Syndication Attorneys Podcast
When doing financial analysis for real estate syndication or fun, there’s a lot of different what I call levers which can change the outcome for your investors. And for you. In this blast from the past, we’re going to look back at a video I made about two years ago, talks about cash flow, and about what those levers are in cash flow. So we can see how does the syndicator think about those levers and you know, what they can manipulate in order to give the best return possible to the investors ultimately make more money for the syndicator or fund manager, and everybody’s happy.
So, now that we’ve discussed that, let’s go ahead and talk about our levers again. So we’ve got our assumptions, actually straight facts and assumptions.
And that leads to our calculation of NOI.
And that leads to our calculation of cash flow.
And that leads to our metrics and equity.
So that is our normal starting place on on where everything’s begins. Now, we’ve talked about facts and assumptions and how we calculate those things. Ad nauseam, right, so we know what facts are, we know what our assumptions are, we know that as we get further out from where we are today, we get more and more assumptions, right? We’re making more and more assumptions about what’s going to happen. For example, when Anya and I were looking at that house, for $174 a square foot, we made an assumption, we made an assumption that turned out to be absolutely wrong. That, well $174 A square foot is a is a fair price for that house. And our assumption is that when one year has passed, those same properties, similar properties would be maybe, maybe with a crazy, crazy market, maybe $200 a square foot. Because we really didn’t see a lot of $174 a square foot, most of them were like 150, this one was 174 that we liked the most. So maybe they would go up to $200 a square foot and that assumption was wrong. So we all know what assumptions are. And we all know that as we get further out, like our projection a just a year out. And in this case, it’s our projection just six months out, there is no way I would have guessed that it would go over $174 a square foot there that it would go over $200 a square foot in six months, that would be absolutely nuts. But it did. So that is that those are our assumptions. And a y we already know about right? That’s our operating our our income, minus operating expenses, equals our noi. I’ve already gone through all of those and really kind of talked at length about how we do that. So right now though, I’d like to talk a little bit more about cash flow. And if we have time, we’ll talk a little bit about metrics and equity. So cash flow is pretty simple. So cash flow really starts with Noi. Right? And if you remember in, in when we’re talking about noi, there’s two kinds of expenses. Right? So our anoa our cash flow is our noi minus our below the line costs, which I guess we’ll put discretionary expenses. Actually, well, we’ll see Yeah, I don’t really want to use the word capital expenses. It’s a little bit takes us a little bit off topic. And that equals our cash flow. And for our purposes, its cash flow before tax. Because we don’t, we don’t really taxes into main concern for almost everything we did was gone. There we go. So what are those discretionary? Why are we scrambling like that? I have no idea. So what are is our discretionary expenses, the biggest one is debt is debt service, right. So when we’re looking at a loan, and we’re looking at financing the property, we make more money in general, when we put debt on the property, and we just need less equity. So our investors make more money, I should say, actually, if you do the way, the deal, the way that I tend to where we just take an equity stake, you actually make less money because you’re raising less equity. And so if I’m getting 10% of the, of the total amount raised, if I put debt on it, that’s not money I’m really raising. So I don’t get that portion of that money. So I, as a syndicator, I tend to make less money, if I put debt on it not but most of the time you need debt in order to make the deal work. So debt service, and so we’ve got our principal expenses.
It’s bad spelling, nope, that’s principal, like your principals, your principal and your interest. Right. So I always want to keep my I would like to keep if I could, in a in a syndication of a reasonable term, I would probably choose if I could to do no interest. I mean, though, of course, it should do no interest, I would prefer to do an interest only lot. And the reason is, is that interest only means that I’m not really capitalizing, I’m not getting extra money for paying the bank back for part of the principle, I’m only making, I’m making more money off the spread between where I bought it. And where I’m selling it right from this spread here is where I’m making my money. But if I’m reducing this Unbound, if I’m giving money to the bank, basically, without any real kind of, or I’m doing it a basically a bank interest is putting it away, it’s like saving it with the bank interest, right? I’m not getting real great value on that, where I’m looking for big, big wins, where the, the increase of the value of the property is over what the over what the I would be paying the bank. So if the bank is making 3% or 4%, say, on its loan interest. And then, but I’m getting, you know, I buy it at a seven cap. I have this 3% spread it’s just there, right? That’s, that’s in my pocket. Whereas if I’m paying down the principal of the property, that 3% It’s so minimal in comparison to what I’m getting on the rest of it, me paying down my principal just it just eats up my my profit in the long term. Now, it’s great if you are a if you are the kind of investor who’s looking for pure appreciation, and cash flow isn’t very important, right? If you have a zero cash flow building, just because it’s all appreciation that you’re going to be doing. And that your principal is part of that that’s okay. Because you’re you’re not really looking for those payments that are going to the investor every single period in order to raise your IRR. So that service is your big one. But you also have other things you have your leasing costs. Right, that’s a big expense. You’ve got your tenant improvements, you’ve got your capital expenses. Now your capital expenses may or may not be able to be passed on half to two in two tenants sometimes it can sometimes it can’t it’s in your lease. And then I’ve got of course my, why are you doing that to me? My asset management fee so we’ve got, we’ve got our debt, debt service, principal and interest, leasing costs, T eyes, capital expenses, asset management, amount towards reserves.
