On this episode of The Passive Income Attorney, Seth speaks with Kim Lisa Taylor of Syndication Attorneys. Seth and Kim discuss syndications, explain the role of sponsors in syndications, what a PPM and operating agreement is, and much more. Enjoy!
“When you invest in real estate and you get these returns that augment your own income, all of a sudden that starts to add up and eventually you get your money back. It’s a way to enhance the quality of your own life and that of your family.”
0:00 – Intro and background on Kim and her company
4:12 – Seth asks Kim about some exemptions that syndicators use
9:29 – Kim explains in her words what syndication is and goes through it in detail
14:25 – Reading the PPM can be very intimidating in the beginning, but you need to read every page of it
16:25 – Kim talks about PPMs, and offering and operating agreements
17:58 – Seth asks Kim where listeners would be able to find deals
19:25 – Kim talks about how to vet a sponsor
22:10 – Seth asks what sponsor fees look like
30:50 – Kim discusses active investing vs. passive investing
34:48 – Wealthy professionals can participate through being a loan guarantor
38:14 – It’s time for the Freedom 4 – In an alternative universe where you weren’t involved in real estate, what would you be doing?
38:56 – What do you do to keep her mind and body healthy?
39:39 – Where were you 5 years ago and where do you see yourself in 5 years?
40:48 – How has passive income made your life better?
FIND | KIM LISA TAYLOR:
Seth: What’s up law nation. I know you all been working really hard this week and I’d love to help you work a little bit less and enjoy life a little bit more. So, we have a fantastic episode lined up for you today. I have an awesome guest, Kim Lisa Taylor, a nationally recognized corporate securities attorney, speaker, and author of the number one, Amazon bestselling book, how to legally raise private money. She’s also the founder of syndication attorneys PLLC. This episode is jam-packed with knowledge you all. We’re going to get into the nitty-gritty, starting with the basics of what exactly is a real estate syndication. What is an accredited investor, a sophisticated investor, how to find great opportunities to invest in and how to properly vet and operating partners? Let’s go.
Seth: Well, welcome to the show, Kim.
Kim: Hi, Hi Seth. Thanks for having me.
Seth: Absolutely. Thanks for coming on. Really appreciate it.
Kim: Oh, I’m so happy to be here. Yeah.
Seth: Happy to have an expert in the field with us today. So, tell us a little bit about your law practice and what that looks like.
Kim: So, we have, we’re a corporate securities law firm that really just focuses on how our clients can legally raise private money. So, we help them set up their companies. When they’re going to be offering investment opportunities to investors, we help them figure out how to split all of that the money and the profits with the investors. And then we also help them with their security’s legal compliance, because when they’re raising money from private investors, they have to comply with securities laws.
Seth: Sure, sure. So, what exactly is a security?
Kim: So, when someone is selling interest in a company, it’s actually something called an investment contract. So, an investment contract that the technical term, I know your audience are attorneys. So, there’ll be interested in this. It’s an investment of money in a common enterprise with an expectation of profits based solely on the efforts of the promoter. So that’s what is called an investment contract. And if somebody is selling investment contracts that would you know, include interest in their company, or there’s going to be a management team, that’s going to be generating the profit on behalf of a group of passive investors. Then that would fall within that definition of an investment contract that’s a security. So, what does that mean? That means that if you’re selling securities, then you have to qualify for an exemption from registration or you have to register your offering. So, registering the offering means going public like Facebook or Google did when you’re taking your company public. And that means you’re filing a pile of paperwork with regulatory agencies and then getting their pre-approval before you actually sell securities to the public. Well, with real estate transactions, you don’t have that kind of time to get regulatory approvals. So, you’re going to look instead to see if there’s an exemption available to legally raise private money. And there are several exemptions. Each exemption has a specific set of rules and will define things like how much can be raised, what the qualifications of the investors have to be like their financial qualifications and whether or not the person can advertise for investors. So, most of our clients are falling under the securities exemptions and buying real estate with a small group of private investors.
Seth: Right. Yeah. I mean, when you only have 60 to 90 days to close, you don’t have time to register a full offering. You need to one of those exemptions to work under. Could you maybe briefly go over those, you know, the main exemptions that some of the syndicators use?
