SEC Traps & GP/LP Structures for Infinite Cashflow

Jonathan, thank you so much for joining us today. Uh you were here pro a couple of months ago and we still had so many topics to cover. So I'm so happy that you're back with um wealth of information regarding syndications and funds. But first, why don't you please remind people what you do and uh we'll take it from there. — Yeah. Well, thanks so much Stephanie. I must have not completely bombed the last time we uh we spoke together that you invited me back on, but thanks for the invite. Jonathan Tvaris, um managing partner of Premier Law Group. Um our firm is uh narrowly focused on helping um real estate syndicators to raise capital for their real estate projects and uh and real estate funds. — And like we said before, we use you guys. You guys are fantastic, extremely uh fast in responding, on top of your game. So, highly recommend your services. And let's jump into the topic for today's conversation, which is SEC exemptions and compliance. What are some of the common mistakes that syndicators like us make and how can we avoid these mistakes? Yeah. So, uh, the first one that comes to mind, and this is probably, um, a conversation I have at least, uh, three times a week with, um, sometimes existing clients, uh, and a lot of times, uh, new or prospective clients is not calling a spade a spade. What I mean by that is, um, understanding what the difference is between a joint venture and an actual syndication where you're selling securities. So, um, the world that we sort of live in as a as a law firm is helping and guiding our clients, um, with complying with the securities rules for raising capital for either project specific syndications or in a fund model where they're acquiring multiple assets and raising capital from retail, sometimes institutional investors. Um, but sometimes clients will come to us, especially with smaller deals and um and say, "Hey, well, you know, we're raising capital from investors who are going to be passive. Can we just call it a joint venture so we don't have to worry about doing a PPM, doing all those disclosures, filing forms with the SEC, states where our investors are from and all of that. It takes up time. Obviously, there's a cost to the compliance. Um, and sometimes that can be tough, especially for smaller deals. And unfortunately, you can't just dictate whether your deal is going to be a joint venture or a syndication. You actually have to have facts that support it. So, um, typically speaking, a syndication is going to be a model that we're going to set up where uh the investors are passive. If your investors are passive, you're selling securities. So if they're not actively involved in managing the underlying assets or they don't have voting rights in the investment vehicle, then you're selling securities if they're passive investors. And so if they are passive, then you have to provide them with appropriate risk disclosures. You have to find appropriate exemption under the federal securities rules. And you also have to make sure that uh you're filing um uh notice filings accordingly. uh it's called the form D u when you're raising capital under 506b or 506c and the states also require you to send them um notice filings as well. So um it does take work but it's the right way to do things if you're raising again from investors who are passive. Now, if you truly do have a joint venture structure, yes, you can avoid all of the securities compliance and not have to worry about a PPM, investor questionnaires, subscription agreements, and investor portals and any of those things. If you have a joint venture where all the partners are active and they're contributing something to the uh the joint venture and part of it could be capital, uh it can also be knowhow. Um, so in a real estate deal, you know, maybe someone's a real estate broker and so they come in with you, you know, expertise on uh on valuations and understanding the market, where the underlying, you know, real estate's located and uh they can bring other things to the table sometimes um in development projects. You might have a joint venture where one of the partners is a civil engineer um you know, something along those lines. Maybe someone's an attorney and so they can bring you know some of the zoning and the land use planning um to um they can bring those skills to work inside of the joint venture. But um but the key is in a joint venture structure is that the partners are actively involved in the management of the real estate. So uh so that's the biggest thing is your facts are going to determine whether you're running a joint venture or a syndication. And that's one of the biggest mistakes that I see uh clients make is they want to dictate um which