Reserves those are all subtracted now from noi in order to get your cash flow before taxes now, is there anything that gets added into there? Not really. There’s nothing that brings up your cash flow in this particular conversation. Now you can do some fancy accounting. But I wouldn’t. So some of you may be thinking, well, couldn’t I do something like what Elon Musk is doing in order with with the with? What do you call those things? With cyber with cryptocurrency? For Tesla, can you do the same sort of thing? Where you’re parking that money that’s being spun off by the cash flow into an asset? Which hopefully appreciates or pays income and rate raises that amount? Well, yeah, you can. That is something that does happen. It just doesn’t happen really in the real estate game much at all. Once it once you start doing this, you’re really talking in the hedge fund world, and that’s just not that’s just a different world, and then what we plan so, but I’m always trying to look at okay, well, how can I game the system? And how can I? How can I? How can I plus one? Anything, right? I want to plus one my noi, I want to, you know, here, I want a minus one my assumptions and plus one my facts and how can I get my equity, you know, double plus one, your double, I guess plus two, that will be plus two when
So I, you know, I’m always when wanting to do that. So when I even just write it there, that’s what I’m thinking like, Okay, well, how can I get my How can I increase my so if discretionary expenses comes off of my noi, to give me my cash flow before taxes, is there anything that increases? So you should be thinking the same way? How can I increase it? And likewise, you’re always thinking about these things, too. How can I reduce my leasing costs? How can I reduce my debt service which goes to our discussion on interest only loans? I can tell you as an aside, I have had in the past week, I’ve had conversations with people with syndicators three four syndicators who all are doing hard money loans and three of them are looking at borrowing one is putting together a fund to lend and I certainly understand the the one putting together to lend and I cannot understand the three that are looking to borrow right now. I mean, I know that it’s it’s appealing because of timing because of the funds that are available but man oh man money’s cheap right now and there’s tons of people looking to invest it’s just an aside because your print the your interest payments and penalties are so huge on hard money, but I don’t really see the point. It’s, it’s well if you absolutely have to do it, but otherwise, so how can you reduce ti costs becomes a lot more tricky. You know, in a hot market where there’s a lot of people clamoring you can negotiate T eyes and get less less T eyes. Capital expenses, you know, this is not a good time to be paying capital expenses. So the costs of construction are really, really high. I wouldn’t be, I would be hoping to avoid any kind of capital expenses right now. Asset management fees are mine to decide with. So what I want to do, and reserves right, I want to keep that as low as possible, because I want to give as much money to my investors as possible, so that they’re happy. But I also need it as reserves so that I have it. That’s just sort of a discussion on cash flow and some of the thought process behind it. I know that video was useful for you, if you’re looking at putting together a syndication or a fun, even these video, this video was in the real estate context, but it doesn’t have to be it could be for business or for anything really, financial analysis takes place both ways and both under any kind of security that you’re putting together. Now if you need help putting your security together, then give me a call. My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. You saw the video of the way that I did things back then I still do that today. That’s the kind of help that on top of the legal documents that we can help you with. So as part of why my representation of clients, we of course, do all the legal paperwork, the private place memorandum operating agreement, subscription agreement, but a lot of times our newer syndicators or even the season ones have specific questions about you know how to do things, how to put things together and how to make it so that they’re a their offering is as good as possible. That’s what we’re there for. Not only the legal documents, but do whatever we can do to help you be successful in your securities offering.
This is the first of seven videos as part of a series on how you as a syndicator, or a fund manager can stay out of trouble and be in compliance with both the states and the SEC. So that you can do what you do best. Run your syndication or run your fund. My name is Tilden Moschetti. I’m a syndication attorney with the Moschetti Syndication Law Group.
This first video is going to go through regulators those big scary things, or are they scary? What’s their purpose? How is it all set up? So that way you can understand who you’re up against or not up against as the case may be. Now, why am I being cagey? And toying with you know who you’re up against and things like that, because regulators themselves are not the bad guy. Regulators are actually the good guy here. So regulators job is to protect people like your family members who may not know better and fall prey to unscrupulous fraudsters. We don’t want that happening. That’s not a good thing. And there are a lot of them out there. There’s a lot of fraudsters, and so they’re the SEC is job, the state regulators job is to keep those people away. These rules, the rules that we operate under when we’re doing Regulation D syndication are to protect the public from those fraudsters. So it’s allowing you to be able to do what you need to do to raise money so that you can deploy that capital, make money for your investors and make an income for yourself as well. But it’s to keep those people who are committing fraud away. And that’s what the whole point of it is. So who are regulators? Well, regulators either come are either part of the SEC, or another regulatory body within the federal government, or state regulators. Both of them have these people who regulate securities. Who are the people exactly? Well, the people are actually very, very intelligent, quality people who care, they are mission driven to make to protect the investing public. That’s a good thing, right? We want these people protecting your family. Think of it like police officers, a lot of police officers do their job, probably the vast, vast, vast majority, because they want to protect the public, they want to help people, right. And same with security regulators. Their whole mission is just to protect the investing public, and protect the markets as a system as a whole. We need that as a capitalist society, we need to protect those people. So that way, capitalism can actually do what it does best. And it keeps the people who want to cheat and lie and steal away. So regulators, we love you, great job, keep doing what you’re doing. These videos are how to stay out of trouble with them. It’s not about how to be sneaky and get around them because they’re doing the right thing, right? These regulators are trying to help the system. So these videos are how we can actually help them by making sure our stuff is in compliance with the rules. It’s in the compliance with the rules. Sec loves it. FINRA loves it. The state regulators love it, everybody’s happy. There’s rainbows and unicorns everywhere. That’s what we’re looking for is that kind of compliance, where everybody gets to be happy at the end of the day. So how does this system actually work and in its nuances, so let’s break it down by looking at a whiteboard. So you are looking at offering a security and you are in the state of Florida. For example, forgive my drawings because I’m not the best artist in the world. But let’s say you’re in Florida. You’re right here. You’re in Florida. You I’ve identified a let’s use real estate syndication as an example. So you’re in Florida, you’ve identified that you want to develop this beautiful apartment building in Florida. You’ve identified three investors all in Florida who all want to invest with you and they want to contribute they want to grow this property. Everything is great. Now you have a choice. As a as a resident of Florida, yourself. You can File this under We call the State Blue Sky laws. The State Blue Sky laws are the laws about securities that each state has, we call them blue sky laws, because we’re talking about, you know, that they’re, you know, there’s a land of the