Kim: Sure. The most common exemptions are the federal exemptions. And that’s usually because the person who found the deal otherwise known as the sponsor, is going to be raising money from people in multiple States. So anytime that you’re going to step outside of the state, meaning, you know, if everything’s in one state, the property, the sponsor and all the investors, then you could follow a state rule for a securities exemption. Or if you’re going to be raising money from people in multiple States, then the sponsor would end up following the federal exemption because that preempts the state laws except for requiring a notice filing with the States based on where the investors live. So those exemptions, the most common ones are regulation D rule 506B and B, like boy and regulation D rule 506C. So, with rule 506B the sponsor can raise an unlimited amount of money from an unlimited number of accredited investors and up to 35 non-accredited, but sophisticated investors. But they can’t find them through any means of general advertising or solicitation. And the way to prove that is to show that they had a pre-existing substantive relationship with those investors prior to telling them about their investment opportunities. So that’s regulation D rule 506B. This is the friends, family, and acquaintance exemption.
Seth: B for buddy.
Kim: B for Buddy. That’s a great way to put it. I’d never heard it that way, but I like it. Yeah, so you’ve got to get to know people before you can tell them about your investment opportunities and you don’t just get to know them, you actually have to understand their suitability to invest in the kinds of things that you might have to offer. So that’s going to be a requirement for a friends and family type rule 506B exemption. The alternative to that is regulation D rule 506C. And that one does allow free advertising. I mean, when, I mean free, I mean on the internet or however you want to advertise, and, but it doesn’t allow you to bring anybody into your deal that isn’t a verified accredited investor. So, I guess we need a roll into, you know, what those definitions are, [05:30 inaudible] or not accredited. So accredited, that means somebody who has over a million dollars net worth excluding any equity in their primary residence, or they have $200,000 a year income. If they’re single or $300,000 a year income, if they’re married that has to have been in place for the last two years with an expectation that will continue indefinitely into the future.
So, I call that one, two, three rules. It’s a million dollars net worth $200,000 income of single $300,000 if married. So, if somebody meets that definition, then they’re an accredited investor. And if they don’t meet that definition, then they’re non-accredited investor. We mentioned in regulation D rule 506B, that you could have non-accredited but sophisticated investors. So, you know, what’s sophisticated, it’s very subjective, but it’s someone who has the ability either by themselves or with the assistance of their financial representative investment advisor, to be able to understand the risks and merits of the offering and make sure that it’s a good fit for their portfolio. And that experience can come either from their financial advisor or it can come from their own background. Maybe they have heavy investing experience prior real estate investing experience. Or they’ve gone through some training on how to vet and invest in syndication deals. So, they’re more than someone with just some savings and a job that’s never invested in what you’re offering before.
Seth: Gotcha. And they’re able to self-certify on that right? On the 506B?
Kim: Yeah. So, on the 506B, the investors can just look at the definitions and they can explain to you how come they think they’re sophisticated enough to be in your deal. And then you get to look at it and make sure that as the sponsor, you would look at it to make sure that, you thought they were sophisticated enough. And part of that sophistication involves understanding the risks, but then also being able to afford to take the risk, you know, because you’re going to be asked in a syndicate to invest $50,000 plus in many cases. And so, you don’t want to invest your only $50,000 in one deal. And as a sponsor, you know, the sponsor, shouldn’t try to take somebodies only $50,000. You know, they have an obligation to help that investor understand what’s at risk.
Seth: Sure, sure. Well, now that we’ve dug into kind of, you know, generally what a security is, an accredited investor and sophisticated investor, let’s get more specific on what exactly is a real estate syndication. A lot of people hear that word and they’re a little intimidated by it and they don’t really realize what that is. So maybe you can give them kind of your common definition of what that is.
Kim: Yeah. You know, this is a Black’s law. That definition is [08:29 inaudible] for a common purpose to carry out I mean, to carry out and achieve a common goal. So, it could be two people, it could be a hundred people. It doesn’t matter. It’s just a group that’s formed for a specific purpose. And in the case of a real estate syndication, it’s usually formed for the purposes of acquiring either a specific property and that’s called a specified offering, or it could be a fund, that’s been formed for the purpose of acquiring multiple properties. And usually if it’s a fund, then there’s going to be some type of description and business plan incorporated or attached to that that’s going to explain what type of properties that, that fund plans to invest in.