path they go down without considering the facts of their underlying situation. Um the second big thing and this conversation also comes up on a weekly basis is can you pay GPS to raise capital? That's always a question that I get. Um, and one of the biggest mistakes is that a lot of syndicators um, assume they can because they see other people doing it. And um, and to be fair, in a lot of coaching programs that I've seen, I won't name any names, um, a lot of them are structured on the premise that as a GP, you can bring on other COG partners and compensate them for helping to raise capital. That's a big no in the SEC world. Um, so cogps that are brought on simply to raise capital have to be licensed broker dealers with the SEC. And in my experience for most of our client base, almost none of their cogps are licensed broker dealers. It's there's a huge compliance cost. There's a lot of work to become a broker um and to be able to get commissions or any sort of compet uh compensation for selling securities. Um, I like to make the analogy um, for a lot of clients of uh, you know, having a real estate license, right? broker's license because essentially the rule operates the same, right? You can't share a real estate commission with a non-licensed real estate broker. And so the rule is the same in the security space is that you have to be registered uh, broker dealer with FINRA in order to participate in any compensation. The SEC calls it transactionsbased compensation. if you're getting paid for helping to raise capital. Now, that doesn't mean that can't be one of the jobs that a GP has. Um, for sure, that's one big, you know, heavy lift, especially in in bigger deals where you do have to raise a small amount of equity. And so, that it's a consideration, but it has to be part of the totality of what they're doing. The SEC says raising capital has to be incidental to their other duties. So they can do things like uh be part of acquisitions, they can be part of asset management, uh investor relations, um marketing. And in fact, the more jobs that they have um the easier it is to justify what you're paying them, whether it be in straight fees or equity that they're getting as a GP member, um or any other uh compensation arrangement that you may have. So, that's a really big one in the real estate syndication space is make sure that your GPS are actively involved and have real jobs in your syndications and funds and aren't getting paid just to raise capital. — Yeah. — Um, yeah. So, that's a big one. — I've also seen a few people do that. So, what would be a consequence if you know the SEC finds out? — Yeah, that's a really good question. Um, so the SEC has a lot of options at their disposal. And I always tell clients, I mean, for most deals, it's true, is the SEC ever going to find out that you're uh you're paying um GPS to raise capital? Well, maybe in a lot of circumstances, no. Uh but it's not a problem until it's a problem, right? So, um, generally how those things come about is you have a deal that goes sideways, investors lose money or the relationship between the GPS starts to deteriorate. Um, and you know, partners are looking for ways to get some money back, right? Because a lot of these things, you know, center around money, right? I mean, as they say, follow the money. So a lot of times um there is money involved in when these relationships deteriorate, when these investments go sideways or start to go south. And so that's generally when the SEC might get involved because someone might actually start reaching out to the SEC, right? They may hire litigation attorneys and start sniffing around to see um you know how they can trip up the sponsor or see if there's any steps that they didn't follow. And um the securities rules are a great place to start because um the SEC is very uh very much focused on uh protecting investors. And so if you've not provided the uh appropriate disclosures or if you have um not disclosed uh compensation or if you've compensated uh in a way that is not permitted by the SEC, those are always huge things that the SEC will hit you on. So to answer your question, um a couple of um options are at their disposal, the SEC, is that they could just shut down the private offering, right? So, uh they could require you to uh to not continue to operate under the exemption you're operating under and require you to register your offering. So for most syndicators, that's um that's just a deal killer at that point. if they can't continue to operate under a specific exemption from registration, then registration's not an option. I

mean, we're talking like an IPO, right? Where uh you it may take, you know, several years to put together an offering and you may be talking, you know, big money, six, seven figures. And so, uh that's only going to make sense for pretty big funds. — Um the other thing is um disorgment. So if you've already sort of, you know, been um been operating your syndication, been making, you know, profits, cash flow, um the SEC may require you to may claw back those profits from the GPS and require you to give back uh those profits into the company um and also pay back your investors capital at that point um when they shut down the offering. So um so they could take back profits and um again this is all part of you know closing down that offering. Um in extreme examples um they could bar a syndicator from raising capital in the future and future um uh exemption offerings um or you know pay heavy fines uh penalties. And um we kind of like to joke about it because it's not very uh um it's not very likely but um of course you could serve uh you know prison time but that's generally in cases of uh of fraud. I mean I'm sure we've all seen cases like Bernie Maid off and uh things of that nature of securities fraud. Um so that's definitely at the the top of the list in terms of most extreme um penalties for not following the securities rules. — Got it. Thank you. very helpful. Uh so I know you and I have chatted