free and you know, blue skies everywhere. Not important why the State Blue Sky laws are to protect the art to protect investors in the state of Florida. So the state of Florida, if you have investors in there, they’re set out to protect the state law, the investors from Florida. So you have this offering, you put it together, everything is good, you do the necessary filings under Florida rules. So then we’re talking about in Florida, everything is in Florida, everything transacts from Florida, everybody’s happy. It’s all takes place. under Florida’s rules, if you choose because you don’t have to, you can also choose to go under Regulation D, for example, which would allow you to market to other people. But in this particular instance, you’re marketing to Florida. So we’re a big country, and again, forgive my very poor drawing. And then Texas kind of goes there. It looks something vaguely like that. And we’ve got Alaska. Now we’ve got Hawaii. Right. So that’s the United States in a very ugly format. So you just you have a possible investor, oops. You have a possible investor, who is in Texas. And he’s heard about your deal, because he’s a good friend of yours. And he wants to now invest in this entity. Well, he can, but not under the State Blue Sky laws. What would happen? Why is that a problem? Because Texas, Texas is interested in protecting its people, right? It’s pretty interested in protecting its investors, its citizens. So Texas won’t be very happy. If you decide to file in, if you file just under the State Blue Sky laws of Florida. So you still have kind of two choices. This has now become a federal issue. It’s now a federal matter, because we’ve got two states. So we call that interstate transaction is taking place, right between multiple states, you could decide to lodge this all under four, a two of the securities regulation. So what four a two lets you do is it lets you enter it lets you put together offerings for interstate transactions. But it needs to comply Exactly. With both Texas and Florida law. So now you need a lawyer from both Florida and you need a lawyer from Texas to help you figure out how to stay compliant with both of those. So you’ve got this project almost up and running. And now you’ve got somebody in California who wants to invest. Calif, California and Texas are also both states that are very, very, very protective of their citizens when it comes to securities regulation. As is and I can’t draw New York, as is New York. Very, very, very protective of their of their citizens. They also want to invest. So now if you decide to do this under regulation for a two, you need a lawyer from Florida, you need a lawyer from Texas, you need a lawyer from New York, you need a lawyer from California, all to put this deal together because for a two requires if you’re going to do this right and comply. It doesn’t. It does. It’s basically says hey, we’re not in violation of federal law for doing this but ya gotta be in compliance with state laws. So now you’ve got four states that are all vying for for supremacy really, really kind of a challenging situation for you. What if instead of 4(a)(2) we say now I want to use Regulation D. And specifically, I want to use Regulation D rule 506(b), or it could be 506(c), but I’m just choosing one because you all know, you know, these people. So this guy here, he knows everybody in those states.
So why am I letting narrowing it down to 506(b) and 506(c), because Rule 504 of Regulation D actually doesn’t get us out of the struggle of all these different states having these interests under Rule 504, you still have to comply with every state rule. But why don’t we under Regulation D rule 506. Because Regulation D Rule 506 says, okay, states, listen up. We’re a federal country, the country is federal yet got rights, states rights are important. But come on, this is going this is creating a nightmare for everybody. This guy just wants to develop his property. He just wants to take investors, these investors just want to make money. So we’re gonna make rule 506. And Rule 506 says, okay, no matter what, where are your people are from under Rule 506, the offering and sale of a security, this becomes important later, that’s why I’m making it clear, the offering and sale of the security is, is part of the federal system. If they want the Safe Harbor, of rule 506, Regulation D, they can, and we’re gonna just preempt all the states rights, we will of course, you can require notice and things like that. So that, you know, these activities are going on because states rights are important. We want states to be able to know what’s happening. But we got to make this all work. So five rule D, Regulation D rule 506(b), states can get noticed. And that’s it. The rest of it is Regulation D rule 506. It’s under the nice auspices of the SEC. Okay, so that that’s all good. That all make sense. All right. So let’s kind of clean up a little bit. So we got lots of arrows everywhere. All right. So we’ve got these, we still have these investors, right. So let’s get rid of that arrow. Oops. So we’ve decided we’re going under SEC rules, regulation D rule 506. So now we’ve got regulators from the SEC, who are helping to protect these people helping to protect everybody in the investing public within the United States. And to regulate this guy, make sure that this guy is doing what he’s supposed to do. Because there’s actually other rules for people outside of the United States. But we’re going to talk about that one in another video. So there are some nuances that cause compliance issues can happen for people outside of the United States. But we’ll deal with that when we talk about inadvertent advertising and inadvertent solicitation under Regulation S, which is compatible with Regulation D. So stay tuned for another episode. So SEC interested in that. But what about this guy here? What about him? New York is very, very interested in protecting him still. It’s all well and good that they have to get that they can get notice of it. But then New York really wants a little bit more. Right. So New York actually has more of an interest of protecting its people than just Notification. Now, there’s a lot they can’t do because of its Regulation D rule 506(b) encompasses everything. Right. But remember what I said it covers the offer and the sale of the security, right? So it offers it covers the offer and the sale of the security. What it doesn’t cover is when this guy is talking to his friend in New York, and working on getting the sale. It doesn’t necessarily cover the the actual sales process. Now, most of the time and does but as we’ll see, again, in another video when we talk about improper structures, the problem move funds of funds. We look at this guy, New York’s looking at this guy and going okay, well, he is in the process of selling that security, which is fine for the transaction itself. But what about the actual of the making of the sale? What about the deal, the broker dealing kind of activities in that? Maybe we can regulate that? And the answer is they might be able to. And that’s what we’re going to talk about in the improper structures. video that explains just what goes wrong when this when this happens. So now we’ve got state regulators who definitely have an interest, they also have an interest because they require that notice. So if they, they they require that notice of the Regulation D most states do almost every state requires notice. It if they don’t get that notice, why weren’t they noticed, they want to be noticed there, they are expecting to be noticed. And if they don’t get it, that may or may not cause issues. So this is a game where ever states are continually trying to make sure that they’re upping their regulation, states want to have this heavily regulated as much as they possibly can. Now Regulation D kind of keeps things down, it’s trying to keep it down, but the states keep trying to push it back up. Fortunately, for us, most of the time, because of federal preemption, it’s able to keep it all down, right, it’s able to keep that down. So we comply with the notice rules and things like that. And that mostly keeps things at bay. The times when it doesn’t is when the state regulators see something funny going on. So the if you go outside of this boundary, if you try and walk outside of this boundary of Fe Regulation D, that’s when the state regulators get hungry. So that’s sort of the the issue when it comes to the SEC. So we’ve got the we’ve got Regulation D as this giant umbrella. term that looks like a nice, even umbrella. And then we’ve got Regulation D. But there’s also the state here.