Seth: Right. Oh, go ahead.
Kim: So, there’s really two parts to a syndication. There’s the legal structure. So, there’s the corporate structure. What kind of entity are we forming? What is the investor getting in exchange for their investment? And it’s usually going to be an LLC, a limited liability company operating agreement or limited partnership agreement. Not usually used for real estate, but even corporate shares could be securities, but most commonly for real estate, you’re going to be using a limited liability company, an LLC or a limited partnership. And in that case, they would get that agreement. They would, you know, the investor would read and review and understand that agreement, and then they would make the investment. And that structure in that agreement is going to describe how the money is going to be split, what kind of fees the manager’s going to earn. And just generally how, you know, what has to happen before the investors are going to get their money back and a return on their investment. There’s a second part then to a syndication. And that is the securities. Cause we talked about securities laws and these requirements they have to comply with in these exemptions. So, there are some documentation that goes along with that. And one of the documents is typically a private placement memorandum, otherwise known as a PPM. And so, it’s very much like a prospectus for corporate shares that you might see and, you know, NASDAQ, New York stock exchange. If you’re going to make an investment, you might read the perspectives to understand the company and its objectives and what you’re investing in. So that’s what the private placement memorandum does is it describes the investment opportunity, how it’s structured, again, it’s going to talk about you know, your investment, what has to happen before you get your money back. What has to happen before you get a return on your investment, when you can expect returns to come in and then how much the management team is going to earn. So that’s always disclosed. So, the PPM is really the disclosure document. Additionally, the PPM will describe all of the risks of investing in, you know, real estate in general, this type of a structure that specific property, IRS risks you know, tax risks and things like that, so that you understand what you’re investing in and how it could impact you in multiple ways. And then what could happen to your investment, you know, there’s things that could go wrong that might cause you to lose all or part of your money. It happen all that often, but you know, there’s occasionally things that happen beyond somebody’s control. So that could be a possibility. The other part of the securities compliance is a subscription agreement, and the subscription agreement is where the investor tells the sponsor about themselves. And they certify to the sponsor that they have read all of the documents the sponsor has provided, and that they understand the risks, they can afford to take those risks and even lose their money if you know, worst came to worst and that they have kind of assumed that risk of that investment for themselves and are willing to take that chance because they’re being offered a great return. And in most cases that generally happens. The other part is that there are some filings that are done by the corporate securities council. So we would file a form D with the SEC, informing them that, which exemption you are claiming, and then also some filing blue sky notices with the States telling them that you sold a securities in their jurisdiction.
Seth: Gotcha. Gotcha. Yeah. And that PPM is usually a scary document in a couple of different ways. I mean, it’s, you know, it gives you all the, all the disclosures, it tells you pretty much the worst-case scenarios. And when the first time you read one of those, it’s a little intimidating and it’s also probably a hundred pages long too.
Kim: Yeah. Ours are about 50 pages long. Yeah, I’ve seen them as long as a hundred pages. And yeah, I mean, it really, It’s just to inform the investor so that they, it’s a place where the sponsor can put all the material facts related to the investment so that the investor can read it and understand it and make a decision as to whether or not that investment is appropriate for them.
Seth: Yeah. Should Our listeners have read all those documents, all those pages?
Kim: Yeah. They really should. You know, when we write, we write in plain English, so you know, and then the SEC actually mandates that for the PPM that it is written in plain English, they’ve actually put out a plain English writing guide which is pretty helpful. And, you know, the whole point is to give you something in plain English that explains, this is what the deal is, and these are the things that could happen. And then you decide as an investor, whether or not that’s a risk that you want to take on for the potential rewards that are being offered.
Seth: Yeah, for sure. And I mean, the more of them that you read, the more you see that they’re all going to be very similar in structure and you get faster at reading them. And if it’s the same sponsor, you don’t necessarily have to read every single word. You get better at it as time goes on.
Kim: And that’s true of our clients too, because as our clients [14:41 inaudible] you know, they’re reading documents and they’re getting more and more familiar with the documents over time. But yes, for the investors too, and we get a lot of compliments from our clients, investors on the documents that we write, just because they are so understandable and not just the private placement memorandum, but also the operating agreements. Some of these operating agreements can be pretty archaic and you know, have a lot of cross-references and things like that. It makes them a little confusing to read. So, we’ve tried to eliminate that for the most part in the things that we write.