about this topic before but I think it'll be interesting for our audience to learn um what how uh how is a syndication structured when the LPs and the GPS want to hold a piece of real estate forever um in terms of infinite cash flow. I know it's not super common, but I do know that a lot of investors would love to hold real estate forever because, you know, once you return the funds, they have to find another deal. Uh, so a lot of them just want to leave, you know, be part of the deal for the long term and get some checks in the mail beyond the five to seven year. — Yeah, that's a good question. And um, yeah, there's absolutely ways to do it. Um, a lot of times the challenge u then becomes or the question then becomes um you know is that a model that um coincides with your investing strategy as it relates to your investors, right? Is that something that your investor base um is going to be aligned with? Um, and so generally speaking, when the GPS want to be able to keep the asset long-term and at some point either, you know, sort of refinance and buy out the investors or um or or have some sort of other, you know, capital infusion that allows them to buy out investors at a certain point. um it's sort of a forced exit that we call like a call option that the um that the GPS have the ability to exercise to buy out investors after a period of time. Um we definitely have run into challenges with some uh some clients um in trying to implement this in the past and a lot of it has to do with the investor base. So, it's something that you definitely want to have conversations with your investors about, especially your bigger investors in your syndication or fund. Um, and make sure that they're aware at the outset what the long-term plan is, what the exit plan is, and in fact, in your private placement memorandum. Um, this is something we're very focused on uh on disclosing upfront um to make sure that when investors sign up for your syndication, they know what they're in for. Um and so typically when we do structure a call option which is really an early it's a forced exit of the investors at a certain point in the life cycle of the investment um you want to consider how um how that buyout price will be calculated and um and when you have the ability to exercise it. So I always recommend uh the clients they should at least um have a certain minimum number of years that the investors can participate in the investment uh so that if it is producing cash flow um or you know equity is you know producing you know additional cash flow over time because you're increasing the value of the asset and in turn you're able to raise rents or you know whatever the case is. So, so it's ultimately having an effect on whatever those monthly or quarterly returns are that are going to the investors that you can at least guarantee them a certain amount of time in the investment to the extent that you're going to hold onto that property. Um, for the most part, we always provide discretion for the managers to sell at any point. So, for example, you may have a five-year um horizon, you know

strategy and a syndication and then decide in, you know, year two or three things are going really great that as the manager, you sell, divide out profits, everyone's happy. Um, now in the call option approach, you know, maybe the plan is to hold on to this property longterm, but maybe exit the investors at year three or year five. Um so in that case you would build a call option that would um would have a what we call a lockup period for the GP where they wouldn't be able to exercise it for a certain amount of time. So that would provide some sort of comfort and protection for the investors so that they know they can participate in the deal for that amount of time. So, uh, on the low end, I would say at least two years, but in a lot of cases, sometimes it's three, four, maybe 5 years. Again, depending on the type of investment and what the long-term strategy is, but at least investors know they can participate for that period of time. And then the buyout price u may be based on some predetermined rate. So maybe your projections say that the investors are going to get a 20% irr, maybe 25% irr. Um, and so at that point you may say, "All right, well, we're going to build the call option to um to generate just above whatever those projections are or maybe significantly above depending on again what the investor base would want in terms of return so that when you do exercise the call option a after that lockup period, the investors are parting with you, but um they're feeling that they've gotten a good return because maybe it would have taken them another year or another two years or maybe longer to receive the returns they that would have otherwise gotten had the natural course of the syndication taken place. So, uh so that's usually the biggest challenge is figuring out how you're going to value um the underlying investment at the time that you exercise the call option. Um in other cases, it may be um a multiple or maybe you know a certain percentage above the fair market value of the property as determined by uh you know a third party appraisal. Uh again, the theory behind that is, you know, I if you're going to buy out the investors, you want to make sure that they're happy being bought out. So sometimes that means giving them slightly above, you know, market