So you’re covered, as long as it’s dripping right here. Right? Then it’s all under nice federal rules. It’s very simple and straightforward. Problem is what happens when a drifts there. And accom oops, you can’t see that. What happens when it drips there, and it’s falling on the state jurisdictional issues. That’s when states start regulating. So hope that was interesting. Hope that puts the whole kind of regulatory context in put in place for you. Because we’ve got two systems going on, we’ve got this federal system, and we’ve got state system going on. We’ve got regulators from both each, his job is exactly the same. They want to protect the investing public and the overall market. So they’re, that’s their job, and they want to do a good job. And we want them to do a good job, because we do want to keep on unscrupulous people out. So that’s how the system works. This video, this video series is going to go through the biggest problems that I see as a syndication attorney, of people where they go awry. So where do the security regulators go? Excuse me, I, what you’re doing there? Let’s back up a minute, I think there might be something wrong. And when they say that they probably could be right. And if they’re right, you know, first we need to know, are you in trouble? Did a line get crossed? Because they couldn’t be wrong? And if they did, if you did cross the line, well, how much did you cross the line? And what’s the problem? And what’s the remedy? I mean, is there a way to fix this? I mean, obviously, if you’re stealing money in your fraud stream probably should go to jail. But those are my clients and those aren’t you I’m sure because Why are you watching this about how to be compliant. If you don’t want to be compliant, right, thieves want to be thieves, they’re gonna steal that’s their thing. People watching these videos, you’re not those people. So this video series is going to go through just where those lines are because you want to do a good job. You really, really don’t want a regulator who’s looking closely at you trying to Do the right thing for the investing public because you’re gonna be wrong. If they are right. So if they are right, you are going to be in the wrong and there’s going to be heavy penalties for it. So I hope you’re looking forward to these videos as much as I am. They’ll be coming out on a weekly basis over the period of next several weeks. And I hope that you like and subscribe it. My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. We specialize in Regulation D, Regulation D, Regulation D, that’s all we do. We help our clients stay compliant with the rules of the SEC and the state regulators. Because we want to not only be compliant, but we want to make sure that you’re successful. We want to do everything that is in our power to help you be successful so that you can make much, much, much more money. And then you can enjoy the wonderful benefits that we have under Regulation D how amazing is it that you can put your own security together, you don’t have to be a giant company in order to put raise money from investors, put it into the world, do good things, do big projects, make the world a better place and make lots of money for you, yourself and your investors at the same time. I love Regulation D. So that’s what we’re working on. Those are what the videos are. Thanks a lot.
There are five key documents as part of any syndication or fund. And we’re going to go through what those five documents are, what how they work, and why you need them and how they fit into the whole system.
My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. A lot of times when I have people who are brand new who have never done a syndication or fund before, they are confused as to what the documents are that go into what we’re all putting together. How do we build that security, when we’re looking at it from a document kind of point of view, there are five key documents that take place before the form d and notification to the, to the states in order to build that structure of what that security looks like. So we’re gonna go through those, the very first one is the articles of formation or sometimes called the Certificate of Formation. This is typically filed with the secretary of state for the state where that entity is being formed, you can think of it as the birth certificate of the entity. So for an LLC, it’s always the articles of formation, Certificate of Formation, something like that, if it’s a corporation, and oftentimes, it’s called the Articles of Incorporation, almost all of them are LLC. And so we’ll just use the LLC link go here, it’ll be simpler. So the articles of formation or Certificate of Formation filed with the SEC or MA filed with the secretary of state, it does have several different things. First, it lets the state know, hey, we’re forming this entity. So it has a filing fee attached to it basically sets that up, it gives them the contact information for it as well. So hey, if you need to get a hold of me state, this is where I am. And this is how we’re who’s in charge. It’ll oftentimes have what kind of business it can be that most of the time, we can get away with just saying any legal purpose. So if we can do that, we do it just because it’s nice and vague. And in what you’re setting up is for a legal purpose anyway. And it’s nice and flexible for you. So a lot of times that will be a part of it as well. Another piece of it that’s also very important is who is the registered agent or the agent for service of process. What that means is that if somebody needs to file a notice or serve notice upon somebody, say they’re starting a lawsuit, they need to be able to have, who that person is how to actually give it well, the articles of formation or Certificate of Formation is visible and is available for view by the public. So they can look at that entity, look at who that registered agent is or the agent for service of process, and know who it is either as an individual or an entity, so that they can give formal notice to them. So that is number one, that is the Certificate of Formation or articles of formation. Number two is the operating agreement. So the operating agreement you can think of as the rules for the road. So it is the the rules that the opera that the entity that you formed with that Certificate of Formation, that birth certificate, it’s the rules that it must comply with. So that’s the operating agreement. Now the operating agreement is always extensive and informed, and basically and legalese. Because there’s a lot of things we’re trying to do. We’re trying to make sure that it’s very clear what happens if so the operating agreement should be a document that if there is ever a question about what to do when blank, that blank gets through, you know, once you identify that blank, you can go to the operating agreement and find the actual answer about what is supposed to happen. We try to make that as complete as possible, but as flexible as possible to so that way, whatever is in that blank, there is an answer that is provided for in the operating agreement. For a typical syndication or fun, these can be 50 to 70 pages long. So it’s very extensive and it covers a lot of stuff. So everything from who can be a member or what happens if a member wants to go out or allocations for taxes or who they are. It’s the who’s the manager and how can the manager be paid to distributions and compensation all of those things or if there’s problems, what do we do? That’s the opera The agreement the rules for the road of the entity. The third document is the subscription agreement. So the subscription agreement is the document that an investor signs that says, hey, I want to be part of this investment. It’s that investor saying, I’m gonna give you this amount of money, and you’re gonna give me this amount of interest in that LLC. And that I want to be a part of, in