Seth: Yeah. Yeah. And that operating agreement is really the one you’ve got to pay a lot of attention to because that’s really going to control everything.
Kim: Well, yeah. So, the PPM is what you read about to understand the offering and you know, what the investment opportunity is. And then the operating agreement is what governance, the operation of the company for the duration of your investment. And it usually comes into effect when the sponsor closes on the property. So, once they acquire that property using investor funds, from that point forward, those funds are what’s called irrevocably, contractually committed. And at that point, you know, the investors can’t get their money back very easily because it’s invested in this property and until the property sells, or maybe there’s a refinance and cash out event, then there’s really no opportunity for these sponsors to return somebody money. So, you have to make sure that you understand the duration of the investment as an investor, and you know, that’s going to fit within the timeline for your needs as far as your investment. And when you might want that money back, or maybe for some other purpose to retire, to send a child to college or something like that.
Seth: Yeah. Yeah. I mean, there’s got to be alignment of goals.
Kim: That’s absolutely correct. And that’s what the PPM should explain is what the goals are of the company. And so, the investors need to make sure that that’s a good fit.
Seth: Yeah, yeah. So, a lot of our listeners are probably only invested in real estate in the capacity of buying their own home or, and their investing capacity might only be investing in their 401k. Where would they find one of these types of deals?
Kim: Well, so your podcast is a perfect example, right? So, I think, you know, you’re a syndicator, right? You put deals together and put groups of investors together. And certainly, there’s other podcasters out there that are doing that, but there’s also meetups, there’s real estate meetups that are local in your community and real estate investment associations. And they have meetups. A lot of those are being held virtually right now, but once the pandemic has subsided, then perhaps we’ll be able to give back to the live meetings and they’re usually held once a month. So, you know, that’s a really good way to meet people, also educating yourself about the syndication process and the real estate investing process. A lot of my clients meet their investors at real estate investing events that are held by trainers who are training people how to invest in real estate and how to put these groups together. And so, a lot of the people that go, aren’t looking to be the active member, who’s going to go out and find the deal and run it. They’re looking to meet other people who are finding deals and running them so that they can invest with them.
Seth: Yeah, yeah. That makes a lot of sense. I mean, the sponsor is usually the most important part of the deal, even more so than the market or the deal itself. And I think that gets kind of confused sometimes. How do you actually vet a sponsor? How would you recommend vetting a sponsor?
Kim: Well, we actually have an article about that at our website at [18:25 inaudible] in the library, there is a list of articles. There’s about 40 different articles in there. And one of them has called 10 things to know before you invest in a syndicate, in a real estate syndicate. And so, it gives you some, you know, questions that you might ask and things to look out for. And you know, some of the things are, you want to make sure that the offering documents have been written by a qualified securities attorney and not self-drafted. You’ll be able to tell if they’re self-drafted, usually because you’ll see a lot of conflicting terms and you’ll be able to notice that, well, wait a minute, this isn’t consistent from here to there. And, you know, we’re talking about partnership interest in a limited liability company, which really doesn’t have partnership interests. It has members and, you know, so there’s a difference in terminology that often gets overlooked by do it yourself, but you want to look for a track record. So somebody who’s done this before, you know, if you know somebody very well and you’ve watched their career over the years, and you just know that this person succeeds at everything that they do and they have a lot of integrity, they’re an honorable person then sure. You might be willing to take a chance on their first deal. And they might do spectacularly with that deal. I’ve seen that happen again and again. But if you don’t know the person very well, then you want to rely on their track record of past successful investments in the similar kind of asset class that they’re offering to union. So you want to ask about their track record and experience, and you want to know, you know, there could have been bad deals in there, and you want to know about the bad deals and the good deals, because, you know, who’s to say that yours is going to be of the bad deals and you want to understand what’s the worst case scenario. So, you know, looking at their track record, their experience you can ask for references from other investors you know, I’ve actually had clients who’ve or where their investor and a couple of investors have called me and said, what do you know about this person? And, you know, I mean, I can’t tell them confidential information, but I can say, you know, sure, they, you know, they participated with us for, you know, X number of deals that we’ve helped them with and things like that. As long as that client of course gives me permission to say those things.
