand their portfolio and how their portfolios going to evolve over time, they need to know well, if this sort of event happens, these are the consequences to what’s going to happen for the benefit of the family or families that are they’re part of that family office. Number six is diversification. The reason that they’re talking to you at all is because they need to diversify their funds. So they cannot put all of them in all of their funds with one money manager, or one syndicate or one private equity fund, that would be disaster for them. One of them goes out, they’ve lost everything. Diversification is the key for them, they make a very large portfolio plans, and they need to understand how you fit into there. So help them out and make it clear how you’re divert how your project how your fund how whatever you’re offering is, can fit into a diversity of their of their portfolio as a whole. Number seven, educate you just don’t pitch, right? Don’t pitch these people, you don’t hard sell them, they need to understand what you’re doing. And that’s it. These people see deal after deal after deal. It doesn’t matter if you can sell snow to an Eskimo because they are going to make the decision purely based on what we’ve just talked about. All these things are what are going to be part of their decision making process, not some fancy sales tricks. They’ve seen it before. And they will not tolerate any sort of shenanigans going on with that. Number eight, showcase your track record, no matter what you have a track record. So even if it’s a track record, that’s very short, showcase why you’re good. Showcase why you’re doing this, make sure make it clear on why you can deliver results. Number nine, personalize it. At the end of the day, you’ve got another person across the table from you, they need to understand who you are that builds the trust, that transparency, that integrity, that vision, they need to be able to see all that personalize that and it will pay dividends. Number 10. Always look for co-investment opportunities with them. So they don’t want to be the only one investing in your project. They would love to see you co investing in it as well. skin in the game is important for family offices, they want to make sure that you’ve got a lot to lose if this thing goes south, because they feel like they should do when they have to talk to the heads of families that are investing with them. So make sure that you have those opportunities. If it’s not there, that’s okay, still have those conversations, but set your expectations of a little bit lower. Because maybe they have very high requirements. It’s possible that they don’t they may just like you enough that they’ll do it anyway. But make sure that they that if you do have that, hey, we’re going to be putting 20% of our own money into it. Oh, that’s a big deal. That suddenly tells the family office Okay, these people are just as invested as they’re asking us to be. I hope these 10 tips have helped. Please let me know if we can help you put together your next Regulation D rule 506b or 506c syndication, fund or syndication then we will we will help you.
There’s a syndication myth out there that you need to know about that myth is called the “Syndication LLC”. The “Syndication LLC” is not true, it is a pathway to an SEC, securities violation and civil and criminal penalties. We’re going to talk about what that myth is and how to recognize it. And what’s exactly wrong with it.
That “Syndication LLC”, let’s talk about how it’s being described. And then we can go into the details about what’s wrong with it. So the story goes something like this, you buy a piece of real estate
say 10 units of real estate. You identify it. And then you say to yourself, Okay, off the top, I am going to take 20% of the equity. And maybe I’ll put down 5% of cash and the rest of it is your syndication, entity’s profit. And then the rest of it comes in form of equity. From other investors, maybe in 10% increments. So you have, sensually a bunch of pieces of the pie like that. So you’ve got this thing, and this is the syndication, LLC. So how it’s being described is okay, you find these investors, they come in and on paper, that’s how it’s being described on paper, you need to make sure that everybody has voting rights. And as some sort of control, the descriptions that you hear about it also go on to say, it doesn’t matter how you actually do it. And this is the huge problem with it, it doesn’t matter how you actually do it, it just needs to be this way on paper. And I’ve heard it also described as complying with the Investment Company Act. As an aside, the Investment Company Act is not the right regulation for this. And especially if this is real estate, it’s already not part of the Investment Company Act at all. But the where it is a problem is this part here. So each one, you may be giving investors, a partial ownership shares, and you may be giving them those voting rights. But it’s much more critical is not the fact that on paper that they have these voting rights, but there’s an understanding that you’re in control of the whole property. It’s not the on paper that’s critical. It is important that it’s correct and proper on paper. But it is also just as critical that in fact that your investors have control and owning REITs if