exchange for all that I, as an investor, get to be a member of that, of that company. So when they, there are other things that take place as part of that. So there’s this identification of an exchange of money for units in the LLC. But also we have some warranties that are being made that that the company that the offering of the security itself was compliant with the rules to make sure that’s everything, everybody is clear about what happened, that the investor was given a private placement memorandum, which we’ll talk about in just a minute, things like that, that all goes into a subscription agreement. The fourth document is the investor questionnaire. Now, the investor questionnaire actually technically isn’t required required in quotes, but it is a darn good idea. So the investor questionnaire serves two purposes. First, especially under Rule 506 B, what do you have a non accredited investor, the non accredited investor must be sophisticated. So this questionnaire helps us with that sophistication part. There is a survey, there’s a couple questions that establishes that the investor is saying that they’re a a sophisticated investor, that they know what they’re doing when they make this investment, that helps the syndicator or the fund manager, because if there’s ever a problem, they can always present that document that’s that basically outlines all a good faith basis for establishing that the investor is indeed a sophisticated investor. The second rule that the investor questionnaire for is for is for compliance and ease of use. So what it does is it lets us, you know, pay our taxes, lets us file are make distributions, because it has the investor, it lists your investors name, you know, if they’re doing it under an entity, it’s got social security numbers, it’s got information for the Know Your Customer laws, like driver’s license number, things like that. So that way, when it comes tax time or distribution time, you’ve got one easy place to look where the document lives. Now, the fifth one is the private placement memorandum. Now you can think of this as the biggie the big kahuna and the big dog. This is the document that basically sets up all the reasons that this is a legitimate investment for somebody to invest it. Now, it’s not the legal paperwork in terms of the operating agreement or the actual rules. But what it is, is it’s the required disclosures and declarations being made by the sponsor of the security to the investor. So part of it is the terms of the offer. So the terms of the offer is how distributions happen, what’s the membership price, what are we investing into all those things that take place in it.
It also is doing other things that are very important as well. So it’s making mandatory disclosures, disclosures, like a investor, you know that these are risky, right? You know, that you could lose all your money, it’s a fact you need to know it. And it will also go through more specific instances of what other risks are inherent in the investment. Because no matter what, there are always inherent risks in any investment. This, the other part of it is, is it makes a disclosure of any conflicts of interest. Because there are also always inherent conflicts of interest, because you’ve got a sponsor, who is making money off of basically having an investor take care come into the investment, and so that they can pay distributions to that. So they’re making money off of that, but they’re also acting as a fiduciary at the same time. So based on that there’s always a conflict of interest. Now conflict of interest are okay, but they need to be disclosed and disclosed and disclosed. So it’s very apparent what those conflicts of interest are. So that way nobody ever can say, hey, you never told me that you were getting paid a commission or you never told me that you You’re investing in this property yourself, or whatever it is, those different conflicts of interest. We’re trying to make sure that all the risks, all the conflicts, everything gets told to the investor. So ultimately, they can make a determination whether this investment is suitable for their own purposes. They’re the ones at the end of the day, making that determination, and to make a determination for suitability for their own purposes. They need all of the information. And that is the point of the private placement memorandum. Wow, that’s the five big documents all that take place before the forum D ID state notices. As you can see, there’s a lot of inner workings that are going on. So my name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Grop. We help people put together these documents, we put them together for syndicators and fund managers, because it’s part of the compliance it’s part of how you structure it. On top of all these documents, we also help our syndicators and fund managers really do whatever is needed in order to help them be successful in their security offering. Sometimes that’s going through materials like marketing materials and helping them identify what what sort of disclaimers need to be there. Whatever we can do to help make our syndicators and fund managers successful is in everybody’s best interest. That’s what we all want at the end of the day. And that’s why that’s why syndicators and fund managers hire us, we’re great at that. We can help them make decisions that are sound rational, compliant with the rules, but also based on the best practices have somebody who’s actually done a lot of deals for themselves, which is me, and somebody who’s also overseen and given a lot of interaction and advice about the inner workings of the offerings that my clients are making more than just putting together the legal documents. If we can help you do the same thing. We’d love to talk with you. Give me a call, send me a message and let’s do that.
About two years ago, I had a training program for people with the top of their career in real estate, primarily real estate professionals, or insecurities itself, who wanted to make the leap into real estate syndication. So these were your a level players who wanted to be the a level players in real estate syndication and real estate funds. So I put together this video, this is one of our rapid implementation calls, again, it’s about two years ago. But it what it walks you through is the market analysis that goes through and I’m talking about the market cycles, not individual markets themselves, but about some of the thought processes that went on and what’s going on at the macro time. At that point, you’ll see some my predictions were completely true. And occasionally, they were not didn’t come quite as true as I had thought they would. But certainly, the information is valid. What’s important here is not what that specific information was at that time. But it’s the thought process that went into how we look at the market cycle and where we’re at at the market cycle. To begin with, when we’re making predictions about the future, which is what we’re doing in securities, when we’re doing when we put together an investment vehicle is we’re trying to make a prediction about what’s going to happen in the future. So that there’s some sort of gain for our investors, and ultimately, for us as well. So this is part of that thought process. So I hope you find this video useful, because this is how I think about things in terms of what’s important when it comes to money where we’re at in any sort of market cycle. And I know you’ll find it useful.
So there are four stages in any market cycle. And they can be drawn as a circle, or they can be drawn as they can be drawn linearly like this. For our purposes, though, I’m going to draw it as a circle, because that’s the way I am used to it. So we have a market cycle. And there are four distinct phases within that cycle. So we have this period here, which is our recovery. And so everything here, by the way, is going this way.