Seth: Yeah, of course, of course. So how exactly do the sponsors get paid? I mean, you know, you see these awesome returns that they’re projecting and you compare that to, you know, the stock market and some other things, and sometimes it looks like it’s too good to be true, but you know, the sponsors have to get paid as well. What are those fees typically look like?
Kim: So typically, when somebody is selling interest in a company, then they’re going to set up, what’s called a carve out. And the carve-out means that they’re going to keep a piece of reserve, a piece of ownership in that company for the management team. And so, you know very common market conditions right now, we’re seeing a lot of 70/30 deals where the sponsor will put together a deal. They’ll sell 70% of the interest in their company to a group of investors who will put up a 100% of the money. Now that doesn’t mean that the sponsor won’t also invest. It just means that if the sponsor does invest, they invest alongside of their investors. And so, they buy the same interest and get the exact same returns that their investors get with their own cash. So, a 100% of the deal is made up by the investment group. It will typically structure a company so that there’s two classes of members, class A, would be all cash paying investors, including members of the sponsor and all other passive investors. And then class B would be the portion that’s reserved for the management class. So the other way that the, so that means that as there’s cashflow, let’s say, if you’re buying an apartment complex, then there could be cash flow from rental income during the period of time that the company owns and operates the property. And that cashflow is usually going to be a portion of it given to the investors and a portion of it given to the management team. There’s going to be a waterfall that describes how the money will flow. So whatever income the company receives is going to be distributed according to this waterfall. And usually there’s going to be payments of course, for operating expenses of company and offer debt service. So, typically the syndicator is going to get a loan for 70% to 80% of the purchase price of the property. And they’re going to raise the rest from those investors. And that waterfall is just going to describe how all that money is going to flow. And then when it gets after you’ve paid off the debt and the operating expenses and withheld some reserves, then there’s usually some money left over that’s going to be deemed distributable cash. That distributable cash is then going to be split amongst the, class A and class B members. Very typically there could be a preferred return for class A, meaning that the manager is going to distribute the cash in such a way that class A hits a certain hurdle rate. And right now, that’s somewhere between 6% to 8% of their investment on an annual basis. So, if somebody invest $100,000, then the sponsor is going to try to hit a target where they’re going to give them maybe 7% return on that a $100,000 annually. So that would be a 7% preferred return. It’s usually going to be broken up and distributed on a quarterly basis. And then the manager will have some earnings after that hurdle rate is met. So, there are a variety of ways that that can go. So that’s one way. So that’s profit share from cashflow. The other way is that there could be a profit share on sale of a property. So once the property is sold, then of course, all of the sales expenses will be paid, and debt service paid off and any outstanding liabilities. And then whatever’s left is going to be used to pay back [24:51 inaudible] in the class A preferred returns than to give the manager whatever, it might be do if there’s a class B catch up, then that could be taken care of at that point. And then whatever’s left after that is going to be split between that class A and class B members. So that’s kind of how the profit works. So, there’s always the waterfall that operates during the ownership phase of the company and a waterfall that is going to take effect on a sale, or what’s called a capital transaction. So, the other way that the sponsor earns money though are some fees. So, there’s usually an acquisition fee. That’s going to be based on the purchase price of the property, usually between 1% to 5%, the smaller the deal, the higher the percentage, the bigger the deal, the smaller the percentage, and it’s based on the purchase price. And that’s the kind of the reward that the sponsor gets for doing all the due diligence and getting this deal to closing table. These sponsor has had to put up their own cash to do all this due diligence, to hire legal counsel, like us, to do all of their documents, to hire real estate counsel, to help them out [25:59 inaudible] transaction, [26:02 inaudible] pay loan fees. And so, they’ve got a pile of cash already in the deal, and if they don’t close on the deal, that’s their risk. They lose that money. That’s not investor money, so they’re not using investor money until they close on the property. And at that point, then, you know, it’s invested in the property. So, the acquisition fee is important. And the sponsor to be well compensated because if the sponsor is not well compensated, then their interests are not going to be aligned with the investors.