value, which uh may seem like an odd concept, right, at the time that you exercise it, but if the plan is to keep the asset long term, then you're probably not concerned with uh you know, overpaying a little bit to get investors out. um if you know it's an asset that is going to produce significant cash flow and have significant equity long term. — That's awesome. Very helpful. Thank you. Let's move on to you know what are some of the legal challenges and opportunities in real estate investing today from what you're seeing in the market right now which is you know a little bit a unique market at this point. — Yeah. It's it's definitely unique. I mean, with all of the news we're hearing all around the world, whether it's potential war, whether, you know, it's, you know, still talks of uh inflation and uh in and tariffs, and you look at the stock market all this news, it's like the stock market's been ignoring it and it's been running up on a tear. and then uh you're in the real estate world and trying to figure out of all you know all these different things that are going on economically, politically. Uh well, the good news is in terms of real estate, especially those involved in you know, multif family real estate, which is a lot of our client base, we know that people are always going to have to live somewhere. So, uh it's an investment that's not going away. Although there are certain times that are more beneficial and maybe less beneficial to uh to be in certain types of investments, for sure. — Yeah. Um, I'd say one of the biggest challenges we've seen, especially in the multif family space, and um, you know, I'm sure you've heard this, you've seen it, maybe even experienced it with, uh, with other colleagues as well, is um, is some of the, uh, the downturn in the uh, in the multif family space um, as far as um, uh, debt service. Uh we saw a lot of clients several years ago um getting bridge loans that were you know two three-year terms um and they were um you know they were maybe fixed rates for that period of time but a lot of them figured well I mean we could just refinance after this 3 years or you know heck we're going to sell this property in three years so it's not going to matter once we um reach you know maturity for this uh bridge loan but with the exponential increase in property taxes insurance, especially in, you know, certain markets like in Florida and in Texas, right, where there's been so much u so much property that's been syndicated there over the last several years and in some cases some over supply. There's been a lot of um you know, over supply in certain markets. Yeah. specifically in Florida that I'm thinking right um it's led to situations where um in some cases some of these multif family properties and

syndications the um the cash flow is not even able to support the uh the debt service and all of the fixed expenses on a monthly basis. So, you know, at that point then you're needing to make a couple decisions, right? So, I mean, either you try to um you know, weather it out, but if you're bleeding on a monthly basis, then maybe you've got to figure some way to, you know, refinance and, you know, restructure your debt, which uh in many cases, a lot of lenders were wanting to see um higher ratios of equity, right? So, it meant going back to investors and asking them for more capital, which is always tough when you issue uh capital calls to investors. is not something investors like to hear about. Uh and it's generally something that's really hard to get them to participate in. So that's one of the biggest challenges we've seen over the last probably 18 months is a lot of capital calls to try to you know restructure the um uh the cap table in a lot of these multif family syndications. So that's uh that's definitely been a big struggle and working with clients to uh to be creative in what they offer to their existing investors to um to try to get them on board to participate with some of these capital calls as they try to weather the storm of uh of multif family. Um and so that's been a significant challenge. But um on the flip side that's also I think created opportunity. I mean in many markets um you know a lot of prices have dropped for multif family and so that has u provided some opportunity for uh for syndicators as well and so I am seeing that and some of our our clients that are um very active in operating um funds and and starting funds to be able to capitalize on um on the uh the drop in prices and in multif family and a lot of uh favorable markets long term but now are you know facing uh facing some struggles. So — yeah, I keep hearing on my few masterminds that you should definitely call the bank and get them to reduce your uh loan amount because regardless they're going if they were to take over the property, which they don't want to do as we all know, uh they already lost that value anyway regardless of who's going to buy next. So, it's always uh from what I keep hearing it from masterminds um a great idea to really have a serious conversation with your lender. — Yeah. And you know what, for good operators, um I think a lot of them who are savvy, they know to how to navigate those conversations with uh with lenders, they may be difficult conversations, but um I think they're conversations that will be fruitful, but I think for um for I'll call them capital raisers because there's so