So we’re going that way. So recovery. So after the Great Recession, things were stable for a while, they were pretty low, and then they slowly slowly rebuilding up. And then we went into this expansion stage. And then after a point, it expands and expands and expands. And what happens if you like blow up a balloon too much. It just can’t expand any more. Enter hyper supply. In the after that that phase of the market, we finally if I press play, it starts going down, right, because there’s too much and we enter a recession. I’m not going with the technical definition of a recession. Because if you look at a technical definition of a recession, we’ve been in a recession for a while. So recession is where GDP does not match inflation, it’s negative. And I would argue that by any reasonable measure of inflation, not the ones currently being used, we probably have been in recession for a while. And so we just keep pumping money in so we’re in this weird sort of recessionary, expansionary phase right now, of the market. So what happens in these in this part of the market? Well, let’s talk about what happens kind of here. And the expansion stage so we have rents rising. rents go up, and construction levels go up
just click on this because I can’t see. There we go. Alright, rents go up, construction levels go up. At some point in that cycle. We start getting this high rent in a tight market. Sound familiar? Because I said we’re in a recession But we’re also in this expansion stage. And I don’t think we’re quite into hyper supply yet, but I think many markets are, are are seeing it. Now new construction takes place everywhere from here on all the way over to here in general because the cycle of building takes so long, so the smart developers started developing early on down here. But then their projects may not have gotten approved until over here. And so suddenly, now they’re in hyper supply, they still need to deliver that building. But it’s been difficult in this phase, so let me just back up a little bit.
Alright, so that’s what happens during an expansion period. Now what happens during the hyper supply period is we start seeing positive rent growth, but declining… Right, so that steeps that’s going down now this is all as it relates to commercial real estate and I’m gonna make an argument a little bit in just a little bit that this also applies equally to residential real estate and kind of all markets as well. What happens in a recession? Oh, we have way increasing vacancy. Competition goes way up. And by this we mean it’s either a renters market. Actually, let’s just renters is kind of vague. So let’s put tenants market or it’s a buyers market and what happens in a expansion stage is it is definitely a landlord market and a seller’s market.
All right, so after vacancy goes up, competition go is going up. Finally, we enter this new phase of the recovery. And so finally we are vacancy reaches its maximum here. And let’s call this max occupancy. And somewhere in here is probably the point at which its maximum rent, probably somewhere around here. And then, in the maximum, you can see this is the lowest trends.
Alright, during that recovery phase, we have a, we have increasing big I’m sorry, we have a declining vacancy. No new construction, right? No new construction is taking place. They’re declining vacancy, but rents stay fairly stable.
I really don’t start increasing until that vacancy factor here drives down to such a level that there’s enough demand in the market in order to create in order to charge higher rents. So why this is hot on my mind right now is last week on you and I decided that we it just doesn’t make sense at this point to move to North Carolina. which bothers me greatly. I wish it weren’t true. Because I really really was looking forward to going number one sec. Okay. So why did we make that decision? Well, it’s because of this it It’s because of this market cycle. So if you look at the market cycle, we are in this really strange period. And I’m sure you’ve noticed this, that we’re in this period where there’s definitely some recession going on. And I’ll prove that in just a minute. And then there is definitely this weird kind of expansion. Because where do those, those two interact? Like, if you looked at a Venn diagram, it’s actually this weird interaction point.
Between the two that that makes us puts us right here in this weird middle space, and that middles weird middle space is inflation. Right, because if we look at the pure definition of recession, not the not the one that I’m using here, but if we look at the pure definition, where we’ve got we are in a recession. Recession if if GDP is less than quantity of GDP.
I’m sorry, I did read that backwards. If GDP is I totally botched that if GDP minus recession minus inflation is greater than a backwards sign is greater than zero. Right. So why do I think that the inflation is greater than zero right now? So the Raleigh market kinda capitalizes on it. But you’ve noticed it too. One of the main expenditures in most families between 30% and 50% of their annual income is their house is their housing right now. Well, rents right now are extremely high. And new home prices are extremely high. Right? They’re big, big expenses. The cost of goods right now is really, really high. goods.
Goods costs are really, really high. They’re way higher than they were before. Just a you know, just a silly example. A candle. A very boring candle was on that was available last year, that on your bought and liked was was $19. The same candle is now $29. Does that make sense? On the on the on the cost of a new home. So a home that that is comparable to what we are looking at. Wood was going for $174 a square foot in March. This was when we were last in Raleigh. Right. And it it’s sold in March for $174. Unfortunately, we weren’t the ones that bought it. Because it was a great house and we should have bought it. But that $174 in March is now completely shot. And now the market is over $350 a square foot that’s a symbol for square foot $350 a square foot. I mean it’s doubled the cost. Now, when you’ve got something that looks like a spike. I mean, you’ve got this arrow right here makes sense. So you’ve got this graph here and here you’ve got price per square foot and you’re taking into account 2% rent growth annually. So we’re taking In the Account 2%, nothing crazy. Right? If you look at at the trendline, it looks like boom, it looks like that. Now, does that make any sense at all? Or does that look like an unstable market? I would posit that that is such so irrational, that we have long since left this expansionary period. Even though we’ve got high rents still, we’re in that tight market. I think that this kind of right here, that cannot last. That means that we’ve got this period where we’ve got this declining coming really, really soon. Because there’s also this inflation that’s pulling everything down. In there’s nothing that we mortals can do about it. Inflation is pulling everything down, and the bottom is got to fall out. And now why is it possible that this can happen? So I don’t, as you have probably noticed, I don’t make political comments here. But I can make a political comment about both parties, both major parties. And I don’t have any problem doing that. Because, as a side note, my typical, what people when they asked me what my political affiliation is, I typically say whatever my clients affiliation, that’s, that’s, that’s typically my answer. So I keep that private and to myself, but we’ve got when you’ve got this, you’ve got the Fed, who clearly cannot be scoffing at the at the value of what inflation currently is. Right? So they are seeing they’ve got excellent data sources, they see this inflation that’s happening in this country, and their mandate isn’t neutral unemployment.