They’re going to just want to sell and try to get their share from the sale. And the investors might be happily enjoying their preferred returns. So, if the sponsor’s well compensated, then their interests are aligned and they’re going to want to keep that deal long-Term. So, some other fees that the management might get as an asset management fee, usually 1% to 2% of the gross collected income from the property during the period of ownership there will also be a refinance fee. If there’s somebody who, you know, if they’re going to refinance the loan, then there’s a lot of work that goes along with gathering all the data that the lender needs to process that loan. So usually a guarantor fee or a refinance fee of 1% to 2% of the loan amount is going to be required. Sometimes there’s a disposition fee, a 1% to 3% of the sales price. And again, that’s for the managers efforts and gathering all the information and working with the buyer on that transaction to get that property sold for the best price. So those are some common ones. If there’s a heavy construction or innovation, there can be in construction oversight fee. And also the sponsor has to put up somebody who has the net worth equal to the loan amount, and it could be one person, it could be multiple people so that the lender will actually make the loan. And so, there’s a risk for the sponsor in putting up that person as a loan guarantor on behalf of a group of investors that they don’t know. So sometimes there’s either a separate guarantor fee or some kind of a financing for that.
Seth: Right. Right. Thank you for all that. That’s awesome. And again, you know, just because the fees are lower in one deal compared to the next is not necessarily a good thing, you really want the sponsor to get paid. So, they’re motivated to continue to execute the business plan and operate the property to its optimum ability, so everybody wins.
Kim: That’s absolutely correct, Seth. I can’t tell you the number of deals that I see where you know, there’s investment groups that will kind of squeeze the sponsor. And you know, they’re really doing themselves a disservice because if the sponsor is not making enough money to make a living as a syndicator, then they have to do something else to feed their family. And they’re turning their attention away from this investment. And that’s not in the investor’s best interest. So, it’s far better to, well compensate the sponsor so that they stay invested in the business, along with the investors. And they have some incentive to make sure that the property performs well for them and for the investors, and then their interests are aligned. And they’re more likely to be happy with the investment. And the investors are more likely to do better over the long-term.
Seth: Yeah. For sure. Absolutely. What are your thoughts about kind of investing passively versus actively? We’ve had people on here that talk about that are kind of coaches that teach people how to invest actively, how to buy apartments themselves, and then other folks that have made a professional life out of investing passively don’t do anything else. What are your thoughts on one versus the other?
Kim: Well, investing actively is a job. You know, it’s a lot of work. So, if you already have a full-time job or, you know, some of us as attorneys have more than a full-time job to go out and actively pursue deals because it really requires dedication and perseverance. You’ve got to get to be an active syndicator. You’ve got to get to know the markets that you’re looking in. You’ve got to get to know brokers, you’ve got to stay in contact with them. You’ve got to be constantly vetting deals. You’ve got to be putting out letters of intent. I tell my clients on a regular basis you know, the people that are finding deals right now are putting out 30 to 40 letters of intent a month, not one or two, you know, cause I get also clients that are, Oh, you know, we’re thinking about investing in this deal and you know, this is the second one we’re going to do this month. And then, you know, it’s very unlikely that they’re going to find a deal. It’s a numbers game. And so that requires a lot of effort. You go look at a lot of deals, you got to, you know, analyze a lot of deals and you got to make offers on a lot of deals. And if you’re not doing that on a regular basis, then it’s a fluke if you happen to run across something. And you know, so it’s a job, it’s a very big job. And then that’s just finding the deals. And then you’ve got to also find the investors and get your investor group together and, you know, can do the due diligence on the property and get your legal documents done. And then once you have the deal, now you have to oversee the property managers and constantly supervise and make sure that they’re doing their jobs and turning apartments and screening tenants correctly and handling evictions on timely basis and collecting the rent. And you know, so you’ve got to constantly supervise the property managers on behalf of the investment group. And then you know, like I said, there’s a lot of work involved with getting the financing and risks involved with getting the financing. So, it’s a big job to be an active syndicator. To invest passively if you’ve got the money to passively invest you know, sure find you know, one or two great sponsors. And I have clients that have investors that have invested in their deals seven or eight times, you know, so they liked that sponsor. They trust that sponsor. They’ve been, they’ve had their own track record and experience with that sponsor, and they continue to invest again and again with those same sponsors. So, you know, that’s a great way to do it because you know, it is a little bit of a challenge to find people and to vet them yourself and make sure that you’re comfortable with that group and their style. And that they’re adequately communicating with you to make sure you understand what your investment is doing.