you’re going to be complying with this, in one of my other videos, we went through the difference between a joint venture and a syndication. That here a joint venture is where you’ve got partners coming together, where the decisions are really being made together. And I emphasized in that video, that it’s important that most all of the decision makers, all of the people have that joint venture have a very active part and be active, inactive thing. Some of the myth that’s out there about the syndication LLC, is that it doesn’t actually need to be active that it can be passive, which is completely untrue. The courts have found time and time again, that when something is set up as a syndication LLC, it’s not a syndication LLC, it’s a security and a security requires there to be a PPM. It requires that if it’s going to either be registered or it needs to fall into one of the exemptions. It doesn’t matter what number of rights that you give, it’s what number of rights the investor themselves feels like they have if there is a tacit understanding that the investor doesn’t isn’t participating and isn’t an active part of the decision making. It is not a syndication LLC, properly called a joint venture. It’s not it is a security which must be registered or fall under one of the exemptions so big takeaway here is don’t fall prey to listening to people on the internet about how you should legally structure something. And with the side understandings, there is not a shortcut around following the rules. Trying to make a shortcut is a long is a long cut to getting what you want. But it’s a shortcut to ending up in jail or civil penalties. Yes, it may not happen right away. But at some point one of your investor is going to is going to file a complaint, and all the holding up of your operating agreement in the world saying, Oh, but it says here, my investors have voting rights isn’t gonna help you worth a darn, it’s going to end you up in big, big trouble, the big trouble because they didn’t actually feel like they have those rights. It may say that on paper. But if there was an understanding amongst all of your investors, and if one is making a complaint, the others are going to be right behind when they find out that they can get a piece of their pound of flesh as well, by saying, yeah, exactly know, the understanding. He told me that I wasn’t going to be active at all. In fact, we never had meetings, I never made a single decision, you’re going to end up in big trouble if you try and go that way. If it’s a joint venture, however, and everything is good, then everything’s good. But what’s being described as a syndication LLC is completely and 100% Wrong. So that is a joint venture, which requires active participation. Everything else must be either registered with the SEC or fall under one of the exemptions in order to be compliant. Hope that helps. My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. If we can help you stay in compliance and not fall victim to these kinds of nonsense that you see on the internet.
When one of my clients calls me and they want to make changes to their offering something that’s already taken place, and there’s already been investors in there, they’ve already contributed money. There’s one thing that’s going on in my head, it’s front and center that I’m always analyzing. It’s not necessarily something I’m always talking with my clients about if it’s not necessary, but it’s always the first thing I’m checking in my head to see if there’s an issue. Let’s talk about what that is.
So what is that one thing? That one thing is dilution. Dilution is a bad, bad word when it comes to private equity, or syndications or private equity funds, or whatever it is that we’re doing. In the investment world dilution is deadly. And dilution, not only is bad for investors, but it’s also very bad for you as a fund manager or a syndicator. It’s bad because it’s bad for investors, because investors start to lose faith almost instantly, as soon as they see it happening. Now, it may be subtle sometimes. And it may not really be aware that it’s even happening at all. But ultimately, somebody’s going to pick up that there’s been a dilution, and then there’s going to be phone calls happening. And they’re not going to be happy phone calls when you don’t have the answer there. So that’s why the dilution problem is always front for and foremost in my mind, within the time we’re changing anything, because I don’t want to have to get the phone call of why didn’t she tell me that that happened. And obviously, I want my investment my syndicators to be extremely successful, and preventing dilution, or if it dilution is going to be happening, making sure everybody knows this is why it’s happening. This is the whole point of it. It’s an OK thing because of this, because that happens sometimes, too. So let’s talk about exactly what it is. And how it happens. Here is a simple whiteboard of that describes what happens. So let’s say all of your investors are here. Right, you’ve got a whole slew of people. And they’ve all put into your investment to buy, let’s use a piece of property as an example. So they’ve bought into this property. And I’m going to tell you that the way this comes about more often than not, so if they bought into this property, now the years go by, it’s year one, year two, year three, I had suddenly, in year four, there is a big, big problem. There is this property that you still have. And let’s say that there is for just there’s 100 units, right? That are that are being divided. So 100% of the property is being divided amongst the investors, there is a big problem. This property is under has some regulatory issues. And now suddenly, it needs $2 million put into it. You have a choice, you can do a capital call and call up those previous investors and say, Hey, investors, I need $2 million, or we’re in big trouble. Or, hey, you need $2 million. It worked really well braising that money before. Let’s get a few people together here actually, let’s use a different color. Let’s get a few people here