The United States neutral unemployment is not relevant to what the Fed is trying to do. The Fed only job its mandate by its what how it was called out was to have a stable growth and decrease with minimal inflation. So instead, what is the Fed doing the Fed points out the fact well, but we’ve got this COVID situation that’s going on for some time. And so we really need to just keep pumping money and money and money into the system. I mean, the loan on our house right now is 3.5% on a 30 year fixed. A building that that I know of that’s owned, is now at as seven years commercial building, seven years on it, and its rent is 3.75% which is way below the cost of inflation.
Right, it’s below the value of inflation, and it’s below the cost of it’s below the predicted growth of our economy. So what’s below that mark? So yet, the bank is the Fed is encouraging banks to keep pumping money into the economy to keep this rent low to keep these mortgages low, but it isn’t working because rents are sky high, because the money is low, so landlords drive them as high as they can. And then home prices are sky high. Because the Fed keeps pumping money into the system and keeping prices low, which is driving up inflation. All right. So it doesn’t make any sense where things are at. So when we had originally thought, okay, perfect, we can go from you know, a place that I, I’m would rather like to leave called California, where we’ve got what’s going to be fairly soon a 16% state income tax. And we’ve got a standard of living that is less than good. We can talk about that offline if anyone wants to. So we got a less than great standard of living, we have. And all for what, and we have earthquakes, all for all for what? And, but then I look over at. And we have really high prices, right. So our price per square foot is somewhere around $750 a square foot right now. And residential. And I’m sorry, this has turned into a discussion on residential real estate. But it’s what’s on my mind right now. And it all relates to exactly what you’re doing. Because you got to find opportunities. And but if you don’t know why the market is, and aren’t paying attention to where the market is, it’s going to be difficult to find opportunities. So and we’ve got North Carolina here, which has about a 5% income tax, in some ways, a better standard of living. Well, but we’ve got real estate here. That’s two times where it was just six months ago. Is that right? Six, yeah, six months ago. Versus here where it’s a ridiculous steal 10%, where it was six months ago? Well, let’s think about what’s going to happen when the bottom falls out. This is a lot more stable, because our house really isn’t that much more. It’s not two times what we bought it for, at this point. It’s just not. And that’s over a period, we’ve lived in that house for about six years, maybe almost seven years. I guess it’s about seven years today. So so this is in seven years, it’s gone up a fair amount. But in six months, this has gone up 2%. So the market kind of adjust that the fair market value of California real estate right now. It’s not too far off, right? So if you look at it like a like whether it’s stable or not, it kind of looks like this. Not too top heavy. Right? But if we look at at rally right now, it’s like this, it’s incredibly top heavy. And it just needs something to try and push that off. So I just am so concerned if we were to move right now, that that market, what happens when it goes underwater? So say we bought this house? Where to go? What if we bought this house at 100 and at $350 a square foot we bought that house for $350 a square foot and then the market corrects and let’s say it goes down to $250 a square foot well, then we suddenly got this gap here that we’re underwater, not necessarily underwater by in terms of the loan cost depending on how much we put down, right. But the you know, we just lost $100,000 in value of not 100,000 I think we just lost $100 a square foot, much bigger number in value. So what to do, I think the only logical thing is hunkered down hold tight on this kind of real estate. So now where are the opportunities then given this? So the opportunities are here they’re in there in real estate that is is going to hold its value Still is good value good properties out there, there’s properties below the replacement costs that are able to get, there are properties that are have a fairly long, if they have long enough trajectory that you’re planning out, they’re going to be fine. But if you’re planning on a quick flip, it’s just not going to hold. The people who are flipping are already getting in trouble, right? Because the the flippers are right here at the point where they’re paying the maximum number of dollars that they can pay for a unit. And their margins are so narrow right now, it’s just a little tiny switch. And suddenly, every one of them is losing money. I mean, a lot of them have been losing money anyway, we saw this dip that took place, actually, this year for flippers, where they were where if you looked at, like time and margin. I mean, they were doing really, really good. Right, and then it’s sunk. It just became terrible, terrible margins. And a lot of them went out of business and lost a lot of money. And now it’s back up where the margins are back high, where they can where they can do it. I mean, actually, it’s not that high, because the other thing that drives the flipper market is their renovation costs. So their expenses have gone sky high, because not only are they having to buy into the property very high. But fortunately, growth is making it so it’ll still kind of work. But the value of the labor and the materials is just killing any sort of long term prospect in that business.
So while I’m still hot on the markets that we talked about before, Atlanta fee, Phoenix, Seattle, I’m so hot on those markets, I wouldn’t be going in for a short term, I’d be looking for something where its price per square foot is relatively is low compared to the market, that it is something that’s going to be desirable for a very long time. And, and that’s what I would be mostly focused on. So let’s go ahead and turn a little bit to, to financial analysis of the soapbox about the state of the market right now and how frustrating it. But I think you all know what that market is, but don’t let my my procrastinations about the market kind of dissuade that. So again, there are great opportunities out there, it takes some work I’ve got, I subscribe to a bunch of other syndicators and I’m watching every deal they do. I’m seeing deal after deal after deal come out of these guys. So there are deals out there. And they’re not bad deals. And I’ve looked at the numbers, and they all look pretty good. And they look believable, and they’re not making outrageous claims. So there is great opportunity out there plus, you’ve got a huge amount of cash, that still hasn’t been put back into the market yet. So you’ve got cash sitting on both in the form of just general like people who set tend to save a lot, have saved a ton. But there’s also regular people have just saved a lot of money. We’ve also see Wall Street putting in more and more money into buying out companies which creates liquid liquidity events for your investors, which means they’ve got money to put invest into your real estate. So there’s plenty of opportunity right now, that said, Would I want to put all of my eggs in one particular basket? No. But that’s why it’s indication so great, because I can not only buy something in California and Raleigh, I can buy something in Ohio and Atlanta, and Charlotte and Texas and Florida and around. Right I can, Colorado is a great market, I can put those that money in to use is that would be much, much smarter and better. And so there’s tons of upside on syndication. There’s a lot of opportunity still to find great deals, and there’s going to always be opportunity. Because no matter what’s going on, there’s always I’m just talking right now about the big picture that Mike the macrocosm, of what’s going on in the economy. But really, real estate is a micro game, right? So every property is a little bit different. Some properties do really really well all the time. Some do great in recession, some do great in and big markets. You know, it’s just finding the right thing, and something that matches your fit, getting it done and syndicated. So that’s how I look at a general market cycle and where we’re at at any given point. Again, this video is two years old, but the information is still valid and it’s definitely you can see a very methodical thought process. If I can help you put together your syndication, whether it’s for real estate for your business, private equity, anything like that, we’d be happy to help. My name is Tilden Moschetti. I focus exclusively on Regulation D, Rule 506b and 506c syndications. My name again is Tilden Moschetti of the Moschetti Syndication Law Group.