Seth: Sure. Yeah. I mean, it’s passive, but there is a little bit of work upfront.
Kim: Yeah. There absolutely is. And I’ve been on both sides. I’ve been on the active side; my husband and I syndicated a deal, and we had some friends in it. And you know, it was a lot of work. My husband was working on it weekly, if not daily, at times and managing issues and handling problems all the time. And we owned that property for nine years. And there was very little cashflow during that nine years when we finally did sell it, then the you know, everybody got paid back, plus we all got a reasonable return, but there was a long waiting period before that could happen. You know, and passively I’ve invested in some passive deals and you know, some have panned out some have not.
Seth: Yeah. Yeah. And a lot of our listeners are full-time attorneys or physicians or, you know, professionals, and it’s tough to do an active investment while you’re working full time at a demanding job. So passive investing is definitely something I think they should look into.
Kim: But there is one way that maybe those busy and wealthy professionals can participate and that is we mentioned, the loan guarantors. So anytime [33:52 inaudible] deal together, then they’re you know, looking for either, you know, one or more people that have that collective net worth to help guarantee that loan. And that’s something that somebody can do if you have the income and the net worth to be able to support that. You can take a role in management on account of having done that. So you’d get more, you know, and you can still invest cash into the deal and you’d have class A interest in the deal, but then you’d also have a share of those class B interests maybe for participating in the management role in helping to guarantee those loans. So that’s something to consider. I know somebody, a couple of people that have just made a career out of guaranteeing loans and they’ve become very wealthy doing it. With a say a multifamily syndicate where you’re getting that that is subsidized by the federal government or insured, not subsidized, but insured by the federal government. There’s some certain types of loans that are set up that way. And they’re usually called Fannie Mae, they’re insured by Fannie Mae or Freddie Mac. So, you may have heard those terms. There’s actually, you know, it’s true definitions of what those acronyms mean, but those are the common acronyms, but the Fannie Mae or Freddie Mac loans are insured by the federal government. And the guarantor is not taking on a huge risk because they’re not personally guaranteeing the loan, but, and these are called non-recourse loans, which means that there’s only a couple of instances what that something could happen at the property that would trigger personal liability on the part of that guarantor. And that would be if you know, something illegal was allowed to persist at the property that ultimately ended up in the lender losing money. Or if there was an environmental condition that was later discovered, and both of those are very remote risks because the environmental conditions, a lender won’t even allow you to buy a commercial property without doing an environmental site assessment. And so that’s already going to be factored into whether or not they even agree to do the loan and there’s little risk of that happening if the environmental site assessment comes in clean. And I know that I used to do those. I actually used to be a professional geologist before becoming an attorney.
Seth: Oh wow, I didn’t know that.
Kim: I’m still licensed in California. Yeah, so that’s a very small risk and, you know, the sponsor isn’t going to allow, you know, they’re not going to allow math labs and, you know, gang activity and illegal things to happen that are going to cause that loan to fail. So being a guarantor is a great way for somebody with some network and ability, but not a lot of time to participate and to get a little bump in their return.
Seth: Yeah, that’s a great point. I don’t think anyone’s brought that up before Kim. If you have the net worth of the liquidity to jump on that loan that’s a great way to invest passively and become, get a piece of equity in these deals and it’s truly passive as well.
Seth: Well, cool. Let’s jump into the freedom four. In an alternative universe where you weren’t involved in real estate. This is a tough question for everybody. What else would you be doing?
Kim: Well, I think I already tipped my hand there. I am a professional geologist. I maintain my license, you know, I’d probably be going, and you know, working at the national parks or something and, you know, just enjoying the beauty of our natural world.
Seth: That’s awesome. That’s awesome. Well, I’m big on health and fitness and Kim, you look great. So, what do you do to, you know, treat your mind and body and keep it healthy?
Kim: I walk a lot. I do yoga, eat healthy and take some supplements for various things. So, you know, I got a puppy during COVID, my puppy keeps me busy a lot.