to give us $2 million. And when it comes to that percentage, we’re going to make it so that these people now have 20%. And the blue people now have 80%. So you see how we went from 100% down to 80%. That’s why we use the word dilution because it’s suddenly diluted their value of their property is now gone. That’s the problem and that’s how it comes about. Now there are times where dilution is a good thing. Maybe it’s Something like, hey, look, we actually need this $2 million. Because we’re going to realize a gain of 400%. If we raise that additional $2 million, if we don’t do it, it’s going to be worth 100% of what its original value is, that’s a good reason to say, hey, look, we’re going to dilute. But the reason we’re diluting here is by bringing in $2 million, and new investors can bring it in to. So it also can be from you as part of a capital call, you could also bring in that value. So if if my current investors only bring 1 million, I can bring in 1 million from the outside world. But the reason is, because we’re going to have this huge gain, everybody’s happy. If it’s communicated that way. And that’s the truth, then you’re not going to have the same angry phone calls. But this is how dilution happens. So how do we work around it? Well, you can work around it a few ways. You can say to your your people, hey, look, we’ve got this thing we could do a capital call. The most common way to deal with this exact situation that we have here is to say, okay, they’re going to take $2 million, we’re gonna we need that $2 million to be raised. But we’re gonna do it as debt. We can’t do it any other way. And so we’re going to raise it as just pure debt. And then we’re going to pay that back at some rate. That way, then 100% of the equity is still owned by the blue people. There’s no dilution, and we go our way. That’s dilution and how it happens. So you can see why whenever there’s a change, that’s the immediate thing that I’m thinking about, is their dilution air. How do I prevent it? How do I work around it if there is a dilution. So let’s go through the key takeaways from this topic of dilution. Number one, equity dilution because that’s what we’re really talking about is equity diluting it happens when the company or the syndication or whatever issues new units, reducing the ownership stake of the existing investors and value of their units. This process is all is only used for raising that additional capital. But if it’s not done right or explained to them, right, your investors are gonna be furious and calling you on the phone. Number two, the stake value can decrease due to a lot of different factors, including performance, financial health market conditions, understanding how those our external factors as him impacts it, it’s important in order to manage the investment effectively, and make sure that those dilutions aren’t happening. Number three, the share dilution can impact your existing shareholders by reducing their overall reward so that the distributions that they’re entitled to their percentage of equity, therefore, it’s crucial that you understand exactly how they’re structured, what that percentage of ownership is, and be prepared, if there is going to be a change in that percentage of ownership that you get in front of it and explain it well. Lastly, navigating this share dilution issue requires an understanding not only of the impact of the equity, just the dilution, but also balancing the desire to basically have your assets grow in a way that gives a positive thing like in that example, where the with the 400% and making sure that it’s communicated in a very clear way to your investors, and listen to what their opinions are. Because, boy, if there is a perceived dilution problem, emphasis on problem, you’ve got a big problem. And that’s just the kind of thing you don’t want at the end of the day. My name is Tilden Moschetti. I am a syndication attorney for the Moschetti Syndication Law Group. If we can help you with your Regulation D offering under Rule 506b and 506c, we’d be happy to talk with you and talk about what you’re working on. Ultimately, we want all of our syndicators and fund managers to be as successful as possible to help them grow from where they’re at today to whatever it is, whether it’s a billion-dollar hedge fund, like we’ve done for other clients, or whether it’s just you want to do multiple deals for friends and family. We’d be happy to be part of your journey and can definitely show you the way give us a call or look at our website and sign up for a consultation.