How does the inner workings of a real estate syndication team actually get what it needs to do done? Well, this video from the past is going to go through that this video was recorded for training program for real estate syndicators that I did about two years ago, information is still totally valid and up to date, I know you’re gonna find it useful.
In these videos, we are talking about your flight crew. And specifically in this video, we are going to dive deep into your internal organizations flight crew. So let’s start at the top. We have you, here you are, you are the captain of the ship, you are the captain of the plane, you are the one who is getting to decide where you go, when you go all those things, you may have a team you may not. And if you do have a partner, they are your copilot in some manner. And so let’s let’s actually draw a copilot in here. Wow. So you were the pilots of this, you’re the ones who set the direction. Now one thing in if you do are part of a team is and we talked about this in the formation of the company itself, is make sure you’ve got established how all decisions get made between you and your partner that clears up any ambiguity. And in a later video, when we start talking about your focus, we’re going to go through also those all those internal dialogues that take place about what you what you believe, as a organization, and make sure that you’re in alignment on there. It’s those that internal identity that you’re having you everybody in the driver’s seat needs to have be on the same page about that. So here you are in your company. And then we’ve got you have control over maybe a few people. Now some of you will have have crew members, some of you won’t. And that’s okay, if you don’t have crew members and you’re doing this, this just the same as as if you’re doing all the work of them as well. And this is your flight crew. These people are what who you discuss it with anything that needs to take place. Now what what are you really giving your flight crew, you’re giving them your focus, what the focus of the company is, what direction you’re going, where it’s going, what those goals are, if you’re on if you’re in piloting an airplane, and you’re flying from Los Angeles to Miami, you’re you shouldn’t be telling your flight crew that we’re going to Miami. So that’s part of it. The other part of it is your internal identity. So you can think about this as their as your values. It’s also it’s just who you are as an organization and what you believe in in order to get to that goal to get to me Miami from Los Angeles
So this is your plane, and this is an arrow here because we don’t want to forget the word transferring those that identity over. We’ll make this a little bit fancy like that. So this is your plane. This is your vehicle, the vehicle that we’ll talk about in other lessons about getting your investors there, this is the way to go. You got your flight crew
and you’ve got your pilots. And you may have other executive people and you want to call them navigators and CO pilots that’s all good. You want to make sure that your flight crew is the right kind of people. And by that I’m not saying like good guys bad guys. I think most people are basically good. That’s how I That’s my core one of my core beliefs that that people are all basic going very good. Most people, 99.999% of people. And so the people that you’ve got in your organization to make sure they’re the right people, we do that because they have the right internal identity. So they have alignment to your values. And we’ll be talking about that in the internal identity section of focus, which is part of the core. So when it comes time to make decisions, I believe that there needs to be an open dialogue between your flight crew and your pilots. It means that they always have the right
to report facts, you need those optics to complain, tell you when things are going right, to give advice and openly debate I’m sure some of you are a little nervous about this right now. Well, let me make it very clear right now that the right to complain the right to give advice and the right to openly debate any issue is something that will set your organization up to become efficient, and to become good. Now, what this does not equal is the right to decide. You are the pilot, so you are the one that gets to decide where you’re gonna go. So between pilots and flight crew, when these ships, when the reports are coming in. They are everything all this reporting facts, complaints, advice, especially advice or debate is judged by believability.
Both from them to you for what they believe you. And believe that you have their best interests in the investors interests at heart and your believability of them. That’s how you weigh out what is what what advice, you’re going to take what you’re going to leave behind, when to close the door and stop communicating and things like that. And I think also, it is important to have a foundation of tough love. You are in charge and you need to assert your authority as the one in charge, they expect that from you. Or they if they don’t expect that from you, shame on you for not setting that up from the very beginning. Because you are the one in charge, you’re the one setting the direction. And it’s important to have somebody at the stick who can make sure that they can get from all the way from Louis from Los Angeles to Miami and this little tin can. Somebody’s got to do that. And somebody’s got to be in charge and that person is you if you’re here, you are a founder and you have that authority. Now, can I shrink this more? No, okay. So, when we are doing any sort of syndication, what we are really doing here is we are going for taking our business which will represent by just a little building. Right? So we’re taking this, this building. And in our company as it is at any given point, it’s here, and then there’s this huge gap. And we want to take our company here and here it’s a really big building. Right? Man we want we want to make something bigger than than what it currently is. That’s why we’re here. This may be more money, more assets under management, more properties, whatever it is for you. And so the way we do that is with
This vehicle and that flight crew is the way you’re going to get there. But you are the pilot, you’re the one setting direction, you’re the one setting it. And the one thing that needs to be here is believability. To tough love, and every single person needs to have
It is the it is the focus and the internal identity that you set out. And the holding people accountable. While letting them do these things like report the facts, complain, give advice, openly debate that give that bridge this gap, this huge gap here and take you from that small to that big. So I hope that analogy of the plane really kind of helped set forth with you as the pilot and everybody else was part of the flight crew. My name is Tilden Moschetti. If we can help you put together a real estate syndication or a syndication for perhaps to raise money for your business or a private equity fund. We’d be happy to help again Tilden Moschetti Moschetti Syndication Law Group we focus exclusively on Regulation D Rule 506b and Rule 506c offerings.