Seth: That’s good for your mental health, for sure.
Seth: I mean, a lot of us get caught up in just our work and our business and we don’t take time to take care of our bodies and our minds, and that is just essential and your business and your professional life will be a lot better if you do take care of those things.
Seth: So where were you at five years ago? With your business and where do you see it? Five years from now?
Kim: So, five years ago, I was actually a partner in a California securities law firm. And decided about, oh gosh, in 2016 decided that I wanted to break off and start my own practice. So, I’ve never looked back. I’ve been happy that I’ve done that I’ve had a lot more freedom to market and do the things I want to do and expand my services in to other areas like helping investors or helping sponsors with their investor marketing materials. So, I’ve been able to do a lot of things I wasn’t able to do as a partner in a farm. So, I’ve enjoyed that very much. And you know, five years from now, I would love to have seen the firm grow four or five times in size and you know, kind of be operating on autopilot so I can go off and do those fun things.
Seth: Yeah. Awesome. Awesome. Oh, I know you’ll get there, Kim. So, I know you’ve invested passively in some deals and actively, and you’re obviously entrepreneurial with your own firm. How has passive income made your life better?
Kim: You know, it’s allowed me to do you know, to buy a better house, to move to the part of the country where I really wanted to be to just, you know, feel free from cash flow worries. It’s really just you know when you invest in real estate and you get these returns that augment your own income, it, you know, all of a sudden that starts to add up and you know, eventually you get your money back, you can go reinvest it again. And, you know, if a property sells, you get a big chunk of cash, you know, all of that stuff, you know, is just a way to enhance the quality of your own life and that of your family. So, I’ve certainly been able to do that with my passive investments.
Seth: Yeah. Yeah. And I think it gives you a confidence, you know, just piece by piece. Like every time you invest in a deal or you have some passive income coming in, it just gives you more confidence to be like, you know, if you’re in a job that you don’t like, you’re like, all right, well, I can walk away from this now if I, if I want to, I don’t have to, and I might not, but I can. And it just gives you that air of confidence.
Kim: That’s right. And, you know, I mean, we say we’re in an era where we’re one paycheck away from financial ruin. I hope no listeners on this call are that way. But you certainly feel like you’re not in that situation when you have passive investments.
Seth: Yeah, for sure. For sure. Where can our listeners find out more about you and you know, check out your website and hire you for a job or a syndication or talk to you about syndications and real estate. Where can they find you?
Kim: So, their main website is www.syndicationattorneys.com. And on that website, there is something that each of you, if you have a little bit of spare time might want to do, and that is to read my book, I’ve written a number one, Amazon bestselling called how to legally raise private money. And the last chapter of that book is that 10 things investors should know before investing in a syndicate. And I put that specifically in the book, because I think the book is a great way for people who are interested in investing in a syndicate to learn what it’s about. And the more you understand what it’s about, then you’re going to be able to look at these potential sponsors and find out if they’re doing it right. And you know, the book of course was also written for people who want to learn how to syndicate into put these groups together.
Kim: So, you know, so it really is helpful from both sides, but we’ve talked about aligning interests before. If you understand what the sponsor is doing, then you’re going to be a better investor. And they’re going to be better if they understand what they’re doing of course. So how to legally raise private money is the book. You can also get it on Amazon. My name is Kim. So, if you want to look me up on Amazon, you can. But also, we have another website called www.investormarketingmaterials.com. That’s a great way to learn about putting together investor marketing materials, and maybe understanding some of the investor marketing materials that others are providing to you and what the purpose of those documents are for.
Seth: Awesome. Thank you for sharing all that. Kim, you’ve been incredible. It’s been an awesome show. Really appreciate it.
Kim: All right. Thanks so much, Seth. Glad to be here. Bye.
Seth: There you have it Folks. Kim just dropped syndication knowledge all over us, such a great guest. One of the most highly recognized syndication attorneys in the industry. Check out the show notes to learn more about Kim. I know you guys learned a ton about syndications today. What they are, what to look for if you even qualify to invest. But if you’d like to learn even more about passive investing, go to www.passiveincomeattorney.com and snag our free, special report on passive investing. Got to run for now, See you all in the next one. Enjoy the journey.