many in the syndication space that have been good at raising capital the last several years, but don't have experience or or background or understand the importance of operating. And um I mean there were articles on the front page of you know the Wall Street Journal. I remember, you know, about a year or two back, um, just showing, you know, green pools, um, in certain, you know, properties and I think one in particular that I that I saw was in Texas of a particular syndicator that had accumulated so many properties um, and, you know, they had raised a lot of equity, but obviously they they weren't doing the work, asset management, and so these properties were not being uh, managed effectively. And um and then you know sort of the trifecta right of the you know these tax rates going up, insurance going up and then um not being able to manage their debt service once these uh you know bridge loans expired. uh combined with uh um with not the right management experience to effectively, you know, run these uh run these properties just uh I think led to a bad situation in a lot of cases and some that just don't even know how to navigate those conversations with the lenders either, but arguably maybe should never have been in the business of syndicating or should have brought the right people with them. So, — Exactly. Yeah. These people are probably, I would guess, not our listeners because they're not taking their job seriously. That's right. — Uh so that was wonderful. Jonathan, was there anything else that you we haven't touched on or I haven't asked that you think is important for our audience to know today? — Um so one other thing that um I think is important to uh to mention especially in the syndication space um is some new rules around accreditation. I mean, I'm not sure um how much uh your listener base follows the uh um the updates that the SEC uh puts out regarding accredit in investors. Arguably, these are probably nerdy things that uh that I'm involved in checking — Yeah. — week in and week out. But um but I think this does have an impact on uh on syndicators who raise in 506 C deals. So

from accredit investors only the SEC issued a no action letter which is basically um guidance that comes from um typically it's a letter from a law firm that poses a certain set of facts of a certain client looking for some sort of feedback from the SEC uh to prevent some sort of future enforcement by them. Um, so it's a way to to get advice without uh getting hit with the stick on the back end from the SEC, which can be helpful not only for the uh the individual who's writing the letter um or the firm who's writing it on their behalf um the uh securities issuer, but also for under other syndicators as well. Um, and so one of the things that they clarified is that um, typically in a 506C deal, you have to verify the accreditation status of your investors. Um, which means they've got to have a million dollars in net worth excluding their primary residence where they make $200,000 a year um or um, or more, $300,000 as a couple. And so that's the accreditation status, but the SEC says you have to take reasonable steps. So, usually that means they have to go to a third party and you know send them all their financials whether it's tax returns or um you know W2s, 1099s um and you know other financial statements or they go to their CPA or attorney get them to review their financials and write a letter that says they're accredited um which can sometimes um cause a little bit of friction when you're trying to onboard investors and you know raising capital. um LPs that are pretty familiar with the process and have done it a lot realize that it's just a part of the journey, but sometimes it can be tough when you're building relationships with new investors. So, um one of the things that the SEC came out with is they said that an investor can be considered accredited on their face if they put in $200,000 or more into an offer as an individual or through their entity. So, um, so a lot of clients have been using that as, uh, as one a a way to create less friction with investors. So, they'll create a class, sometimes a higher class, even if they weren't intending on doing it, um, for 200,000 plus investments, and they're able to uh to tell investors, hey, it's actually a simpler onboarding process. Um, and it gives them the ability to potentially raise more from investors as well because they can use that as an excuse, right, — for uh for helping um — helping attract less investors. — Yeah. — Who bring on more capital in some circumstances. So, uh, so interesting development. — I didn't know that. When did this happen? — Uh, so this was back in March. — Oh, fantastic. Thanks for sharing this great piece of news with everybody. Awesome, Jonathan. As always, uh, wonderful episode. Thanks so much for making the time here. How can our listeners get in touch with you? — Well, I'll see if I can do it right this time. I think I gave, uh, incorrect website last time. So, it's premiergroup. net. You can go there and take a look at the services that we offer and um, some of the resources that we provide there. Uh my email is uh jonathanplglp. net. Um or uh listeners can feel free to call me at 5082121193. — Jonathan, thank you so much. As always, all of this will be under show notes. I really appreciate your time. — Thanks, Stephanie. I appreciate it.